On land, high oil prices have ended America's love affair with sport-utility vehicles. In the air, sky-high fuel costs have prompted airlines to raise ticket prices and cut routes. What about at sea? Could rising shipping costs scupper China's export boom?
This question has been much discussed since Jeff Rubin and Benjamin Tal of CIBC, a Canadian bank, issued a memo a few weeks ago saying that a reversal of the great migration of manufacturing operations to China might already be underway.
The cost of shipping a standard 40-foot container from Shanghai to America's East Coast, for example, has jumped from $3,000 in 2000 to about $8,000 today. The extra cost of transporting goods halfway around the world, Rubin and Tal wrote, is wiping out the often-slim margins of Chinese exporters.
What's more, if oil and shipping prices stay high, many Western companies that now outsource their manufacturing to China might decide that it makes more sense to shift production closer to their customers at home.
Such scenarios would entail a huge shift in global trade patterns. Stephen Jen of Morgan Stanley, an investment bank, said higher shipping costs could even sound the death knell of the entire East Asian export model. This is because so many of the finished goods that China exports to America and Europe are made from components imported from Taiwan, Japan or South Korea. Clearly, affordable transportation costs are an essential ingredient in this regional production matrix.
Exporters in China are certainly feeling the pain of higher shipping costs. The Transpacific Stabilization Agreement bunker charge, a benchmark fuel surcharge imposed by shipping firms on sea freight, has risen from $455 per 40-foot equivalent unit in January 2007 to $1,130. Shipments to Europe face similar increases. In the first half of 2008 the growth rate of Chinese exports slowed to 21.9 percent from 27.6 percent a year earlier.
In Guangdong province, the traditional heart of China's export manufacturing, growth plunged to 13 percent from 26.5 percent.
But if there is a migration of manufacturing from China, it is hardly an exodus. Even the latest trade figures do not show a fall in Chinese exports -- only a drop in their pace of growth. This can be attributed to a number of reasons, including China's stronger currency (up almost 7 percent against the dollar this year), upward pressure on domestic wages, less generous Chinese government incentives for low-end exporters and weakening foreign demand.
There are already signs that Chinese officials are rethinking their "get tough" policy toward manufacturers of cheap goods. On Aug. 1, the finance ministry increased export-tax rebates on a range of clothing products from 11 to 13 percent, and on bamboo products from 5 to 11 percent, in an apparent effort to help exporters of cheap goods. The closure of thousands of small factories is clearly worrying officials.
As for shipping costs, many companies in China export on a "free on board" basis. So theoretically it is the buyers on the other side of the ocean who must absorb the higher fuel surcharges on freight. Of course, they are forcing sellers to share some of the cost. But large bulk purchasers, such as Home Depot or Wal-Mart, are also squeezing the shipping companies to keep the overall bill down.
On balance, higher shipping costs are "not as big a factor" as the rising yuan or cost of raw materials, said an executive in the Shanghai office of an American building-materials company that exports Chinese-made goods to America, India and Australia. For a typical pair of Chinese-made shoes sold in America, shipping accounts for only 3 to 4 percent of the price.
Besides, companies will not find it easy to move their manufacturing out of China. Norman Cheng, co-founder of Strategic Sports, one of the world's largest motorcycle and bicycle helmet-makers, with two factories in Guangdong, said if he shifted production out of China, he would have to set up factories in his two biggest markets, North America and Europe. Shipping costs would fall, but labor costs would rise and there would be fewer economies of scale.
So China's manufactured-export industry does not seem to be in imminent danger. Foreign and local firms can also divert production to China's fast-growing domestic market.
There is no doubt that oil at $200 would have dire consequences, both for Chinese exporters and for other firms. But given the effect on the world economy, higher shipping costs might be the least of their worries.
