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.
Monday, June 23, 2008