The peak oil vs. globalization smackdown

High oil prices equals higher shipping costs equals no more "free" trade.

Published January 31, 2006 11:05PM (EST)

Whenever my 11-year-old daughter hears someone complain about high gasoline prices, she launches into one of her favorite soapboxes: "High oil prices are good," she says. "They encourage people to walk and bike."

Yes! The price mechanism at work, also sure to encourage more investment in renewable energy technologies. Nothing makes the world go round like the price of oil, as it is easy to tell from every sudden stock market swing when someone stubs a toe in the Mideast. But try this stat on for size: Shipping costs from Hong Kong to the East Coast of the United States have almost doubled since 2000.

"On average," reports the investment bank CIBC World Markets, "a one percent increase in fuel prices leads to a 0.4 percent increase in total freight rates." In terms of a potential impact on world trade, say the authors of the report, Jeffrey Rubin and Benjamin Tal, "the $30 per barrel increase in crude prices since late 2003 is equivalent to an average tariff increase of 5 percentage points -- more than doubling the current average world tariff rate of 4.5 percent."

And what if oil hit a hundred dollars a barrel? That "would be tantamount to an almost tripling of current tariff rates and a de facto elimination of the entire cumulative tariff reduction of the past 45 years."

Tariff reductions = "trade liberalization." Globalization, meet your nemesis: peak oil. As supplies of cheap oil get tight, long-standing global economic trends could be poised for upheaval.

The relationship between cheap transportation costs and growing world trade is complex, and some economists have argued that it is less important than others. But as oil prices rise and the cost of container shipping and air freight surge with it, one is hard-pressed to see how that cannot have a serious impact on global trade.

The implications could be dramatic. One reason Mexico hasn't seen the economic gains that advocates of NAFTA hoped for is that China undercut it. But what happens if trucking plastic chairs from Mexico suddenly becomes cheaper than the slow boat from Shanghai? Eighty-five percent of Wal-Mart's suppliers are in China -- what happens to its margins if transportation costs keep going up?

The logic of globalization mandates that the world is becoming a smaller place, but if energy costs reverse that, the Far East might start living up to its nickname, once again.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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