Transportation costs could reverse outsourcing
CIBC economists say ''globalization is reversible''
By Tom Stundza -- Purchasing, 5/28/2008 2:10:00 PM
Outsourcing soon may become a victim of the elevated cost of energy, forcing North American companies to revert to local purchasing of necessary materials, parts and components. So says Jeff Rubin, chief economist of CIBC World Markets in Toronto, in a new Economics & Strategy Report published this week.
He says “globalization is reversible” since rising transportation costs to such levels that businesses will be forced to look closer to home for suppliers. "In a world of triple-digit oil prices, distance costs money,” writes Rubin. “And while trade liberalization and technology may have flattened the world, rising transportation prices will once again make it rounder."
Chinese exports of such products as steel, furniture, footwear, metal goods and industrial materials are beginning to slow because of a combination of high global raw material costs and high energy costs in China. Atop that, the report notes that recent changes in transportation have led to increased sensitivity to higher energy prices. “Most notable of these changes is the massive trend towards containerization that effectively makes shipping costs more vulnerable to swings in fuel costs,” the report says.
The Montreal Gazette report notes that the cost of shipping a container from Shanghai to the North American east coast, including in-land transportation, has increased from $3,000 in 2000 to $8,000 today. If oil reaches $200/barrel, the report calculates that the cost to ship the same container “is likely to reach $15,000.”
Co-author Benjamin Tal, another economist, tells the Canadian Press that the cost of moving goods—particularly heavy materials such as steel—not the burden of tariffs, is the largest barrier to global trade today. He and Rubin have calculated that this year’s explosion in transportation costs—caused by the record price of crude oil— has offset all the trade liberalization efforts of the past three decades.
Their reasoning is that the cost of transportation in 2000 was the equivalent of a 3% U.S. tariff rate when oil was $20/barrel. They calculate that transportation costs at $150/barrel are equivalent to an 11% tariff—which would be about the average of tariffs in the 1970s. If oil goes to $200, as CIBC World Markets has forecast, Tal says tariff rates would be back to levels not seen since the early 1960s, just before the Kennedy Round of GATT (General Agreements on Tariffs and Trade) negotiations begun reducing tariffs to ease international trade.
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