Is expensive oil deglobalizing the world?
A report today from CIBC World Markets says the skyrocketing cost of transportation is leading to inflation and taking away the edge that many Asian countries have had in offering cheap labour. The end result, as oil approaches $200 a barrel, is what the bank sees as a deglobalization of world markets. The report finds that the cost of shipping a standard 40-foot container from East Asia to North America’s east coast has tripled since 2000 and is expected to double again as oil reaches $200 a barrel. In 2000 it cost roughly $3,000 to ship a standard container from Shanghai to North America’s east coast, including inland transportation. That was when oil was $20 a barrel. Today that cost is $8,000 and at $200 a barrel it soars to $15,000. Jeff Rubin, CIBC’s chief economist, said if this were translated into a tariff it would represent an 11 per cent trade tariff today on goods coming to North America, and a 15 per cent tariff when oil reaches $200.
This, the bank argues, threatens decades of trade liberalization and will force some overseas manufacturing to relocate closer to home. “Higher energy prices are impacting transport costs at an unprecedented rate,” says Rubin. “So much so that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today.”
It must be forcing companies such as Wal-Mart to rethink their business. Business decisions in the future, argues Rubin, will be based on finding the cheapeset labour force within a reasonable shipping distance to a destination market. It sure makes Mexico look good. At $200 a barrel, it will cost three times as much to ship an item from China as it will from Mexico. Rubin points to the steel market to illustrate his point. Steel exports from China to the U.S. are falling 20 per cent year over year, while U.S. domestic steel production has increased 10 per cent. It’s no wonder wind-turbine makers are looking to establish themselves in North America, rather than build in Europe or China and ship across the ocean.
This fact — this renewed appreciation of domestic production — could mean happy days ahead for American and Canadian startups who in the past have had their innovations stolen and replicated at low cost overseas, then shipped back into North America. Battery makers, solar manufacturers, electronics makers in North America could suddenly find themselves more competitive. It could also mean better days ahead for North America’s struggling automotive sector, if it can adapt to the need for more efficient vehicles that don’t necessarily burn gasoline. And if unions can adapt as well.
But one thing is for certain: It won’t lead to lower prices. It just means goods from China, benefitting from cheap oil in the past, are now on more even cost-footing with North American rivals. Consumers are still going to feel the pinch of inflation over the coming years. And, it should be pointed out, the effect is a two-way street. North American manufacturers will find it too costly to sell into Asia markets without setting up their own manufacturing facilities in the region they wish to sell into. Likewise, the Chinese and other East Asian countries may get to the point where it makes more economic sense to build manufacturing in Canada or the United States and populate the plants with their own countrymen.