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Globalization – Won’t get fueled again

It is ironic that rising oil costs will finally do what global warming or even a tanking US economy could not do — slow down or even reverse globalization. Transportation costs have been so low for so long, people in the US don’t even notice anymore that hardly anything they buy in Wal-Mart is made in the USA.

When a US company decides to manufacture something overseas instead of here, they are making a purely financial decision, and most of that decision hinges on labor versus transportation costs. The question asked by the company is: can I pay people low enough wages in another country to overcome the cost of transporting things there and back. Until recently, the answer has been (mostly) yes, leading to rampant globalization.

Take the example of Tesla motors, a company just starting to manufacture electric-powered cars. Originally, the company was going to manufacture their heavy batteries in Thailand, ship them to Britain for installation, and then ship the entire cars back to the US for final assembly and sales. But in an ironic twist, the same rising oil costs that made their cars desirable in the first place is also shattering their plans for a global supply chain. Tesla will now build the battery packs and assemble the cars near their headquarters in California. Avoiding transportation costs saved them more than enough money to compensate for higher wages in the US.

Another example is IKEA, the Swedish furniture giant, who opened their first factory in the US in May so they wouldn’t have to ship all their products into the US. This trend toward manufacturing locally also works on smaller scales. For example, electronics companies are moving manufacturing facilities from China to Mexico in order to lower transportation costs. And even within the US, locally grown food can cost significantly less because of lower shipping expenses.

Reducing the distances that goods are transported not only reduces costs, but also means less greenhouse gases and other pollutants, a significant benefit. Not only that, but it leads to more local jobs. For example, in the US, steel production is rising after decades of decline.

From the NY Times.



  1. e wrote:

    I’m confused at the logic in the last paragraph: low transportation costs = less green house gases and less pollutants. Wouldn’t the opposite be true? Low transportation costs = more people are transporting people or stuff = higher emissions and pollution?

    I’m not meaning to start an argument. Just trying to get my mind around that statement. Thanks.

    Monday, August 4, 2008 at 7:00 am | Permalink
  2. iron wrote:

    Sorry, the original post was a little unclear. The “lower transportation costs” I was referring to was because goods were being shipped shorter distances, not because oil was cheaper. If you don’t have to ship things very far, you save money, and pollute less.

    Monday, August 4, 2008 at 5:38 pm | Permalink

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