Wednesday, July 16, 2008

2008's Smoot-Hawley

"Every day, planes filled with fresh flowers from Ecuador and Colombia land at Miami International Airport, where the flowers are transferred to refrigerated trucks cooled to 34 to 36 degrees. ... Since the mid-1980s, U.S. businesses that rely on quick delivery for time-sensitive products--from sushi restaurants to flower shops to manufacturers that use just-in-time delivery strategies--have benefited from inexpensive transportation costs. ... Over time, the increasing expense of moving goods could lead to a broad restructuring in the way America conducts commerce. ... Just as the SUV owner will eventually switch to another car, U.S. businesses will find ways to cut their transportation bill. But it will take time", Justin Lahart (JL) at the WSJ, 30 June 2008.

"As a sign over its main boulevard proclaims, Honghe is 'China's Famous Town for Sweaters.' But the economy of sweater town is unravelling, providing an early sign that China's manufacturing sector may be entering middle age. ... Manufacturers say their profits have dwindled as they pay out more for raw materials and energy", James Areddy at the WSJ, 30 June 2008.

Except for high-value products, just-in-time inventory will no longer be a viable strategy, see my 23 July 2007 post. JL limits his comments to American commerce. Increased transportation costs are a worldwide phenomenon with worldwide effects.

I could not explain the Chinese stock market's 55% collapse from October 2007 at 6,092, currently, 2,748, until now. Putting these two articles together made it clear to me. About 25 years ago the WSJ had an article following the Congressional Smoot-Hawley (SH) tariff debate and the Dow Jones. As SH went through Congress, the Dow collapsed as it understood the impending disruption of world trade patterns. Today's transportation cost increases are doing what SH did in 1930. The economic analysis of transportation costs is virtually identical to that of tariffs.