Copyright © 2005 Global Insight, Inc. REVERSE GLOBALIZATION Is International Trade Reversing? 6 TH ANNUAL INDIANA LOGISTICS SUMMIT Charles W. Clowdis,

Copyright © 2005 Global Insight, Inc.

REVERSE GLOBALIZATIONIs International Trade Reversing?

6TH ANNUAL

INDIANA LOGISTICS SUMMIT

Charles W. Clowdis, Jr.

IHS Global Insight (USA), Inc. Indianapolis, IN

November 12, 2008

Copyright © 2008 Global Insight, Inc. 2 6/2008

Reverse Globalization ?

Much attention has been given to the topic of ‘Reverse Globalization’ and ‘near-sourcing’.

High energy prices this summer were indicating a paradigm shift whereby higher transport costs, due to oil price spikes, were thought to be reversing globalization.

The argument has been based on claims of high freight rates for international ocean shipping causing higher costs for sourcing goods, resulting in manufacturing moving back to the U.S.

The influence of transport costs on trade patterns is real; domestic producers, and near-neighbor trade partners, could stand to benefit when oil prices are high.


Crude Oil Prices Will Not Rebound Anytime Soon*

The declining dollar and conditions that pushed up the crude oil price this summer have reversed.

The key underlying driver of global oil demand outstripping supply has run its course. Americans driving fewer miles.

Periodic supply disruptions, geopolitical events, and speculation can contribute to oil price volatility.

The world has abundant energy resources that are concentrated in high-risk countries, adding to volatility.

Even lower prices may follow in the medium-term (staying below $90/bbl in 2009) as conservation and additional production continue despite financial crises

*Price of Crude Oil per bbl. Yesterday?


Underlying U.S. Globalization Trends Still at Work

Credit Crunch has brought about added concern, stranded tonnage,

troublesome Letters of Credit.

Importers can still benefit from foreign resources and labor, but with

ever-vigilant oversight

Exporters benefit from larger, more open markets

. . . If firms are world-class competitive

Facilitated by trade agreements, improved technology and mechanisms

for easily handling financial side of trade flows

Results in continuing shifts in U.S. and other economic geography

Environment, labor, safety and security standards all affect trade as well


-15

-10

-5

0

5

10

15

20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Real U.S. Exports Real U.S. Imports

(Percent change from a year earlier, volumes)

U.S. Foreign Trade Outlook Reflects the Impacts of Exchange Rates, Business & Consumer Spending

Source: Global Insight U.S. Macroeconomic Forecasting Service


China’s Underlying Forces at Work

More than 1,000 factories in the shoemaking industry folded in the “Powerhouse Province” of Guangdong in 2007. This is more than 20% of the provincial total.

--Most were small and medium-sized firms

--These made up 10-15% of Guangdong’s shoemaking capacity

--Those closed employed 150,000-200,000 workers

• Shutdowns also reported in apparel, textiles, plastics, and electronics

• A survey by the Federation of Hong Kong Industries showed 37% of the 80,000 Hong Kong firms in Guangdong plan to move at least part of their operations out of Guangdong.


China’s Wages have Risen Sharply in Important Industries since 2002

2002 Wage 2006 Wage 2002-06 (US$ Hr.) (US$/Hr.) (% Chg.)

Total Manufacturing 0.60 1.02 69.7

Food Processing 0.43 0.72 68.9

Textiles 0.39 0.67 72.0

Apparel & Footwear 0.49 0.80 64.4

Chemicals 0.56 1.03 85.2

Ferrous Metals 0.81 1.51 86.5

Non-Ferrous Metals 0.67 1.15 70.8

Transport Equipment 0.78 1.29 65.7

Electrical Machinery & Equipment 0.67 1.04 55.2

Electronics, Telecom., Computers0.95 1.35 42.0

Source: National Bureau of LABOR STATISTICS GLOBAL INSIGHT calculations


Measuring China’s Strengths & Weaknesses

Strengths

Fast Productivity Growth

Large Domestic Market

Improving Human Capital

Political Stability….

Low security risk

Weaknesses

Fast rising wage in light industries

State controlled energy sector

Inefficient financial intermediation

Environmental degradation

Insufficient intellectual property protection

Corruption

Political uncertainty


Non-Energy Cost Trends Affecting Trade

Costs have increased in last seven years for security and safety of transit to final destination, pushing up traded goods costs

U.S. transportation, warehousing and logistics costs are stable again. Cost savings from use of advanced logistics approaches such as distributed, point-to-point shipments (e.g., Asia direct-to-store) are paying dividends in today’s challenging environment

Demand for efficient flows – more products per shipment to reduce re-handling; pre-blocking containers on ships in Asia for U.S. intermodal trains; minimizing empties, and inventory costs are important regardless of sourcing approach


Energy Cost Impact on Trade is Significant, but Hasn’t Significantly Reversed Globalization…yet

In a paper released in May, two economists made the case that higher transport costs due to oil price spikes are reversing globalization.

They argued that observed reductions in Chinese exports of ‘Freight Intensive’ goods to U.S. in 2007 proved that increased transport costs were diverting trade from China (back to Mexico and the USA.)

In reality, the ‘freight intensive’ commodity category of “furniture” has experienced a slight shift because of higher transport energy costs. However, the fact that this furniture was lower-grade, hotel/motel line, with lower density, should be noted.

Correlation does not totally prove causation, The ability to analyze the underlying conditions within sectors of the economy provides a proper understanding and ability to forecast international trade. This is what our World Trade Service provides its users.


Continued…

Supply Chain Managers are taking an even harder look at their manufacturing, transportation, and distribution network costs.

Will a new or revised model override the cheaper overseas labor and manufacturing when coupled with the longer transportation of goods?

Even domestically, does that DC located in the less-populated area with cheaper labor still make sense?

With 65% of the US population in the East, does shipping cross-country from LA or Long Beach still make sense?


Maintain diligent balance between transportation costs and inventory costs

Slowing the Supply Chain adds dollars to cost of inventory in-transit

JIT can lose a bit of its shine

Changing modes must be done systematically

Measurement and cost visibility of Inventory in transit is vital

Stay Ever-Mindful of Inventory Carrying Costs


The Bottom Line is…..

Trade patterns are affected by energy prices; many factors & prices impact total delivered cost.

Trade with near-neighbors and even domestic sourcing may be relatively higher as transport costs increase and/or remain unstable.

U.S. imports weakened due more to U.S. and Global slowdown and value of the Dollar, than from the energy price spike; while U.S. exports were up until current credit crunch.

Trade patterns continue to evolve and the bottom-up, sector-based approach of the World Trade Service is the best way to separate short-term events from long-term influences on trade.


Thank you

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www.globalinsight.com

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Copyright © 2005 Global Insight, Inc. REVERSE GLOBALIZATION Is International Trade Reversing? 6 TH ANNUAL INDIANA LOGISTICS SUMMIT Charles W. Clowdis,