Source: adapted from J. Rubin and B. Tal (2008) “Will Soaring Transport Costs Reverse Globalization?”, CIBC World Markets Inc., StrategEcon, May 27.
The usage of China as a privileged location in the global manufacturing system has been linked with low input costs (mainly labor) as well as lower long distance transport costs brought by containerization. When oil prices are low (in the $30 to $50 range), the longer distances of shipping freight from China are positively compensated by lower input costs. The benefits of offshoring to China far exceeded the additional transport costs and delays. This helps explain why integration processes in North America, namely the use of Mexico as a low cost manufacturing base, were mainly by-passed in the 1990s and 2000s.
However, as the price of oil surpassed $100 per barrel in 2008, the comparative advantages of China in freight intensive goods (such as steel and other ponderous goods) were being substantially eroded. The Mexican economy may be positively impacted by such a trend which will put a greater emphasis on NAFTA as a comparative advantage structure. Changes in the structure and direction of freight flows in North America are to be expected if energy prices remain comparatively higher and as labor costs in China rise.