Wednesday, June 11, 2008

The world gets rounder

The recent run up in gas prices has inflicted pain on people living at the margins. It also has made it tough for independent truckers, and others that can’t immediately shuttle these costs off on their customers.

While I don’t occupy an economic development role, my workforce development position puts me in a place to observe, as well as follow, various aspects of development. Each time I’m on the road, not only are gas price hikes cutting into my take home pay like everyone else—I also am observing aspects of America’s economic engine at work, primarily in the form of over-the-road transport. Recently, I’ve been part of a group looking at developing an initiative aimed at transportation, distribution, and logistics, in the Lewiston/Auburn area.

Initial conversations with company representatives occupying the transportation side of this sector have been productive. Interestingly, I keep hearing talk about regional models of transport, and more of a focus on moving goods throughout the region, and less about shipping lettuce 3,000 miles to satisfy some elitist need to ingest organic produce.

Higher energy costs are having a profound impact on trade, so much so that the cost of moving goods, not the cost of tariffs, is causing a realignment of trade. This is countering three decades of trade liberalization, which contributed to globalization.

The driver of globalization was often the huge (but quickly shrinking) labor differential between China, and North American producers. At this point in time, capital-intensive manufacturing is experiencing changes, due to the high ratio of their freight costs to final selling prices.

Take steel, for instance. High freight costs being incurred by Chinese (as well as Asian producers) from oil’s escalation in price, is changing the global cost curve of the product. Since most parts of China, and Asia are short on iron ore, requiring imports from Australia, and Brazil, changes in the global cost curve now provide a competitive advantage to U.S. steel, the first time this has happened in over a decade.

While it’s easy to be reactionary about energy cost price spikes, I think it is important, particularly for anyone in a policy-making role, to take a long view, vs. the typically short-term, politically expedient response that is all too prevalent when constituents yelp.

[Information for this post was pulled from StrategEcon (May 27, 2008), and the article, "Will Soaring Transport Costs Reverse Globalization?", by Jeff Rubin, and Benjamin Tal]

No comments: