Economists: Higher oil prices could slow globalization
Skyrocketing energy prices could slow globalization and cause a “fundamental realignment in trade patterns,” suggest two economists from the Canadian Imperial Bank of Commerce (CIBC).
“Higher energy prices are impacting transport costs at an unprecedented rate. So much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,' write Jeff Rubin and Benjamin Tal in the May 27 CIBC World Market StrategEcon newsletter. 'In fact, in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades.”
They contend that because containerships travel at relatively high speeds and are nearly always in motion — pausing only briefly in ports to discharge and load cargo — containerization is sensitive to movements in fuel prices.
Their analysis shows that “back in 2000, when oil prices were $20 per barrel, transport costs were the equivalent of a 3 percent U.S. tariff rate. Currently, transport costs are equivalent to an average tariff rate of more than 9 percent. At $150 per barrel, the tariff- equivalent rate is 11 percent, 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.”
Today crude oil is selling for just under $130 a barrel in electronic trading on the New York Mercantile Exchange.
The article said that in 2000 when oil was $20 a barrel, it cost only $3,000 to ship a 40-foot container from Shanghai to the U.S. East Coast. Today it costs about $8,000 including inland transportation, and if oil was to hit $200 a barrel the cost would be $15,000, Rubin and Tal said.
“We are already starting to see some change in capital-intensive manufacturing whose products carry a high ratio of freight costs to final selling prices,” they said.
For example steel, which only requires abut 1.5 hours of labor per ton, has seen dramatic changes in trade patterns. Chinese steel exports to the United States are down 20 percent while U.S. production is up about 10 percent in the same period.
They note these trends may benefit countries close to the United States like Mexico, particularly for goods with low value-to-freight ratios.
“If in 2000 American importers paid 90 percent more to ship goods from East Asia to the U.S. East Coast, today they pay 150 percent more, and when oil prices reach $200 per barrel, they will pay three times the amount it costs to ship the same container from Mexico,” Rubin and Tal said.
“It seems that American importers are starting to do the math and already shifting some business from China to Mexico,” they write. 'While the pace of shipments from China to the U.S. is slowing — mainly among freight-intensive goods, even non-energy Mexican exports to the U.S. are still rising at a healthy annual rate of more than 7 percent. And interestingly, the goods that have seen the fastest growth are the ones that, on average, are more freight-intensive and directly compete with China, such as furniture, iron and steel, rubber and paper products.”
The article by Rubin and Tal can be seen at: research.cibcwm.com/economic_public/download/feature1.pdf