A rounder world threatens Asia's economies

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

LONDON (Reuters) - 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 economies.

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 London.

"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, like stevedores.

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.

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