Could soaring oil costs reverse globalisation?

by | Jun 2, 2008


Here’s a question I’ve been wondering about for a while now.  Just how much of an impact are soaring oil costs having on international trade through making it more expensive to ship freight?  And if oil costs keep rising – to $200 and beyond, say, as some analysts reckon could happen by the end of the year – is there a risk that transport costs could in effect start to roll back globalisation’s relentless advance over the last few decades? 

Last week, courtesy of John Robb, I found the first serious attempt I’ve yet come across to answer that question, from Jeff Rubin and Benjamin Tal (both at CIBC, an investment bank) – see pdf here (scroll down to page 4).  And it’s pretty powerful stuff, right from the first sentence, which says bluntly: “Globalisation is reversible.” 

The authors say that every one dollar rise in world oil prices translates into a one per cent rise in transport costs.  And as freight costs rise steadily upwards, they argue, what’s in effect happening is a de facto reversal of the tariff reductions that have been painstakingly negotiated in international trade rounds. 

Back when oil prices were $20 a barrel, they explain, transport costs were the equivalent of a 3% US tariff rate.  But at $150 a barrel – just $15 or so higher than oil today – the equivalent tariff rate goes up to 11%  – “going back to the average tariff rates of the 1970s”.  And $200?  “We are back at ‘tariff’ rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s.”  So with this kind of economic impact, the authors continue, markets will seek shorter, and hence less expensive supply lines – which is “precisely what we have witnessed in response to past OPEC oil shocks”.

Now think about what this means for economies that – like China and India – have emerged by exploiting their cheaper labout (albeit that wage costs have more recently been rising sharply in both countries).  China’s steel exports to the US, they say, are now falling by 20% on a year-on-year basis – and they think that’s not only because of the slowing US economy, but also because cheaper Chinese labour is starting to be offset by the sheer cost of transporting the steel across the Pacific. Bottom line:

“In a world of triple-digit oil prices, distance costs money.  And while trade liberalisation and technology may have flattened the world, rising transport costs will once again make it rounder.”

Although Rubin and Tal don’t get into the effect on food prices specifically, the drivers they discuss are profoundly relevant for the longer term food outlook.  More on that in a future post.

Author

  • Alex Evans

    Alex Evans is founder of the Collective Psychology Project, which explores how we can use psychology to reduce political tribalism and polarisation, a senior fellow at New York University, and author of The Myth Gap: What Happens When Evidence and Arguments Aren’t Enough? (Penguin, 2017). He is a former Campaign Director of the 50 million member global citizen’s movement Avaaz, special adviser to two UK Cabinet Ministers, climate expert in the UN Secretary-General’s office, and was Research Director for the Business Commission on Sustainable Development. He was part of Ethiopia’s delegation to the Paris climate summit and has consulted for Oxfam, WWF UK, the UK Cabinet Office and US State Department. Alex lives with his wife and two children in Yorkshire.


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