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Ocean transport an emerging barrier to trade

Jamaica Gleaner | June 8, 2008

Ocean transport an emerging barrier to trade

David Jessop

If energy costs remain high, Caribbean governments will now have to study carefully how ocean freight rates may not just modify global trade patterns, but also come to change hemispheric relationships

When governments engage in trade negotiations their principal objectives are to achieve trade advantage for their business community in overseas markets, lower the cost of imports and to encourage foreign investment.

As a consequence they focus predominantly on issues such as reducing tariff barriers, ensuring market access for national products and spending time addressing technical issues such as rules of origin.

However, a recent short paper published by one of the big Canadian banks threatens to stand all of this on its head.

In a study entitled: ’Will soaring transport costs reverse globalisation?’, its authors Jeff Rubin and Benjamin Tal argue that the unprecedented impact of rising energy prices on the cost of ocean transport means that moving goods from one nation to another has become a bigger barrier to global trade than tariffs.

In headline catching language they suggest that recent increases in ocean transport costs have effectively offset all trade liberalisation measures in the last three decades.

More expensive

Their report published by CIBC World Markets, the investment banking arm of the Canadian Imperial Bank of Commerce (CIBC), argues that as oil prices increase it has become prohibitively more expensive to ship cargo over long distances at high speeds. As a consequence, they believe the reaction to higher freight costs are likely to change global trade and production patterns enabling for example domestic manufacturers to withstand competition from lower-waged countries and causing production to be moved to nations or regions much closer to their end market.

The authors of the paper also seem to imply that increased transport costs will offset many of the hoped for gains resulting from the reduction of tariff barriers in the presently idling Doha Round at the World Trade Organisation or in other international trade negotiations and might even turn back the process of economic globalisation.

The report notes that in 2000, when oil cost US$20 per barrel, transport costs were equivalent to a three per cent tariff rate in the United States.

When they reached US$100 per barrel earlier this year they outweighed the impact of tariffs for all of America’s trading partners and should oil pass US$130 per barrel, then transport costs, they suggest, will become equivalent to an average tariff rate of over nine per cent.

They produce tables showing that shipping a standard 40-foot container from Shanghai to the US east coast cost US$3,000 when oil was at US$20 per barrel and now costs US$8,000.

As evidence of changing trade patterns they cite the fact that US steelmakers have become competitive against Chinese imports for the first time in more than a decade.

Put more simply, the report’s authors are arguing that the effect of oil price rises on ocean transport is to undo the negotiated tariff reductions of the past 30 or more years.

Low wage locations

The study suggests that the effect of this will cause manufacturers’ worldwide to begin searching for low wage locations within reasonable shipping distance of any market.

If this is correct and energy prices remain high, it implies a significant structural change in economic and political relations as nations move to seek advantage in their trade relationship with nearer neighbours rather than those that are distant with low production costs.

In the Americas this would imply US economic and political re-engagement with Latin America and a much deeper relationship with its nearest neighbours in the Caribbean and Central America.

It would suggest that low-cost manufacturing to supply the North American market will migrate from China to Mexico and to other locations such as the Dominican Republic and even Cuba if relations start to normalise under a democratic president.

Unspoken important messages

For these reasons the document contains some unspoken important messages about the Caribbean’s future approach to investment attraction and regional integration. It suggests that manufacturers thinking about low wage nations will change their approach as they recognise that future profitability will involve identifying locations within a reasonable distance of a major market like the US.

Paradoxically having just concluded an Economic Partnership Agreement with Europe, it would also seem to suggest that the real value now would be in the region moving rapidly to conclude first a free trade agreement with Canada and that at the very least arguing strongly for the rapid renewal of the Caribbean Basin Economic Recovery Act with the US if not a full trade agreement.

The report also has implications for the regional supply of food and by extension suggests that there is a pressing need for the creation of a viable inter-island shipping service if plans to increase food production for the region in Guyana, Belize and elsewhere are ever to have validity.

Further investments

In a commentary at a recent meeting of the Caribbean Development Bank in Halifax, Canada, Dr Marshall Hall, one of Jamaica’s leading businessmen and academics, argued that unless the region focussed more on investing in port infrastructure and the development of a regional trans-portation network plans the Caribbean would never be self sufficient in food.

He said that sea transportation was particularly important for the movement of produce and goods, adding that the region was at present totally dependent on the international shipping lines moving goods from the north to the Caribbean.

He also warned that the Caricom Single Market and Economy (CSME) would not work if the issue of regional transporta-tion was not adequately addressed.

What the CIBC report suggests is, if energy costs remain high, governments in the Caribbean will now have to study carefully how ocean freight rates may not just modify global trade patterns, but also come to change hemispheric relationships.

David Jessop is director of the Caribbean Council. Email: [email protected]

 source: Jamaica Gleaner