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Global trade pattern of auto parts faces reshuffle

Since the 1980s, Asian economies have taken advantage of the historical opportunity brought by low international oil prices and the wave of economic globalization. They successfully shifted the world’s manufacturing base from Europe and the United States to the region, transforming these developed economies into two of the largest consumer markets globally. However, since 2003, rising oil prices have become a major concern. The recent spike to $147 per barrel has only slightly eased, but the impact on global trade remains significant. High oil prices have directly increased shipping costs, with fuel now accounting for 20% to 30% of shipping company expenses. According to a report by the Malaysian Shipowners’ Association, fuel costs per ton of cargo have surged from $250 a year ago to $700 today. This is clearly unsustainable for Chinese manufacturers and U.S. retailers. Chinese exporters have already felt the pressure of high freight rates. In the first half of 2008, China’s export growth dropped to 21.9%, down from 27.6% in the same period the previous year. Guangdong, a key export province, saw its growth fall even further, from 26.5% to just 13%.

Looking at the broader picture, I believe three major trends are becoming increasingly evident:

First, the global supply chain of multinational corporations is shrinking. In the era of globalization, companies were used to sourcing parts from around the world, assembling them in China or India, and then shipping the finished products back to the U.S. or Europe. However, with the sharp rise in shipping costs, this model has become less cost-effective, as transportation expenses now outweigh labor savings. Some firms that once sourced components from Asia are now shifting production closer to home to reduce costs. For example, Tesla Motors abandoned its original plan to produce batteries in the UK, assemble them there, and ship them back to the U.S. Instead, it has centralized all production around its California headquarters. Similarly, American furniture companies that once imported timber from the U.S., processed it in China, and shipped it back, are now processing wood locally in Virginia or North Carolina, reviving the domestic woodworking industry.

Second, globalization is giving way to regionalization. In an age of high oil prices, the biggest obstacle to global trade is no longer tariff disputes in the Doha Round, but the soaring cost of shipping. These rising costs could undo decades of progress in trade liberalization. As a result, economic ties with neighboring countries are becoming more practical. European companies, for instance, are reducing their investments in China due to rising labor and transportation costs. According to the German Institute of Engineers, up to one-fifth of member companies are planning to leave China, while expanding into Eastern Europe and Russia. The Financial Times reported that EU direct investment in China fell to 1.8 billion euros in 2007, far below the 6 billion euros in 2006, while investment in Russia rose sharply from 10.6 billion to 17.1 billion euros. A similar trend is seen in North America, where Mexico has steadily increased its exports to the U.S. by 7% annually, particularly in furniture, steel, rubber, and paper industries, gradually taking over market share from China. While this may seem like bad news, it also presents an opportunity for East Asian countries to accelerate regional integration and boost intraregional trade and investment.

Finally, China and East Asia will experience faster industrial upgrading and a more dramatic leap forward. Even without the pressure of currency appreciation, high shipping costs are making the traditional labor-intensive export model unsustainable. Economists like Jeffrey Sachs argue that while rising trade costs may slow globalization, they are not fatal. From the perspective of East Asian countries, this view makes sense. To remain competitive in the U.S. market, goods must be priced more favorably than those produced in Mexico or other Central American countries. Otherwise, they may lose market share. This shift could lead to more localized production and innovation, ultimately reshaping the global economic landscape.

In the process of redefining the global economic map, Chinese companies face both challenges and opportunities. The key lies in how they respond. If they continue to complain and wait for government intervention, they risk being left behind in the long run. Instead, embracing change and adapting strategically will be essential for future success.

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