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High Oil Killing China Labor Advantage

High Oil Killing China Labor Advantage

Thursday, May 29, 2008 3:02 PM

What goes around, comes around. Chinese labor is cheap, but high oil — perversely, the direct result of quick Chinese growth — is now killing the Asian giant’s manufacturing cost advantage.

The cost of transporting heavy cargo over long distances will become so expensive it will completely erode China's low-wage economic advantage, says a key analyst. That could provide incentives to produce more goods at home.

“Exploding transport costs may soon remove the single most important brake on inflation over the last decade — wage arbitrage with China,” CIBC World Markets Chief Economist Jeff Rubin told CNBC.

“The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today.”

Indeed, oil price rises have already driven up shipping costs so much that Chinese imports are now high-cost and losing market share, a new CIBC research report shows.

The cost of shipping a 40-foot container from Shanghai to the U. S. eastern seaboard has quadrupled to $8,000 on high crude prices.

If oil reaches $200 a barrel it will double again, increasing the impact on entire global trade for goods that carry high freight costs.

“If that container is filled with diamonds, it doesn’t matter,” Rubin says. “But for mass-manufactured products it means that a lot of those jobs may be coming home.”

“This is going to cause a major re-think for people who have re-jigged their supply lines to China,” Rubin says. “It’s going to turn global cost curves on their head.”

Freight-sensitive Chinese exports to the U.S. now account for 42 percent of total exports, down from 52 percent in 2004.

Rubin estimates that were it not for the dramatic increase in transport costs, growth in Chinese exports to the U.S. since 2004 would have been 35 percent stronger than the actual tally.

As additional evidence, Rubin points out that Chinese steel exports to the U.S. dropped by 20 percent during the past year, and U.S. steel production increased 10 percent during the same period.

“That’s all about freight costs,” Rubin says, adding that the more oil and transport costs rise for Chinese steel exporters, the more North American steel wage rates can grow.

“It’s great news for steelworkers, but not so great news if you’re the Federal Reserve Board,” Rubin notes.

“But if you're a steel buyer, your costs are going up regardless of whether you're sourcing from China or Pittsburgh.”

Even domestic transport costs are becoming a tough uphill battle — according to YRC Worldwide Chairman and CEO Bill Zollars.

About 70 percent of goods moved in the U.S. are moved by truck, and the 800,000 customers Zollars’ company serves include major players like Home Depot and Wal-Mart, which he says gives him a good overall view of the U.S. economy.

“It’s interesting that the biggest impact (Washington) thought it could have was yelling at the guys who are making money,” Zollars told CNBC.

“I’d love to see Congress pick up the ball and start running with it.”

“We’ve got to start drilling more, and we need more refineries and get serious about alternative fuels and conservation,” Zollars says. “Our only saving grace now is a weak dollar holding up imports.”

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