In recent months, we’ve watched the world come to a standstill, forcing individuals and businesses to hit pause as the COVID-19 pandemic touches every corner of the economy. Reliance on the global market has forced international trade teams to evaluate the depth and breadth of lockdowns on their supply chains.
The pandemic shined a spotlight on the dependence of many companies on a limited number of suppliers, primarily in China. From widespread supply shortages to dwindling demand, the subsequent effects on the global economy are likely to have lasting impacts on international trade. Taking a closer look at China from a global trade lens, the economic effects of COVID-19 have been felt in three main channels, according to the Congressional Research Service:
- Directly through supply chains, as reduced economic activity spread from intermediate goods to finished goods producers;
- An overall drop in economic activity, which reduced demand for goods in general, including imports, and
- Reduced trade with commodity exporters that supply producers, which in turn reduced their imports and negatively affected trade and economic activity of exporters.
As a result of the pandemic, the International Monetary Fund predicted that the global economy would experience its “worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.” IMF estimates in its baseline projection that the global economy could decline by 4.9% in 2020, before growing by 5.4% in 2021.
By contrast, the Organization for Economic Co-operation and Development projects a global economic contraction of 7.6% in 2020, and a growth rate of 2.8% in 2021, delaying a return to full recovery until 2022. While the two projections offer different outlooks for recovery, the common theme is that the situation is likely to get worse before it gets better, as the impact of the pandemic continues to spread to nearly every industry.
Industries that have experienced major disruptions to their global supply chains may move to a model that includes diversification of suppliers and the use of reshoring or near-shoring to take advantage of supply-chain efficiencies. The pandemic is also accelerating investments in technology, such as artificial intelligence, automation, and transportation-management services.
Yet the pandemic isn’t the only ongoing situation impacting global trade. U.S. trade with China, as well as Brexit, remain major concerns.
Ramifications of the trade war with China and yet-to-be defined parameters of Brexit continue to loom over the trade landscape. While the COVID-19 pandemic has taken the focus off the U.S.-China trade war, commitment to the Phase 1 trade deal was reaffirmed between the two countries in August. The deal seeks gains in sectors most impacted by the trade war, including U.S. agriculture and energy.
As for Brexit, there are tangible “if this, then that” protocols in place, as trade negotiations between the United Kingdom and European Union continue. If the two sides fail to reach agreement and ratify a new trade deal by Dec. 31, the U.K. will automatically drop out of the EU’s single market and customs union. The absence of a trade deal will be much like pulling a loose yarn from a sweater, unraveling trade and services sectors and broadly impacting multinational corporations that rely on open trade between the U.K. and EU. Once invisible borders and duty-free movement of goods and services contract, trading partners will become importers, and will be required to file customs declarations and pay applicable duties and taxes. Should the single market be dissolved, technology such as geofencing and mobile-enabled carrier solutions will likely become the way of the future for handling customs formalities.
Brexit and U.S.-China trade relations will remain top priorities, as fluctuations in trade continue through the pandemic.
Supply-chain organizations can prepare for any change by adopting the concept of “data is king.” In an ever-changing global economy, the best way to stabilize a supply chain is to increase one’s ability to adapt to those changes. Sustainability can be achieved through superior data visibility, and knowing when and where to act when shifts occur. Mike Ross, founder of the Juniper consultancy, identifies five steps that any business can adopt that will allow it to ride the tops of the waves during any storm. They can easily be applied to international supply chains:
- Recognize the value of making your business and supply chain adaptable;
- Identify potential disrupters and create a disruptive-change matrix;
- Create an early-warning system and define items in your “be watchful” category;
- Prepare a change plan, and
- Start small, tolerate failure, and learn. Ask yourself: What low-cost initiatives can you implement now?
While challenges continue to mount and uncertainty remains, understanding the current landscape and tools available to minimize the impact will help organizations not only to survive, but thrive.