Transport costs could alter world trade

On the high seas, giant vessels stuffed with furniture, toys and electronics are slowing down in a bid to conserve fuel.

Customers are pulling packages from costly air shipments and sending them by ship instead.

And some are beginning to wonder what an era of persistently high oil prices will mean for the multinational corporations that have come to rely on globe-girdling supply chains.

Crude prices have backed off last month's run toward $150 a barrel. But they persist above $110 a barrel, a level that was hard to fathom even a year ago. The end of cheap oil heralds a potentially dramatic reshaping of the globalized trade flows that have emerged in the past two decades. Rising transport costs are suddenly a key factor in decisions about both where to place factories and how much inventory to stockpile.

For now, the trend seems to favor the United States. Swedish furniture maker Ikea opened a new plant in Virginia. Midwestern steelmakers are thriving. And consumer products giant Procter & Gamble is considering new distribution centers. All, some say, because the cost of moving things from far-away places is beginning to trump the savings involved in using far-away, low-wage workers.

"Globalization is reversible," says Jeff Rubin, an analyst at CIBC World Markets in Toronto.

Well, maybe. No one predicts a wholesale return of manufacturing jobs to the United States. And there are other forces at work, including a weak dollar, which boosts exporters. But today's oil prices act like a tariff on global commerce, discouraging long-distance shipment of some components and finished goods, Rubin says. Shipping a standard 40-foot container from Shanghai to the U.S. East Coast in May cost about $8,000, vs. $3,000 eight years ago, when oil was around $20 a barrel.

If long-term trends push oil prices near $200, as some analysts expect, sending that shipping container halfway around the world would cost a staggering $15,000.

At such prices, the calculations that drove a doubling in global trade volume since 2000 and the establishment of far-flung supply networks might require rethinking. Orders might be placed with factories closer to home. Shuttered assembly lines could be given new life. And suddenly, the confident claims of globalization's cheerleaders that distance doesn't matter would ring hollow.

"The low-hanging fruit of globalization has been picked. … Now, things are changing," says Stephen Jen, currency strategist for Morgan Stanley in London.

At UPS, executives are nervously eyeing emerging shifts in trade between continents, which could require swapping the shipper's largest cargo aircraft for smaller planes on some ocean-spanning routes. UPS also is looking ahead to the potential impact of $200-a-barrel oil, examining the possibility that manufacturers might relocate some production closer to the USA.

"If we see prolonged very high oil, you may see trade lanes change. You may see more near-sourcing in the future, people building the goods closer to the end consumer," CEO Scott Davis told analysts on a July 22 conference call.

Offshore momentum slows

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