Oil Costs for Shipping May Reverse Globalisation

Oil Costs for Shipping May Reverse Globalisation
Oil prices are driving up the costs of shipping on the international seas and bringing outsourced business and jobs back to America. These rising energy costs are putting the brakes to rapid globalization. Manufacturers shifting work away from their foreign plants may even reverse the globalisation forged in recent decades.The extraordinary rise in the price of crude oil is ruining outsourced business models everywhere and distance from your customer increases the cost of transport which has become a problem. Proximity has suddenly become more profitable and local solutions are looking less like the expensive option.Shipping costs for a 40-foot container from China and East Asia have tripled since 2000 and could double again if oil hits $200 a barrel. Shipping costs are now the same as a 9 percent tariff on the imported goods, compared to 3 percent when oil sold at $20 a barrel in 2000. This margin would rise to 15% if the cost of oil per barrel rose to US$200. These differences could potentially more than offset any cost advantages enjoyed by East Asia-based industries.China needs to import iron ore and coking coal, but the cost of shipping a tonne of ore from Brazil to China now exceeds $100, a cost that is equal to the value of the mineral itself. British flower importers have seen a 40 per cent increases in freight rates. In the case of carnations, a commodity product, the cost of airfreight from Kenya or Colombia now accounts for half of its value. The cost of transporting Chinese steel to the US has given domestic producers the edge for the first time in more than a decade.
In a world of triple-digit oil prices, soaring transport costs, not tariff barriers, pose the greatest challenge to trade, . . . Globalisation is reversible. While trade liberalisation and technology may have flattened the world, rising transport prices will once again make it rounder.Jeff Rubin and Benjamin Tal, authors from ICTSD in a report for CIBC Soaring global transport costs have already offset all the trade liberalisation efforts of the past three decades. As an example while it cost only $3,000 to ship a normal (40-foot) container from China to the US in 2000, today its costs $8,000. And at $200 per barrel, it will cost $15,000. China's freight-intensive steel exports to the US are falling by more than 20 per cent on a year-over-year basis, while US domestic steel production has risen by almost 10 per cent during the same period. It is estimated that for every 10% increase in the distance of a trip, energy costs rise 4.5%.
Oil prices, though they may come back down eventually, appear unlikely to sink to anything like the historically low levels of the 1990s. It's not only our bus and taxi fares that have risen. So, too, have shipping costs and air fares. People are travelling less, and going shorter distances. But even more important, the long-term decline in shipping costs that occurred throughout the twentieth century may now have ended. As a consequence, as it becomes pricier to ship goods from China, fewer of them may make it on to Western store shelves.John Rapley, president Caribbean Policy Research Institute (CLICKHERE for more . . . )At $150 per barrel, the tariff-equivalent rate is 11 per cent, going back to the average tariff rates of the 1970s. And at $200 per barrel, we are back at tariff rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s.During the last three decades, major cuts in tariffs and non-tariff barriers led to explosion of world trade, including the rapid industrialisation of India and China. Two past oil shocks led the US to cut imports from Europe and Asia and raise regional trade with Caribbean and Latin American nations. Soaring oil prices are driving transport costs to such levels that businesses will be forced to seek supplies locally, rather than importing at huge costs from China and India. Less Chinese and Indian competition for North American manufacturers, and more regional trade, will benefit Mexico because of its abundant cheap labour and proximity to the US and Canada. The cost of doing business in China in particular has grown steadily as workers there demand higher wages and the government enforces tougher environmental and other controls. China's currency has also appreciated against the U.S. dollar increasing the cost of its products.Certain industries like electronics firms can continue to take advantage of offshore production, many are now clustered in Asia and gain a major benefit of proximity to one another. Industries that depend on proximity, networking and experience for high-value goods like electronics will likely remain in Asia.
POSTED BY:-
SHILPI KUMARI
PGDM-3rd SEM