(James Saft is a Reuters columnist. The opinions expressed
are his own)
By James Saft
LONDON The "flat" globalized world is getting a
bit rounder, as high energy prices increase the costs of
transportation and undermine Asia's economic miracle.
The idea that the world was flat -- a phrase coined by
Thomas Friedman meaning that goods and services could be easily
produced in one place and sold across the globe -- was one of
the crucial underpinnings of China and other Asian export-based
But much of this was predicated on cheap transportation and
energy, and with oil at $140 a barrel the sums increasingly
don't add up.
"This will stress-test the entire Asian model, which has
been built in a time of low energy costs and low shipping
cost," said Stephen Jen, a strategist at Morgan Stanley in
"The world has completely changed and we, including myself,
are only starting to realize some of the implications. In China
a lot of the factories were built in the past 10 years with
certain levels of energy costs in mind. I suspect we have
significantly breached the levels of energy costs that would
make these factories viable."
The upshot for Asia, which has thus far shrugged off the
worst of the effects of the global credit malaise, is a
continued fall in profit margins and with it continued falls in
stocks and some currencies.
The MSCI Emerging Asia index .MIMS00000PUS has fallen
sharply recently, tracking the main markets in China, and is
down about 23 percent so far this year, as compared with a loss
of about 14 percent in the S&P 500 .SPX.
And the pressure won't just be on China, it will be felt
across the region.
Asia has developed a highly efficient and highly
interdependent manufacturing model. Manufacture of a good may
begin in very low wage areas like Vietnam, often with materials
sourced thousands of miles away, and then be taken to high-tech
factories in China for more skilled and high-value finishing,
before finally being shipped across the globe to consumers in
Europe or the United States.
That model uses lots of energy for transport, a cost that
has massively increased. In fact, the proportion of China's
exports that were first imported from elsewhere before being
finished and sold on has dropped to 44 percent from over 50
percent last year, moving down as oil moved up.
CIBC World Markets economists Jeff Rubin and Benjamin Tal
estimate that the cost of shipping a 40 foot container from
Shanghai to the east coast of the United States is close to
$10,000 with oil at $150, about double the 2005 price. By
comparison the same container costs just $4,000 to ship from
Mexico at $150 per barrel.
An irony is that the move to container ships, which cut the
costs of shipping and turbo charged globalization, means fuel
price increases are more keenly felt and more inflationary.
While old-fashioned ships burned fuel just like containerized
ones, a higher proportion of their costs were other things,
That means that every dollar increase in the price of oil
has a proportionally bigger impact on overall shipping costs
than it would have even ten years ago.
HOW LONG WILL CHINA SUBSIDISE ENERGY?
And of course the rising price of goods from China is not
just a problem for China and its firms, but for the United
States and its monetary policy makers, who for years have had
their jobs made easier as cheap imports from Asia held down
A key question is how long China, which subsidizes energy,
will continue to spend its money this way. China hiked diesel
and gasoline prices by about 18 percent two weeks ago, the
first such move in eight months and biggest ever one off rise.
There will clearly be winners as globalization's effects
are blunted. Manufacturers in Mexico, Canada, Eastern Europe
and even in the United States and Western Europe will find they
are more competitive. This has already happened in the steel
industry, where U.S. makers are newly competitive due to being
closer to the source of raw materials, unlike Chinese steel
firms that must import iron ore from Brazil or Australia.
"Globalization was centered around China," said Jen at
Morgan Stanley. "China is going to be one of the major victims.
The parts of Asia servicing China, benefiting from China, will
also be hurt."
Jen sees Asian companies as caught in a squeeze, with
pressure from their currencies, which are appreciating against
the dollar, and further pressure on profit margins from surging
wage and energy costs.
There is also the small matter of demand from the United
States and Europe, which is a good bet to weaken or stagnate.
"Equities will get killed in Asia," Jen said.
"This is just the beginning of the process."
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund)
(Editing by Ruth Pitchford)