Short term fluctuations in energy prices notwithstanding, the long term trend of rising energy costs will affect commerce and change where our goods are manufactured. Last May I heard a radio interview in which an importer in New York City said the cost of moving a container of goods from China to NYC had increased in less than a year from $4000 to $5600, and it occurred to me that this is a greater increase than the gross margin on many of the less expensive goods currently being shipped. Will manufacturing return to the affluent areas like North America and Europe in a reversal of the globalization trend we’ve seen in the last few decades, due to increasing energy prices?
Globalization has been driven by relative manufacturing costs, and enabled by cheap energy. Cheap movement of goods around the world has created an increasingly integrated global economy, and I think many have thought development in this direction would only continue. This change was based on cheap energy as much as innovations in the shipping industry, however, and most of that energy has come from fossil fuels of which the world has only a limited supply. As that supply runs down, and the cheapest and most easily accessible forms are exhausted, costs will inevitably rise, and that will impact the cost of moving goods around the globe. Then, as costs rise, the goods we ship, led by the cheapest and least dense in terms of value per unit weight and volume, will no longer be economical to ship long distances. The shipping cost will eclipse any cost advantage to be gained by manufacturing overseas. This suggests a return to regional economic manufacturing, first for low margin products, in a pattern that will extend to goods with higher margins and value-densities as energy prices climb.
Workers in the low-cost countries are gaining power and demanding higher pay and better benefits. Articles over the past year have described how Chinese workers have begun demanding higher pay, benefits, and safer working conditions, and walking off the job if their demands weren’t met. This is not to say that they’ve been organizing. That would draw official attention that could be highly undesirable. Instead, workers have been voting with their feet – walking off the job and finding a new job in another factory nearby or in another city. One report last spring cited over 200 factories had closed in Southern China and the operations had been moved to other countries, predominantly Indonesia and Viet Nam, because of rising costs. Still, China is the current world manufacturing power house, and demand for labor is high.
The return of manufacturing may come sooner than many expected. Actually, I think most people never expected to see manufacturing returning to the U.S. and other most developed countries, or at least felt it would be decades before such a change would occur. The recent rise in oil prices, however, has already started to noticeably turn the tide. It is an economic certainty that, when the combined cost of shipping and manufacturing goods elsewhere becomes less than the cost of manufacturing near the point of consumption, companies will move manufacturing facilities to optimize their profits. I don’t think this will be bad for the developed countries, but the overall result will depend on what other changes come about in conjunction with oil price increases.
As always, I welcome your comments. – Tim