Shipping costs could 'reverse globalisation', says study

London: Rising international shipping costs driven by high oil prices could effectively change global shipping patterns, according to new research from Canadian bank CIBC World Markets, reported by the ICTSD (International Centre for Trade and Sustainable Development). The study, conducted by Jeff Rubin and Benjamin Tal, argues that high transportation costs would create a financial buffer for domestic producers against lower-wage producers, changing current import and export trends.

"In a world of triple-digit oil prices, soaring transport costs, not tariff barriers, pose the greatest challenge to trade," the authors say. "Globalisation is reversible. While trade liberalisation and technology may have flattened the world, rising transport prices will once again make it rounder." For example, 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 terms of shifts in trade and production patterns, products for which freight costs make up only a small proportion of final sale prices stand to be less affected if shipping becomes more expensive - additional freight charges would be dwarfed by everything else. However, where freight-to-value ratios are high, transportation expenses can be very significant. A "surprisingly high percentage" of Chinese exports to the US, such as furniture, footwear, metal manufacturing, and industrial machinery, fall into the latter category, according to the report.

The study's authors suggest that manufacturers' worldwide search for low wage expenses "will increasingly take place within the constraints imposed by soaring transport costs. Instead of finding cheap labour halfway around the world, the key will be to find the cheapest labour force within reasonable shipping distance to your market."

The predict that some low-cost manufacturing to supply the North American market is likely to move from China to Mexico. Current oil prices mean that extra shipping costs from East Asia are equivalent to a 9% tariff in the US; 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.  [05/06/08]