Rounder world threatens Asia economies

By James Saft

LONDON (Reuters) - The "flat" globalized world is getting a bit rounder, as high energy prices increase the costs of transportation and undermine Asia's economic miracle.

The idea that the world was flat -- a phrase coined by Thomas Friedman meaning that goods and services could be easily produced in one place and sold across the globe -- was one of the crucial underpinnings of China and other Asian export-based economies.

But much of this was predicated on cheap transportation and energy, and with oil at $140 a barrel the sums increasingly don't add up.

"This will stress-test the entire Asian model, which has been built in a time of low energy costs and low shipping cost," said Stephen Jen, a strategist at Morgan Stanley in London.

"The world has completely changed and we, including myself, are only starting to realise some of the implications. In China a lot of the factories were built in the past 10 years with certain levels of energy costs in mind. I suspect we have significantly breached the levels of energy costs that would make these factories viable."

The upshot for Asia, which has thus far shrugged off the worst of the effects of the global credit malaise, is a continued fall in profit margins and with it continued falls in stocks and some currencies.

The MSCI Emerging Asia index .MIMS00000PUS has fallen sharply recently, tracking the main markets in China, and is down about 23 percent so far this year, as compared with a loss of about 14 percent in the S&P 500 .SPX.

And the pressure won't just be on China, it will be felt across the region.