The global economy today is more integrated than ever before. Globalization has on the whole, brought tremendous benefits to the participating nations.Among other reasons, the unprecedented worldwide economic boom witnessed in the last few years was due to manageable oil prices. I say manageable because, while oil prices which were around $30 a barrel before the start of the US led invasion of Iraq, rose to about $60 a barrel by the end of 2006, they were still well below earlier peaks after adjusting for inflation. Trade between nations has grown exponentially, particularly between the US and other Asian countries, which have been able to successfully leverage their low wage structure. In the process these Asian countries, notably China, came to enjoy sustained double digit rates of growth, which lifted a large proportion of its huge population out of poverty. The cheap goods which they exported to the US, helped in keeping inflation there in check and prevented any major increases in wages. This led to a tremendous improvement in US corporate productivity and profitability.
Now the dream is coming to an end.The cost of transporting both goods and people is rising at such a fast pace that it threatens to derail global trade. Shipping costs to the US from Asia have already tripled since 2000, and are set to rise further as oil prices show no signs of coming down.Not only is the cost of shipping goods to the US from China increasing, China finds that the cost of importing raw materials is increasing as well, which will undoubtedly impact its profitability. The rising cost of imports will further increase inflationary pressures within the US economy and will make the Fed's job of restraining inflationary pressures more difficult. The Fed is well aware of the problem that it faces, and in recent comments Bernanke has focused more on the dangers of inflation with the housing crisis taking a back seat. It has to perform a tough balancing act in the days to come. Faced with expensive imports, consumers are likely to switch their demand to locally manufactured goods, which though being good for local industry as it gives them pricing power, will certainly impact global trade. The process of de-globalization seems to have begun.