The world stands at a once-in-a-lifetime turning point

01/12/2020

In this article, we look back at 2020 and discuss the ramifications for the future of global trade. World trade and gross domestic product have traditionally grown in tandem, but the reactions of governments worldwide to the Covid-19 pandemic have defined a new normal. Serious questions are presenting themselves as to the extent that this new normal will drive a fall in consumption.

The government-dictated closure of much of the services industry has led to considerable falls in discretionary spending at the micro level, and a concomitant rise in household savings. Spending less, saving more money, supporting local businesses, spending more time working from home feature among the changes that could become permanent, with significant impact on global trade.

An ongoing social study by University College London suggested in late-August that only 10% of people plan to return exactly to their previous lifestyle and spending patterns post-pandemic. 

Shaping the post-pandemic future


According to the IMF (International Monetary Fund), the global economy is expected to contract by 3% this year with a possible decline in global trade by as much as one-third as a result of the lockdown. Countries have been impacted in different ways. Countries with high levels of debt and low external reserves are even more vulnerable now, and those exporting commodities have been impacted by the drop in consumption

The crisis will have a dramatic impact on emerging economies following the brutal stop of tourism, the rush out of capital and the fall in commodity prices. Small to mid-sized enterprises (SMEs) in these countries will face extreme difficulties and will struggle to keep on buying vital goods from other countries and to export their own goods. 

The main difference between this and earlier crises is that, in this one, not all sectors are suffering equally. Some have been severely hit with suddenly almost no demand at all. Aeronautics, tourism, and restaurants have recorded much reduced or no turnover. Other sectors like health, technology and logistics are benefiting from the crisis. And the trade of services has remained steadily healthy

The big picture is thus full of stark contrasts. How will global trade recover? At what speed? Which trade corridors will recover best? It is too early to tell what we will see unfold over the next several months. We could see greater interest for a while in traditional trade finance instruments such as letters of credit, although so far, rather surprisingly, this has not yet materialised. 

The dislocation and recomposition of supply chains


In Europe, where supply chains are the most integrated internationally, companies found themselves being hit twice. Firstly because they could not get the intermediary goods needed for their production, and secondly because of the lack of demand. The question of how demand will resume, and to what extent it will resume - or not - is key. 

The COVID-19 crisis has dislocated supply chains across the word for a range of reasons. These include, for example, the interdependency and complexity that have become the global standard in the auto manufacturing industry, where 2,500 parts will come from many different locations to build a car. This can be well nigh impossible to understand, and to manage, and to adjust to rapidly. We have even seen the sovereignty of a number of countries being threatened in an unprecedented manner in, for example, matters relating to medical supplies.

We will likely see a restructuring of supply chain as a growing number of countries think about producing more locally, in the region in which they are based. We will see less ‘just in time’ production and more ‘just in case’, bringing a reduction in the length and complexity of supply chains. 

Reshoring is, however, easier said than done, not least because of the transfer of expertise and experience that has taken place in the decades since outsourcing and offshoring became everyday practice; 100% reshoring will simply not be possible and in some cases not even suitable. 

However, even if a portion is achieved, it will be a significant change, and governments can be expected to push for this to occur, if only in order to fight domestic unemployment. In this context, companies that have benefited from government support during the crisis will be expected to demonstrate their nationalist credentials and react accordingly. 

The acceleration of evolution 

“ The impact of the pandemic will be felt increasingly in day-to-day operations, as we experience an acceleration in evolution. While physical documents remain a staple requirement of global trade, the pandemic might well have supplied the push that was needed to make day-to-day processes more efficient. Players across the value chain are now well aligned to strongly advocate a much quicker adoption of digitisation and automation. ”

During the health crisis, digitisation has been proven to deliver an even stronger competitive advantage. It is not only about efficiency gains or the acquisition of new business, but also about ensuring the resilience of the business in such situations as we have come to know recently, involving the large-scale restriction of physical interactions

Last but not least we believe that in the short-, medium- and long-term future we will see a growing movement from the pursuit of economic growth at almost any cost to a more sustainable level of economic growth

This will be driven by government awareness that we collectively need to build a more sustainable world for our children. There will be relaunch plans for economic recovery, funded by governments, of which a large part will be dedicated to greening, relocating and modernising major industrial and transport infrastructures

In conclusion


I am a fervent supporter of Europe and an even more fervent supporter of helping SMEs to survive in these unprecedented times. Without healthy SMES, supply chains simply cannot function. The reshoring of at least some strategic or vital activities into Europe will help SMEs survive the crisis and help manage the inevitable changes that are expected to revolutionise the job market. A significant number of jobs will cease to exist in a few years and others that we cannot yet even imagine will emerge. One of the key challenges for sustainable growth is to help people adjust to this series of dramatic changes.

The future landscape will see less emphasis upon travel, and more emphasis upon the appropriate use of technology and sustainable growth in a sustainable world. We will see growth in recycling and the further development of new trade corridors, a reduction in the number of suppliers, a broadly enhanced sharing of added value and a shift in the geographic location of employment, all the while facing the highly publicised challenges of the US/China trade war and other geopolitical tensions. These will be the key drivers shaping global trade.

Head of Trade Services Transaction Banking - Societe Generale