ONSANDO: How Covid-19 will impact world trade and new opportunities it presents

By , K24 Digital
On Thu, 9 Apr, 2020 09:19 | 4 mins read
A Seafarer stands on a cargo ship. PHOTO | JOE FURNESS | MAERSK
A Seafarer stands on a cargo ship. PHOTO | JOE FURNESS | MAERSK

In the coming months, Covid-19 is likely to be as contagious economically as it has been medically. This is because, unlike most global economic threats in the past, this pandemic is causing both supply and demand shocks. As such, it's overall potential impact on global trade cannot be overemphasized.

To properly understand how the pandemic will impact global trade, there are a few facts we need to be alive to.

First, Covid-19 has greatly impacted countries that are economically important, in the grand scheme of things. US, Italy, China, Japan, Korea and Germany top the list of countries with high numbers of confirmed cases of the virus.

The six countries account for about 55% of the world's Gross Domestic Product, 60% of the world's manufacturing and 50% of the world's manufacturing exports.

Second, in curtailing the spread of the virus, policy interventions such as partial lockdowns, stay at home orders, travel restrictions, etc, are likely to significantly slow down aggregate demand in these and other nations and in effect slow down global trade substantially.

Finally, these nations also happen to be the nuclei of global manufacturing systems. Each of them is key suppliers of industrial inputs to each other and to the rest of the world.

For example, industrial parts and components manufactured in China are important to manufacturing sectors in most if not all countries. As such, any supply shocks experienced in China, as a result of the virus, will be felt even in countries that have been relatively insulated from the pandemic.

Hard hit on manufacturing

The manufacturing sectors account for a bulk of global trade inflows and outflows.

Its peculiarity makes it particularly vulnerable to the "economic contagion" that is Covid-19. Manufactured goods, generally speaking, are 'postpone-able' purchases.

As such, we are likely to witness a wait-and-see precautionary stance by consumers in the wake of the uncertainty the pandemic portends. This, coupled with a recession-fueled drop in aggregate demand for manufactured goods, will hurt the sector deeply.

On its supply side, we are likely to continue seeing disruptions in manufacturing hubs across the globe. For example, Korean carmaker Hyundai has already closed its Alabama factory after workers in the facility tested positive for the virus.

Further, smaller manufacturing countries will find it harder and/or more expensive to find inputs for their industries.

It is, therefore, safe to conclude that the next casualty, after hospitality and aviation, of the Covid-19 economic contagion is the manufacturing sector.

Impact on supply chain linkages

Globalization has led to highly complex and interdependent trade supply chains. Multilateral trade has eclipsed bilateral trade as the mode of doing business.

Take China and the US for example, there are three ways a Chinese product can make its way to America.

The first way is through the direct import of a finished product such as a hooded jacket.

The second way would be a Chinese made component being used to manufacture a product on American soil, such as a home alarm system.

The third way is a Chinese made component, imported by a third party country, for the manufacture of a product that will ultimately be exported to America, such as a motor vehicle manufactured in Mexico.

We can predict, therefore, a complex domino effect on the global trade system beyond countries directly affected by the pandemic.

For example, it is plausible that a fall in demand for clothing and apparel in the US could ultimately lead to a reduction in the export of cotton to China from India.

Similarly, it is plausible that a supply disruption in the manufacture of motor vehicle components in China may ultimately affect the export of motor vehicles, from Mexico to the US.

In looking at the impact of Covid-19 on global trade, we must take into consideration the complexity and interdependence of the global supply chains and the resultant domino effects.

Once we recognize and understand the specific nature of supply and demand shocks from the Covid-19 economic contagion, we are then able to see some of the opportunities the pandemic may present.

Growth propeller

Covid-19 could be viewed as a propeller for growth in new sectors while reviving declining or otherwise dormant sectors.

First and in the short term, there is obviously great opportunity in the medical supplies sector. The demand for equipment such as ventilators, masks, gloves and personal protective equipment is expected to keep growing.

In the long term, the health sector is expected to take center stage in the economic outlook. The pandemic has exposed an obvious need to strengthen health systems across the world.

As such one can expect significant increases in budgetary allocations to the health sector by most countries. This will drive demand for healthcare products and solutions at a macro level.

At a micro level, we should expect to see more attention being paid to healthcare solutions such as home testing kits, remote diagnosis solutions and tech solutions in healthcare such as surveillance software and information apps.

The pandemic will also lead to a renewed focus on personal health. Therefore, we are likely to see increased demand for health supplements, organic foods, diet and nutrition services as well as fitness and exercise products and services.

Countries that have deliberate interventions to support and enable these aspects of the healthcare sectors will be sure to enhance their ability to cushion from reduced trade outflows.

Second, we can expect that the demands on the global trade software infrastructure, for instance, trade finance, credit and insurance will reduce as a result of the impact on the manufacturing sector.

This will create an opportunity for producers of raw, consumables such as horticultural produce to tap into this existing infrastructure, as they won't be affected by the precautionary wait-and-see stance by consumers.

Finally, one of the mitigation measures against the pandemic has been for people to stay at home, and to the extent necessary, work from there.

The net effect of this is that employers will look at flexible work arrangements more critically.

As businesses continue to pay rent for unutilized office space, there will emerge a growing demand for remote work systems, cloud-based services and other software platforms.

This creates a huge opportunity for tech and software developers to create products that can permanently disrupt the work environment as we know it.

Whilst this list is anything but exhaustive, it demonstrates that economies can make up for some of the losses they will incur from trade disruptions by leveraging on the opportunities that those very disruptions may present.