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  • From: Tompkins County Relocalization Project <tcrp-news AT lists.ibiblio.org>
  • To: Sustainable Tompkins <sustainabletompkins AT lists.mutualaid.org>
  • Cc: tcrp-news AT lists.ibiblio.org
  • Subject: [tcrp-news] Fw: Shipping Costs Start to Crimp Globalization
  • Date: Sun, 03 Aug 2008 21:33:11 -0400

This story, which appeared on the front page of today's New York
Times, bears out the predictions that leading peak oil theorists
have been making for several years. That these predictions are
beginning to be borne out by data is extremely significant for
our economy, both national and local.

Jon

==================================================================

The New York Times
August 3, 2008
Shipping Costs Start to Crimp Globalization
By LARRY ROHTER

When Tesla Motors, a pioneer in electric-powered cars, set out to
make a luxury roadster for the American market, it had the global
supply chain in mind. Tesla planned to manufacture 1,000-pound
battery packs in Thailand, ship them to Britain for installation,
then bring the mostly assembled cars back to the United States.

But when it began production this spring, the company decided to
make the batteries and assemble the cars near its home base in
California, cutting more than 5,000 miles from the shipping bill
for each vehicle.

"It was kind of a no-brain decision for us," said Darryl Siry, the
company’s senior vice president of global sales, marketing and
service. "A major reason was to avoid the transportation costs,
which are terrible."

The world economy has become so integrated that shoppers find
relatively few T-shirts and sneakers in Wal-Mart and Target
carrying a "Made in the U.S.A." label. But globalization may be
losing some of the inexorable economic power it had for much of
the past quarter-century, even as it faces fresh challenges as a
political ideology.

Cheap oil, the lubricant of quick, inexpensive transportation
links across the world, may not return anytime soon, upsetting the
logic of diffuse global supply chains that treat geography as a
footnote in the pursuit of lower wages. Rising concern about
global warming, the reaction against lost jobs in rich countries,
worries about food safety and security, and the collapse of world
trade talks in Geneva last week also signal that political and
environmental concerns may make the calculus of globalization far
more complex.

"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, the 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, and
I think that’s great."

Many economists argue that globalization will not shift into
reverse even if oil prices continue their rising trend. But many
see evidence that companies looking to keep prices low will have
to move some production closer to consumers. Globe-spanning supply
chains -- Brazilian iron ore turned into Chinese steel used to
make washing machines shipped to Long Beach, Calif., and then
trucked to appliance stores in Chicago -- make less sense today
than they did a few years ago.

To avoid having to ship all its products from abroad, the Swedish
furniture manufacturer Ikea opened its first factory in the United
States in May. Some electronics companies that left Mexico in
recent years for the lower wages in China are now returning to
Mexico, because they can lower costs by trucking their output
overland to American consumers.

Neighborhood Effect

Decisions like those suggest that what some economists call a
neighborhood effect -- putting factories closer to components
suppliers and to consumers, to reduce transportation costs --
could grow in importance if oil remains expensive. A barrel sold
for $125 on Friday, compared with lows of $10 a decade ago.

"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, in Washington. "You could
have a very significant shock to traditional consumption patterns
and also some important growth effects."

The cost of shipping a 40-foot container from Shanghai to the
United States has risen to $8,000, compared with $3,000 early in
the decade, according to a recent study of transportation
costs. Big container ships, the pack mules of the 21st-century
economy, have shaved their top speed by nearly 20 percent to save
on fuel costs, substantially slowing shipping times.

The study, published in May by the Canadian investment bank CIBC
World Markets, calculates that the recent surge in shipping costs
is on average the equivalent of a 9 percent tariff on trade. "The
cost of moving goods, not the cost of tariffs, is the largest
barrier to global trade today," the report concluded, and as a
result "has effectively offset all the trade liberalization
efforts of the last three decades."

The spike in shipping costs comes at a moment when concern about
the environmental impact of globalization is also growing. Many
companies have in recent years shifted production from countries
with greater energy efficiency and more rigorous standards on
carbon emissions, especially in Europe, to those that are more
lax, like China and India.

But if the international community fulfills its pledge to
negotiate a successor to the Kyoto Protocol to combat climate
change, even China and India would have to reduce the growth of
their emissions, and the relative costs of production in countries
that use energy inefficiently could grow.

The political landscape may also be changing. Dissatisfaction with
globalization has led to the election of governments in Latin
America hostile to the process. A somewhat similar reaction can be
seen in the United States, where both Senators Barack Obama and
Hillary Rodham Clinton promised during the Democratic primary
season to "re-evaluate" the nation’s existing free trade
agreements.

Last week, efforts to complete what is known as the Doha round of
trade talks collapsed in acrimony, dealing a serious blow to
tariff reduction. The negotiations, begun in 2001, failed after
China and India battled the United States over agricultural
tariffs, with the two developing countries insisting on broad
rights to protect themselves against surges of food imports that
could hurt their farmers.

Some critics of globalization are encouraged by those
developments, which they see as a welcome check on the process. On
environmentalist blogs, some are even gleefully promoting a
"globalization death watch."

Many leading economists say such predictions are probably
overblown. "It would be a mistake, a misinterpretation, to think
that a huge rollback or reversal of fundamental trends is under
way," said Jeffrey D. Sachs, director of the Earth Institute at
Columbia University. "Distance and trade costs do matter, but we
are still in a globalized era."

As economists and business executives well know, shipping costs
are only one factor in determining the flow of international
trade. When companies decide where to invest in a new factory or
from whom to buy a product, they also take into account exchange
rates, consumer confidence, labor costs, government regulations
and the availability of skilled managers.

'People Were Profligate’

What may be coming to an end are price-driven oddities like
chicken and fish crossing the ocean from the Western Hemisphere to
be filleted and packaged in Asia not to be consumed there, but to
be shipped back across the Pacific again. "Because of low costs,
people were profligate," said Nayan Chanda, author of "Bound
Together," a history of globalization.

The industries most likely to be affected by the sharp rise in
transportation costs are those producing heavy or bulky goods that
are particularly expensive to ship relative to their sale
price. Steel is an example. China’s steel exports to the United
States are now tumbling by more than 20 percent on a
year-over-year basis, their worst performance in a decade, while
American steel production has been rising after years of
decline. Motors and machinery of all types, car parts, industrial
presses, refrigerators, television sets and other home appliances
could also be affected.

Plants in industries that require relatively less investment in
infrastructure, like furniture, footwear and toys, are already
showing signs of mobility as shipping costs rise.

Until recently, standard practice in the furniture industry was to
ship American timber from ports like Norfolk, Baltimore and
Charleston to China, where oak and cherry would be milled into
sofas, beds, tables, cabinets and chairs, which were then shipped
back to the United States.

But with transportation costs rising, more wood is now going to
traditional domestic furniture-making centers in North Carolina
and Virginia, where the industry had all but been wiped out. While
the opening of the American Ikea plant, in Danville, Va., a
traditional furniture-producing center hit hard by the outsourcing
of production to Asia, is perhaps most emblematic of such changes,
other manufacturers are also shifting some production back to the
United States.

Among them is Craftmaster Furniture, a company founded in North
Carolina but now Chinese-owned. And at an industry fair in April,
La-Z-Boy announced a new line that will begin production in North
Carolina this month.

"There’s just a handful of us left, but it has become easier for
us domestic folks to compete," said Steven Kincaid of Kincaid
Furniture in Hudson, N.C., a division of La-Z-Boy.

Avocado Salad in January

Soaring transportation costs also have an impact on food, from
bananas to salmon. Higher shipping rates could eventually
transform some items now found in the typical middle-class pantry
into luxuries and further promote the so-called local food
movement popular in many American and European cities.

"This is not just about steel, but also maple syrup and avocados
and blueberries at the grocery store," shipped from places like
Chile and South Africa, said Jeff Rubin, chief economist at CIBC
World Markets and co-author of its recent study on transport costs
and globalization. "Avocado salad in Minneapolis in January is
just not going to work in this new world, because flying it in is
going to make it cost as much as a rib eye."

Global companies like General Electric, DuPont, Alcoa and Procter
& Gamble are beginning to respond to the simultaneous increases in
shipping and environmental costs with green policies meant to
reduce both fuel consumption and carbon emissions. That pressure
is likely to increase as both manufacturers and retailers seek
ways to tighten the global supply chain.

"Being green is in their best interests not so much in making
money as saving money," said Gary Yohe, an environmental economist
at Wesleyan University. "Green companies are likely to be a
permanent trend, as these vulnerabilities continue, but it’s going
to take a long time for all this to settle down."

In addition, the sharp increase in transportation costs has
implications for the "just-in-time" system pioneered in Japan and
later adopted the world over. It is a highly profitable business
strategy aimed at reducing warehousing and inventory costs by
arranging for raw materials and other supplies to arrive only when
needed, and not before.

Jeffrey E. Garten, the author of "World View: Global Strategies
for the New Economy" and a former dean of the Yale School of
Management, said that companies "cannot take a risk that the
just-in-time system won’t function, because the whole global
trading system is based on that notion." As a result, he said,
"they are going to have to have redundancies in the supply chain,
like more warehousing and multiple sources of supply and even
production."

One likely outcome if transportation rates stay high, economists
said, would be a strengthening of the neighborhood effect. Instead
of seeking supplies wherever they can be bought most cheaply,
regardless of location, and outsourcing the assembly of products
all over the world, manufacturers would instead concentrate on
performing those activities as close to home as possible.

In a more regionalized trading world, economists say, China would
probably end up buying more of the iron ore it needs from
Australia and less from Brazil, and farming out an even greater
proportion of its manufacturing work to places like Vietnam and
Thailand. Similarly, Mexico’s maquiladora sector, the assembly
plants concentrated near its border with the United States, would
become more attractive to manufacturers with an eye on the
American market.

But a trend toward regionalization would not necessarily benefit
the United States, economists caution. Not only has it lost some
of its manufacturing base and skills over the past
quarter-century, and experienced a decline in consumer confidence
as part of the current slowdown, but it is also far from the
economies that have become the most dynamic in the world, those of
Asia.

"Despite everything, the American economy is still the biggest
Rottweiler on the block," said Jagdish N. Bhagwati, the author of
"In Defense of Globalization" and a professor of economics at
Columbia. "But if it’s expensive to get products from there to
here, it’s also expensive to get them from here to there."




  • [tcrp-news] Fw: Shipping Costs Start to Crimp Globalization, Tompkins County Relocalization Project, 08/03/2008

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