an article on transaction costs! oooh, aaahh....

One of the staples of economics-- not just the cost of production or the price of the product, but "the cost of making a trade happen". Most obviously, this refers to search costs-- the cost of finding and getting a product, the costs of communication and transportation.

Dramatically lower transaction costs have been arguably the most important economic story over the last 30 years-- and inarguably, the most undersold economic factor over the last 30 years. Through massive technological advance and the deregulation of Reagan and Carter (the only good thing from the latter's presidency?), transaction costs plummeted-- and with that, globalization began in earnest.

Here, from Timothy Appiel in the WSJ, what happens when transaction costs increase (in this case, because of higher gas prices)...

The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas....

The movement of factories to low-cost countries further and further away has been a bittersweet three-decade-long story for the U.S. economy, knocking workers out of good-paying manufacturing jobs even as it drove down the price of goods for consumers. But, after exploding over the past 10 years, that march has been slowing.

The cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel, says Jeff Rubin, chief economist at CIBC World Markets in Toronto. He estimates transportation costs are now the equivalent of a 9% tariff on goods coming into U.S. ports, compared with the equivalent of only 3% when oil was selling for $20 a barrel in 2000....

But moving production closer to markets won't avoid all the problems associated with rising transportation costs. Manufacturers face hefty surcharges on domestic shipments by truck and train. And already congested domestic transportation systems may have difficulty handling a sudden upswing in demand from manufacturers buying and moving more raw materials and other supplies over U.S. rails and highways.

Moreover, in certain industries the advantages derived from offshore production continue to trump higher transportation costs.

Electronics firms, for instance, are now clustered in Asia and gain a major benefit of proximity to one another.

While many manufacturers are re-evaluating production strategies, there are limits to how many jobs will flow back to the U.S. One problem is that much of the basic infrastructure needed to support many industries -- such as suppliers who specialize in producing parts or repairing machines -- has dwindled or disappeared....

The higher costs are particularly problematic for lower-value goods: The cheaper a product, the more significant transportation costs are in the final price. That may help explain why Chinese exports of such "freight-sensitive" goods to the U.S. are now falling for the first time in more than a decade, according to CIBC's Mr. Rubin....