Freight Parity

The phrase "the cost of moving it" conceals a long list, and the completeness of that list is what determines whether a parity figure is informative or merely arithmetic. A calculation that includes only sea freight is not a parity calculation; it is a subtraction with a parity-shaped label.

• Transport on every leg — inland to the port, the international movement, and inland at the destination
• Handling at each transfer: loading, discharge, storage while waiting, and terminal charges
• Insurance over the movement, and the financing cost of the cargo’s value while it is in transit
• Duties, taxes, and any levies applying on entry, which depend on classification, origin, and any preference that applies
• Losses and quality change in transit, which are physical costs even when no invoice records them
• Quality reconciliation — the two prices must be for comparable material, or the calculation compares two different goods
• Currency, where the two prices are in different ones, which introduces a variable that has nothing to do with freight

Each of these is an assumption, and each carries uncertainty. A parity figure is therefore a conditional statement — under these cost assumptions, this distant price corresponds to this local one — and it is only as good as the weakest assumption in it. Presenting a parity number without its assumptions strips out precisely the information a reader needs to judge it.

The two familiar forms of the calculation run in opposite directions and answer opposite questions, and confusing them inverts the conclusion. Both are the same arithmetic; the difference is which price is the input and which location is the vantage point.

Import parity

Starts from a price at a supplying location and adds every cost of landing the commodity at a domestic point. It answers: what would this commodity cost here if we brought it in? It bounds what a domestic buyer would rationally pay locally, since above that level importing is the alternative.

Export parity

Starts from a price at a destination market and deducts every cost of getting there from a domestic origin. It answers: what does that foreign price leave back here? It bounds what a domestic seller would rationally accept locally, since below that level exporting is the alternative.

Together the two form a band. Where a local price sits between import parity and export parity, neither importing nor exporting is compelling, and the local price is free to be determined by local conditions. Where it moves outside the band, trade in one direction becomes attractive, and the trade — if it can happen — tends to push the price back toward the boundary. This band structure is the real content of the concept, and it explains why local prices in a tradable commodity move within limits set by distant markets.

The band only constrains a price if the trade it implies can actually take place. A parity calculation is a statement about arithmetic; whether the arithmetic binds is a statement about the world, and the two come apart routinely.

• A trade barrier, import ban, or quota can make the implied trade impossible regardless of the arithmetic — the parity figure remains computable and stops meaning anything
• Capacity limits bind: if no vessels, no port slots, or no storage are available, the implied movement cannot occur at any price
• Phytosanitary and standards requirements may exclude the commodity from the destination entirely, whatever the cost comparison says
• Costs are not constant with volume; a calculation using a single freight assumption misstates parity for any quantity that would move the freight market itself
• Time matters: parity compares prices at a moment, while the implied movement takes weeks, during which either price can move
• Where the two locations’ material differs in quality, the calculation compares different goods and the parity is spurious

The consequence worth holding is that parity is a description of a constraint that may or may not be operative. When trade flows freely, it is a strong description; when trade is blocked, it is a piece of arithmetic about a movement that cannot happen. A parity figure never announces which situation it is in.