Transport costs could alter world trade

Shippers' response to higher fuel bills is prompting a rethinking of the lean inventory approach that has dominated business strategy for years. From consumer products to autos, companies are proliferating distribution centers so they're closer to customers, Murphy says. That means inventories, whether in warehouses or floating on ships that are moving more deliberately across the waves, will be higher than in the past.

Consumer products giant Procter & Gamble began readying itself for this new era even before the past year's doubling in crude oil prices. In the past, the cost of building a factory or distribution center far outweighed the costs of moving goods from there to customers, says P&G spokesman Paul Fox.

"That is going to flip flop. Transportation costs are now going to be critical to the distribution of products," he says.

Bloc by bloc

Morgan Stanley's Jen anticipates higher fuel costs eventually reshaping global trade into regional blocs. Instead of relying so heavily on imports from Chinese factories 7,500 miles away, the U.S. will source from Mexico. Western Europe will rely upon suppliers in the former Soviet bloc or Turkey. And Asia will orient itself around the ever-larger Chinese economy, expected to be roughly as large as the U.S. economy by 2030, according to a new Carnegie Endowment study.

If Mexico stands to benefit, China's role as factory-to-the-world faces challenges. Wages for factory workers in export centers have been ticking higher. The full impact of higher world oil prices has not yet been felt in export factories, thanks to government energy subsidies. But that protection is scheduled to be withdrawn, meaning Chinese factories will face higher energy bills. Higher wages, electric bills and shipping costs — all will eat into Chinese manufacturers' profit margins.

"Many companies want to be in China anyhow to serve the domestic market. The question is whether China is the best place to serve the U.S. market," says economist Marc Levinson, author of The Box, a history of the shipping container.

Whatever the long-term results, higher fuel bills are affecting shipping lines and others involved in moving products from point A to point B. At NYK Line, captains are slowing their container ships, while executives consider retrofitting or scrapping older, thirstier models.

Slowing a giant oceangoing vessel to a speed of 23 miles per hour from almost 29 mph can lead to fuel savings of at least 20%, says Peter Keller, president of NYK Line. But to maintain the same level of service on a given route, the shipping line must add a ship. NYK also has raised prices and is scouring its fleet for older ships that can be made more efficient or that must be retired.

Older vessels, such as the Iris, built in 1983, carry a little more than 2,000 20-foot containers. Newer models, such as the NYK Vesta, christened last year, tote four times as many.

Still, Keller is skeptical that higher transport costs will turn back the clock to an era when the world economy was much less integrated. "The case for globalization is so strong. … Personally, I don't think we'll go back," he says.

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