Stung by Soaring Transport Costs, Factories Bring Jobs Home Again

Posted on June 18, 2008. Filed under: Uncategorized |

The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

The movement of factories to low-cost countries further and further away has been a bittersweet three-decade-long story for the U.S. economy, knocking workers out of good-paying manufacturing jobs even as it drove down the price of goods for consumers. But, after exploding over the past 10 years, that march has been slowing.

The cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel, says Jeff Rubin, chief economist at CIBC. He estimates transportation costs are now the equivalent of a 9 percent tariff on goods coming into U.S. ports, compared with the equivalent of only 3 percent in 2000.

“In a world of triple-digit oil prices, distance costs money,” Mr. Rubin wrote in a recent report. He figures that for every 10 percent increase in the distance of a trip, energy costs rise 4.5 percent.

Transportation costs are just part of a larger wave of inflation sweeping global manufacturing, which has also been pounded by higher costs for basic materials, such as steel and resins.

The cost of doing business in China in particular has grown steadily as workers there demand higher wages and the government enforces tougher environmental and other controls. China’s currency has also appreciated against the dollar – though not as much as some critics contend it should – increasing the cost of its products in the U.S.

“I believe a decent amount of production could come back into the States within five years, not everything,” he says. “But it won’t be because of transport costs – it’ll be because other production costs have gone up and companies have realized they can have better control over their production when it’s closer to home.”

For many manufacturers, though, oil prices that have hurtled past $130 a barrel have been the tipping point.

“That’s when it became a dominant part of the discussion,” he says, adding that oil then was less than $100 a barrel. “So with oil now at $130, it’s even more serious.” Mr. Monser says Emerson’s larger strategy is to regionalize manufacturing, producing as much as possible within the part of the world where its sold.

While many manufacturers are re-evaluating production strategies, there are limits to how many jobs will flow back to the U.S. One problem is that much of the basic infrastructure needed to support many industries – such as suppliers who specialize in producing parts or repairing machines – has dwindled or disappeared.

U.S. job losses in manufacturing have averaged 41,000 a month so far this year – nearly double the pace last year, with sectors such as autos and construction materials tied to the housing slump especially hard hit. In essence, every job added as a result of companies pulling work back home is being more than offset by others reeling from the domestic slump.

And the heavier and bulkier goods are, the more sensitive they are to fuel costs. CIBC’s Mr. Rubin predicts Mexico will be “the biggest winner of all” as increased transportation costs make China uncompetitive in an ever-growing list of businesses in North America. Even Mexico may be too far for some companies.

Source: Wall Street Journal via libertypost

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