When I noticed that the econoblogosphere was making a big deal about a new report from CIBC World Markets Inc., "Will Soaring Transport Costs Reverse Globalization?" by Jeff Rubin and Benjamin Tal, I thought, hmm, that sounds oddly familiar.
And sure enough, I had blogged about that exact topic, two and half years ago, in my post "The Peak Oil vs. Globalization Smackdown" -- taking as my jumping-off point a CIBC World Markets Inc. research paper by ... you guessed it, Jeff Rubin and Benjamin Tal!
Tal and Rubin, it's safe to say, own this story. And with good reason: The data presented in the new report is startling. A sharp rise in shipping costs, primarily due to energy prices, is remaking patterns of world trade.
Higher energy prices are impacting transport costs at an unprecedented rate. So much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today. In fact, in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades...
At today's oil prices, every 10 percent increase in trip distance translates into a 4.5 percent increase in transport costs. The duration of a typical sea voyage from China to North America is four weeks. Including inland costs, shipping a standard 40-foot container from Shanghai to the U.S. eastern seaboard now costs $8,000. In 2000, when oil prices were $20 per barrel, it cost only $3,000 to ship the same container. But at $200 per barrel, it will soon cost $15,000 in transport costs to ship from China to the U.S. eastern seaboard.
So the same energy costs that are pummeling low-income and working-class Americans are also responsible for changes in global terms of trade that will make the economics of manufacturing in the United States much more favorable. Who wouldn't want to make that trade: a good job in exchange for high gas prices?
Take the steel sector for example. With little over an hour and a half of labor time embodied in the production of a ton of steel, and relatively high freight costs, the global cost curve of the steel sector is changing rapidly. Given that most parts of China (and Asia in general) are short iron ore, getting the raw materials to the steel mill (mainly from Australia and Brazil) adds an additional and growing cost not typically incurred by U.S. steel producers. Add to it the $90 freight cost of shipping a ton of hot-rolled steel sheet from China to the U.S., and the transport component is large enough to turn the global steel cost curve on its head. Even at today's oil prices, rising transport costs have already more than offset China's otherwise slim cost advantage, giving U.S. steel a competitive advantage in its own market for the first time in over a decade.
But before we get too excited about "de-globalization" or "reverse globalization" and the consequent rebirth of localism all over the world, it's worth considering exactly what changes and what doesn't change in the global economy when energy costs go up. Because globalization isn't limited to moving physical goods back and forth. It's also -- especially since the emergence of the globe-spanning Internet and cheap telecommunication networks and ubiquitous computers -- a process in which ideas and information are zipped around. Rising energy costs won't hurt the competitive advantage of India's software outsourcing industry all that much, for example.
We usually think about technological improvements in productivity as benefiting the highly skilled and educated, and disenfranchising the poorly skilled and uneducated, but what I find most interesting about globalization in an era of $127 dollar-a-barrel oil is that blue-collar workers who make physical things in the West will stand to benefit, newly protected from foreign competition by energy tariffs, while white-collar workers who live off their wits will still feel the immense pressure of competing with everyone else in the world.
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