By Ron Beasley
In 2005 the pompous and erudite Thomas Friedman told us the world is flat. A year earlier Aaron Naparstek and James Howard Kunstler had already explained why he was wrong - peak oil.
Kunstler foresees "the demise of Wal-Mart style, big box, national chains." Companies whose profit margins depend on "merchandise made by factories 12,000 miles away" simply won't function in a world of $100-plus barrels of oil. "We're going to have to seriously reorganize our whole system of retail trade and economy."
Well $100 plus barrels of oil are here and.......
Tom Friedman wrote "The World is Flat", suggesting that globalization had leveled the playing field between industrial and emerging countries. Jeff Rubin of CIBC World Markets suggests that this is perhaps changing because of the cost of fuel.
The cost of shipping a 40 foot container from Shanghai to the east coast of North America has gone from $3,000 in 2000 to $8,000 because of the cost of fuel, and for many products, the Asian cost advantage has virtually disappeared.
�In a world of triple-digit oil prices, distance costs money,� write Jeff Rubin of CIBC World Markets. �And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder.�
The new tariff
Shipping costs to and from Asia have risen so much that they have eclipsed tariffs as a barrier to global trade, Mr. Rubin and Mr. Tal say, calling the cost of moving goods �the largest barrier to global trade today.�
�In fact,� they say, �in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades.�
When oil was $20 a barrel, transport costs were equivalent to a 3-per-cent tariff rate; now it's above 9 per cent.
Aggravating the problem is the fact that modern new container ships travel faster than old bulk carriers and so use up more fuel, doubling fuel consumption per unit of freight over the past 15 years.
�This is an environment in which shipping from the Pacific Rim may not make sense any more,� Mr. Tal said in an interview.
And yes it will be the US manufacturing sector that will be the first to reap the benefits of this new world order. It will no longer be cheaper to make that toaster in China and ship it across the Pacific. It will be the intellectual jobs, like software, that remain on that flat earth. With fiber optic cables connecting the world it will remain cheap to transfer ideas. Not what Tom had in mind I would guess.
Tip of the Newshoggers hat to Big Gav
The political fallout from the revitalization of blue collar manufacturing while communications advances continue to decimate white collar jobs below boardroom level will be....interesting.
ReplyDeleteA lot of very intelligent (formerly) upper middle class people are going to be seriously pissed at running on the training treadmill to keep their jobs in the face of outsourcing only to be told to hit the factory floor to keep food on the table.
Standing by while the professional class is forced down the economic ladder is the kind of thing that makes regime stability an open question.
Curmudgeon
ReplyDeleteIt's not as bad as you make it sound. For every three or for production jobs you have an Engineer a couple of technicians and a manager or supervisor.
The argument that expensive oil will improve the prospects for local production compared to overseas import seems rather dubious to me. Transport within a country is equally susceptible to oil price rises.
ReplyDeleteOverwater transport always was and will continue to be the cheapest way to transport stuff. And there are ways to reduce the oil cost of ships, starting with allowing them to move more slowly. There are also promising experiments with auxiliary sails etc. Anyway, shipping rates are still largely composed of non-oil costs, such as crews, capital servicing of the ship's costs, port charges etc.
Trucks and even rail cannot really compete. I suspect an oil price rise will rather lead to a marked differential between coastal and inland areas.
Greetings
KHR
KHR --- I agree with your last two paragraphs but I think your mental model of supply chains is wrong in the first paragraph as it seems to have an implicit assumption that ports consume most of their imports within their immediate city region. I think a better mental model goes like this:
ReplyDelete1) Location follows costs and at some point in the past at time T the total cost of shipping a production step overseas including transport and additional distribution costs was significantly lower than keeping production at location X due to labor costs. Assume roughly equal capital costs for high end equipment.
2) A product is distributed over a wide region which is mostly independent of where a good is produced.
3)Since the local/regional distribution chains for a good produced at X or Overseas are roughly similar the changing component of the cost structure is getting the product from Shanghai to Los Angeles or Dublin to New York. Once it lands, the cost structure of distribution from either production source is roughly the same.
4) At T+Y the differential between producing at X and Overseas has reversed due to a combination of rising foreign wages, a falling dollar, and higher transportation costs.
5) Going back to assumption 1 that location slightly lags costs, production slowly shifts back to a point closer to the regional distribution network.
fester: I don't thionk we really disagree on the issue.
ReplyDeleteBut you have shifted the premise of the argument to include more factors.
"to a combination of rising foreign wages, a falling dollar, and higher transportation costs."
The original post was only about oil prices and their effect on shipping costs and that's what I discussed.
Clearly, the other factors such as wages and exchange rates, play an important role and in reality, economic developments depend on the combined effects.
And at least near-term and most likely mid-term, overseas shipping costs will continue to be a small fraction of most products' cost.