The COVID-19 pandemic poses fundamental questions for governments and businesses about the resilience of international trade.
How to ensure supplies of crucial goods (medical supplies, food) that are dependent on global supply chains?
How to survive the immediate crisis and be best placed, with suppliers and customers, to resume production as soon as conditions allow?
How to protect national industries while retaining the benefits of free and fair international trade?
The immediate responses have thrown up an array of new regulations together with temporary relaxations of existing rules. These recent developments and COVID-19, primarily from a UK/EU perspective, have had an impact on supply chains, tariffs, export insurance, customs, export controls and sanctions.
The impact of COVID-19 on international, and indeed domestic, supply chains are profound. The character of the pandemic is such as to wreak maximum mayhem. Cycling from a supply-side crunch as production in Asia was hit, to a demand-side crisis as companies in Europe and the US canceled orders, and back again to supply constraints as reinfections break out and supplier companies fail to survive.
Food Supply Chain
The food supply chain, in particular, is increasingly struggling with quarantines, labor shortages, shipping interruptions and export restrictions to ensure domestic consumption needs are met.
Russia has proposed a seven million tonne grain export quota for April through June; benchmark rice prices in Thailand have risen more than 11% since the end of February and wheat futures in Chicago have risen 15% since mid-March. Further food security protectionist measures look likely.
Beyond the food sector, manufacturers and retailers are torn between protecting their own financial position on one hand and extending support to their suppliers on the other,to ensure that they survive until business resumes. While some have canceled orders and extended payment terms, others have taken delivery of already produced goods and prioritized vendors that supply parts and raw materials critical to revenue generation.
Impact on Freight
The pandemic is undercutting sea freight and raising airfreight prices simultaneously. Order postponements and cancellations threaten to leave shipping containers piling up at ports and warehouses full. Ships are traveling on longer routes than usual, deliberately delaying the arrival of the cargo, but are likely soon to face falling demand and a consequent hit to freight prices. At the same time, exports of essential goods face sharply increased demand for airfreight capacity, combined with a reduction in supply as passenger jets, which usually carry some cargo, due to airlines grounding part or all of their fleet.
For the longer term, the pandemic is exposing vulnerabilities in both critical and non-critical supply chains and may accelerate the re-shaping of global trade that was already underway:
- Companies are starting to re-evaluate the resilience of current ‘just-in-time’ business models. Thin inventories sourced from around the world have always posed a risk, but many companies are now re-evaluating that risk and looking to build up buffer stocks produced closer to home.
- Governments will need to review the risks to national and economic security, and not only for supplies of pharmaceuticals, medical equipment and food. How far it is reviewed nationally or multilaterally is critical in avoiding a wave of protectionist trade and investment measures.
On 27 March, the G-20 leaders recognized the severe risks that the pandemic poses to international trade. They pledged to work both to ‘ensure the flow of vital medical supplies, critical agricultural products, and other goods and services across borders’ and at the same time to keep emergency measures aimed at protecting health ‘targeted, proportionate, transparent, and temporary’ in the interests of realizing ‘a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open.’ The challenge of translating these objectives into action remains daunting.
The changes to trade regulations and trade flows we have seen so far are only the start of the response to COVID-19.
There will be many more challenges to come as the crisis evolves, and there will be a time when regulators begin to unwind the temporary measures that are in place.