Oil, China, and Globalization

Brad Setser notes that China has decreased its subsidies on oil by about 17%, bringing its cost per barrel, according to Brad, to around $90. There is no question that China’s voracious appetite for energy–coal and oil–is putting price pressure on both commodities. Similarly, China’s oil subsidies are distorting world prices, driving them up. (See also.) And, of course, China compounds its difficulty in maintaining a loose peg to the dollar. Relaxing the peg even more would certainly lessen the price of China’s oil. But the peg to the dollar supported its export machine, especially to the states. China is between a rock and a hard place.

Something has to give.

There are a number of implications here. First, China’s rapid growth is colliding with resource depletion–or resource limitation. Regardless of what position we take regarding total resources, those resources in the immediate future will not become available fast enough to meet accelerating demand. The world will have to tighten its belt. Those countries now enjoying massive account surpluses will fare better than those now deeply in debt. What the U.S. can expect is not only rising costs in essential commodities–energy and food, for example–but also rising costs in all that it imports from China and other developing countries…. and here the list is long, from electronics to wearing apparel. (See here.)

While the U.S. may contemplate tax cuts or rebates…or whatever…in order to keep the consumer buying, it is ill prepared to do much more than slowly sink. Depreciating its currency to avoid debt seems less and less a viable option. For the U.S., the price of oil and goods will just climb higher. Using the consumer as leverage for import certificates seems useless. The latest tax rebates may be the last gasp for the consumer leverage. If rebates are our way of jump-starting a deeply debt-ridden economy, what do we have left? Those rebates will be used to buy imported goods! The rebates will not stimulate manufacturing here. And stimulating production here is the issue.

Import certificates for oil are obviously off the table. And what about everything else we import? Are we going to ramp up manufacturing to supply our needs here? Takes a while.

Secondly, as China becomes a more expensive export base–higher energy cost, rising labor expectations, etc–, some companies have adopted what is called a “China Plus One,” Vietnam often being the “One.” (See World Bank research project The Coming Age of China Plus One.)

As China phases out its tax differential between foreign and indigenous firms (foreign firms paid half the tax rate of indigenous firms), firms are looking elsewhere to keep their competitive edge.

Vietnam is offering such a tax edge along with plentiful cheap labor. Among the companies employing this strategy are Canon, Hanesbrands and Nike to name only a few.

The problem is that this chase for ever-cheaper labor and taxation must end. If consumers are being hard pressed–as in U.S.–, there will come a time that no matter what production advantages third world countries offer, those advantages will not be enough.

The rising cost of energy is not going to abate soon or quickly. We can certainly expect the rising cost of oil to affect not only the production of goods but also their transport costs. Even if the price of oil stays within the $130-$140 range, how long before this price radically affects everything we do and buy? The coming Saudi summit of producers and consumers will be closely watched. I have heard that drilling platforms and ships to carry oil are now in short supply.

Additionally, if commodity prices continue to climb, then poor–but safe–production havens will disappear. Companies seek countries that are free of turmoil, where the government is stable.

Successful dictatorships have always been at a premium. On this score, capitalism and communism seem to have found common ground. Unfortunately, this symbiotic relationship will fail.

Capitalistic countries–the U.S. especially–are enjoying the fruits of communistic labor and stability. Ironically, the flow of wealth is away from capitalistic countries, even while their multinational giants prosper. Communist countries see rapid industrialization as a catch-up game…and pay little regard to anything else, including their own labor force and environment. More socialistic countries seem to be better positioned than either. (Their labor force is happier–health care, education–and they seem to be moving more rapidly towards alternate energy sources.)

In any case, the current pattern of globalization seems to be running into the headwinds of available resources to say nothing of pollution.