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Global Trade After the Pandemic

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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.

U.S. Export Volume Expected to Climb in 2015

Baltimore, MD –   U.S. exports are expected to grow by $88 billion or 5 percent, in 2015, despite tepid global GDP growth, according to a research report just released by trade credit insurance provider, Euler Hermes.

According to the company’s latest Economic Insight report, the U.S.’s biggest export gains in 2015 will come from Canada, China and Mexico.

The report also projects strong export increases to smaller countries in Asia, Latin America and the Middle East, “reflecting recent rapid growth in these emerging markets, while also providing the U.S. with more diversification in its export composition.”

Export gains will primarily come from the agrifood, chemicals, energy and mechanical sectors. Textiles and ferrous metals show the smallest increases as the U.S. has become a much smaller player globally within these industries.

As U.S. energy companies are expected to start exporting natural gas globally by the end of 2015, revenues from this sector could be significant, growing from $16 billion in 2012 to $42 billion in 2040 or nearly 1 percent of GDP.

The planned 2016 expansion of the Panama Canal, which may double its capacity, “will also boost U.S. trade by allowing larger ships to carry exports from the U.S. through the canal, significantly reducing costs and making those exports more competitive.”

The U.S.’s largest trade deficit is with China, but several factors could shrink it, especially as China pivots toward a more domestically driven economy, and as the U.S. natural gas boon and favorable labor conditions have reduced China’s competitive wage advantage to the point that a growing number of companies are opting to ‘in-source’ their manufacturing.

In the coming year, the value of the U.S. dollar is expected to rise in 2015 making U.S. exports more expensive and less competitive with export financing faces several challenges, including tight lending conditions and risk-averse bankers.

Rising rates in 2015, the report says, “may make financing more costly and/or harder to obtain, especially given fragile global growth and geopolitical uncertainty.”

In addition, global business insolvencies “are expected to fall 3 percent, a much slower rate than 2014’s decrease of 12 percent.”

At the same time, insolvencies still remain 12 percent above 2007’s pre-crisis levels, meaning that exporters will need to continue stringently evaluating their partners for insolvency risk.

To further promote U.S. exports, two major trade agreements – the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership – are currently being negotiated.

Both agreements  are being structured to reduce the burden of Customs, regulations, tariffs and taxes, lower barriers to trade, and allow increased access to new markets.

“Demand for U.S. exports is, of course, dependent on the strength of the global economy,” said Dan North, senior economist for Euler Hermes Americas.

“While the global economy is set to enter its fourth straight year of lackluster growth, the U.S. economy continues to grow and many of our industrial sectors are showing strength both at home and abroad.”

12/11/2014