The once-thriving practice of outsourcing manufacturing may be thwarted by rising energy costs.
According to the Wall Street Journal, many U.S. manufacturers have halted plans to build factories overseas because the costs to transport goods back home have risen. Some, such as the heater manufacturer DESA LLC, are even considering moving production back to the U.S. "My cost of getting a shipping container here from China just keeps going up — and I don't see any end in sight," said DESA retail heating division president Claude Hayes. The company now considers itself lucky to have kept its old U.S. factories.
The return of DESA's heaters to the U.S. coincides with a new report by CIBC World Markets called "Will Soaring Transport Costs Reverse Globalization?" The report argues that high energy costs could potentially reverse the outsourcing that has occurred in some areas of manufacturing. Foreign trade cannot expect the same opportunities to develop markets in India as there were 30 years ago because of today's high energy costs. This situation could give countries closer to the U.S. like Mexico a little more appeal in the future than current economic giants such as China.
But do not expect outsourcing — the major transformer of world economies in the last 30 years — to go silently into the night. As Andrew Leonard points out in his article "Who Needs Tariffs When You Have Expensive Oil?" high energy prices do not affect all aspects of global trade, including the areas of telecommunications and computers. For example, the software industry in India will continue to thrive because it thrives on cheap Internet and not natural resources. So while some manufacturing may feel the pressure of high oil prices, American companies will continue to outsource in other ways.
Energy costs won't likely come down anytime soon. Could American manufacturing make a comeback?