Increased Shipping Costs to Restrict Globalization and Eventually ETFs?

August 05, 2008 at 10:00 am by Timothy Hubbard

As oil prices continue to soar and show an uptrend, shipping costs have increased dramatically as of late, and seem to have an adverse affect on globalization, eventually, exchange traded funds (ETFs).

Many economists argue that globalization won’t shift into the opposite direction, but companies have been looking to keep prices low, ultimately bringing some production closer to the consumer.

Ikea, the Swedish furniture manufacturer, opened its first factory in the United States in May in order to avoid having to ship its products from abroad, says Larry Rohter of The New York Times. Decisions like this are resulting in what economists are calling the neighborhood effect, where companies are putting factories closer to suppliers and consumers to reduce transportation costs. As shipping costs rise, they have overtaken tariffs as the largest barrier to global trade today.

Regardless of rising shipping and transportation costs, economists admit that trade costs do matter, but the world is still in a globalized era.

This sharp rise in transportation costs is most likely to affect those industries that produce heavy or bulky goods which are relatively expensive to ship. However, plants and factories in industries that require less infrastrucutre investment, such furniture, toys, footwear, and even food have already shown signs of mobility as shipping costs rise.

An index that is particularly important to note is the Baltic Dry Shipping Index, which tracks the actual cost of shipping raw materials by sea, based on real cargo bookings, according to Kevin Depew for Minyanville. This index is considered to be a pretty good indicator of global trade volumes. Regardless, the index has declined for 10 straight sessions, which is a good indication of the impact that increased shipping costs have on the shipping industry.

According to Heather Bell for IndexUniverse, Claymore is planning to launch an ETF that will track an index of companies involved in the maritime shipping industry and are listed on developed-market exchanges. This ETF, the Claymore/Global Shipping, appears to be the first filing that specifically covers the maritime shipping industry.

Bell also reports that according to the Roundtable of Intrnational Shipping Associations, more than 90% of world trade is transported by ship. Powershares and SSgA both have transportation ETFs in registration, but one ETF that may also be affected in the long run is iShares Dow Jones Transportation Average (IYT), which is up 5.4% for the month.