Morgan BellOil Costs for Shipping May Reverse Globalisation
June 25th 2008 16:49
Oil prices are driving up the costs of shipping on the international seas and bringing outsourced business and jobs back to America. These rising energy costs are putting the brakes to rapid globalization. Manufacturers shifting work away from their foreign plants may even reverse the globalisation forged in recent decades.
The extraordinary rise in the price of crude oil is ruining outsourced business models everywhere and distance from your customer increases the cost of transport which has become a problem. Proximity has suddenly become more profitable and local solutions are looking less like the expensive option.
Shipping costs for a 40-foot container from China and East Asia have tripled since 2000 and could double again if oil hits $200 a barrel. Shipping costs are now the same as a 9 percent tariff on the imported goods, compared to 3 percent when oil sold at $20 a barrel in 2000. This margin would rise to 15% if the cost of oil per barrel rose to US$200. These differences could potentially more than offset any cost advantages enjoyed by East Asia-based industries.
China needs to import iron ore and coking coal, but the cost of shipping a tonne of ore from Brazil to China now exceeds $100, a cost that is equal to the value of the mineral itself. British flower importers have seen a 40 per cent increases in freight rates. In the case of carnations, a commodity product, the cost of airfreight from Kenya or Colombia now accounts for half of its value.
The cost of transporting Chinese steel to the US has given domestic producers the edge for the first time in more than a decade.
Jeff Rubin and Benjamin Tal, authors from ICTSD in a report for CIBC
Soaring global transport costs have already offset all the trade liberalisation efforts of the past three decades. As an example while it cost only $3,000 to ship a normal (40-foot) container from China to the US in 2000, today its costs $8,000. And at $200 per barrel, it will cost $15,000.
China's freight-intensive steel exports to the US are falling by more than 20 per cent on a year-over-year basis, while US domestic steel production has risen by almost 10 per cent during the same period.
It is estimated that for every 10% increase in the distance of a trip, energy costs rise 4.5%.
John Rapley, president Caribbean Policy Research Institute (CLICKHERE for more . . . )
At $150 per barrel, the tariff-equivalent rate is 11 per cent, going back to the average tariff rates of the 1970s. And at $200 per barrel, we are back at tariff rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s.
During the last three decades, major cuts in tariffs and non-tariff barriers led to explosion of world trade, including the rapid industrialisation of India and China. Two past oil shocks led the US to cut imports from Europe and Asia and raise regional trade with Caribbean and Latin American nations. Soaring oil prices are driving transport costs to such levels that businesses will be forced to seek supplies locally, rather than importing at huge costs from China and India. Less Chinese and Indian competition for North American manufacturers, and more regional trade, will benefit Mexico because of its abundant cheap labour and proximity to the US and Canada.
The cost of doing business in China in particular has grown steadily as workers there demand higher wages and the government enforces tougher environmental and other controls. China's currency has also appreciated against the U.S. dollar increasing the cost of its products.
Certain industries like electronics firms can continue to take advantage of offshore production, many are now clustered in Asia and gain a major benefit of proximity to one another. Industries that depend on proximity, networking and experience for high-value goods like electronics will likely remain in Asia.
Many businesses are holding off or cutting back their plans to relocate to China or other countries, preferring to take advantage of domestic facilities and cut costs by staying close to home. Manufacturers are rethinking any plans to open new factories in low-wage nations, and some even ponder returning factories to the US and Mexico from China. The shift is not expected to restore the thousands of jobs that have been lost to outsourcing, but the high cost of fuel could slow the trend of the past two or three decades. High transportation costs would create a financial buffer for domestic producers against lower-wage producers, changing current import and export trends.
Last fall, Crown Battery Manufacturing Co. decided to close a plant it bought in Reynosa, Mexico, and move the jobs to its Ohio home base, adding 25 workers to the 400 it already employed. The batteries were large and heavy, designed to be used in lawnmowers and underground mining machines and were travelling over 2,000 miles from Mexico to the major customers clustered in the Midwest. Shipping over long distances was adding 5% to 10% to product costs and creating issues with quality control.
U.S. job losses in manufacturing have averaged 41,000 a month so far this year (nearly double the pace last year) with sectors such as autos and construction materials tied to the housing slump especially hard hit. In essence, every job added as a result of companies pulling work back home is being more than offset by others reeling from the domestic
slump.
Also, moving production closer to markets does not solve all the problems associated with rising transportation costs. Manufacturers face hefty surcharges on domestic shipments by truck and train and congested domestic transportation systems. Other obstacles include diminished infrastructure or support for factory parts or repair.
Rising international shipping costs driven by high oil prices could effectively change global shipping patterns, pushing globalisation into reverse gear. A surprisingly high percentage of Chinese exports to the US, such as furniture, footwear, metal manufacturing, and industrial machinery, have a high freight-to-value ratio. Some of the low-value manufacturing that supplies the North American market is likely to move from China to Mexico.
In the future it looks like transport costs will steer business away from globalisation and back towards localisation. It is also likely business will embrace regionalisation, where neighbouring countries trade with each other but avoid the long-haul freight costs that come with transporting goods outside the region. Instead of finding cheap labour halfway around the world, the key will be to find the cheapest labour force within reasonable shipping distance to your market
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The extraordinary rise in the price of crude oil is ruining outsourced business models everywhere and distance from your customer increases the cost of transport which has become a problem. Proximity has suddenly become more profitable and local solutions are looking less like the expensive option.
Shipping costs for a 40-foot container from China and East Asia have tripled since 2000 and could double again if oil hits $200 a barrel. Shipping costs are now the same as a 9 percent tariff on the imported goods, compared to 3 percent when oil sold at $20 a barrel in 2000. This margin would rise to 15% if the cost of oil per barrel rose to US$200. These differences could potentially more than offset any cost advantages enjoyed by East Asia-based industries.
China needs to import iron ore and coking coal, but the cost of shipping a tonne of ore from Brazil to China now exceeds $100, a cost that is equal to the value of the mineral itself. British flower importers have seen a 40 per cent increases in freight rates. In the case of carnations, a commodity product, the cost of airfreight from Kenya or Colombia now accounts for half of its value.
The cost of transporting Chinese steel to the US has given domestic producers the edge for the first time in more than a decade.
In a world of triple-digit oil prices, soaring transport costs, not tariff barriers, pose the greatest challenge to trade, . . . Globalisation is reversible. While trade liberalisation and technology may have flattened the world, rising transport prices will once again make it rounder.
Jeff Rubin and Benjamin Tal, authors from ICTSD in a report for CIBC
Soaring global transport costs have already offset all the trade liberalisation efforts of the past three decades. As an example while it cost only $3,000 to ship a normal (40-foot) container from China to the US in 2000, today its costs $8,000. And at $200 per barrel, it will cost $15,000.
China's freight-intensive steel exports to the US are falling by more than 20 per cent on a year-over-year basis, while US domestic steel production has risen by almost 10 per cent during the same period.
It is estimated that for every 10% increase in the distance of a trip, energy costs rise 4.5%.
Oil prices, though they may come back down eventually, appear unlikely to sink to anything like the historically low levels of the 1990s. It's not only our bus and taxi fares that have risen. So, too, have shipping costs and air fares. People are travelling less, and going shorter distances. But even more important, the long-term decline in shipping costs that occurred throughout the twentieth century may now have ended. As a consequence, as it becomes pricier to ship goods from China, fewer of them may make it on to Western store shelves.
John Rapley, president Caribbean Policy Research Institute (CLICKHERE for more . . . )
At $150 per barrel, the tariff-equivalent rate is 11 per cent, going back to the average tariff rates of the 1970s. And at $200 per barrel, we are back at tariff rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s.
During the last three decades, major cuts in tariffs and non-tariff barriers led to explosion of world trade, including the rapid industrialisation of India and China. Two past oil shocks led the US to cut imports from Europe and Asia and raise regional trade with Caribbean and Latin American nations. Soaring oil prices are driving transport costs to such levels that businesses will be forced to seek supplies locally, rather than importing at huge costs from China and India. Less Chinese and Indian competition for North American manufacturers, and more regional trade, will benefit Mexico because of its abundant cheap labour and proximity to the US and Canada.
The cost of doing business in China in particular has grown steadily as workers there demand higher wages and the government enforces tougher environmental and other controls. China's currency has also appreciated against the U.S. dollar increasing the cost of its products.
Certain industries like electronics firms can continue to take advantage of offshore production, many are now clustered in Asia and gain a major benefit of proximity to one another. Industries that depend on proximity, networking and experience for high-value goods like electronics will likely remain in Asia.
Many businesses are holding off or cutting back their plans to relocate to China or other countries, preferring to take advantage of domestic facilities and cut costs by staying close to home. Manufacturers are rethinking any plans to open new factories in low-wage nations, and some even ponder returning factories to the US and Mexico from China. The shift is not expected to restore the thousands of jobs that have been lost to outsourcing, but the high cost of fuel could slow the trend of the past two or three decades. High transportation costs would create a financial buffer for domestic producers against lower-wage producers, changing current import and export trends.
Last fall, Crown Battery Manufacturing Co. decided to close a plant it bought in Reynosa, Mexico, and move the jobs to its Ohio home base, adding 25 workers to the 400 it already employed. The batteries were large and heavy, designed to be used in lawnmowers and underground mining machines and were travelling over 2,000 miles from Mexico to the major customers clustered in the Midwest. Shipping over long distances was adding 5% to 10% to product costs and creating issues with quality control.
U.S. job losses in manufacturing have averaged 41,000 a month so far this year (nearly double the pace last year) with sectors such as autos and construction materials tied to the housing slump especially hard hit. In essence, every job added as a result of companies pulling work back home is being more than offset by others reeling from the domestic
slump.
Also, moving production closer to markets does not solve all the problems associated with rising transportation costs. Manufacturers face hefty surcharges on domestic shipments by truck and train and congested domestic transportation systems. Other obstacles include diminished infrastructure or support for factory parts or repair.
Rising international shipping costs driven by high oil prices could effectively change global shipping patterns, pushing globalisation into reverse gear. A surprisingly high percentage of Chinese exports to the US, such as furniture, footwear, metal manufacturing, and industrial machinery, have a high freight-to-value ratio. Some of the low-value manufacturing that supplies the North American market is likely to move from China to Mexico.
In the future it looks like transport costs will steer business away from globalisation and back towards localisation. It is also likely business will embrace regionalisation, where neighbouring countries trade with each other but avoid the long-haul freight costs that come with transporting goods outside the region. Instead of finding cheap labour halfway around the world, the key will be to find the cheapest labour force within reasonable shipping distance to your market
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Comment by Market Newbie
Gizmo Peek
Stock Market Punk
Comment by Morgan Bell
Deep Pencil
Business News
Movie Train
i can always count on you for a comment!
when i was researching i found alot of people secretly cheering because they thought globalisation was wasteful and exploitative anyway . . . my first reaction to the news was isnt it a shame business would rather spend money on transport than local wages . . . maybe if alternatives fuels are found globalisation will seem more appealing again?
Comment by Market Newbie
Gizmo Peek
Stock Market Punk
But what really caught my attention in this post of yours has to do with oil. This energy source has given too much power to very few that the mere act of increasing its price can cause the starvation of so many people around the world. The sad thing is, those who are capable of doing something about it seem very reluctant to do so.
Comment by Clint Emry
Strategy and Solutions