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.
High fuel costs are expected to have a dramatic impact on trade patterns, as businesses look for supplies closer to home“It’s helped us because it’s harder for the Asians and others to ship over here,” said Barry Zekelman, chief executive officer of Atlas Tube Inc. of Harrow, Ont.
He said that after taking 30 to 40 per cent of the North American market for some steel tubing products, the Chinese have now “virtually disappeared” – partly, though not exclusively, because of the costs of transporting a heavy product such as steel across the Pacific.
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.
“Rising transport costs have already more than offset China’s otherwise slim cost advantage, giving U.S. steel a competitive advantage in its own market for the first time in over a decade,” the economists write.
They say higher transport costs are affecting other “freight-intensive” sectors such as furniture and industrial machinery, too. These goods now account for 42 per cent of total Chinese exports to the United States, down from 52 per cent in 2004.
In fact, if oil prices had not risen so quickly and transport costs had not soared so dramatically, growth in Chinese exports since 2004 would have been 30 per cent stronger than the actual figure.
Of course, the rising cost of goods from China is hardly happy news for many Canadian companies that source parts from Chinese factories, sell imported goods from China or have their products assembled by Chinese workers.
They suggest that “instead of finding cheap labour half way around the world, the key will be to find the cheapest labour force within reasonable shipping distance of your market.”
While Canadian companies could benefit, the bigger winner will be Mexico, they say. “Look for Mexico’s maquiladora plants to get another chance at bat when it comes to supplying the North American market,” they write.
Shipping costs to and from Asia have risen so much that they have eclipsed tariffs as a barrier to global trade, Mr. Rubin and Mr. Tal say, calling the cost of moving goods “the largest barrier to global trade today.”
“In fact,” they say, “in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades.”
When oil was $20 a barrel, transport costs were equivalent to a 3-per-cent tariff rate; now it’s above 9 per cent.
Aggravating the problem is the fact that modern new container ships travel faster than old bulk carriers and so use up more fuel, doubling fuel consumption per unit of freight over the past 15 years.
“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.”
