In recent months, we have watched the world come to a standstill globally, forcing individuals and businesses to hit pause as the COVID-19 pandemic has touched every corner of the economy. Reliance on the global market forced international trade teams to evaluate the depth and breadth of lockdowns on their supply chain.
The pandemic put a spotlight on the dependence of many countries 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, there were three main channels in which the economic effects of COVID-19 impacted globalization as we know it according to the Congressional Research Service:
- Directly through supply chains as reduced economic activity spread from intermediate goods producers to finished goods producers.
- As a result of a drop overall in economic activity, which reduced demand for goods in general, including imports.
- Through reduced trade with commodity exporters that supplied 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 (IMF) predicted the global economy would experience its “worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.” The IMF estimates in its baseline projection that the global economy could decline by 4.9% in 2020 before growing by 5.4% in 2021.
In contrast, the Organisation 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 both projections offer a different outlook for recovery, the common theme is the situation is likely to get worse before it gets better as the impact continues to spread to nearly every industry.
Immediate Changes and Additional Concerns
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 nearshoring to take advantage of supply chain efficiencies. The pandemic is also accelerating investments in technology including artificial intelligence, automation and transportation management services.
Unfortunately, the pandemic is not the only ongoing situation impacting global trade. US trade with China and Brexit remain as major concerns.
Ramifications of the trade war tariffs with China and the yet-to-be-defined parameters of Brexit continue to loom over the trade landscape. Though the COVID-19 pandemic has taken the focus off the US and China trade war, commitment to the Phase 1 trade deal was reaffirmed between the US and China in August. The US-China Phase 1 deal is aligned to support reaching statistical gains in areas most impactful to the US position in the trade war. Among these goals are increased buying of US agriculture and energy sector goods outlined by the proposed deal.
Regarding Brexit, there are tangible ‘if this, then that’ protocols in place as the UK-EU trade negotiations continue. If the UK and EU do not reach an agreement and ratify a new trade deal by December 31, 2020, then the UK will automatically drop out of the EU’s single market and the 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 who presently rely on open trade with both the UK and the EU. Once invisible borders and duty-free movement of goods/services contract, trading partners will now become Importers and will be required to file customs declarations and pay applicable duties/taxes. Should the UK-EU single market be dissolved, technology such as geofencing and mobile-enabled carrier solutions will become the way of the future for handling customs formalities.
Brexit and US-China trade relations will remain top priorities as both trade balances and supply/demand fluctuations continue through the pandemic.
How to Prepare
The best way that supply chain organizations can prepare for any change is to adopt the concept of “Data Is King.” In an ever-changing global economy, the best thing to stabilize a supply chain is to increase the ability to adapt to those changes. Sustainability can be achieved through superior data visibility and knowing when and where to act when shifts occur. According to Mike Ross, founder of the consulting firm Juniper, there are five steps that any business can adopt that will give them the ability to ride the tops of the waves during any storm. These steps are intuitive and can easily be applied to international supply chains:
- Recognize the value of making your business / supply chain adaptable
- Identify potential disruptors and create a disruptive change matrix
- Create an early-warning system and define items in your “Be watchful” category
- Prepare a change plan
- Start small, tolerate failure and learn. What low-cost initiatives can you implement now?
While challenges continue to mount and uncertainty remains, understanding the current landscape and the tools available to minimize the impact will help organizations to not only survive, but thrive.
Michelle Frennier is a Director, Solution Consulting at BluJay Solutions specializing in customs and compliance. BluJay Solutions helps companies around the world achieve excellence in logistics and trade compliance.