Question

If you’ve paid attention to the general level of prices of goods and services over time, it should come as no surprise that rising oil prices have an impact on world trade, specifically that higher transport prices serve to act as a de-facto tariff on goods that cross borders. In your opinion, what effect do you think high oil prices could have on U.S. trade with distant countries like China, and will it lead to “Made in America” being the choice of American consumers again?

Answer 1

Oil prices affect long distance trade cost more as compared to short distance. Shipping costs include both fixed and variable costs. Oil prices affect variable cost. So we can say that increase in oil prices will lead to large trade costs for long distance. This will lead to decrease in trade between two countries. So, US will have less trade with China and distant countries, thus affecting the profitability of both the countries. Increase in oil prices increase the transportation costs. This increased price is passed on to the consumers. So, countries will start having trading with countries who are located closer to them geographically or will try to produce same goods and services themselves if possible.High oil prices put the breaks on globalization, as the distance elasticity of trade is higher in years of high oil prices.

Yes, Made in America is a possible solution to meet increased costs due to rising oil prices but again all goods and services can not be produced in a particularly country due to geographical, technological and climatic conditions and availability to desired manpower. Another solution can be increase of trade with the countries located nearby thus resulting in less trade costs.