Fuel and Chinese exports

The rapid increase in the price of fuel has obvious knock on effects on transport costs. There are two issues here.

1. There will be an addition fuel cost per shipping container so price goes up

or

2. The ship will go slower to conserve fuel but also resulting in higher transport costs in terms of time.

This has important implications for the study of international trade, offshoring, outsourcing and globalisation in general.

A recent China Economic Review article commenting on a Washington Post piece touches on this development:

China’s getting too expensive. Back to America! [China Economic Review]

We’ve heard plenty in the news this year about rising prices hurting export-oriented businesses in places like Guangdong and, more recently, Zhejiang. Clearly some areas of China that were once “workshops” for the world’s cheap goods are pricing themselves out of the market, with the slashing of export rebates, inflation, currency appreciation (though that appears to be slowing viz. the US dollar) and rising labor, material and fuel costs all playing a part. The next step for these areas, local governments hope, is to climb the greasy pole value chain and start producing higher-value goods.

So who’s going to make our cheap furniture and sleeping bags now? Americans?

Not as strange as it sounds. In some cases, according to this interesting article by the Washington Post’s Ariana Eunjung Cha, some low-cost American manufacturers are headed back home. Transportation costs are a big part of it, according to Cha:

With fuel prices at record highs, the cost of sending a standard 40-foot container of goods has gone from $3,000 in 2000 to about $8,000 today, squeezing profit.

So this summer Kazazian, chief executive of Exxel Outdoors, a Los Angeles-based maker of recreational equipment, did something radical: He moved the manufacturing back to Haleyville, Ala.

Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the “China price”– the 40 to 50 percent cost advantage once offered by Chinese producers.

The export model that has powered China and other Asian countries for three decades will be compromised if fuel prices continue to rise, said Stephen Jen, a managing director for Morgan Stanley.

“Globalization has gone a little bit too far. It has overshot,” Jen said. “We’re not saying Asia is going to crumble, but we are saying Asia enjoyed extraordinary conditions in the past. Now the conditions are changing very quickly because of the energy shock, and Asia is coming under pressure.”

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