High Oil Prices, Other Challenges May Disrupt Global Supply Chains

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Continued from Part One.

As far as America’s vast reserves of shale gas go, by 2015, the Boston Consulting Group claims, average manufacturing costs in the US will be 8 percent lower than in the UK, 15 percent lower than in Germany and France, 21 percent lower than in Japan and a whopping 29 percent below Italy.

The study points to anecdotal evidence that the process is already underway, and while we don’t accept that high-tech products like gas turbines or engine discs makes a supportive case, the example of Toyota making cars in Kentucky that are then exported to Korea certainly sounds like a trade flow we would historically have expected to go in the opposite direction.

Not surprisingly, not all agree quite so enthusiastically with the BCG.

David Simchi-Levi, an expert on manufacturing and professor at the Massachusetts Institute of Technology (MIT), is quoted as saying that the trend towards regional manufacturing will ultimately dominate over the next two to three decades.

In a retreat from the elaborate global supply chains that multinationals built over the last 20 years, producers will prefer to manufacture closer to their customers. This trend is already much in evidence in the automotive industry and by some multinationals like Caterpillar with manufacturing plants in all the major markets.

In the absence of any new low-labor-cost markets and with the gradual equalization that a more globally integrated world entails, the BGC’s argument makes sense.

A high oil price is probably here to stay; we aren’t at peak oil, but arguably all the cheap sources are already exploited. Transport costs will therefore challenge global supply chains in a way they didn’t in the last decade and encourage manufacturers to seek gains from efficiency or productivity improvements rather than exploiting low-cost labor.

A survey by MIT in July has highlighted areas in which government can help or hinder this process — not surprisingly, a cut in corporation tax and tax credits to support research and development come high on the list.

Maybe both presidential challengers would, in the long run, do more for America in pursuing such policies rather than seeking to boost consumer spending by perpetuating personal tax breaks for the better off.

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