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Free Trade in Free Fall: How Companies Can Navigate the Pandemic

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Free Trade in Free Fall: How Companies Can Navigate the Pandemic

Even before the global pandemic arrived in every corner of the globe, free trade and the globalized trading system were in critical condition. The bruising U.S.-China trade war, along with regional conflicts such as the Japan-Korea trade war, Brexit, import tariffs, the decline of the WTO, left companies struggling to adjust supply chains and many wondering whether the globalized trading system will survive.

Yet these challenges pale in comparison to the trade and supply chain issues the COVID-19 pandemic generates on a nearly-hourly basis. Demand has plummeted around the world for goods and services as vast portions of humanity are isolated in their homes and left without incomes. Export restrictions on medical supplies, food and other critical products, while still limited, are on the rise, creating fears of reverse protectionism. Airfreight capacity has dropped as tens of thousands of flights are grounded. Logistics companies are struggling to deliver goods as nearly every country in the world has implemented ever-tightening border restrictions in a matter of weeks.

As a result, companies and individuals are struggling to keep our grocery stores, pharmacies, and retailers stocked with the cheap and plentiful products consumers have grown accustomed to, not to mention supply the medicine and equipment that our frontline healthcare workers desperately need. While these are dark days in trade, there are ways to immediately protect your company and your supply chain.

First, companies must protect their workers from the disease. Crisis management procedures to keep people healthy, whether that means remote working procedures or social distancing policies to keep production facilities running, should be implemented and revisited as the crisis moves on. While most companies have implemented these policies as a result of government orders, companies should continuously evaluate how to both keep their employees safe and their companies running. Fighting this disease and its economic ramifications is a marathon, not a sprint, so companies should find ways to maintain continuity as long as possible.

Next, now is the time to be hands-on with your supply chain. Companies need to examine every aspect of their supply chain and logistics: every container, every ship, every truck, every port, and every border crossing. In this way, you can understand how your goods must pass to understand how the pandemic will affect each shipment. Seafreight remains stable, though that could change, so companies with any slack in their supply chain should consider moving goods in advance through slower means.

Companies also need a proactive examination of their legal risks.  This assessment must include a review of which contracts may be broken through force majeure and other similar break clauses, whether initiated by you or the other party. At first, only producers were using force majeure as they realized they did not have the raw materials, labor shortages, and logistical support to deliver products. Now, importers and end-users are breaking their contracts as demand drops and shops close. Similarly, insurance markets are struggling to find ways to insure goods, services, and even projects as supply chain issues threaten to slow projects around the world. A holistic examination of your legal risks will save your company money and time when legal challenges arise.

Companies also need to find help from their governments. Governments are looking to help companies stay afloat, keep people employed, and keep goods and services flowing, but they are frequently looking for answers from companies. If you are not part of a trade association, join one. And if you do not have representation in Washington, now is the time to make sure that government authorities know how best to help your company and industry navigate this crisis and to remind them of the value that trade brings to communities around the world, and where you need help.

The COVID-19 crisis will leave the global trading system permanently altered, but it is also a reminder that, just as our physical health is intertwined with our neighbors, our economic health is also dependent. Long-standing trade relationships are under strain, contracts will be voided, and shipments unfulfilled. Yet a healthy dose of compassion and understanding that your business partners are facing the same challenges as your company may help you maintain your trading relationships through these hard times and allow them to rebound faster when the crisis is over.

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Benjamin Kostrzewa is a Registered Foreign Lawyer at Hogan Lovells, working in Hong Kong and Washington serving the needs of clients on both sides of the Pacific. Before joining Hogan Lovells he served as Assistant General Counsel at the Office of the U.S. Trade Representative.

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Global Trade After the Pandemic

The staggering impact of the coronavirus pandemic on world trade is still reverberating and will for many months. Businesses are struggling to adjust to the current challenges that travel bans and factory stoppages present to their firms. They are concerned about how to keep their employees safe, informed, and on the payroll in the face of a dramatic economic turndown. But once this pandemic is over, what will its lasting impact be on global trade? How will the trade environment change and how will successful companies respond?

The jury is still out

What the final economic and personal toll of the coronavirus will be to the U.S. and global economy remains to be seen. It may take several months or years to ride out the pandemic and sort out the first stage economic loss that it will leave in its wake. The coronavirus pandemic has already drawn comparisons to the 9/11 attacks and the 1987 and 2008 recessions as far as its overall impact on the U.S. and global economy. It is a uniquely painful moment for international business, especially in regards to the movement of people and products. The recent lock-downs throughout the European Union and the travel ban from Europe to the United States, for example, have no historical precedents. Much like the world looked to regulatory changes in the wake of 9/11 or the financial cascade of problems from 2008, they will again as this initial impact recedes and governments assess how they failed to prepare for this pandemic and how they can help curtail the damage of such occurrences in the future.

Worker safety and transportation screening will be promoted

Unions, companies, and government regulators are already looking at how working conditions will need to change to better protect employees who work in the global trade trenches. From airport workers to longshoremen, workers in many key industries are exposed to cargo and passengers from overseas that potentially could be carrying new diseases across borders. The potential costs of improved detection and phytosanitary procedures will eventually be passed to consumers, but these expenses will be difficult issues to negotiate for industries that have already been hammered by first the U.S.-China trade war and then the dramatic world-wide reduction of traffic flow due to the pandemic.

Much as the terrorist attacks of 9/11 and related incidents gave rise to a host of new security measures at ports and borders, the spread of the pandemic will eventually be the subject of substantial discussion, public hearings, and eventual regulatory changes.  Governments will look for systems that would help them to better screen for potential pathogens at transportation nodes, which may include longer periods of isolation for cargo, and longer lines at the airport for global travelers (not to mention more tax funds to set up these screening and control systems).

Air and cruise industries: only the strong will survive

Passenger airlines and the cruise industry will not likely recover from the economic impact of the pandemic without some substantial government assistance. Even with that financial support, both industries will face substantial challenges to get back to a healthy volume of traffic as the pandemic brought both cruise and air traffic to a standstill. Coming on the heels of ‘flight shaming’ and a wide-spread movement to reduce their carbon emissions, as well as the Boeing crashes and 737 MAX delays, the airlines were already in a delicate position. The pandemic was the knock-out punch.  In the short term, airline CEOs such as British Airway’s Alex Cruz have noted that this is a “crisis of global proportion like no other we have known.” Airlines are projected to lose as much as $113 billion in 2020 alone. Cruises have faced similar challenges, essentially given a ‘death blow’ by the U.S. State Department warning to avoid cruise ships and port lockdowns in the Mediterranean.

What will change as a result?

The economic results of the pandemic have had some additional first-tier effects beyond border safety and damage to the transportation industry. For example, commentators have already noted that the pandemic has forced us into a great virtual working experiment. Insurance companies and their clients will be looking closely into (and likely litigating over) the responsibility for losses as a result of the pandemic. Governments will look to fix the problems we are already seeing in regards to testing and readiness. But what are the secondary effects of the pandemic for businesses? How can companies position themselves to survive and possibly benefit from the changing business landscape that awaits us?

Invest in strategy and security expertise as well as sourcing flexibility

Is this the coronavirus pandemic an isolated incident? Not according to the World Health Organization (WHO), which warns that ‘global catastrophic biological risks’ may be seen on a more regular basis in the coming decades. On top of that natural risk, consider that terrorist organizations have also seen the remarkable disruption caused by the pandemic and may attempt to weaponize biological weapons. It is a risk that governments have known about for some time, but seems even more realistic now that we’ve seen a pandemic in action and the challenges that governments face in attempting to contain it.

This future risk should result in companies spending more time and energy on both corporate strategy and security. The increasingly volatile state of the global markets means that companies will need to beef up their existing forecasting and modeling capabilities. On the risk side, security of employees and far-flung assets will take on a new urgency in the wake of the pandemic. Preparing a company that can flex and adapt in volatile times will mark the difference between companies that thrive and those that go bankrupt. Many companies will also be doing a complex overhaul of their logistics and production concepts.

The US-China trade conflict, and other isolationist tendencies that will linger after this pandemic, will encourage companies to both look closer to home for their production as well as to value the benefit of having alternative sources.  Countries like Canada, Mexico or Latin America will seem more attractive after this experience to U.S. companies. In Europe, sourcing within the EU makes much more sense once the factors of reliability and local access are properly factored into cost comparisons.

The Bottom Line

This pandemic will break firms that cannot handle the financial strain of such a dramatic and abrupt downturn. Government investment and bailouts will allow some to keep their heads above water, but others will simply disappear. Those that do survive will find a different global trade environment: one that demands a greater focus on logistics flexibility and security and the ability to succeed in an international business environment that has new regulatory boundaries which will challenge ‘just in time’ concepts and put a greater value on diverse and more local sourcing. As with all challenges, this situation will also bring opportunities – companies whose products foster virtual communication in businesses and provide equipment that can identify and protect workers from biological agents will see a new surge in interest.  Global world trade will not be killed by this pandemic, but it will have a different and potentially more chaotic nature.

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Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company that offers market research, political risk assessment, and international expansion assistance. Mr. Samson is a former U.S. diplomat and international law advisor who lived and worked in ten different countries.

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Global View of How the Coronavirus Affects Stock and Real Estate Markets

The coronavirus has already killed more than 3,000 people worldwide. Although most cases are concentrated in the Chinese city of Wuhan, the virus has left the country and has spread to up to 30 nations. On February 16, 2020, Kristalina Georgieva, managing director of the International Monetary Fund, warned that the growth of the world economy that is currently estimated at 3.3% for this year, could be cut between 0.1% and 0.2% due to the coronavirus.

The optimism at the beginning of the year for Asian markets has blurred in the shadow of the coronavirus epidemic.

In the medium term, so long as the epidemic is contained in the coming weeks, equity markets will probably rise again. This is partly because global growth should benefit from the delayed effect of the decline in fixed income yields and an improvement in the global industrial sector due to significant restitution of stocks.

Furthermore, uncertainty — an important risk aversion factor for investors — receded considerably with the truce in the commercial war and the adoption of an orderly Brexit, as investment firm Imperial Fund recently stated. There is confidence that the budgetary/credit stimuli in developed countries (mainly Europe) may continue with a change of stance of the German Government due to the pressure from recent external events.

China should also contribute its grain of sand. Its percentage of health spending remains much lower than that of developed countries, which will lead the Government to increase social spending and continue adding liquidity to support its economy.

Production chains are also much more interconnected, in a world that is still very globalized despite Donald Trump’s attempts to limit trade.

In the U.S., the favorable forecast of the economy persists despite some inconveniences derived from the potential spread of the disease and its effect in the manufacturing and services sector. The Fed made a mid-cycle adjustment before entering pause mode and there is some uncertainty about a possible increase in protectionism and fiscal regulation.

In essence (for now), there is no reason to panic. But, let’s face it, the market provides for a strengthening of corporate results, an increase in investment in capital goods and a greater willingness of investors to take risks. This is not really the intended scenario. At a minimum, we must protect ourselves against risk of an extended pandemic that affects the economy for a longer period than the planned months.

Does it affect the real estate market?

Yes. Housing is another sector that is affected by the coronavirus. For instance, in the first week of February alone, house sales plummeted 90% year-over-year in the 36 main Chinese cities and most real estate agencies are closed to the public. The price of housing in the country has registered the most moderate growth during the past year and a half.

The real estate industry in the U.S. has had to take its own challenges to keep the market moving as well. The presence of the coronavirus becomes a new hurdle to overcome within luxury real estate in cities like New York, Miami, and San Francisco.

The federal government suspended the entry of foreign citizens who have visited China in the last 14 days in an attempt to stop the spread of the virus, a situation that could affect the housing sector due to the blocking of access by potential investors.

Foreign entrepreneurs often get an idea of ​​their future homes with the offer presented on the internet; however, investors have less incentive to buy real estate if its uncertain he or she can visit the property. Therefore, in the short term, the virus could further reduce luxury sales. Time will tell.

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Imperial Fund is a mortgage investment fund formed in 2014 and headquartered in Hollywood, FL. Imperial seeks to achieve attractive risk-adjusted returns by exploiting inefficiencies in the residential and commercial real estate lending market.