Please read the excellent page 1 Wall Street Journal article, if possible. The article “Stung by Soaring Transport Costs, Factories Bring Jobs Home Again”.
Summing it up…the high costs of oil has lead to very large increases in transportation costs to ship from China and other Asian countries. Current shipping costs for containers has risen 15% since the first of the year and will rise another 5% in July for a Bowling Green, Ky manufacturer.
Jeff Rubin, an economist with CIBC World Markets in Toronto estimates the costs have tripled for shipping a 40 foot container from Asia to the East Coast since 2000.
So, what does this mean? Will manufacturing jobs return to the United States? Possibly, but the problem is our manufacturing infrastructure has been GUTTED in many places. Take a drive around your old hometown and look at the deserted and vacant factories. Now it is becoming more and more difficult to find local suppliers of parts and services needed to support manufacturing. Economists project that manufacturing will start to level off instead of disappearing.
Further, the article indicates that Mexico could see a revival in manufacturing jobs as it is much closer to the US than Asia. However, quality issues are a factor.
Inflation is creeping upward, some say jumping upward in China, pushing their prices higher, plus the dollar’s lower value makes it difficult to import goods as profitably as in the past.
So, what does this mean for the railroads?
There probably wont be a mass rebirth of manufacturing jobs in the US, but the wholesale exporting of those jobs will probably slow considerably. Wouldnt it be something after all the investment that UP and BNSF is making in the west coast capacity that container business would level off or drop?
Well, this was certainly Futuremodal’s contention – that low transportation costs in the railroad portion of the transportation chain in the form of cross subsidies from captive shippers were a key component in driving U.S. jobs overseas.
Certainly there were many conversations here about it some time ago, and a good deal of evidence offered. It is interesting, in light of those conversations, that factories do, in fact, relocate due to transportation cost differentials, and that this contention is supported now not only by the logic offered in the conversations, but now in news reports as well that factories are relocating based on the changed cost differential.
An interesting thought, and I haven’t seen it mentioned in the literature, yet, is that fuel cost increases will hurt Chinese exports the most of all, since transportation costs represent a larger portion of their product costs than exports of, say, the United States or Germany. That is, their product cost is more highly leveraged – good when the cost is low, bad when it is high – by transportation costs than the exports of other countries.
Maybe the Asian shipping companies will convert their fleets to steam power! Okay, I’m only half kidding, but if we read of a shipping line converting at least one of it’s ships to coal-fired steam power sometime in the near future, don’t be suprised.
However, I don’t believe we’ll see a resurgance of US-based manufacturing coming back from overseas for the simple reason that our national energy policy seems fixated on punishing successful energy companies and the few heavy duty manufacturers left in this nation, rather than expanding and supporting the domestic supply of relatively cheap energy. As long as the spector of CO2 taxes loom on the political horizon, manufacturers will continue to look beyond our borders for placement of new factories, unless they’re making
I always enjoyed Futuremodal’s discussions. Didnt always agree with them, but the discussions were interesting.
Not sure that I am in full agreement with his assessment of the transportation differential being the reason that jobs were exported…as I havent the resources to do so. However, logical thinking would say that without attractive freight rates (both ocean and inland) the imports would not be as strong. The situation is now reversing as our exports are strong, based on the weakening dollar.
This discussion can really deepen when one considers the free market vs controlled market aspects of an economy, of which I have very little training. Personally, I like the free market aspect, but it certainly can lead to short term (and longer term) suffering and pain while the economy adapts to the changes.
The free market can “seem” irrational or ruthless at times, but that’s because every nuance is generally visible, and change incremental. The rigid or controlled markets seem to have a way of locking up and when change does finally occur, it is generally a massive collapse of the whole structure and thoroughgoing suffering. By comparison, the free market then starts to look pretty good and even benevolent.
"Give a nation twenty years of prosperity, and a quarter of its people will believe prosperity takes no work.
"Give a nation twenty years of peace, and a quarter of its people will believe peace comes from ignoring enemies.
“Give a nation twenty years of freedom, and a quarter of its people will lose the ability to imagine the misery of a life in chains.” [Frank Warner]
I think the concept of the “free market” suffers from that cycle of ignorance on, well, a regular cycle …
Perception plays a role too. Here’s an excerpt from a 2004 column by Allan Reynolds:
"The 1992 Clinton-Gore campaign book, “Putting People First,” somehow imagined "Japan and Germany “threaten to surpass America in manufacturing by 1996.” The Tokyo-based journalist Eamonn Fingleton’s subtitled his 1995 book “Blindside” as “Why Japan is Still on Track to Overtake the U.S. by the Year 2000.” Americans were being sold an economic inferiority complex, and many bought it. Or at least they bought the books.
"What was really happening? From 1990 to 2000, industrial production increased by 49½ percent in the United States, 13.4 percent in Germany and 1½ percent in Japan. By 2003, Japan’s industrial production index was still m
The WSJ article talked about one tendancy is a shift in manufacturing from SE China to N. MX. Any thoughts on if the KCS will be able to finance expansions needed for future growth from Laredo to the SE Gateways? Might we see NS doing joint ventures down to the border? I have the impression the KCS is tapped out.
Some interesting things would have to occur such as dramatic increase in demand (possible, but not probable), political unrest and terrorist activity disrupting Mideastern production (possible), refining capacity problems in US (possible), dollar devaluation (lets hope not), speculative pressure ( is this a bubble or real?). No doubt there are many other possibilities and subpossibilities.
RWM, very interesting notes on the production that occurs overseas today. So, it is primarily lightweight assembled goods coming across? Do you include electronics in that?
It appears that imported steel is all but dead for now, which is one good aspect for the economy, particularly here in NW Indiana.
These are very interesting times. I was way to self centered in the mid 70s’s to notice what was happening around the country and around the world, but today it affects my life just a little bit more.
Lightweight consumer electronics, yes. Or anything else that is straightforward to engineer a manufacturing process and assemble. The Asian factories are peerless at being able to rapidly change from producing, say, cell phones to Xboxes to hard drives to laptop computers, all in the same building. The secret is people, which are highly adaptive and able to do just about anything. The manufacturers break down assembly to a series of tiny tasks, so each person can be rapidly trained to do it – in a matter of a few minutes, even. It would be fantastically expensive to emulate that methodology today in the West, where labor is not a fungible commodity like salt or 2x4s.
Judging by the amount of hot band and structural steel railroads are now hauling to the West Coast from Chicago District mills, steel that just a few years ago was 100% sourced overseas, it might be only a matter of a few more months before some of that steel starts getting loaded onto ships for markets in Asia. What a turnaround that will be. What an irony if we could have had that kind of manufacturing power several years ago if only we hadn’t been so interested in propping up consumer buying power and home equity loans.
Doesn’t matter what happens to the exchange rate or rail rates, the idea that heavy manufacturing will return to the USA is a pipe dream, since current US plants are having a difficult time just trying to modernize.
What heavy manufacturing left the United States and was replicated elsewhere, and now commands a U.S. market share that can’t or won’t be expelled? I’m excluding Canada since from the railroad industry’s point of view it matters little whether the plant is on this side of the dotted line or the other.
My clients are currently building in excess of $100 billion of heavy manufacturing in the U.S., ranging from power plants to coal gasification plants to petrochemical refineries to ethanol plants to expansions of steel mills to expansions of refineries. My clients are a tiny slice of the whole.
I wonder how long the price of oil can climb before significant changes happen with both supply and demand. We were in a similar place in the early 1980’s - though then the supply was more limited by global politics than by exhaustion of resources. A lot of work was being done at that to increase supply (e.g. oil shale) and decrease demand (e.g. unducted fans to replace ducted turbofan engines). Much of that work pretty much stopped when the price of oil dropped in the mid-1980’s (partly driven by the opening of the North Sea fields).
One caveat with oil price versus supply and demand is that it can take years to bring in new supplies and also take years for changes in technology to reduce demand to take effect.
One eye-opener (or maybe closer) was the amount of pollution generated in those cities. Researchers from Scripp’s Institute of Oceanography were surprised by how much heat was being trapped in the brown haze covring the northern Indian Ocean. I’ve also read reports that pollution from Asia is darkening the snow that falls in Colorado and as such is one of the reasons that the snowpacks are melting earlier.
I have looked at literally more than 500,000 railroad slides over the years – not including all the ones I took that live in boxes in a closet. I started to notice that colors in slides from the 1950s and 1960s consistently seemed prettier, brighter, and more vibrant. For years I ascribed that to differences in the film or my rose-colored glasses but gradually I began to see that the skies in the 1960s and earlier were consistently more blue and less hazy. Now I live on the west coast with prevailing winds from the west coming in mostly from Alaska and Siberia where there is little human occupation, and on clear days the sky is the blue I see in those old slides. I’ve never seen any science describing sky color, but if my observations of my 500,000 data points are valid, the sky is significantly greyer and hazier in the U.S. now. As you glumly point out, we’re all in the same sandbox now, and their grit is in our eye too.
I am in the process of reading the article, more comments later.
Your comment regarding the blue skys of the 60’s and earlier is interesting and something that I have considered, but not in detail as you. Is there any quantifiable information or data out there regarding the “blue sky” factor?
BTW, of the 500,000 plus slides you have looked at, which one is the most memorable? Describe it if you can.
I took 2,500 or so slides between 1970-1974 as the railroad wanted photos on slide film – Kodachrome. I haven’t taken a single slide since I left, but plenty of Kodacolor negative film and, now, digital. I always assumed – well, it was what the professionals told me – the bluer skies in the slide shots were because Kodachrome and Ektacolor emphasized blues; whereas Kodacolor emphasized yellows. It was so distinctive that you would hear the remark “that’s a Kodachrome Blue Sky” by photographers who could instantly identify the film type used by the color of the sky.
Ed – I did see an article on this subject a few years ago, but I didn’t save it. Should have. Fishing around on Google this morning, I found an abstract from a Columbia University paper that estimates the amount of light reaching the surface of the U.S. has declined 10% since the 1950s, and another abstract pointing to a general redshift of daylight due to soot and sulfuric acid particles.
As to memorable slides, there is no single standout, only trends, and the more “railroad” photos I look at the more I prefer to see slides of people instead of trains. The locomotives, the mountain backdrop, the sunset glint, begin to look alike. A few memorable ones are two small series that Richard Steinheimer shot on a UP branch line in Nebraska in the 1960s and on the Tetonia Branch in Idaho at the same time, photos that show the train crew sitting in the beanery eating breakfast, and a 4th of July parade in a small Nebraska farming town with the Wheat Queen waving from a convertible. Recent impressive work is Mark Perry’s candids of CN and CP railroaders, farmers, and Eastern Orthodox congegrations and priests. Among the photos I would put on my wall would be Philip Hastings riding the caboose of the NP Highball from Spokane to Lewiston (which are b&w), or anything by Plowden or Patrick.
I always wondered where the Kodachrome Sky term came from. It is one I used years ago and people would cast strange looks at me. After a morning shower, I see such a Kodachrome sky now.
Do you still possess those slides or did the MILW retain them? Most of my 1970’s shots were B&W with a few slides thrown in. My kids today are amazed when looking at slides.
RWM…I just finished Fallow’s first article. Thanks for the suggestion, it was well worth reading and was very educational. It will be interesting to see what happens when the Chinese start implementing the design and engineering aspect to the product developement and retain more than the current $2 per ethernet cable.
What was so amazing was the fulfillment and logistics aspect being handled. That itself would be worth an article.