But there is a caveat. Each wave of globalization has been driven by falling transport costs and reductions in tariff barriers. Conversely, when transport costs have been rising, or tariff barriers have been increasing, or both, progress in globalization has been overturned.
Given the soaring prices, oil has the potential for such a reversal.
Since the postwar era, multilateral trade negotiations - particularly reduction in tariffs and non-tariff barriers - have supported dramatic surges in global trade. But, along with the new protectionist winds in the advanced economies, the greatest immediate challenge to global trade and investment may be the triple-digit oil prices.
When oil prices were still around $20 per barrel in the year 2000, transport costs amounted to an average tariff rate of 3 percent. At $150 per barrel, the rate is 11 percent, which was the average level of the 1970s. If the price hits $200, it would reflect the kind of average tariff rates that prevailed in the mid-1960s.
These estimates by CIBC World Markets indicate that a 10 percent increase in trip distance translates into a 4.5 percent increase in transport costs. In 2000, it cost $3,000 to ship a standard 20-foot container from Shanghai to the east coast in the US, including inland costs. At $200 per barrel, the transport costs could soar to $15,000.
Until recently, the great manufacturing advantage of China and India was driven by the substantial wage differential between the labor in the US and in these large emerging economies. Due to energy prices and the freight costs, the differential is diminishing faster than anticipated.
Today wage differentials must be assessed within reasonable shipping distance to the market. Further, a substantial proportion of Chinese exports to the US (furniture, apparel, footwear, metal manufacturing, industrial machinery, etc) represent goods with low value to freight ratios. Due to the soaring energy prices and freight costs, China's steel exports to the US have been falling.
