A few days ago Jeff Rubin and Benjamin Tal with the Canadian International Bank of Commerce created a stir with a briefing paper on the impact rising fuel prices were likely to have on restricting trade: Will the Rising Price of Oil Choke Off Global Trade? (The Custom-House, June 4)
Andrew Leonard at Salon asked, "Who needs tariffs when you have expensive oil?"(June 6). Leonard noted that services delivered electronically wouldn't be affected, and observed...
...that blue-collar workers who make physical things in the West will stand to benefit, newly protected from foreign competition by energy tariffs, while white-collar workers who live off their wits will still feel the immense pressure of competing with everyone else in the world.
Rubin and Tal discussed sea transport; Menzie Chinn added that airfrieght would also be affected: More on De-Globalization: Oil, Transport Costs and Inflation (Econbrowser, June 4).
This morning Timothy Aeppel reports picks up the discussion for the Wall Street Journal. High fuel prices increase the cost - and the relative costs - of moving goods (see graphic) and create incentives to move manufacturing operations closer to markets. Aeppel focuses on shifts from China to North America.: Stung by Soaring Transport Costs, Factories Bring Jobs Home Again (Wall Street Journal, June 13). Aeppel focuses on the way manufacturers see the changing incentives, rather than on analytical estimates of actual impacts.
Fuel isn't the only price that's changing:
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 dollar -- though not as much as some critics contend it should -- increasing the cost of its products in the U.S.
And there are factors that will limit shifts:
But moving production closer to markets won't avoid all the problems associated with rising transportation costs. Manufacturers face hefty surcharges on domestic shipments by truck and train. And already congested domestic transportation systems may have difficulty handling a sudden upswing in demand from manufacturers buying and moving more raw materials and other supplies over U.S. rails and highways.
Moreover, in certain industries the advantages derived from offshore production continue to trump higher transportation costs.
Electronics firms, for instance, are now clustered in Asia and gain a major benefit of proximity to one another.
While many manufacturers are re-evaluating production strategies, there are limits to how many jobs will flow back to the U.S. One problem is that much of the basic infrastructure needed to support many industries -- such as suppliers who specialize in producing parts or repairing machines -- has dwindled or disappeared.
Expect larger changes in the location of production for heavy, low value, products. Mexico may be the big gainer, although Aeppel ends with an anecdote suggesting that even Mexico faces fuel challenges in some markets.
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