China Offshoring Analysis: Relocalize or Die

Isochroma · Tar Sands Joined: Jul 22, 2007 Posts: 20

China Offshoring Analysis: Relocalize or Die

The Effects of Rising Fuel Costs on U.S. Trade

Isochroma · Tar Sands Joined: Jul 22, 2007 Posts: 20

China will get perhaps one more generation of prosperity, then will begin sinking back into its former isolated poverty.

In contrast, North American economies will enjoy a revival as jobs flood back. Unions and individuals will gain strength and bargaining power, because employers will no longer be able to threaten them with offshoring. Wages will rise and the gap between rich and poor will decrease.

All the world's a stage, and the price of oil beats the drum of change into a new age.

Tyler_JC

Shipping costs are not particularly important when we're talking about $20 versus $2 per hour for labor.

We are going to need MUCH higher oil prices before China becomes an expensive place to do business.
_________________
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DomusAlbion

Isochroma · Tar Sands Joined: Jul 22, 2007 Posts: 20

Tyler_JC: I can assure you that we will, in very short order, be getting those higher oil prices, as the graph illustrates. One more generation, at most is all they'll get before its no longer economic to export 90% of what goods they export now.

outcast · Heavy Crude Joined: Apr 21, 2008 Posts: 179

Isochroma · Tar Sands Joined: Jul 22, 2007 Posts: 20

From the graph, what do you think oil will cost in 2050? At the rate it's going (hell, even at half the rate of increase), it won't be more than another 20 years before shipping costs from China completely wipe out any benefits from its workers' lower wage costs.

When local labor is cheaper, then jobs will migrate back to the locale. When jobs are local and foreign labor cannot compete, then local populations will set wages via negotiations/job action.

Employers will have no other choice than to deal on Labor's terms, because they won't have anywhere else to go (economically) for labor.

The one industry that won't be so much affected is IT (Information Technology) because its products don't require shipping.

americandream

outcast · Heavy Crude Joined: Apr 21, 2008 Posts: 179

Isochroma · Tar Sands Joined: Jul 22, 2007 Posts: 20

Oil's cargo cushion
27 May 2008

The soaring cost of fuel is whittling away at the cheap-labour advantage enjoyed by Asian exporters, giving Canadian firms a welcome edge in their fight to win back business from Asian competitors.

Two bank economists argue in a report released Tuesday that because of higher fuel costs, shipping a standard 40-foot container from Shanghai to the east coast of North America now costs $8,000 (U.S.), up from $3,000 in 2000 when oil was just $20 a barrel.

That higher cost is passed on to North American consumers, making goods from China and other Asian places more costly compared to the offerings of domestic North American producers.

Some Canadian manufacturers are already noticing the effect.

“It's helped us because it's harder for the Asians and others to ship over here,” said Barry Zekelman, chief executive officer of Atlas Tube Inc. of Harrow, Ont.

He said that after taking 30 to 40 per cent of the North American market for some steel tubing products, the Chinese have now “virtually disappeared” – partly, though not exclusively, because of the costs of transporting a heavy product such as steel across the Pacific.

Jeffrey Rubin and Benjamin Tal of CIBC World Markets Inc. say higher oil prices are reversing the world-is-flat effect, in which lower trade barriers and new technologies like the Internet made it cheaper to move goods and services from developing Asia to the markets of the rich world.

“In a world of triple-digit oil prices, distance costs money,” they write. “And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder.”

Mr. Rubin and Mr. Tal say the steel sector is a prime example of the world-is-round effect.

Chinese steel exports to the United States are falling by more than 20 per cent year over year. China's costs have risen because Chinese producers have to bring in their iron ore from faraway places such as Australia and Brazil, then ship the finished steel to the United States. As a result, U.S. steel producers actually have an advantage over Chinese rivals.

“Rising transport costs have already more than offset China's otherwise slim cost advantage, giving U.S. steel a competitive advantage in its own market for the first time in over a decade,” the economists write.

They say higher transport costs are affecting other “freight-intensive” sectors such as furniture and industrial machinery, too. These goods now account for 42 per cent of total Chinese exports to the United States, down from 52 per cent in 2004.

In fact, if oil prices had not risen so quickly and transport costs had not soared so dramatically, growth in Chinese exports since 2004 would have been 30 per cent stronger than the actual figure.

Of course, the rising cost of goods from China is hardly happy news for many Canadian companies that source parts from Chinese factories, sell imported goods from China or have their products assembled by Chinese workers.

They suggest that “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.”

While Canadian companies could benefit, the bigger winner will be Mexico, they say. “Look for Mexico's maquiladora plants to get another chance at bat when it comes to supplying the North American market,” they write.

Shipping costs to and from Asia have risen so much that they have eclipsed tariffs as a barrier to global trade, Mr. Rubin and Mr. 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,” Mr. Tal said in an interview.

“If you're thinking, ‘maybe we should bring in a container from China,' you should think again.”

Isochroma · Tar Sands Joined: Jul 22, 2007 Posts: 20

High oil prices will hurt trade, report says
27 May 2008
CIBC Report (PDF)

HEATHER SCOFFIELD , Globe and Mail Update

OTTAWA — The rising price of oil is making international trade of heavy cargo prohibitively expensive, and acting as an incentive for importers to find products such as steel closer to home, new research by CIBC World Markets shows.

For heavy products, rising shipping costs are eroding the low-wage advantage of China over North America, say chief economist Jeff Rubin and senior economist Benjamin Tal.

If oil prices continue to rise, the soaring cost of global transport will act like a major tariff barrier and lead to a substantial slow down in international trade, they argue.

“Globalization is reversible,” they state.

Oil passed $133 (U.S.) a barrel on Monday, and Mr. Rubin forecasts the price will average $106 this year, $130 next year, $150 in 2010 and $225 by 2012.

These days, the cost of oil is the equivalent of imposing a tariff rate of about nine per cent on goods coming into the United States. At $150 a barrel, transport costs act like a tariff of 11 per cent. And at $200, all the trade liberalization efforts of the past 30 years are reversed, Mr. Rubin said.

Oil prices now account for about half of total freight costs, and for the past three years, for every $1 increase in world oil, there has been a corresponding one per cent increase in transport costs.

“Unless that container is chock full of diamonds, its shipping costs have suddenly inflated the cost of whatever is inside,” Mr. Rubin said. “And those inflated costs get passed onto the Consumer Price Index when you buy that good at your local retailer. As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage.”

Persistently high oil prices will also cause many commuters to consider moving to the city, reversing the allure of the suburbs, he said. And it could also force a change in eating habits, as foreign food becomes too expensive to ship.

“It means forget about that 50-mile commute from Cooksville to Toronto, and also forget about that avocado salad in January.”

More fundamentally, the soaring oil price will prompt a major rethinking of how production is organized, Mr. Rubin argues, and could even lead to a revival of North American manufacturing.

Already, U.S. imports of Chinese steel are declining dramatically, while domestic production is rising at rates not seen for years, they say.

China's steel exports to the United States are falling at a 20-per-cent annual pace, while U.S. domestic production has risen by 10 per cent in the past year. That makes sense, the economists say, because Chinese steel producers need to import iron ore from the likes of Australia and Brazil, then turn it into steel and then pay huge and rising freight costs to send the hot-rolled steel to the United States.

Regional trade looks much cheaper in comparison, they say.

As oil prices continue to climb, shipments of furniture, footwear and machinery and equipment are likely to meet the same fate, the economists say.

“In a world of triple-digit oil prices, distance costs money,” they say in a paper released Tuesday. “And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder.”

At first glance, such developments may seem to favour a renaissance of the moribund steel mills and boarded up furniture plants of Canada. But high oil prices won't eliminate importers' search for cheap labour. Instead, they're eyeing Mexico.

“Instead of finding cheap labour half-way around the world, the key will be to find the cheapest labour force within reasonable shipping distance to your market,” CIBC says.

“In that type of world, look for Mexico's maquiladora plants to get another chance at bat when it comes to supplying the North American market. In a world where oil will soon cost over $200 per barrel, Mexico's proximity to the rest of North America gives its costs a huge advantage.”

While high oil prices will require major reorganization of global supply chains, the bigger danger comes in the form of inflationary pressure, Mr. Rubin warns.

“If you're a steel buyer, your costs are going up regardless of whether you are sourcing it from China or Pittsburgh,” he says, saying the same dynamic applies to Hamilton.

Soon, the United Steelworkers of America will want a piece of that higher price, and wages that have been kept flat for years because of labour competition from Asia will begin to rise.

He doesn't necessarily see a return to the double-digit inflation of the early 1980s, but figures the central banks in the United States and eventually Canada will have to begin raising rates dramatically in order to confront inflation running at around 3.5 or 4 per cent annual pace. Canada's target is two per cent a year.

Isochroma · Tar Sands Joined: Jul 22, 2007 Posts: 20

Oil price crisis threatens to reverse globalisation
11 June 2008

With brutal efficiency, the oil price is beginning to duff up a monster of the 20th century: globalisation. Those great tentacles that gripped our world in a hideous embrace are suddenly weakening and the multinational octopus is looking a bit pale and sickly. The extraordinary rise in the price of crude oil is wrecking outsourced business models everywhere and distance from your customer is no longer merely a matter of dull logistics. Whether you are selling coiled steel or cut flowers, the cost of transport is a problem.

America's steel industry is enjoying an unexpected revival, its competitive edge sharpened by the tariff wall erected by the cost of shipping heavy, low added-value products across the Pacific. We hear fewer complaints from Americans about Asian steel-dumping; instead, it is Asian exporters who are feeling the pinch and the pressure is from inputs as well as shipping to customers.

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. The oil overhead for passage from the Atlantic to the Pacific is proving to be a powerful bargaining chip in negotiations between some Australian iron ore mining companies and their Chinese steel mill customers. Antipodean miners are holding out for a higher price, arguing that some of the benefit of lower carriage costs belongs to producers. Proximity is suddenly more profitable and local solutions begin to look less like the expensive option. It would be rash to predict a revival of the Yorkshire textile mill and the demise of the Guangdong sweatshop, but you have to ask whether it makes sense to ship stuff from China when the price of a sea voyage from Shanghai represents half of the value of the product.

The economics of long-distance supply chains are being rewritten; if it is small and expensive - drugs and sophisticated electronics, for example - fuel costs have little impact, but bulky goods are under the cosh. Furniture, footwear, basic machinery, building materials - this is the stuff that China exports in vast quantities to America and it was very cheap, until now.

Economists at CIBC World Markets reckon that globalisation might go into reverse if the escalation in fuel costs continues. The freight cost of importing goods into America represented an effective tariff of 3 per cent when the oil price was $20 per barrel in 2000; it is now more than 9 per cent and will rise to 11 per cent if oil hits $150, CIBC says.

The revenge of localisation will be good for some but not for others and, just as globalisation had its victims, so will the gradual retreat by big business from the air and the high seas.

The business of airfreighting perishable goods is going seriously awry. Most of the cut flowers sold in Britain come from East African and Latin American plantations. This trade has been a key target for climate change campaigners, who worry about so-called food miles and advocate local sourcing to reduce the carbon footprint of produce. British flower importers complain about 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. Too bad, say the anti-globalisation brigade. Do without roses in January. Eat turnips, wear scratchy English tweeds, save the planet and blow a raspberry at global capitalism. Unfortunately, it will not work like that because without the benefit of cheap global trade, we will be at even greater risk of exploitation by big companies.

Inexpensive fuel has made life in Britain very easy for the great majority, bringing with it not just cheap clothes and appliances from Asia but also very cheap food. The tariff wall of expensive marine and jet fuel will favour domestic manufacturers, but it will punish consumers, who will find themselves once again at the mercy of a reduced number of suppliers. These will expand their profit margins, comfortable in the knowledge that the overseas competitor is suffering a critical cost disadvantage.

It is not clear that Britain will gain much from a localised world. A nation that depends heavily on trade is unlikely to profit when trading becomes more expensive.

A more likely outcome than localisation will be regionalisation - Asian, Latin American and African manufacturers will be forced to look to neighbouring markets for opportunities if the cost of long-haul markets becomes prohibitive.

An expansion of regional trade would be good for the world as it might open opportunities for neighbours of giants, such as China and India to sell their wares.

However, it may not be good for Britain, which has thrived on London's role as a global trading mecca. It would not be illogical for trade in financial services to follow the regionalisation of trade in goods - we may see more dispersal of financial markets to the Far East, the Middle East and, eventually, to Latin America and Africa. In such a world, where travel is expensive and financial capital more dispersed, Britain's advantage might be more difficult to sell.