There are no riots in China!
Posted on 06/10/2008 10:22:39 PM PDT by TigerLikesRooster
June 11, 2008
Oil price crisis threatens to reverse globalisation
Carl Mortished: World Business Briefing
With brutal efficiency, the oil price is beginning to duff up a monster of the 20th century: globalisation. Those great tentacles that gripped our world in a hideous embrace are suddenly weakening and the multinational octopus is looking a bit pale and sickly. The extraordinary rise in the price of crude oil is wrecking outsourced business models everywhere and distance from your customer is no longer merely a matter of dull logistics. Whether you are selling coiled steel or cut flowers, the cost of transport is a problem.
America's steel industry is enjoying an unexpected revival, its competitive edge sharpened by the tariff wall erected by the cost of shipping heavy, low added-value products across the Pacific. We hear fewer complaints from Americans about Asian steel-dumping; instead, it is Asian exporters who are feeling the pinch and the pressure is from inputs as well as shipping to customers.
China needs to import iron ore and coking coal, but the cost of shipping a tonne of ore from Brazil to China now exceeds $100, a cost that is equal to the value of the mineral itself. The oil overhead for passage from the Atlantic to the Pacific is proving to be a powerful bargaining chip in negotiations between some Australian iron ore mining companies and their Chinese steel mill customers. Antipodean miners are holding out for a higher price, arguing that some of the benefit of lower carriage costs belongs to producers. Proximity is suddenly more profitable and local solutions begin to look less like the expensive option. It would be rash to predict a revival of the Yorkshire textile mill and the demise of the Guangdong sweatshop, but you have to ask whether it makes sense to ship stuff from China when the price of a sea voyage from Shanghai represents half of the value of the product.
The economics of long-distance supply chains are being rewritten; if it is small and expensive - drugs and sophisticated electronics, for example - fuel costs have little impact, but bulky goods are under the cosh. Furniture, footwear, basic machinery, building materials - this is the stuff that China exports in vast quantities to America and it was very cheap, until now.
Economists at CIBC World Markets reckon that globalisation might go into reverse if the escalation in fuel costs continues. The freight cost of importing goods into America represented an effective tariff of 3 per cent when the oil price was $20 per barrel in 2000; it is now more than 9 per cent and will rise to 11 per cent if oil hits $150, CIBC says.
The revenge of localisation will be good for some but not for others and, just as globalisation had its victims, so will the gradual retreat by big business from the air and the high seas.
The business of airfreighting perishable goods is going seriously awry. Most of the cut flowers sold in Britain come from East African and Latin American plantations. This trade has been a key target for climate change campaigners, who worry about so-called food miles and advocate local sourcing to reduce the carbon footprint of produce. British flower importers complain about 40 per cent increases in freight rates. In the case of carnations, a commodity product, the cost of airfreight from Kenya or Colombia now accounts for half of its value. Too bad, say the anti-globalisation brigade. Do without roses in January. Eat turnips, wear scratchy English tweeds, save the planet and blow a raspberry at global capitalism. Unfortunately, it will not work like that because without the benefit of cheap global trade, we will be at even greater risk of exploitation by big companies.
Inexpensive fuel has made life in Britain very easy for the great majority, bringing with it not just cheap clothes and appliances from Asia but also very cheap food. The tariff wall of expensive marine and jet fuel will favour domestic manufacturers, but it will punish consumers, who will find themselves once again at the mercy of a reduced number of suppliers. These will expand their profit margins, comfortable in the knowledge that the overseas competitor is suffering a critical cost disadvantage.
It is not clear that Britain will gain much from a localised world. A nation that depends heavily on trade is unlikely to profit when trading becomes more expensive.
A more likely outcome than localisation will be regionalisation - Asian, Latin American and African manufacturers will be forced to look to neighbouring markets for opportunities if the cost of long-haul markets becomes prohibitive.
An expansion of regional trade would be good for the world as it might open opportunities for neighbours of giants, such as China and India to sell their wares.
However, it may not be good for Britain, which has thrived on London's role as a global trading mecca. It would not be illogical for trade in financial services to follow the regionalisation of trade in goods - we may see more dispersal of financial markets to the Far East, the Middle East and, eventually, to Latin America and Africa. In such a world, where travel is expensive and financial capital more dispersed, Britain's advantage might be more difficult to sell.
On the other hand, high oil price would indirectly do damage to global finance because damage to real economy do have a serious impact on finance. Its highly leveraged nature only make it worse.
Ping!
cannot directly roll back reckless global finance,
every cloud has a silver lining.
Life in America is about to become a helluva lot more expensive for people who have gotten used to paying Wal-Mart prices.
It is inevitable. If U.S. inspired global credit economy hits a wall, So does Chinese economy.
No, it really won’t be that bad. We will have to start looking for locally or nationally made items in place of all that Chinese junk. The result will mean more jobs here in the United States.
We really need to learn to do without so much plastic, too, as it is made from petroleum. As a nation we are imaginative; I’m sure we’ll pull through splendidly.
Yup.
Now comes the $65,535.00 question: When (if) it does.... what happens in China? Do we see riots as their economy goes into a serious reversal for a time? Do we see a war break out in southeast Asia as they go reaching for commodities and assets they need to prop up their economy?
Or do they un-peg the Yuan? And convert their reserves to some other currency, putting the last nail in the dollar’s coffin?
There’s all sorts of possible outcomes to this scenario. None of them particularly pleasant in the short term.
Probably not soon enough to get the financial bubble uninterrupted and China's ambition unimpeded.
If you cared about continued growth, you have to think long and hard about this kind of prospect for a long time, instead of trying to come up with some ideas on a fly now.
There are no riots in China!
Innovation is needed and I don't see any vision from our so-called leaders to provide the proper investment incentives only more nanny statism.
An excellent, excellent article. I’m sure investors and economists are doing their best to quantify these observations.
And yet another good reason for domestic oil exploration and processing.
A couple observations:
- China has been developing the regional market of SE Asia for many years, and seemingly just as aggressively as in any Wal-Mart. For almost any consumer good there is always the choice of “cheap Chinese” or a more expensive and higher quality alternative (that are not from China, e.g, bicycles). This has been going on for at least the last 5 years.
- I’m a bit dubious of the shipping prices mentioned in the article. I’m no expert, but in my limited experience a container load of “stuff” (e.g., furniture) was about $3,700 from Singapore to Baltimore, and I priced a 32-foot pleasure boat shipment at about $5,000 from Baltimore to Bangkok. While I can understand that Columbian carnations and Dutch tulips might get much more expensive to ship via air, it just seems unlikely that sea transport would actually have doubled due to fuel costs alone.
The business of airfreighting perishable goods is going seriously awry. Most of the cut flowers sold in Britain come from East African and Latin American plantations.
So I infer that the flowers are airlifted into Britain.
“So I infer that the flowers are airlifted into Britain.”
Yes it has become a big business for much of South America. Especially Colombia. It is just a further extension of the airlifted fruits and vegetables to markets so that people have strawberries and such year around.
Brilliant post by you! The article is also very interesting and something that’s obvious. High transport cost will curtail global integration. OK by me
That in of itself is a result of greed, not common sense, and therefore waste of labor and resources is quadrupled which in turns stagnates other sectors of the global economy, domestic as well.
IOW, such philosophies denies increase in the standard of living of many world wide.
It may seem a joke, but if the year round flower business is hurt I wouldn’t be surprised if much of South American devolves into further Socialism and many farmers go back to cocaine growing. This is one of those industries that has helped get farmers away from drug production. Further helping Colombia win the PR campaign against FARC.
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