When the pandemic dies down, trade will become the biggest threat to global supply chains.
This will both drive up prices and make resiliency harder to achieve.
Accelerated digitalization and uptake of new technologies can help firms find a balance between supply chain resiliency and efficiency.
Seven months into the COVID-19 pandemic, businesses of all kinds are devising ways to protect themselves from future shocks by making their supply chains more resilient. In doing so, they need to guard against the mistake of preparing for the last battle rather than the coming one.
At some point, hopefully soon, the unprecedented global response to COVID-19 will reduce it to a manageable threat that allows us to return to something approximating normalcy in our personal and professional lives.
When that occurs, the greatest immediate and long-term risk to supply chains won’t be a virus. It will be trade protectionism, which was resurgent even before the COVID crisis, and now threatens to choke off the lifeblood we need to speed us toward recovery.
As recently as 2016, trading nations were erecting fresh barriers – subsidies, tariffs, quotas, licensing requirements and other obstacles – at twice the rate they were adopting measures to liberalize trade, according to Global Trade Alert. By 2018, new obstacles outpaced liberalizing steps by three to one. Last year, the ratio was four to one, and the value of global merchandise trade fell by 3%, the first decline since 2015.
Since the start of the COVID-19 crisis, we have seen protectionism intensify. Some emergency moves are clearly temporary. They were put in place by governments to ensure access to the medicines, machines and protective equipment required to contain or treat the virus. In other cases, the aim was to guarantee adequate food supplies for local populations.
Yet these new measures and others have been taken against a backdrop of simmering trade tensions between the world’s two largest economies, the US and China, and a growing chorus of voices in the US, Germany and other countries calling to re-shore, nationalize or find alternative sources for key products and industries such as 5G wireless equipment, semiconductors, steel, electrical power gear, mobile cranes, rare earth minerals and other goods.
The 164-nation World Trade Organization (WTO), normally the body that would quell trade wars and bolster the global consensus for free trade, has been weakened, perhaps fatally, by a loss of faith in its dispute resolution system and the apparent withdrawal of US support.
“In the current alternate universe we’re living in, global trade is collapsing and the WTO and the liberal order itself are in a true existential crisis,” Bloomberg noted in June.
As economies around the world emerge, unevenly, from the pandemic, we can expect demand to begin to strengthen. As it does, trade flows, carrier schedules and inventory levels will start to normalize, and supply and demand will find a new equilibrium.
But normalization won’t mean a return to normal. The World Bank expects a 5.2% contraction in global GDP in 2020. Advanced economies could shrink by as much as 7%, although they are likely to recover faster than economies in emerging or developing countries, the bank says.
Trade, which has accounted for 54% to 60% of global economic activity in recent years, is set to retreat even further. The WTO forecasts a drop in global trade flows of 13% to 32% in 2020. UNCTAD expects trade to decline by 20%. For context, the largest quarterly decline in trade volume during the 2008 financial crisis was 5%.