NEW YORK, May 27 /PRNewswire-FirstCall/ - CIBC (CM: TSX; NYSE) - The
soaring price of oil has dramatically increased the cost of moving goods
around the globe, posing a major threat to price stability and overseas
manufacturing, finds a new report from CIBC World Markets.
"Exploding transport costs may soon remove the single most important
brake on inflation over the last decade - wage arbitrage with China," says
Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets.
"Not that Chinese manufacturing wages won't still warrant arbitrage. But in
today's world of triple-digit oil prices, distance costs money."
The report finds that the cost of shipping a standard 40-foot container
from East Asia to the U.S. eastern seaboard has already tripled since 2000
and will double again as oil prices head towards US$200 per barrel. These
soaring energy costs are threatening to offset decades of trade
liberalization and force some overseas manufacturing to return closer to
"Unless that container is chock full of diamonds, its shipping costs
have suddenly inflated the cost of whatever is inside," adds Mr. Rubin.
"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
Mr. Rubin says that these forces may reverse the impact of
globalization. "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."
The report notes that it currently costs US$8,000 to ship a standard
40-foot container from Shanghai to the U.S. eastern seaboard, including
in-land transportation. That's up from just US$3,000 in 2000 when oil was
US$20 per barrel. At US$200 per barrel of oil, the cost to ship the same
container is likely to reach US $15,000.
The impacts of these rising costs are already being seen in capital
intensive manufacturing that carry a high ratio of freight costs to the
final sale price, such as steel production. Soaring transport costs, first
on importing coal and iron to China and then exporting finished steel
overseas, have more than eroded the wage advantage and suddenly rendered
Chinese-made steel uncompetitive in the U.S. market. Underscoring this is
the fact that China's steel exports to the U.S. are falling by more than 20
per cent year over year, while U.S. domestic steel production has risen by
almost 10 per cent.
"That's great news if you are the United Steelworkers of America," says
Mr. Rubin. "Long lost jobs will soon be coming home. And the more that oil
and transport costs rise for Chinese steel exporters, the more that North
American steel wage rates can grow. But if you're a steel buyer, your costs
are going up regardless of whether you're sourcing from China or
Converting transport costs into tariff equivalents shows how disruptive
soaring energy prices can be. Mr. Rubin notes that oil at US$150 per barrel
equates to an 11 per cent tariff rate - a level last seen in the 1970s. At
$200 per barrel of oil, "we are back at tariff rates even prior to the
Kennedy Round GATT negotiations of the mid-1960s," he says. "Even at US$100
per barrel of oil, transport costs outweigh the impact of tariffs for all
of America's trading partners, including Canada and Mexico."
Mr. Rubin points to history to show how higher energy and transport
costs serve to dampen trade and force markets to seek shorter, and cheaper
supply lines. Global exports have soared in all periods over the last 50
years when trade barriers were reduced and oil prices were low, his
analysis shows. But he says exports "went absolutely nowhere" during the
oil and energy crises of the 1970s, and for several years after despite
reductions in global tariffs and healthy recoveries from recessionary
"It's relatively easy to see why American importers shifted to regional
trading" during that time, says Mr. Rubin. "Trans-oceanic transport costs
literally exploded during the two oil price shocks. The cost of shipping a
standard cargo load overseas almost tripled, just as it (has) over the past
few years. Ultimately, soaring transport costs were borne by consumers and
markets responded accordingly, substituting goods that could be sourced
from closer locations than half way around the world carrying hugely
inflated freight costs."
Mr. Rubin says that goods with a low value-to-freight ratio will be the
most sensitive to rising transport costs. A "surprisingly high percentage"
of Chinese exports to the U.S. fall in this category, and include
furniture, apparel, footwear, metal manufacturing and industrial machinery,
"Freight-sensitive Chinese exports to the U.S. now account for 42 per
cent of total exports - down from 52 per cent in 2004," says Mr. Rubin,
adding he estimates "that if it were not for the dramatic increase in
transport costs, growth in Chinese exports to the U.S. since 2004 would
have been 35 per cent stronger than the actual tally."
Mr. Rubin says there is "certainly no reason why we should not expect
to see at least comparable if not greater trade diversification" than was
seen during the oil shocks of the 1970s. "Instead of finding cheap labor
half way around the world, the key will be to find the cheapest labor force
within reasonable shipping distance to your market."
In that type of world, Mexico's proximity to the rest of North America
combined with its labor costs will give it a second chance to compete with
Pacific Rim production, says Mr. Rubin who further predicts that when oil
prices reach US$200 a barrel, it will cost three times as much to ship the
same container from China than from Mexico.
"To put things in perspective, today's extra shipping cost from East
Asia is the equivalent of imposing a nine per cent tariff on East Asian
goods entering the U.S. And at oil prices at US$200 per barrel, the tariff
equivalent rate will rise to 15 per cent."
"In a world of triple-digit oil prices, distance costs money. And while
trade liberalization and technology may have flattened the world, rising
transport prices will once again make it rounder," says Mr. Rubin.
The complete CIBC World Markets report is available at:
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SOURCE CIBC World Markets