Monday, June 23, 2008

Comparative advantage

A principle driver for off-shoring production has been that the cost of transportation was pushed to zero by cheap energy prices and increased efficiency. This meant that cheaper labor costs in undeveloped or developed countries could be fully realized. That era appears to be coming to an end. Paul Krugman points to a paper by Venables and Limao about transportation costs and does a back of the envelop to estimate that current oil prices will cut world trade by 17%.

In a second post, Krugman discusses reports from CIBC, and the National Bureau of Economic Research. The later is particularly interesting. Manufacturing involves imported components gets hit by a double whammy, the added cost of importing the components in addition to the cost of exporting them.

The same mechanism will cause changes within larger countries such as the US. We may be rapidly approaching the point where sending fruits and vegetables from California to the rest of the country will no longer pay. This together with the real estate bus might reruralize the exburbs.

Big changes are coming and those who don't catch on are going to lose big time.

8 comments:

John Mashey said...

But don't worry, all the neoclassical economics studies say that world GDP growth just keeps on chugging along indefinitely, so the world is 6X or so richer by 2100, irrespective of minor annoyances like Peak Oil&Gas.

Frequently-referenced economics-of-climate-change studies assume that in BAU reference cases, and then calculate policy effects relative to that BAU case. In some cases, people argue that nothing much need be done soon, since future generations will be so much richer.

The CIBC reports are often worth reading: they were warning to expect the world to get rounder a while ago.

Anonymous said...

"We may be rapidly approaching the point where sending fruits and vegetables from California to the rest of the country will no longer pay."

I have my doubts for a couple reasons:


It will "pay" as long as someone is willing to buy the stuff.

First, there are lots of someones in this country for whom money for fruits and vegetables is no object -- never has been and never will be.

And even if that were not the case, the price of the fruits and vegetables here in the US is kept artificially low by government subsidies to farmers -- probably not likely to change any time soon.

John Mashey said...

Eli:
You may want to go back and reread http://initforthegold.blogspot.com/2008/03/energy-is-unbelievably-cheap.html

and the comments. As I recall, you participated, unless it was a Wallace-like were-rabbit.

I.e., long-distance transport in big trucks actually isn't too bad. oF course, every cost counts, but in many cases, the transport cost is a small piece of the energy cost, although $10 gas would probably fix that.

The worse problem is the general rise in food costs from less nitrogen fertilizer and higher-priced oil, since we eat a lot of oil, even without the final transport.

Anonymous said...

Well, since I live in California, and very near an agricultural area at that, I think I'll stay put so I can get those wonderful seasonal fruits and veggies that won't be shipped East. Seriously, I think we'll see less international food shipments, but shipments by truck and rail will still continue where it's cost-effective. The days of flying cargo planes full of Chilean fruit will eventually become a memory, as well as a symbol of waste and profligacy. I still remember the idea of shipping our live chickens to China to have them slaughtered, packaged, and shipped back to us for our consumption. It was then that I thought the wrong product was being shipped. It should have been economists.

VictorDodger

EliRabett said...

The issue is comparative advantage. A lot of that can disappear with a small change in a particular cost. What you have to look at is not the cost of a particular component, but the difference in costs between raising food in CA for consumption in NY and raising it in NY. That only has to be some small fraction of the total cost to kill farmining of that crop in NY/CA. I also expect that intermodal rail will (as it has) pick up for the same reason.

Dano said...

I agree to a point, but NY has much shorter growing seasons than CA and can't grow the range of crops. Of course, if they stop subsidizing water in CA then all bets are off.

Best,

D

Dano said...

...and complicating matters further, I just heard a story on NPR this morning that many Central Valley farmers are walking away from their tomato fields this year, due to the drought.

Best,

D

crispian123 said...

I agree to a point, but NY has much shorter growing seasons than CA and can't grow the range of crops. Of course, if they stop subsidizing water in CA then all bets are off.
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