How local will we become? – fuel costs and international sourcing

The cost of oil seems to be influencing everthing these days.  A recent report by CIBC World Markets, as reported in the NY Times, finds that the cost of shipping a container from China to the U.S. is now about $8000, up from $3000 earlier in the decade. In fact, the cost of transportation is now larger than the cost of tariffs.

What does this mean for supply chains – it is intuitive that higher transportation costs should lead to more localized production.  Instead of producing something in one location in a far off place, companies will start to choose to produce in multiple locations, closer to consumers.

Will this trend continue? One reason for international sourcing is wage rate differentials. If they continue to decrease (because wages in countries like India and China increase) and energy costs continue to decrease, then we may be looking at a long term trend to reverse globalization.

NY Times, Aug 3, 2008 – Shipping costs start to crimp globalization


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