Will rising fuel costs reverse globalization?

As much as we would like it to be, the world is never a stable place for very long. After the technology bubble and the terrorist attacks of 9/11 in the early years of this decade, we managed to eke out about five years of relative economic stability. Now we understand that the U.S. was only incubating its current credit crisis, and that rising commodity prices – especially for oil and food – are raising the spectre of inflation once again.

A subject of lively debate among economists and business analysts today is the effect of rising oil prices on globalization. Rising oil prices translate into higher fuel costs, and that in turn drives up shipping costs. Ninety per cent of global demand for crude is based on the need for transportation fuels. In a world of triple-digit oil prices, could it cost less to manufacture products more expensively at home rather than ship cheaper products half way around the world? Could rising oil prices slow, stall, or even reverse the trend of globalization?


Economists Jeff Rubin and Benjamin Tal from CIBC World Markets took an in-depth look at this issue in May 2008. They estimated that the extra shipping costs from East Asia at then-current oil prices were the equivalent of imposing a 9 per cent tariff on East Asian goods entering North America. At oil prices of $200 per barrel, the tariff-equivalent rate would rise to 15 per cent. It has already become more economical to produce steel in North America than to ship the raw materials to China and ship the finished product back. Rising fuel prices might be a world trade killer, and the authors cited precedents from the 20th century that support their argument.

Ironically, China, one of the major beneficiaries of globalization to date, is pursuing domestic policies that make globalization more difficult for other countries. The retail price of gasoline is heavily subsidized there; China won’t allow a product like gasoline that could be so inflationary at world prices to derail its economic boom.

Telegraph Journal