Shipping Costs Start to Crimp Globalization

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Some interesting data on transportation costs and possible effects in

reorganizing global production chains. – Wendy

 

Shipping Costs Start to Crimp Globalization

By LARRY ROHTER

New York Times, 8-3-08

 

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 bring20the 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, upse tting 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 incred ibly 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

=0 A

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 clim ate 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 du ring 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 of20food 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

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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 ba ck 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 inc rease 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 it s 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 de cline 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=E 2s also expensive to get them from here to there.”

 

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