The flat world ain't so flat no more

When Thomas Friedman coined the horribly dumb-sounding metaphor of the "flat world," he just meant that transport costs were coming down, which allows countries to trade a lot more. His metaphor may have been a bad one (transport costs are actually lower with a round world), but his intuition was spot-on. Lower transport costs are what have allowed us to outsource to cheap workers in China, India, and elsewhere. (This is actually the foundation of Paul Krugman's "new economic geography" model of how regions grow and decline.)

The thing is, those transport costs are going back up pretty quickly, thanks to rising oil prices. Higher transport costs act like tariffs. The manufacturing news site Thomasnet explains:

When oil was $20 a barrel in 2000, transport costs were equivalent to a 3-percent U.S. tariff rate; now it's above 9 percent...

In tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades. Not only does this suggest a major slowdown in the growth of world trade, but also a fundamental realignment in trade patterns...

Soaring transport costs, first on importing coal and iron to China and then exporting finished steel overseas, have more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the U.S. market. Underscoring this is the fact that China's steel exports to the U.S. are falling by more than 20 percent year over year, while U.S. domestic steel production has risen by almost 10 percent...

"Exploding transport costs may soon remove the single most important brake on inflation over the last decade — wage arbitrage with China," says Jeff Rubin, chief economist and chief strategist at Canada-based CIBC World Markets. "Not that Chinese manufacturing wages won't still warrant arbitrage. But in today's world of triple-digit oil prices, distance costs money."

To use Friedman's phrase, the world is de-flattening.

As Krugman notes, something like this has happened before - in the 1920s and 1930s, when the previous massive wave of globalization was stopped dead in its tracks by a combination of protectionist tariffs and rising transport costs.

What followed that period of de-globalization was, to put it mildly, not pretty. We may be headed for hard times ourselves. But at least we won't have to worry so much about everything we use being made in China.

(PS - I might add that there are other big factors making outsourcing to China more expensive - China's aging population, the exhaustion of its surplus labor pool, and wage increases resulting from China building up more capital.)