Get ready to pay more for everyday items, especially imported ones

    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
 home.
 
     "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
 advantage."
 
     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
 Pittsburgh."
 
     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
 periods.
 
     "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,
 he notes.
 
     "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:
 http://research.cibcwm.com/economic_public/download/smay08.pdf
 
     CIBC World Markets is the wholesale and corporate banking arm of CIBC,
 providing a range of integrated credit and capital markets products,
 investment banking, and merchant banking to clients in key financial
 markets in North America and around the world. We provide innovative
 capital solutions and advisory expertise across a wide range of industries
 as well as top-ranked research for our corporate, government and
 institutional clients.
 
 
 

SOURCE CIBC World Markets