Coronavirus fallout: Shrinking global trade

Coronavirus fallout: Shrinking global trade

World trade looks bleak as government imposed lockdowns to contain the novel coronavirus pandemic froze global production and slashed demand.

Trade is expected to suffer its steepest contraction on record in 2020 as supply chains have been massively disrupted.

Consider this: Large businesses had to deal with an initial supply shock, then a demand shock as more and more nations imposed stay-at-home orders. Governments, businesses and individual consumers suddenly struggled to procure basic products, services and materials. 

The current economic crisis has been termed as the worst since the Great Depression of 1939. The International Monetary Fund forecasts global growth in 2020 to decline by 3 per cent. 

In an optimistic situation, with a sharp drop in trade followed by a rebound starting in the second half of 2020, the Geneva-based World Trade Organization (WTO) predicts the volume of global merchandise trade falling 13 per cent this year compared to 2019.

On the other hand, if the pandemic is not brought under control, and governments fail to implement and coordinate effective policy responses, the decline could be 32 per cent or more.

But both situations project double-digit drops in exports and imports for all regions across the globe, with exports from North America and Asia hit the hardest.

Further, exports from Asia are expected to plummet 13.5 per cent in the optimistic situation and 36.2 per cent in the pessimistic one. The region’s imports this year is expected to fall somewhere between 12 per cent and 31.5 per cent.

The WTO projected a 17.1 per cent -40.9 per cent decrease in exports from North America and a 14.5 per cent -33.8 per cent fall in imports.

Besides declines in volume and value, the outbreak is also expected to trigger a structural change in global trade.

The present economic situation has also led to new tensions in Sino-US relations, with the Trump administration spearheading an initiative to remove global industrial supply chains from China as it examines various ways to ‘punish’ Beijing for its mishandling of the pandemic.  US President Donald Trump has told companies to move out of China. 

With the advent of Covid-19, many firms are already beginning to be impacted negatively, as businesses around the world are deeply reliant on Chinese supply chains for medical equipment, pharmaceutical, auto, and tech products, to name a few. 

China’s  cheap labour market boasted high profit margins and low regulation, and made China a haven for manufacturers. This resulted in Samsung, Nike, Adidas Intel, Apple, Microsoft, and Google, among others, setting up an entire centre of operations in China. 

But now like-minded countries like the US,  Germany, France and the UK are diversifying supply chains away from China.

Japan is a case in point. The country has taken steps to reduce its reliance on China as a manufacturing hub. The Government is willing to pay enterprises to relocate back to Japan, while Japanese firms are making future plans to diversify production across Southeast Asia. 

European nations are also taking measures to nationalise companies to protect them from foreign takeovers. 

This shows that stimulus package for revival may play an important role in shaping future supply chains. 

However, this transition of moving supply chains out of China cannot happen overnight, as it requires long term planning and takes time and effort to identify potential suppliers in areas of manufacturing, quality, capacity, delivery and cost.

Also, if China manages to recover from this crisis faster than the rest of the world, companies may overlook the negative effects of being too reliant on one country (China) for comprehensive supply chain and manufacturing needs, in their search for a quick financial recovery.

But, for India there is some positive news as the country can use this crisis as an opportunity to reform its domestic sector and make it an attractive option for businesses that may seek to reduce risk by diversifying away from supply chains that are focussed on China.