Will the price of oil put a brake on globalisation?
Very few of us remember globalisation in retreat: the last great wave of globalisation swelled in the late 19th century and broke spectacularly with the onset of the first world war. After a rash of protectionism, the great depression and the second world war, the process of expanding trade (and cross-border investment and the flow of ideas and of people) resumed and has continued ever since.
Some economists now wonder if the current wave might also be about to break. The problem is not so much the rolling farce of the Doha round of trade talks, or protectionism in the US – although neither is helpful – but what the price of oil is doing to the cost of shipping goods around the globe. While oil prices have fallen in the past couple of months, they could hardly be described as low. Shipping costs may rise yet further if, as expected, the International Maritime Organisation bans the use of cheaper, dirtier fuel oils by container ships.
There is some anecdotal evidence that this is having an impact on trade: for example, some container ships are reported to be slowing down to save fuel. But there is no sign anything is amiss in the latest World Trade Organization statistics – which, admittedly, date back to 2006. The volume of merchandise trade defied high and rising oil prices to grow at more than 6 per cent a year in 2004, 2005 and 2006.
If that is surprising, perhaps it shouldn’t be. Trade has been bolstered by lower tariffs – China became a WTO member late in 2001 – and by economic growth in general. The economists David Jacks, Christopher Meissner and Dennis Novy argue that much trade has been fuelled by economic growth, rather than by a fall in the costs of trading. They also point out that those trading costs include currency risks, tariffs, customs inspections and informational barriers: transport costs have tended to comprise only a third of trading costs, and of course fuel costs are only a proportion of transport costs themselves – probably just under half, even at current oil prices.
Still, at such dizzy levels, oil prices will surely have some impact on trade. Trade may shift to low-weight, high-value products. The fuel costs of moving steel or timber are large relative to the value of the product; the fuel costs of shipping perfume or memory chips are less significant. We might also expect to see more trade in services. And trading partners closer than China – eastern Europe for the EU, Mexico for the US – may benefit. Some analysts argue that this is already happening.
This is some comfort to protectionists and to those whose jobs are directly threatened by trade, but not much comfort to the majority who benefit from cheaper products and a larger market into which their own employers may export. It is probably particularly bad news for China, which is squeezed twice by transportation costs: once while importing large quantities of raw materials, and again when exporting the finished goods.
There is a more subtle way of measuring the integration of global markets. Rather than looking at the raw volume of trade, we can check the price of similar goods (light bulbs; apples; a T-shirt) in different parts of the world. If prices are very similar across the world, markets are highly integrated. If “price dispersion” is high, then the world is not flat after all.
The economists Paul Bergin and Reuven Glick have done this exercise, and what they find is a shock: for all the globalisation rhetoric of the past decade, international price dispersion has been rising since 1997. Oil prices, of course, have also been rising since the late 1990s. Perhaps fuel costs matter after all.
Also pulished at ft.com.