Will Increased Shipping Costs Decrease Globalization?
Posted by Max Dunn Tue, 24 Jun 2008 23:09:00 GMT
There is speculation that the increased cost of shipping due to rising oil prices will reduce globalization since it will be cheaper to make products locally than ship them all over the world. For some bulk items where shipping is a major component of the price, this could be true. But for many high-value items, manufacturing them in low-cost countries and then shipping them by boat will still be more economical than making them locally.
Let’s look at computers. Costs for shipping a standard 40 foot container by boat from China has gone up from $3,000 to almost $6,000. If oil hits $200 a barrel, it could soar to $10,000. (Ref 1: BusinessWeek, Ref 2: CIBC World Markets)
However, this 40’ shipping container can hold about 500 computer systems (Ref 1, Ref 2). If we conservatively value the computer systems at $500 each, then this container can hold $250,000 worth of computers. So the increase in shipping cost of $7,000 is still less than 3% of the value of the computers. This will be true for many items since shipping by boat is actually a very efficient way to transport items.
Therefore for many items, it will continue to be more economical to manufacture them off-shore and ship them rather than making them locally.