High Oil Prices Eroding Asian Manufacturing Advantage
In addition to having a direct impact on inflation, current high oil prices have profound implications for world trade patterns, according to CIBC World Markets. The cost of shipping a standard 40-foot container from East Asia to the North American east coast has already tripled since 2000 and will double again as oil prices head towards $200 per barrel.
Exploding transport costs may soon remove the single most important brake on inflation over the last decade – wage arbitrage with China.
It currently costs $8,000 to ship a standard 40-foot container from Shanghai to the North American east coast, including in-land transportation, the report said. That’s up from just $3,000 in 2000 when oil was $20 per barrel. At $200 per barrel of oil, the cost to ship the same container is likely to reach $15,000, CIBC’s Jeff Rubin and Benjamin Tal write in Will Soaring Transport Costs Reverse Globalization.
“Unless that container is chock full of diamonds, its shipping costs have suddenly inflated the cost of whatever is inside,” the report says, as quoted by the Financial Post.
As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage. Already the impact of rising oil and transport costs are having an impact on manufacturing that is expensive to transport.
Soaring transport costs, first on importing coal and iron to China and then exporting finished steel overseas, have more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the U.S. Market.
“Instead of finding cheap labour half way around the world, the key will be to find the cheapest labour force within reasonable shipping distance of your market,” they write, according to the Globe and Mail.
Look for Mexico’s maquiladora plants to get another chance at bat when it comes to supplying the North American market.
Shipping costs to and from Asia have risen so much that they have eclipsed tariffs as a barrier to global trade, Rubin and Tal say, calling the cost of moving goods “the largest barrier to global trade today.”
“In fact,” they say, “in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades.”
When oil was $20 a barrel, transport costs were equivalent to a 3-per-cent tariff rate; now it’s above 9 per cent.
Aggravating the problem is the fact that modern new container ships travel faster than old bulk carriers and so use up more fuel, doubling fuel consumption per unit of freight over the past 15 years.
“This is an environment in which shipping from the Pacific Rim may not make sense any more,” Tal told the Globe and Mail.
George Friedman of Stratfor agrees that East Asia has been most affected by sustained high oil prices. Japan, which imports all of its oil and remains heavily industrialized (along with South Korea), is obviously affected. But the most immediately affected is China, where shortages of diesel fuel have been reported.
China’s miracle — rapid industrialization — has now met its Achilles’ heel: high energy prices.
China is facing higher energy prices at a time when the U.S. economy is weak and the ability to raise prices is limited, Freidman writes in a new analysis : The Geopolitics of $130 Oil. “As oil prices increase costs, the Chinese continue to export and, with some exceptions, are holding prices. The reason is simple. The Chinese are aware that slowing exports could cause some businesses to fail. That would lead to unemployment, which in turn will lead to instability.”
The Chinese have their hands full between natural disasters, Tibet, terrorism and the Olympics. They do not need a wave of business failures.
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May 30th, 2008 at 12:13 pm
[...] CIBC’s fascinating analysis of how soaring oil prices are eroding East Asia’s competitive advantage in manufacturing by boosting shipping costs was a populr topic. In China’s case the problem is exacerbated by exchange rate and labor issues, as well as increased demand for deisel fuel as a result of the recent earthquake. The Chinese government has historically intervened to ensure China’s exports remain competitive, but given the many challenges it faces, its options are limited. Even if the CFTC’s investigation finds that speculators have contributed to the current spike in oil prices as an IMF working paperargues, it will not change the longer term fundamentals that suggest continued relatively high prices. Still, not everyone agrees with Goldman’s $200 oil superspike analysis, as one of our most popular posts showed. [...]
September 4th, 2008 at 1:36 pm
[...] oil prices and wages are eroding the manufacturing advantages of Asian nations. As Research Recap reported in May, CIBC World Markets estimates that in 2000, when oil prices were near $20 a barrel, the costs [...]