As the World Bulges

The Cost of Moving Goods, Not Tariffs, Is the Largest Barrier to Global Trade Today

Joe FeeleyBy Joe Feeley, Editor in Chief

Just when you think you have some of your globalization strategy sorted out, a market analysis this summer from analysts at the Canadian Imperial Bank of Commerce might make you rethink it.

The authors, Jeff Rubin and Benjamin Tal, say the world that everyone keeps telling us is flat could be getting a little rounder and the great rush to China might be showing signs of reversal.

The cause is no big secret: rising energy costs add a monster impact to the cost of global shipping. I intuitively knew that, but this report made it immensely clearer.

In 2000, when oil was $20/barrel, it cost $3,000 to ship a standard 40-ft container from the U.S. east coast to Shanghai. Today it’s roughly $8,000. Scarier still, if oil were to reach $200/barrel, that cost rises to $15,000. “The cost of moving goods, not tariffs, is the largest barrier to global trade today,” says the report. It says, in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the past three decades.

The report says the massive trend to containerization makes shipping costs more vulnerable to swings in fuel costs. Speed also is part of that. “Over the past two decades, container ships were built to go faster than bulk ships, so the world’s fleet speed picked up. But greater speed requires greater energy. In global shipping, the increase in ship speed over the past 15 years has doubled fuel consumption per unit of freight.” Didn’t mean a lot, even at $50/barrel, did it?

The authors say the extent to which these increase in transportation costs alter the huge, but shrinking, wage difference between Chinese labor and North American labor remains to be seen. But they’re seeing some change in capital-intensive manufacturing where products carry a freight-cost-to-final-selling-price ratio.

“Unless that container is full of diamonds, shipping costs have inflated the cost of whatever is inside,” says Rubin. “As oil prices keep rising, those transport costs start cancelling out the East Asian wage advantage.” They already have in steel. Costs to import iron to China and then exporting finished steel overseas, have more than eroded the wage advantage and rendered Chinese-made steel uncompetitive in the U.S. The report also specifically mentions industrial machinery in this mix.

Now, some of you are thinking, “Well, Joe, if oil goes to $200/barrel, the economy tanks anyway, so I won’t be shipping much of anything anywhere anyway.”

Well, it wouldn’t be that bleak, but, if you’ve been wrestling for market share with competitive Asian products, it does call for a refocusing on where the cost pressures might resurface from. That, say the authors, might give a rebound to the maquiladora factories in Mexico.

Thought you could use a heads-up on this.