Global trade vulnerable to high oil
The Globe and Mail: Global trade vulnerable to high oil
By HEATHER SCOFFIELD
Friday, September 9, 2005 Updated at 5:10 AM EDT
From Friday's Globe and Mail
The price of oil is poised to climb so high that it may dramatically change the dynamic of global trade and force companies to look closer to home for imports and exports, says a new paper by CIBC economists.
North American traders will be lured back to Mexico and Latin America and away from China and Asia, at least for some types of goods, as oil makes shipping costs prohibitive, say Jeff Rubin and Benjamin Tal, economists at CIBC World Markets.
"Suddenly, Chinese suppliers will look farther and farther away from their North American markets, while others, like Mexico, are about to get another turn at bat," they say in a paper released Wednesday.
They predict that the price of crude will reach $100 (U.S.) a barrel by the end of 2007 -- an aggressive call -- and that the price of shipping manufactured goods will have to rise accordingly.
Indeed, transportation costs could rise to a point that they become a barrier to global trade, and it may already be happening, the economists say.
"It would pretty well offset the trade liberalization efforts of the past four decades," Mr. Rubin said in an interview yesterday.
He estimates that $100-a-barrel oil would be tantamount to almost tripling current tariff rates, and would force companies to re-examine how they do business.
Many importers and exporters are not prepared for major changes to their supply routes, he added, and they will face a "huge challenge" dealing with higher costs.
"Instead of going to China, we'll be going into our own backyard," Mr. Rubin said.
While higher transport costs will affect the price of different goods in different ways, overall transport costs will be about 130 per cent more expensive at $100 oil than when oil cost just $30 a barrel, the paper says.
"All of a sudden, proximity to major markets becomes far more important in determining comparative advantage," the economists write. "Distance translates directly into costs."
In particular, goods that cost a lot to ship will be affected the most. From China, that list would include apparel, furniture, footwear, metal goods, textiles and industrial machinery.
Mexico could pick up some of that trade if lower transportation and freight costs can compensate for relatively higher wages there, the paper argues.
History backs up the argument, the economists say, pointing to previous oil shocks that brought global trade to a standstill.
But others argue that such the predictions are too simplistic.
Robert Hattin, who runs a packaging machinery company in Hamilton, says there's no doubt high energy prices are making shipping far more expensive, especially to far-flung places like China.
"Whether it's a pouch of Sudafed or a car, your freight costs are going to go up," Mr. Hattin said yesterday.
But establishing a new trade pattern can't be done quickly or cheaply, he added. Plus, many Canadian companies do most of their business within Canada or with the United States, and so a shift in pricing to Asia is not going to make a huge difference to his bottom line, and wouldn't prompt him to set up a new supply route, Mr. Hattin said.
Rather, companies like his will wait out the higher energy prices and try to absorb the extra costs.
"Most Canadian manufacturers are exporters across North America. The only market that really matters is the U.S.," he said. "People are just going to have to suck up the costs."
Indeed, much of the CIBC World Markets argument depends on businesses believing that oil will indeed continue to climb, and stay expensive for some time to come, said Bernie Wolf, director of the international MBA program at York University.
"The world doesn't change on a dime," he said. "You won't make shifts if you're not sure these changes are relatively permanent."
Plus, he added, China's wage advantages are significant, compared to Mexico and Latin America, and may offset the extra costs of transportation.
Recent business at Air Canada's cargo division seems to back up Prof. Wolf.
Air Canada raised its shipping rates just this week, to reflect rising fuel costs, said spokeswoman Laura Cooke. But at the same time, the airline does not seem to be anticipating any drop in demand for transoceanic transport, and is adding new cargo capacity for routes across the Atlantic and to Asia.
By HEATHER SCOFFIELD
Friday, September 9, 2005 Updated at 5:10 AM EDT
From Friday's Globe and Mail
The price of oil is poised to climb so high that it may dramatically change the dynamic of global trade and force companies to look closer to home for imports and exports, says a new paper by CIBC economists.
North American traders will be lured back to Mexico and Latin America and away from China and Asia, at least for some types of goods, as oil makes shipping costs prohibitive, say Jeff Rubin and Benjamin Tal, economists at CIBC World Markets.
"Suddenly, Chinese suppliers will look farther and farther away from their North American markets, while others, like Mexico, are about to get another turn at bat," they say in a paper released Wednesday.
They predict that the price of crude will reach $100 (U.S.) a barrel by the end of 2007 -- an aggressive call -- and that the price of shipping manufactured goods will have to rise accordingly.
Indeed, transportation costs could rise to a point that they become a barrier to global trade, and it may already be happening, the economists say.
"It would pretty well offset the trade liberalization efforts of the past four decades," Mr. Rubin said in an interview yesterday.
He estimates that $100-a-barrel oil would be tantamount to almost tripling current tariff rates, and would force companies to re-examine how they do business.
Many importers and exporters are not prepared for major changes to their supply routes, he added, and they will face a "huge challenge" dealing with higher costs.
"Instead of going to China, we'll be going into our own backyard," Mr. Rubin said.
While higher transport costs will affect the price of different goods in different ways, overall transport costs will be about 130 per cent more expensive at $100 oil than when oil cost just $30 a barrel, the paper says.
"All of a sudden, proximity to major markets becomes far more important in determining comparative advantage," the economists write. "Distance translates directly into costs."
In particular, goods that cost a lot to ship will be affected the most. From China, that list would include apparel, furniture, footwear, metal goods, textiles and industrial machinery.
Mexico could pick up some of that trade if lower transportation and freight costs can compensate for relatively higher wages there, the paper argues.
History backs up the argument, the economists say, pointing to previous oil shocks that brought global trade to a standstill.
But others argue that such the predictions are too simplistic.
Robert Hattin, who runs a packaging machinery company in Hamilton, says there's no doubt high energy prices are making shipping far more expensive, especially to far-flung places like China.
"Whether it's a pouch of Sudafed or a car, your freight costs are going to go up," Mr. Hattin said yesterday.
But establishing a new trade pattern can't be done quickly or cheaply, he added. Plus, many Canadian companies do most of their business within Canada or with the United States, and so a shift in pricing to Asia is not going to make a huge difference to his bottom line, and wouldn't prompt him to set up a new supply route, Mr. Hattin said.
Rather, companies like his will wait out the higher energy prices and try to absorb the extra costs.
"Most Canadian manufacturers are exporters across North America. The only market that really matters is the U.S.," he said. "People are just going to have to suck up the costs."
Indeed, much of the CIBC World Markets argument depends on businesses believing that oil will indeed continue to climb, and stay expensive for some time to come, said Bernie Wolf, director of the international MBA program at York University.
"The world doesn't change on a dime," he said. "You won't make shifts if you're not sure these changes are relatively permanent."
Plus, he added, China's wage advantages are significant, compared to Mexico and Latin America, and may offset the extra costs of transportation.
Recent business at Air Canada's cargo division seems to back up Prof. Wolf.
Air Canada raised its shipping rates just this week, to reflect rising fuel costs, said spokeswoman Laura Cooke. But at the same time, the airline does not seem to be anticipating any drop in demand for transoceanic transport, and is adding new cargo capacity for routes across the Atlantic and to Asia.
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