During the negotiations from 4-13 June, over 2000 participants are convening in multiple groups, both formal and informal, focusing on the technical and political issues that have to be resolved with regard to mitigation and adaptation, targets and timetables, technology transfer and financing.

One of the topics participants have sparred over is bunker fuels, with disagreements emerging on how the issue should be treated.

The rapid rise in fuel costs is having a tangible impact on international trade, affecting trade in products for which freight makes up a substantial part of the final price (see related story, this issue of the BioRes). Yet, this is an area that remains largely unregulated, meaning that carbon costs are by no means incorporated into the prices.

After being reintroduced onto the agenda within the UNFCCC context in March this year (see Bridges Trade BioRes, 4 April 2008, http://www.ictsd.org/biores/08-04-04/story1.htm), bunker fuels remain controversial in Bonn. Overall, countries differ on whether bunker fuels should be addressed under the UNFCCC, or rather tackled by the International Maritime Organisation (IMO) and International Civil Aviation Organisation (ICAO). A number of developing countries, such as India, expressed concerns that scoping work by the IMO and ICAO has not sufficiently recognised the principle of common but differentiated responsibilities, which is well established within the UNFCCC process.

Several side events organised in Bonn also touched on the bunker fuels issue, with ideas such as using a trading scheme or an international levy on bunker fuels, with part of the proceeds going to fund adaptation. Small and remote countries highlighted their vulnerability with regard to rising bunker fuels costs.

An update on the conclusions of these discussions, as well as other negotiating tracks, will be included in the next issue of the BioRes.

For daily updates and a summary of the climate change negotiations in Bonn, see IISD’s Earth Negotiations Bulletin at http://www.iisd.ca/climate/sb28/

ICTSD reporting.

By making it substantially more expensive to ship cargo over long distances, higher freight costs are likely to change global trade and production patterns, said the Canadian investment bank. They may also make it easier for domestic manufacturers to withstand competition from lower-wage countries. For instance, US steelmakers have already become competitive against Chinese imports for the first time in more than a decade.

“In a world of triple-digit oil prices, soaring transport costs, not tariff barriers, pose the greatest challenge to trade,” argue the study’s authors, Jeff Rubin and Benjamin Tal.

They reckon that in 2000, when oil cost US$20 per barrel, transport costs were equivalent to a 3-percent tariff rate in the US. At US$100 per barrel, a threshold crossed at the beginning of this year, “transport costs outweigh the impact of tariffs for all of America’s trading partners.” Current transport costs (with oil above US$130 per barrel) are equivalent to an average tariff rate of over 9 percent. If oil prices hit US$150 per barrel, say Rubin and Tal, the ‘tariff-equivalent’ rate in the US would be 11 percent - comparable to import duties in the 1970s. At US$200 a barrel - a rate which some analysts think likely over the next few years - “we are back at ‘tariff’ rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s.”

“Globalisation is reversible,” they posit. “While trade liberalisation and technology may have flattened the world, rising transport prices will once again make it rounder.”

Massive reductions in cargo transportation time and costs have played a major role in enabling the expansion of global trade. A particularly dramatic drop came with the advent of container shipping in 1956, as Nayan Chanda wrote in ‘Bound Together’, his recent account of the history of globalisation. The first rapidly loadable container ship cut port times and charges dramatically, slashing the cost of freight by more than 97 percent. With subsequent improvements, transport-related cost savings between 1950 and 1998 have been estimated to be equivalent to cutting average US manufacturing duties from 32 percent to 9 percent.

However, as Rubin and Tal point out, the fact that container ships spend so little time in ports means that changing fuel costs factor more heavily into shipping rates. It also increases the significance of ship speed. Faster speed invariably needs more energy; they figure that rising ship speed over the past 15 years has doubled fuel consumption per unit of freight.

“At today’s oil prices,” they write, “every 10 percent increase in trip distance translated into a 4.5 percent increase in transport costs.” While shipping a standard 40-foot container from Shanghai to the east coast of the US cost US$3,000 when oil was at US$20 per barrel, it now costs US$8,000. If oil goes up to US$200, the cost would rise to US$15,000.

In terms of shifts in trade and production patterns, products for which freight costs make up only a small proportion of final sale prices stand to be less affected if shipping becomes more expensive - additional freight charges would be dwarfed by everything else. However, where freight-to-value ratios are high, transportation expenses can be very significant.

A “surprisingly high percentage” of Chinese exports to the US fall into the latter category, according to the report. These include furniture, footwear, metal manufacturing, and industrial machinery. And while export growth to the US has in general slowed, the slowdown has been most pronounced for goods that carry relatively high freight costs, it says.

The study’s authors suggest that manufacturers’ worldwide search for low wage expenses “will increasingly take place within the constraints imposed by soaring transport costs. Instead of finding cheap labour halfway around the world, the key will be to find the cheapest labour force within reasonable shipping distance to your market.”

Some low-cost manufacturing to supply the North American market is likely to move from China to Mexico, they forecast. Current oil prices mean that extra shipping costs from East Asia are equivalent to a 9-percent tariff in the US; this margin would rise to 15 percent if the cost of oil per barrel rose to US$200. These differences could potentially more than offset any cost advantages enjoyed by East Asia-based industries.

Precedent suggests that high oil prices could divert trade based on geographical proximity, says the report. From the first OPEC oil shock in 1973 through the early 1980s, when trans-oceanic freight costs were high, the share of products from Europe and Asia in the US’ non-petroleum imports fell by 6 percent, while those from Latin America and the Caribbean rose by a similar margin.

Meanwhile, from 1974 to 1986, world exports’ share in global GDP stagnated, despite fairly robust recoveries from two economic recessions. Indeed, although worldwide GDP growth over that period was comparable to that from 1987 to 2002, the latter interval saw exports’ share in global GDP expand by 60 percent, supported by tariff cuts and far lower energy prices.

Global trade still growing faster than GDP

WTO economists estimate that growth in global merchandise trade is slowing, as “sharp economic deceleration in key developed countries is only partly offset by continuing strong growth in emerging economies.” The growth in world trade in goods dropped from 8.5 percent in 2006 to 5.5 percent in 2007; a 4.5 percent expansion is predicted for this year. However, this growth remains ahead of global GDP expansion, which is forecast to be 2.6 percent in 2008. Over the past ten years, growth in world merchandise trade fell behind output growth only once, in 2001.

A crucial part of economic globalisation, cargo shipping is also a major source of greenhouse gas emissions. The International Maritime Organisation (IMO) recently demonstrated that shipping produces more carbon dioxide than previously thought. Intertanko, the global association of independent tanker owners, puts the annual emissions from the world’s merchant fleet at nearly 4.5 percent of the global total. Shipping emissions are projected to rise by a further 30 percent by 2020, although it is not clear how these estimates will be affected by energy prices.

Dudley Curtis, a spokesperson for Transport and Environment, a Brussels-based campaign group, said that there was very little international regulation of maritime pollution, whether in terms of carbon dioxide emissions and fuel efficiency, or fuel quality.

While it is natural for oil prices to have some impact on demand, and thus on shipping-related pollution, “we don’t think that an oil price spike is a substitute for regulation,” he said.

The CIBC World Markets analysis is available at http://research.cibcwm.com/economic_public/download/feature1.pdf.

The WTO trade statistics for 2008 are available at http://www.wto.org/english/news_e/pres08_e/pr520_e.htm.

ICTSD reporting.