August 5, 2008
Rising Fuel Prices Put Crimp in Global Trade
Who needs protectionism when fuel prices are going through the roof?
The rule of thumb in the brand new global trade world in recent years is that companies look overseas for cheap labor to produce goods and that, even after shipping products halfway around the world, the cost is still less than if they were made at home. That approach may be in the process of changing as rising transportation costs are making the global economic model less attractive, according to a New York Times report.
“If we think about the Wal-Mart model, it is incredibly fuel-intensive at every stage, and at every one of those stages we are now seeing an inflation of the costs for boats, trucks, cars,” said Naomi Klein, author of The Shock Doctrine: The Rise of Disaster Capitalism. “That is necessarily leading to a rethinking of this emissions-intensive model, whether the increased interest in growing foods locally, producing locally or shopping locally.”
A number of factors are working against globalization. There’s the high cost of fuel but also environmental concerns, concerns over product safety, rising wages in countries where goods have been produced on the cheap and a backlash in industrial nations over the loss of jobs and a perceived lowering of living standards.
As the Times article points out, many economists do not think that the move to overseas production will abate no matter how high fuel prices go.
“It would be a mistake, a misinterpretation, to think that a huge rollback or reversal of fundamental trends is under way,” said Jeffery Sachs, director of the Earth Institute at Columbia University. “Distance and trade costs do matter, but we are still in a globalized era.”
Others, however, are looking to move production closer to the consumer markets where they will eventually be sold.
IKEA, for example, opened its first factory in the U.S. in May. Some companies that had pulled up stakes from Mexico to move to China have reopened factories south of the border.
“If prices stay at these levels, that could lead to some significant rearrangement of production, among sectors and countries,” said C. Fred Bergsten, author of The United States and the World Economy and director of the Peter G. Peterson Institute for International Economics. “You could have a very significant shock to traditional consumption patterns and also some important growth effects.”
A report by CIBC World Markets found that rising fuel costs have added what amounts to a nine percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today” and it “has effectively offset all the trade liberalization efforts of the last three decades.”
Discussion Questions: Do you see factors such as fuel costs, environmental concerns, rising production costs in developing nations, etc. causing a slow down or a reversal in the globalization trend? Will we once again start to see goods “Made in America” or at least closer to the U.S. than in the recent past? What will this mean for producing nations such as China and India?
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The cost of fuel to transport overseas production is one factor but not the total issue. Monetary exchange rates may be more compelling to China production challenges than rising transportation costs. Raw materials and labor increases are also strongly impacting China and India as cost effective production sources. Mexico now has become more cost effective to source goods from (at this time) due to the factors above.
Labor will always be a decisive factor in production costs, and the US will always be at a premium labor cost to other countries for many reasons. Sourcing goods locally is great for “green reasons” but consumers will buy items that offer the best features and benefits and are the best “value” for their dollars, then secondarily consider the environmental impact of their purchase decisions.
There will be a movement to source things closer to home in days ahead. Escalating fuel costs, environmental concerns, and currency are enough to start rethinking the approach. As in the fresh seafood discussion, air transport is not sustainable or cost effective sourcing. Particularly in the food area–food products and ingredients will also likely be “repatriated” sooner rather than later, as quality and service issues increase.
Auditing these operations is a relentless challenge. Economic pressures increase the stress on extended multi-partner supply chains. Further, country of origin labeling will also impact cost and consumer perception. As major retailers reconsider sourcing options and longer term costs, there will be change.
There may be a movement to produce and buy some goods locally but the main point that is forgotten is that most, if not all of the machinery that we used in the past is now obsolete or has been sold to foreign manufacturers. Additionally, the skill that we once possessed is now lost. An example is the garment industry.
Recently, I questioned the economics of purchasing cotton from one country and shipping it to China to make clothing and then shipping it to the US. I was informed that the cotton never goes ashore in China. When the ship containing the cotton reaches China, the garment sewers come aboard the ship and sew on the way to the US. They sleep on the deck in shifts.
However, I do believe that many manufacturers are or need to reevaluate their business model, taking into consideration the cost of energy.
I can’t imagine a fundamental reversal of the globalization of manufacturing. The Law of Comparative Advantage forces is too strong. The only way I can envision substantial low-value product manufacturing shifting back to the US is if the dollar continued to slide into oblivion. Even with the debt caused by the unchecked spending of the past, current and either future administrations, and the likely (further) inflation when the US government has to print more money to cover the payments, I can’t imagine we would reach that point. God help us if we do.
As a relevant aside here, I was surprised to notice that all of a sudden, high-class restaurants and foodservice vendors are suggesting that more fish be frozen. When it’s flown by air from distant ports, the carbon footprint is just terrible. So they’re suggesting that more fish be frozen at sea, so that it can be shipped by train, truck or ship.
According to a July 30 story in the Washington Post, “Culinary leaders who care about reducing greenhouse gases linked to global warming need ‘to get people to understand that frozen is fresher than raw’ most of the time, according to Food Network host Alton Brown. ‘What we need is more trains,’ he added. ‘There needs to be a fish train.’”
Okay, so the “fish train” reference was tongue-in-cheek. At least a little. But the story adds that Bon Appetit Management, which runs 400 cafes nationwide, estimates that shipping seafood by air generates 10 times as much greenhouse gas as transporting it by container ship and five times as much as shipping it by truck.
Bon Appetit said in April it would stop serving air-freighted fish by April 2009 and adopt new buying standards that prefer “regionally procured or frozen-at-sea” wild seafood. The newspaper quoted the company’s chief exec, Fedele Bauccio as saying “If it’s frozen at sea and handled right, properly, we can live with it. There’s not a difference. We have to get consumers behind us to make a difference in what we eat.”
To read the whole story, go to http://www.washingtonpost.com and in the little search box, key in “Can chefs cozy up to frozen fish?”
I echo the points here. High inflation in Asia and elsewhere, and higher food prices will only increase the pressure. However, China is now finding many of its exports too expensive and I think the Government will take action after the Olympics to rectify the situation.
India also has a tricky situation with high inflation, rising wages and job hopping but good deals are still there. The same with Vietnam…and the list goes on.
Global trade is needed as is global competition and this won’t go away. Countries and companies will respond to their pressures. Maybe some things will return to US shores but, globalisation will continue with vigour.
We will just chase the cents and dollar improvements in a bigger more dynamic arena.
Certainly fuel costs and the rising cost of materials will have some impact on global trade, but I don’t think they will cause an immediate, marked shift in where goods are manufactured. That shift, if it comes at all, will be the result of years of planning, building factories and training workers. With the cost of doing business in the US, I don’t think we will see a lot of goods made in America, but Mexico could certainly benefit, if the country remains calm politically.
I have not yet seen a trend to move production back closer to home, but I have seen a reaction to higher costs–I have seen more and more retailers take a hard look at their manufacturing and transportation decisions–to the point that some are reducing the decision-making authority of merchandisers in this vein and handing it over to supply chain, to optimize what is best for the company, as opposed to what may be best for the category.
Some years ago I saw a presentation by a German retailer on their re-designed logistics network. They moved from 24 to 12 distribution centers. Using our USA model, I was hard pressed to justify more than 3 DCs. After researching, I found the difference was the price of fuel. As the price of fuel goes up, the service area for the DC reduces. This is only part of the outsourcing equation.
Also some years ago, Puerto Rico encouraged US companies to invest, based on their much lower wage rate. Within a few years of investing, most companies closed down the Puerto Rico operations. Yes, they had low wages, but they also have very low productivity and over 20 paid holidays a year.
Most outsourcing justifications were overly optimistic to start with. Many did not include all costs. Yes, foreign outsourcing does provide lower wage rates, but also a much higher percentage of product that must be re-worked or scrapped.
Inventory ownership and thus investment starts at the factory and, in some cases, even back to the raw materials. Couple these costs with increases in fuel cost and the proposition is not as rosy. For some products the scale will be tipped for closer manufacturing, but not necessarily in the US. To achieve this will require unions to agree to work rule changes.
Asian wages are so low that the fuel cost simply isn’t relevant. If oil prices went to $300 per barrel Chinese goods would still be cheaper than American-made merchandise.
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The cost of fuel to transport overseas production is one factor but not the total issue. Monetary exchange rates may be more compelling to China production challenges than rising transportation costs. Raw materials and labor increases are also strongly impacting China and India as cost effective production sources. Mexico now has become more cost effective to source goods from (at this time) due to the factors above.
Labor will always be a decisive factor in production costs, and the US will always be at a premium labor cost to other countries for many reasons. Sourcing goods locally is great for “green reasons” but consumers will buy items that offer the best features and benefits and are the best “value” for their dollars, then secondarily consider the environmental impact of their purchase decisions.
There will be a movement to source things closer to home in days ahead. Escalating fuel costs, environmental concerns, and currency are enough to start rethinking the approach. As in the fresh seafood discussion, air transport is not sustainable or cost effective sourcing. Particularly in the food area–food products and ingredients will also likely be “repatriated” sooner rather than later, as quality and service issues increase.
Auditing these operations is a relentless challenge. Economic pressures increase the stress on extended multi-partner supply chains. Further, country of origin labeling will also impact cost and consumer perception. As major retailers reconsider sourcing options and longer term costs, there will be change.
There may be a movement to produce and buy some goods locally but the main point that is forgotten is that most, if not all of the machinery that we used in the past is now obsolete or has been sold to foreign manufacturers. Additionally, the skill that we once possessed is now lost. An example is the garment industry.
Recently, I questioned the economics of purchasing cotton from one country and shipping it to China to make clothing and then shipping it to the US. I was informed that the cotton never goes ashore in China. When the ship containing the cotton reaches China, the garment sewers come aboard the ship and sew on the way to the US. They sleep on the deck in shifts.
However, I do believe that many manufacturers are or need to reevaluate their business model, taking into consideration the cost of energy.
I can’t imagine a fundamental reversal of the globalization of manufacturing. The Law of Comparative Advantage forces is too strong. The only way I can envision substantial low-value product manufacturing shifting back to the US is if the dollar continued to slide into oblivion. Even with the debt caused by the unchecked spending of the past, current and either future administrations, and the likely (further) inflation when the US government has to print more money to cover the payments, I can’t imagine we would reach that point. God help us if we do.
As a relevant aside here, I was surprised to notice that all of a sudden, high-class restaurants and foodservice vendors are suggesting that more fish be frozen. When it’s flown by air from distant ports, the carbon footprint is just terrible. So they’re suggesting that more fish be frozen at sea, so that it can be shipped by train, truck or ship.
According to a July 30 story in the Washington Post, “Culinary leaders who care about reducing greenhouse gases linked to global warming need ‘to get people to understand that frozen is fresher than raw’ most of the time, according to Food Network host Alton Brown. ‘What we need is more trains,’ he added. ‘There needs to be a fish train.’”
Okay, so the “fish train” reference was tongue-in-cheek. At least a little. But the story adds that Bon Appetit Management, which runs 400 cafes nationwide, estimates that shipping seafood by air generates 10 times as much greenhouse gas as transporting it by container ship and five times as much as shipping it by truck.
Bon Appetit said in April it would stop serving air-freighted fish by April 2009 and adopt new buying standards that prefer “regionally procured or frozen-at-sea” wild seafood. The newspaper quoted the company’s chief exec, Fedele Bauccio as saying “If it’s frozen at sea and handled right, properly, we can live with it. There’s not a difference. We have to get consumers behind us to make a difference in what we eat.”
To read the whole story, go to http://www.washingtonpost.com and in the little search box, key in “Can chefs cozy up to frozen fish?”
I echo the points here. High inflation in Asia and elsewhere, and higher food prices will only increase the pressure. However, China is now finding many of its exports too expensive and I think the Government will take action after the Olympics to rectify the situation.
India also has a tricky situation with high inflation, rising wages and job hopping but good deals are still there. The same with Vietnam…and the list goes on.
Global trade is needed as is global competition and this won’t go away. Countries and companies will respond to their pressures. Maybe some things will return to US shores but, globalisation will continue with vigour.
We will just chase the cents and dollar improvements in a bigger more dynamic arena.
Certainly fuel costs and the rising cost of materials will have some impact on global trade, but I don’t think they will cause an immediate, marked shift in where goods are manufactured. That shift, if it comes at all, will be the result of years of planning, building factories and training workers. With the cost of doing business in the US, I don’t think we will see a lot of goods made in America, but Mexico could certainly benefit, if the country remains calm politically.
I have not yet seen a trend to move production back closer to home, but I have seen a reaction to higher costs–I have seen more and more retailers take a hard look at their manufacturing and transportation decisions–to the point that some are reducing the decision-making authority of merchandisers in this vein and handing it over to supply chain, to optimize what is best for the company, as opposed to what may be best for the category.
Some years ago I saw a presentation by a German retailer on their re-designed logistics network. They moved from 24 to 12 distribution centers. Using our USA model, I was hard pressed to justify more than 3 DCs. After researching, I found the difference was the price of fuel. As the price of fuel goes up, the service area for the DC reduces. This is only part of the outsourcing equation.
Also some years ago, Puerto Rico encouraged US companies to invest, based on their much lower wage rate. Within a few years of investing, most companies closed down the Puerto Rico operations. Yes, they had low wages, but they also have very low productivity and over 20 paid holidays a year.
Most outsourcing justifications were overly optimistic to start with. Many did not include all costs. Yes, foreign outsourcing does provide lower wage rates, but also a much higher percentage of product that must be re-worked or scrapped.
Inventory ownership and thus investment starts at the factory and, in some cases, even back to the raw materials. Couple these costs with increases in fuel cost and the proposition is not as rosy. For some products the scale will be tipped for closer manufacturing, but not necessarily in the US. To achieve this will require unions to agree to work rule changes.
Asian wages are so low that the fuel cost simply isn’t relevant. If oil prices went to $300 per barrel Chinese goods would still be cheaper than American-made merchandise.