Home Court Advantage?
Posted by SCapozzola on June 13th, 2008
Typically in recent years, companies have moved manufacturing operations overseas in an effort to reduce production costs. Cheap labor, weak environmental standards, and a host of questionable subsidies have all combined to make production in countries like China seem attractive to the bottom line.
According to a piece by the Wall Street Journal’s Tim Aeppel, however, soaring oil prices are threatening to rebalance that equation. Aeppel cites CIBC analyst Jeff Rubin, who notes that “the cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel.” These rising transportation costs “are now the equivalent of a 9% tariff on goods coming into U.S. ports, compared with the equivalent of only 3% when oil was selling for $20 a barrel in 2000.”
Aeppel says that, for many U.S. manufacturers, “oil prices that have hurtled past $130 a barrel have been the tipping point.” Such heavy shipping costs mean domestic manufacturers are scrambling to source production closer to home. One example is Emerson, the St. Louis-based maker of electrical equipment, which recently shifted some production from Asia to Mexico and the U.S., all in an effort to “offset rising transportation costs by being closer to customers in North America.”
Though rising oil prices may help to somewhat recalibrate trade flows, it’s not certain that U.S. manufacturing workers will reap the rewards. With Emerson as but one example, CIBC’s Rubin suggests that Mexico cold be “the biggest winner of all.” While increased transportation costs may dissuade producers from large-scale Chinese imports, Mexico could take up the slack and become the preferred low-wage, environmentally lenient export platform.
But don’t cry for China just yet. They’re still running a $20 billion monthly trade surplus with the U.S.
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