Freight Costs Kill Globalization?

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Global Trade

Nothing gets my goat more than reading something that is not only a little bit misleading but seemingly way off the mark. And now for the second time I have read an article or blog posting referring to a study or analysis put out by CIBC World Markets Inc. I don’t know this firm or really much about what they do. They appear to be involved with investment banking, research and conferences. What they clearly are not experts in is logistics, international trade and economics (though they may beg to differ).

Why the harsh critique? They published a short  analysis on May 27, 2008 entitled: “Will Soaring Transport Costs Reverse Globalization?” You can read it here. But let me warn you, the analysis  misses some key points and when you add them in, you  come to  an entirely different conclusion. Let’s examine a few of these points.

The analysis starts by stating that “the cost of moving goods, not the cost of tariffs is the largest barrier to global trade today.” Well, we know that if the price of two goods were the same and one can be had locally and one could be had globally, the prudent decision would be a “local one.” Freight is one of many total landed cost factors that gets examined when one makes global sourcing decisions. But make no mistake about it, tariff rates, the FOB price, and exchange rates all matter too. So when the article indicated that a 40-foot container from Shanghai to the US Eastern seaboard (including inland costs) costs $8000 (that is the number that I have now seen everywhere including an article I will comment on later this week), I nearly leapt off my chair. $8000? What kind of container is this? A stainless steel encrusted, palladium trimmed, golden locked container?

If you are paying $8000 for a 40′ container, send me an email immediately at lreisman (at) aptiumglobal (dot) com! And I would be pleased to provide you with the name of a good freight forwarder.

The  analysis also gets into the subject of steel and why imports have dropped considerably this year. There is an excellent discussion on low value items and the big effect freight increases have on those items. And it does make good sense. If you have very expensive goods, the impact of rising freight has a smaller impact than if you are shipping lower value goods like steel. But the cost adjustments we’ve seen are more in the neighborhood of 15%. A client of ours was quoted on July 15 (when oil was at $138.74…it dropped over $6 that day) for $3450 for a 20′ container.   That is up $225 from a few months earlier (Shanghai to north of Minneapolis). But it’s hardly the number or the increase that CIBC reported.

Mysteriously absent from the analysis, the relative value of the dollar. Ask anyone buying or selling overseas why there are steep drops in imports and  big increases in exports. It has absolutely nothing to do with freight or the cost of oil.   It is because we have a cheap dollar.  

And that is why we shouldn’t believe everything that we read.

–Lisa Reisman

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