Despite the increasing uncertainty with regards to the financial hit to industries, Russell Group have modelled the exposure for companies and countries. In the first of these articles, we take a look at the impact on shipping.
The Rise of ‘Slowbalisation’ in a World of Breaking Supply Chains
24 April 2020 | Blog Post
Globalisation in its latest incarnation has been bringing together economies predominantly via more liberal trade flows since the 1970s. However, the global volume of merchandise reversed in 2019 in contrast to a 21st century average growth rate of about 3.4% per annum, according to the CPB World Trade Monitor.
Also, in December 2019 the World Trade Organization’s (“WTO”) dispute settlement mechanism was effectively disbanded. PWC expects this trend to continue in 2020 and for trade tensions in the global goods market to persist. The WTO’s dispute settlement mechanism deals with trade-related legal spats among the member countries.
Many academics and policy researchers state that the WTO system without the AB will move back to the GATT days where political power influenced the adoptions of decisions rather than the rule of law. If global trade rules are set by powerful countries over which citizens, in India for example, have no control over, it is back to the “law of the jungle” as Director General of the WTO Roberto Azevêdo stated.
The Path to Slowbalisation
According to PwC therefore, globalisation is likely to give way to ‘slowbalisation’ i.e. continued integration of the global economy via trade, financial and other flows but albeit at a significantly slower pace. Large businesses with sophisticated supply chains spread across the world should therefore plan for a variety of scenarios, some of which have not been experienced in recent history.
The European think tank Bruegel suggests there seems to be enough evidence by now to argue that the globalisation process, including the free flow of trade, capital and people, has stalled since the global financial crisis in 2008. Regarding the movement of merchandise, after a sharp decline in 2008, the general expectation was that trade would continue to grow at rates similar to those previous to the crisis. Actually, this has not been the case.
Zero Growth Rate in Trade
Trade volume grew by an average of 3.5% from 2009 to 2018, which is much slower than the 7.6% average growth before the 2008 financial Crisis. Furthermore, we are now at a zero growth rate in trade, which is understandable on the back of the US-China trade war and several other protectionist waves, such as the US with Europe but also between Japan and Korea.
Initiatives to broaden sourcing locations beyond China will likely continue as the fallout from COVID-19 corrodes the world’s supply chains. Southeast Asia was already seeing the clear benefits of a trend of “desinification” and would likely have continued to see manufacturing growth in 2020 if it were not for the Coronavirus.
Switching sourcing strategies – such as desinification or “desinization” as it has also been termed - can also bring risks, including capacity availability, infrastructure support, and geopolitical stability. While China will continue to be the largest exporter into the United States, some observers say that the trends continue to show volume shrinkage from China.
Accelerated evolution of technology will play its part in changing supply chain strategies. Significant investment in technology and transportation platforms continues to accelerate across the industry. Beyond private equity groups, well-respected and established providers like C.H. Robinson are making investments that will reshape logistics.
End of Global Trade Consensus
COVID-19, however, has really changed the terms of supply chain engagement and it is fair to ask if the global trade consensus that has built up over several decades can ever be the same again.
German Economy Minister Peter Altmaier, for example, said he wanted to support pharmaceuticals companies that are dependent for key reagents on imports from Asia to rebuild their production sites in Europe, as reported recently in Der Spiegel magazine. He also said that nationalization could be one option for supporting strategically important companies brought into difficulties by the coronavirus epidemic, which is causing demand to collapse and severing global supply chains.
“Minimizing one-sided dependencies in order to win back national sovereignty in sensitive areas is the right idea,” he told the magazine. “I can well imagine a common European project for medicine production.” Source: http://ow.ly/Wo3c30qzA2B
Reagents are one of several types of laboratory supplies that have been threatened with shortages recently as coronavirus testing has increased in the U.S. and globally. Reagents are necessary in the testing process to extract virus RNA from test swabs to be analyzed. To help stretch current supplies, the Centre for Diseases Control and Prevention (CDC) has revised coronavirus test requirements to allow labs to test a person with a single swab, and the Food and Drug Administration (FDA) has reduced the number of clinical specimens that must be tested in EUA (Emergency Use Authorization) templates from 50 to 30.
Although a German test using different reagents has recently been tried by Stanford, those reagents may also be in danger of shortages as use of them rises.
Out of China
According to Bloomberg, Japan has earmarked $2.2 billion of its record economic stimulus package to help its manufacturers shift production out of China as the coronavirus disrupts supply chains between the major trading partners. The extra budget, compiled to try to offset the devastating effects of the pandemic, includes 220 billion yen ($2 billion) for companies shifting production back to Japan and 23.5 billion yen for those seeking to move production to other countries, according to details of the plan posted online.
The move coincides with what should have been a celebration of friendlier ties between the two countries. Chinese President Xi Jinping was supposed to be on a state visit to Japan early this month. But what would have been the first visit of its sort in a decade was postponed a month ago amid the spread of the virus and no new date has been set.
China is Japan’s biggest trading partner under normal circumstances, but imports from China slumped by almost half in February as the disease shuttered factories, in turn starving Japanese manufacturers of necessary components.
That has renewed talk of Japanese firms reducing their reliance on China as a manufacturing base. The government’s panel on future investment last month discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia.
Bigger in Japan
“There will be something of a shift,” said Shinichi Seki, an economist at the Japan Research Institute, adding that some Japanese companies manufacturing goods in China for export were already considering moving out. “Having this in the budget will definitely provide an impetus.” Companies, such as carmakers, that are manufacturing for the Chinese domestic market, will likely stay put, he said.
Following the path of the US, other countries are leveraging protectionism and trade as weapons to achieve unilateral benefits. For example, Japan’s recently tightened its export controls on South Korean imports from Japan. Also the US has opened a number of cases against European exports into the US and has even threatened to expand those tariffs to much more relevant sectors, such as the European automobile industry. More generally, the fear exists that other countries may engage in further protectionist measures, introducing a race to the bottom.
Even so, global services trade expected to hit US$7 trillion. Services are now about one third of the size of the global volume of merchandise trade. In contrast to goods, services remain largely unaffected from tariff wars. The latest 2018 data from the International Trade Centre (“ITC”) shows that the global export of services was worth about US$5.8 trillion, or around 3.5% of global GDP.
Shift from West to East
Before the pandemic, PwC had expected the total value of services that are exported to hit a record US$7 trillion by 2020. Assuming historic trends continue, the US and UK are likely to remain the first and second largest exporters of services in the world based on US Dollar valuations. But in yet another reminder of the shift of the centre of economic power from the West to the East it had been expected that China would overtake France in 2020 and become the world’s fourth largest services exporter though those assumption maybe derailed by Coronavirus now.
After decades of increasing globalisation both in trade, capital flows but even people to people movements, it seems the trend has turned towards deglobalisation. There is some evidence of the decrease in merchandise, capital and, to a lesser extent people to people flows. Strategic competition between the US and China could foster the deglobalisation trend further. This is true for trade but even beyond that, to include the tech and finance space. Finally, the demise of the WTO could be one of the most relevant turning points towards deglobalisation, especially as far as trade is concerned. This should bring downward pressure to growth globally.
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