In August 2002, President George Bush signed the Trade Act, which, among other things, created a new set of transportation security rules aimed at reducing the likelihood that terrorists would smuggle weapons into the United States. The new rules apply to every mode of transportation—trucks, trains, ships, and planes—and require these transportation companies to send e-mails or faxes notifying the Bureau of Customs and Border Protection of the contents of all cargoes and the intended recipients. The purpose is to give officials time to identify suspicious shipments so that they can intercept and inspect them for contraband. The advance notice varies with the type of transportation, ranging from 30 minutes for trucks to 24 hours for ships.

Large trucking companies had electronic systems to direct deliveries, so they made costly modifications to them to send automatic messages to government officials. Smaller companies incurred greater costs because they had to make rapid transitions to electronic systems or buy fax machines and incur much higher long-distance phone charges. The two-hour notification requirement for international cargoes required FedEx and similar companies to restructure aspects of their overnight delivery systems. Freight train operators and owners of cargo ships also had to make expensive changes in their record-keeping procedures. The effect was to increase shipping prices for U.S. companies using imported components for their products. These companies also had to adjust their inventory management systems to consider regulation-induced shipping delays. Over time, the effects on shipping costs and inventory management costs diminished.

What was the effect on aggregate supply of the Trade Act? Did the Trade Act affect the SRAS curve or the LRAS curve? How were the price level and real GDP affected? Explain.