Globalisation in reverse gear as oil prices soar: Canadian report

May 29th, 2008 - 1:01 pm ICT by admin  

By Gurmukh Singh
Toronto, May 29 (IANS) Trade liberalisation and technology may have flattened the world, but rising transport prices will once again make it rounder, says a report by a major Canadian bank. In its study - “Will Soaring Transport Costs Reverse Globalization?”, the Canadian Imperial Bank of Commerce (CIBC) says soaring oil prices are driving transport costs to such levels that businesses will be forced to seek supplies locally, rather than importing at huge costs from China and India.

“Globalization is reversible. 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,” CIBC chief economist Jeff Rubin and co-author Benjamin Tal say in their report.

In fact, soaring global transport costs have already offset all the trade liberalisation efforts of the past three decades, the report points out.

If major cuts in tariffs and non-tariff barriers led to explosion of world trade, including the rapid industrialisation of India and China, during the past three decades, it says now “triple-digit oil prices, soaring transport costs, not tariff barriers, pose the greatest challenge to trade”.

Outlining how rising energy prices are set to roll back globalisation, the report says: “Back in 2000, when oil prices were $20 per barrel, transport costs were the equivalent of a 3 percent US tariff rate. Currently, transport costs are equivalent to an average tariff rate of more than 9 percent.

“At $150 per barrel, the tariff-equivalent rate is 11 percent, going back to the average tariff rates of the 1970s. And at $200 per barrel, we are back at tariff rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s.”

Giving an example, the report says that while it cost only $3,000 to ship a normal (40-foot) container from China to the US in 2000, today its costs $8,000. And at $200 per barrel, it will cost $15,000.

Referring to two past oil shocks which led the US to cut imports from Europe and Asia and raise regional trade with Caribbean and Latin American nations, the report says the current oil crisis also points to similar trends as China’s freight-intensive steel exports to the US are falling by more than 20 percent on a year-over-year basis, while US domestic steel production has risen by almost 10 percent during the same period.

The high transport costs have also hit exports of low-value Chinese goods - such as furniture, apparel, footwear, metal manufacturing, and industrial machinery - to the US, the report points out.

It predicts that rising oil prices - and thus transport costs - will spell less Chinese and Indian competition for North American manufacturers, and more regional trade, benefiting Mexico because of its abundant cheap labour and proximity to the US and Canada.

“In a world where oil will soon cost over $200 per barrel, Mexico’s proximity to the rest of North America gives its costs a huge advantage. It seems that American importers are starting to do the math and already shifting some business from China to Mexico,” the report says.

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