Globalization may be giving way to local production due to shipping costs. Photo: Think Panama

Americans can forget about avocado salads in January. The price of oil isn’t just hurting consumers at the pump — record oil prices are changing the way globalization works.

In the past three decades, the world economy has become so integrated that most products travel the world before coming home from the store. Illogical supply chains have emerged — and fossil fuels are wasted — because of price-driven production. From cars to processed foods, raw materials and labor from different countries, even different continents, are part of the production process of much of what we buy.

But cheap oil is now a thing of the past, and the cost of oil changes everything.

Higher prices are upsetting the global supply chains that until now considered cheap labor and raw materials more important than geography. Decades ago, Wal-Mart set the industry standard with this global supply chain model, but now industries that have made their fortunes through outsourcing are in trouble. Shipping a 40-foot container from Shanghai to the U.S. costs $8,000 now, compared to $3,000 earlier this decade. This increased shipping cost is the equivalent of a 9 percent tariff on all global trade, according to a recent report by Canadian investment bank, CIBC World Markets. The report states, “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today” and “has effectively offset all the trade liberalization efforts of the last three decades.”

Globalization, economists are now saying, is changing rapidly. The “neighborhood effect,” or putting factories and suppliers as close as possible to the consumer, is the newest trend. People are now becoming increasingly interested in trying to grow, produce and shop as locally as possible, particularly food and goods which take little time to make or package or are heavy and expensive to transport. Electronics companies lured to Asia by lower wages and lax environmental standards are returning to Mexico, and furniture, footwear and toy industries are returning to the United States.

A shift to local growing will cause a change in what food is available and affordable. Consumers will now be economically encouraged to eat with the seasons, given the prohibitively high costs of exotic items, like avocado or peaches during the winter.

Perhaps most significantly, American steel production is rising after decades of decline, while China’s steel exports have fallen more than 20 percent this year. Motors, machinery, car parts and appliance industries will all be affected. As Chinese factory orders plunge and its export growth slows, the Chinese economy is already slowing. Economists expect growth to slip from double digits to 9 percent this year alone.

Globalization isn't dying — just changing. Products that are light and inexpensive to transport, products that are labor-intensive and products that don't require transportation, like telecommunication and Internet-based industries, will continue to be outsourced. But the change in global trade is shifting who profits and on what. These changes will impact both labor markets and trade balance, lessening the US trade deficit with China.

In an ironic demonstration of the power of globalization, China’s troubles will be felt worldwide. Their dampened economy is one reason gas prices have recently fallen in the United States.

With this change, though, environmental economists have something to celebrate. After all, with the U.S. Energy Independence Act of 2007 setting measly policy goals — reducing U.S. emissions by just 4 percent by 2020 (compared to the EU’s goal of 20 percent) — and the lack of any international climate treaty, the imperative move to green living will have to be driven by the consumer.

Regardless of your opinion of globalization, growing, shipping and shopping local is now the option that is most affordable - and sustainable- and option.

The once-thriving practice of outsourcing manufacturing may be thwarted by rising energy costs.

According to the Wall Street Journal, many U.S. manufacturers have halted plans to build factories overseas because the costs to transport goods back home have risen. Some, such as the heater manufacturer DESA LLC, are even considering moving production back to the U.S. "My cost of getting a shipping container here from China just keeps going up — and I don't see any end in sight," said DESA retail heating division president Claude Hayes. The company now considers itself lucky to have kept its old U.S. factories.

The return of DESA's heaters to the U.S. coincides with a new report by CIBC World Markets called "Will Soaring Transport Costs Reverse Globalization?" The report argues that high energy costs could potentially reverse the outsourcing that has occurred in some areas of manufacturing. Foreign trade cannot expect the same opportunities to develop markets in India as there were 30 years ago because of today's high energy costs. This situation could give countries closer to the U.S. like Mexico a little more appeal in the future than current economic giants such as China.

But do not expect outsourcing — the major transformer of world economies in the last 30 years — to go silently into the night. As Andrew Leonard points out in his article "Who Needs Tariffs When You Have Expensive Oil?" high energy prices do not affect all aspects of global trade, including the areas of telecommunications and computers. For example, the software industry in India will continue to thrive because it thrives on cheap Internet and not natural resources. So while some manufacturing may feel the pressure of high oil prices, American companies will continue to outsource in other ways.

Energy costs won't likely come down anytime soon. Could American manufacturing make a comeback?

Photo: Mark oh! (flickr)

Steven E. Landsburg outlines a few simple ways to wrap your mind around the concept of free trade and outsourcing in the New York Times op-ed, What to Expect When You're Free Trading.

Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?

Internally torn about free trade vs. protectionism? Well worth the read.