What We Think
August 6, 2020
Redefining international trade
Apart from its trail of human deaths, COVID-19 has left an indelible mark and trail of destruction across the global economy. With millions of unemployed and businesses in liquidation, the economic cost of COVID-19 will not only leave many victims and lost output but going forward will change economic dynamics, especially international trade.
The COVID-19 pandemic has delivered perhaps the greatest shocks to international trade since the Great Depression. Global trade in 2020 is projected to decline by around a quarter and the recovery is now expected much slower and erratic than previously imagined. However, irrespective of the actual quantification of the impact, the global trade landscape will look dramatically different and business and nation leaders need to start assessing the risks associated to international trade if they want their organisations and countries to build economic resilience.
There are a number of interrelated factors which are being exacerbated by the pandemic that will have a lasting impact on how and where trade is connected. The pandemic has highlighted the fragility of our interconnected economic world. With destablised economies, a looming debt crisis for developing countries, intensified geopolitical frictions and supply chain vulnerabilities, international trade will definitely be redefined in the new normal.
The macroeconomic environment
There is no doubt that the economic recessions will generate a lower demand for goods and services thus affecting international trade. Apart from this demand effect, production constraints due to logistical disruptions, lockdowns and closures will also limit the supply of goods and services. Trade volumes will be heavily influenced by whether economic recovery is shaped like a V, U, J or W. It is also largely dependent on the various government measures that continue being announced in support of struggling businesses.
There is no doubt that tourism is going to be one of the biggest casualties with fear of travelling being the most pressing issue amongst consumers. For economies that depend on tourism, with a large share of developing economies being dependent on such an economic sector, the net effect will be devastating and will cause further economic strains.
The looming debt crisis of developing countries, who this year have to pay a combined $130 billion in debt service this year, will further destablise the global economy should countries start defaulting with a possible contagion effect kicking in and rocking global financial markets.
With geopolitical tensions already being high on the agenda pre-COVID, the pandemic has only intensified nationalist policies. In addition to worsening the US-China relationship, the pandemic is prompting some governments and customs unions to place further controls on trade in medical and agricultural goods. Governments are also likely to put greater emphasis on domestic production to reduce the risk of future supply shocks.
For many companies, the pandemic has underscored the supply-chain risks of concentrating too much production and sourcing in a handful of distant low-cost jurisdictions. The overreliance of just-in-time inventory management has also brought to the agenda the need to build supply-chain resilience. It is no secret that the conversations that large companies are having in the board room is focused around altering their supply chains and reducing their risks emanating from supply-chain disruptions.
Embracing the new normal
Business and nation leaders are grappling with pandemic and its aftermath. As they chart a new normal, they need to be aware of the changing global trade landscape and the effects that such changes will have on their business and country.
In planning for this new normal, it is evident that the power of digitalization and smart factories made possible by Industry 4.0 need to be not only embraced but internalised in strategic plans and reform packages. Global companies are looking at have multilocal manufacturing sites and have surplus stocks in different locations that are closer than the low-cost jurisdictions.
It is here that Malta should find its space and niche in this changing landscape. Industry 4.0 is a reality and as a jurisdiction we have been successful in attracting high-value and automated manufacturing especially in specific components and parts of the supply-chain. Malta requires an industrial policy that is cognizant of the challenges and the changing global trade landscape but more importantly conscious of the opportunities that exist.
The pandemic and economic recovery remain impossible to predict. Trying to measure or estimate its impact is futile. We need to accept and realise that the disruptive nature of the pandemic will leave a lasting impact on global trade. Rather than waiting to revert to the pre-COVID momentum, business and national leaders need to start implementing the required reforms in their business and in their counties. Supply chain resilience will require changes in supply networks and change can bring opportunities with it. Let us as a country take stock, embrace new technologies and secure our competitive advantage in a new normal.
This article first appeared on Who’s Who.