Get Ready To Pay More for Everyday Items, Especially Imported Ones: Report

(PRNewswire-FirstCall/ - CIBC)

Exploding transport costs are driving up prices and could force some manufacturing to move closer to home, says CIBC World Markets

The soaring price of oil has dramatically increased the cost of moving goods around the globe, posing a major threat to price stability and overseas manufacturing, finds a new report from CIBC World Markets.

“Exploding transport costs may soon remove the single most important brake on inflation over the last decade – wage arbitrage with China,” says Jeff Rubin, chief economist and chief strategist at CIBC World Markets. “Not that Chinese manufacturing wages won’t still warrant arbitrage. But in today’s world of triple-digit oil prices, distance costs money.”

The report finds that the cost of shipping a standard 40-ft. container from East Asia to the North American east coast has already tripled since 2000 and will double again as oil prices head towards US$200 per barrel. These soaring energy costs are threatening to offset decades of trade liberalization and force some overseas manufacturing to return closer to home.

“Unless that container is chock full of diamonds, its shipping costs have suddenly inflated the cost of whatever is inside,” adds Rubin. “And those inflated costs get passed onto the Consumer Price Index when you buy that good at your local retailer. As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage.”

Rubin says that these forces may reverse the impact of globalization.

“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.”

The report notes that it currently costs US$8,000 to ship a standard 40-ft. container from Shanghai to the North American east coast, including in-land transportation. That’s up from just US$3,000 in 2000 when oil was US$20 per barrel. At US$200 per barrel of oil, the cost to ship the same container is likely to reach US $15,000.

The impacts of these rising costs are already being seen in capital intensive manufacturing that carry a high ratio of freight costs to the final sale price, such as steel production. Soaring transport costs, first on importing coal and iron to China and then exporting finished steel overseas, have more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the U.S. market. Underscoring this is the fact that China’s steel exports to the U.S. are falling by more than 20% year over year, while US domestic steel production has risen by almost 10%.

“That’s great news if you are the United Steelworkers of America,” Rubin says. “Long lost jobs will soon be coming home. And the more that oil and transport costs rise for Chinese steel exporters, the more that North American steel wage rates can grow. But if you’re a steel buyer, your costs are going up regardless of whether you’re sourcing from China or Pittsburgh.”

Converting transport costs into tariff equivalents shows how disruptive soaring energy prices can be. Rubin notes that oil at US$150 per barrel equates to an 11% tariff rate – a level last seen in the 1970s. At $200 per barrel of oil, “We are back at tariff rates even prior to the Kennedy Round GATT negotiations of the mid-1960s,” he says. “Even at US$100 per barrel of oil, transport costs outweigh the impact of tariffs for all of America’s trading partners, including Canada and Mexico.”

Rubin points to history to show how higher energy and transport costs serve to dampen trade and force markets to seek shorter, and cheaper supply lines. Global exports have soared in all periods over the last 50 years when trade barriers were reduced and oil prices were low, his analysis shows. But he says exports “went absolutely nowhere” during the oil and energy crises of the 1970s, and for several years after despite reductions in global tariffs and healthy recoveries from recessionary periods.

“It’s relatively easy to see why North American importers shifted to regional trading during that time,” Rubin says. “Trans-oceanic transport costs literally exploded during the two oil price shocks. The cost of shipping a standard cargo load overseas almost tripled, just as it (has) over the past few years. Ultimately, soaring transport costs were borne by consumers and markets responded accordingly, substituting goods that could be sourced from closer locations than half way around the world carrying hugely inflated freight costs.” Read the complete article.

Related: CIBC World Markets report (PDF format).