OTTAWA (CP) -- The high price of energy is undercutting the advantages of globalization by raising transportation costs so much that they are forcing businesses to look closer to home, says a CIBC World Markets report.
''Globalization is reversible,'' the bank's chief economist, Jeff Rubin, wrote in the study released Tuesday.
''In a world of triple-digit oil prices, distance costs money. And while trade liberalization and technology may have flattened the world, rising transportation prices will once again make it rounder.''
Rubin and co-author Benjamin Tal say the cost of moving goods -- particularly heavy materials such as steel -- not the burden of tariffs, is the largest barrier to global trade today.
They calculate that every US$1-a-barrel rise in world oil prices has translated into a one percent increase in transportation costs.
In fact, the report says, the explosion in transport costs caused by the record price of oil has effectively offset all the trade liberalization efforts of the past three decades.
In 2000, when oil was US$20 a barrel, the cost of transportation was the equivalent of a three per cent U.S. tariff rate, the report states.
Now, transportation costs are equivalent to a 9 percent tariff, and at US$150 a barrel for oil they would amount to an 11 percent tariff -- about the average of tariff rates in the 1970s.
Given the costs of moving raw materials and finished goods, distance to market is becoming an increasingly important factor in business decisions, the report says.
It says China's steel shipments to the United States are down by 20 percent from a year ago, the worst performance in a decade, while U.S. domestic steel production has risen 10 percent.
There is evidence that other Chinese exports such as furniture, apparel, footwear, metal goods and industrial materials are also beginning to slow.
''How much of Chinese manufacturing production will be coming home remains to be seen,'' the report adds, ''but there is certainly no reason why we should not expect to see at least comparable if not greater trade diversion than we saw during the OPEC oil shocks of the 1970s.''
A big beneficiary could be Mexico, with its low labor costs and proximity to the U.S. market.
