TORONTO — The rising price of oil has dramatically increased the cost of moving goods around the globe, which could force manufacturers to stay closer to home.
A recent report released by CIBC World Markets has found a continuing increase of energy prices has put a major threat to price stability and overseas manufacturing. But while a decrease in globalization may be bad news for Asian manufacturers, it’s not necessarily good news for Canada’s manufacturers.
"Instead of finding cheap labour half way around the world, the key will be to find the cheapest labour force within
reasonable shipping distance to your market," says Jeff Rubin, chief economist and chief strategist at CIBC World Markets.
In that type of world, Mexico’s proximity to the rest of North America combined with its labour costs will give it a second chance to compete with Pacific Rim production, says Mr. Rubin who further predicts that when oil prices reach US$200 a barrel, it will cost three times as much to ship the same container from China than from Mexico.
"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 found the cost of shipping a standard 40-foot container from East Asia to North America’s east coast has already tripled since 2000 and will double again as oil prices head toward 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, says Rubin.
Rubin expects the high cost of overseas transportation to reverse the impact of globalization, as any wage savings are lost on shipping costs.
"In a world of triple-digit oil prices, distance costs money. And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder," says Rubin.
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