Sunday, June 08, 2008

Miles matter more now...

As we stumble into what I think will be a new era of very expensive energy, no sector will be more changed than transportation. Ask the airline industry. And if transportation changes, many of the current trends in globalization will have to change in response.
The world seems to be becoming less flat. Shipping costs between Asia have risen so much that they have eclipsed tariffs as a barrier to global trade, according to a new report that calls the cost of moving goods "the largest barrier to global trade today."

The impact of rising transportation costs, driven significantly by high oil prices, is already being seen in capital-intensive manufacturing that carry a high ratio of freight costs to the final sale price. But a new report has determined that higher energy prices are affecting transport costs at such an unprecedented rate that "the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today."

The report, released by CIBC World Markets last week, concludes that the continuing increase of energy prices poses a major threat to price stability and overseas manufacturing — to the point that such forces "may reverse the impact of globalization."

"Exploding transport costs may soon remove the single most important brake on inflation over the last decade — wage arbitrage with China," says Jeff Rubin, chief economist and chief strategist at Canada-based CIBC World Markets. "Not that Chinese manufacturing wages won't still warrant arbitrage. But in today's world of triple-digit oil prices, distance costs money." [More via Free Exchange]
For example, remember when we found out chicken was being shipped to China to be processed into prepared foods and then shipped back to us? What if shipping costs make such schemes a non-starter?

Similarly is the argument for food-miles, which was largely discredited for some higher-value fruits and vegetables, at least. But the more costly the mile, the more the productivity gain/labor savings have to be to make the trip worth it.

This will likely affect commodities, although they seem to be in lockstep with energy prices, so the value shipped still overcomes the cost of shipping, but I'm not so sure that is a reliable indicator of the future.

But the underlying reliance on cheap transportation to help speed globalization could be in jeopardy. At the very least, a higher return for local products and services, or those which can be delivered electronically may provide some counter-balance many have been hoping for. Unfortunately, it will be an expensive counterbalance, forcing some harder consumer choices.

I'm not sure betting the farm on shipping commodities across the globe is wise.We need to transport ideas and services and eliminate transportation costs.

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