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After more than a decade of relative stability, the dynamics of global trade have been thrown into disarray by the global pandemic. So says The Economist Intelligence Unit in “A new era: global trade in 2020 and beyond.” In it, the publication paints an uncertain picture of what’s to come on the international trade front over the next 12 months.
“The spread of the coronavirus is affecting production in Asia, disrupting supply chains across the world and depressing consumer demand,” it says. “And while economic forecasts that measure the depth of the looming recession vary, it says there is widespread consensus that the global economy will contract much more sharply than during the 2008-09 global financial crisis.”
The Impacts of COVID-19
The knock-on implications of the virus are disrupting both international business operations and global supply chains, according to The Economist Intelligence Unit, which says that the most-affected regions in China are crucially important to many global industries. Hubei, for example, is the heart of China’s “optics valley” where firms produce essential components for use in telecom networks.
“Around one-quarter of the world’s optical-fiber cables and devices are manufactured there, as are vast numbers of smartphone microchips and more basic goods such as iron and steel components or chemicals,” it points out. “Although Chinese factories [started reopening], the fact that the coronavirus has spread across the world is severely undermining consumer demand in key export markets.”
Having interviewed numerous global trade experts for its report, the organization says most interviewees believe the virus will have a long-lasting, structural impact on the way in which firms manage supply chains and supplier relations. “Many supply chains rely on smaller companies which could go out of business before the virus disappears,” it adds. “Small and medium-sized businesses do not have the capital to survive for months without any sales.”
Volatile U.S.-China Trade Accords
Already an issue pre-pandemic, this is one area of concern that’s only been exacerbated by the global pandemic. In 2019, U.S.-China bilateral trade represented $560 billion. Pre-COVID, tension in this trading relationship was the biggest cloud of uncertainty hanging over global trade, The Economic Business Intelligence states, “and it will continue to be a crucial factor shaping global trade in the coming year.”
The uncertainty caused by U.S.-Chinese trade relations is likely to raise buyers’ costs by forcing firms to hold higher levels of stocks, the organization predicts. “Planning will also be complicated as companies are forced to budget for greater contingency in order to mitigate
the heightened risks,” it continues. “The volatility is likely to prompt procurement departments to think about reducing their exposure to a possible resumption of the U.S.-China trade war, including possible product re-routing or alternative sourcing.”
U.S.-EU Trade Relations
The Economist Business Intelligence says these relations have been under strain since mid-2018 when the US government launched an investigation into the national security implications of imports of foreign-made cars and parts and threatened to raise tariffs on European auto imports by 25%. “Although the U.S. appears to have withdrawn the threat for now, tensions persist on a number of fronts,” it says. For example, the U.S. threatened to place additional tariffs on France after its efforts to implement a digital-services tax.
“Any of these disputes could spark a damaging trade war between the U.S. and the EU,” the organization states. Should these tensions escalate, it could raise costs for businesses and take a bite out of corporate profits. “Sometimes firms can look to pass on extra costs to consumers through higher retail prices,” The Economist Business Intelligence says, “but if domestic demand is struggling as a result of the impact of the coronavirus, firms will have to absorb these costs internally.”
Identifying and Reacting to Disruption
The Economist Business Intelligence points to rising non-tariff protectionism (e.g., subsidies in the form of direct financial support on the part of governments) and the taxation of digital trade as two more trends that organizations should be paying attention to right now. And while COVID-19 is clearly the most widespread, impactful issue to watch at the moment, the pre-existing trends outlined above are equally as important.
“The year 2020 is set to be a watershed for the global economy. Even when coronavirus itself is eventually contained, no company should expect a quick and easy return to ‘normal,’” the organization concludes. “The businesses that survive, and even thrive, in the new normal will be those that identify how these disruptions affect their business and adapt accordingly—sooner, rather than later.”
