Oil’s cargo cushion

reportonbusiness.com

The soaring cost of fuel is whittling away at the cheap-labour advantage enjoyed by Asian exporters, giving Canadian firms a welcome edge in their fight to win back business from Asian competitors.

Two bank economists argue in a report released Tuesday that because of higher fuel costs, shipping a standard 40-foot container from Shanghai to the east coast of North America now costs $8,000 (U.S.), up from $3,000 in 2000 when oil was just $20 a barrel.

That higher cost is passed on to North American consumers, making goods from China and other Asian places more costly compared to the offerings of domestic North American producers.

Some Canadian manufacturers are already noticing the effect.

[…]

Jeffrey Rubin and Benjamin Tal of CIBC World Markets Inc. say higher oil prices are reversing the world-is-flat effect, in which lower trade barriers and new technologies like the Internet made it cheaper to move goods and services from developing Asia to the markets of the rich world.

“In a world of triple-digit oil prices, distance costs money,” they write. “And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder.”

Mr. Rubin and Mr. Tal say the steel sector is a prime example of the world-is-round effect.

Chinese steel exports to the United States are falling by more than 20 per cent year over year. China’s costs have risen because Chinese producers have to bring in their iron ore from faraway places such as Australia and Brazil, then ship the finished steel to the United States. As a result, U.S. steel producers actually have an advantage over Chinese rivals.

[…]

“This is an environment in which shipping from the Pacific Rim may not make sense any more,” Mr. Tal said in an interview.

“If you’re thinking, ‘maybe we should bring in a container from China,’ you should think again.”

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