How flat is the world of the future?Rising oil prices; US$ devaluation; currency re-valuation and upward pressure on labour costs in emerging markets etc. - what are the implications for global supply chains, global trade and economy?
I sense that globalisation's forward momentum has been taken for granted, has even seemed irresistible, but how robust are the mechanisms which have driven it and could we potentially currently be witnessing some reverse momentum? While much progress has been made on liberalising global trade over the last few decades, record high oil prices, the failure of WTO talks and the re-assertion of state interventionism - driven in part by increasing resource scarcity and competition - all have major implications for global trade. An interesting report I read by Canadian investment bank CIBC World Markets back in May (see link below) says that “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” and concludes that as a result “has effectively offset all the trade liberalization efforts of the last three decades.” Russia meanwhile has declared its intentions to revise trade policies and tariffs it was pressurised into by WTO talks which are disadvantageous to Russia; scarcity and price hikes in agro-commodities meanwhile provoked a rash of dramatic market interventions etc.
It seems hard to avoid the conclusion that globalisation has been fueled by cheap oil and energy prices generally. If oil prices remain high, and especially if they go higher, the efficiency/practicality of the long and complex supply chains circling the globe which we have come to take for granted may come under considerable pressure. The Wal-Marts and the Tesco´s of this world and many many other industries have highly fuel-intensive business models (especially for example where they rely on air-freight), but there long supply chains are becoming bloated as costs are inflated at every stage. While there is a general presumption that as emerging economies develop and the differential in cost of labour is eroded, production will be shifted to less developed countries (the rush to outsource to Eastern Europe has already cooled) there is little escaping the cost of oil.
With inflation of costs at every stage of supply chains, and transport costs rising, it may increasingly make sense to shorten supply chains and move production closer to home. The implications are inevitably complicated, but there already seems to be a visible trend for US companies for example to look more towards Mexico and less to wards Asia for production, a tendency for outsourced services to be brought back onshore, and for Asia to turn more to Asian markets for trade volumes as US trade declines etc. A major question is how this will effect developing markets that have grown on the back of globalisation and US over consumption and we seem to find ourselves in the absurd situation where the world is hoping for the US, already over consuming, to keep up consumption in order to support the other economies of the world.
CIBC Report
http://research.cibcwm.com/economic_public/download/smay08.pdf
Shipping Costs Start to Crimp Globalization
http://www.nytimes.com/2008/08/03/business/worldbusiness/03global.html?_r=1&hp&oref=slogin
