By Chris Price, Chief Executive Officer, Agility Global Integrated Logistics

  • When the pandemic dies down, trade protectionism will become the biggest threat to global supply chains.
  • This will both drive up prices and make resiliency harder to achieve.
  • Accelerated digitalization and uptake of new technologies can help firms find a balance between supply chain resiliency and efficiency.

Seven months into the COVID-19 pandemic, businesses of all kinds are devising ways to protect themselves from future shocks by making their supply chains more resilient. In doing so, they need to guard against the mistake of preparing for the last battle rather than the coming one.

At some point, hopefully soon, the unprecedented global response to COVID-19 will reduce it to a manageable threat that allows us to return to something approximating normalcy in our personal and professional lives.

When that occurs, the greatest immediate and long-term risk to supply chains won’t be a virus. It will be trade protectionism, which was resurgent even before the COVID crisis, and now threatens to choke off the lifeblood we need to speed us toward recovery.

As recently as 2016, trading nations were erecting fresh barriers – subsidies, tariffs, quotas, licensing requirements and other obstacles – at twice the rate they were adopting measures to liberalize trade, according to Global Trade Alert. By 2018, new obstacles outpaced liberalizing steps by three to one. Last year, the ratio was four to one, and the value of global merchandise trade fell by 3%, the first decline since 2015.

Since the start of the COVID-19 crisis, we have seen protectionism intensify. Some emergency moves are clearly temporary. They were put in place by governments to ensure access to the medicines, machines and protective equipment required to contain or treat the virus. In other cases, the aim was to guarantee adequate food supplies for local populations.

Yet these new measures and others have been taken against a backdrop of simmering trade tensions between the world’s two largest economies, the US and China, and a growing chorus of voices in the US, Germany and other countries calling to re-shore, nationalize or find alternative sources for key products and industries such as 5G wireless equipment, semiconductors, steel, electrical power gear, mobile cranes, rare earth minerals and other goods.

The 164-nation World Trade Organization (WTO), normally the body that would quell trade wars and bolster the global consensus for free trade, has been weakened, perhaps fatally, by a loss of faith in its dispute resolution system and the apparent withdrawal of US support.

“In the current alternate universe we’re living in, global trade is collapsing and the WTO and the liberal order itself are in a true existential crisis,” Bloomberg noted in June.

As economies around the world emerge, unevenly, from the pandemic, we can expect demand to begin to strengthen. As it does, trade flows, carrier schedules and inventory levels will start to normalize, and supply and demand will find a new equilibrium.

But normalization won’t mean a return to normal. The World Bank expects a 5.2% contraction in global GDP in 2020. Advanced economies could shrink by as much as 7%, although they are likely to recover faster than economies in emerging or developing countries, the bank says.

Trade, which has accounted for 54% to 60% of global economic activity in recent years, is set to retreat even further. The WTO forecasts a drop in global trade flows of 13% to 32% in 2020. UNCTAD expects trade to decline by 20%. For context, the largest quarterly decline in trade volume during the 2008 financial crisis was 5%.

Global trade has shrunk dramatically in 2020

The new wave of protectionism, which includes a sharp rise in the use of international economic sanctions and penalties, will significantly increase the cost of goods at a time when we are experiencing historic levels of joblessness, poverty, and business failures on every continent.

Protectionism is likely to make supply chain resiliency harder to attain, not to mention more costly.

The first step toward resiliency is diversification of sources and suppliers. For many, that means reducing reliance on China, which accounts for 28% of global manufacturing.

Yet the economic trauma caused by COVID-19 will shrink the universe of suppliers, not expand it. And new layers of protectionism will leave companies with even fewer choices of supply because they will rob efficient producers – in China and elsewhere – of their competitiveness and make them too expensive.

Simply uprooting from China is not as easy as it seems. Forty years after it began modernizing, China today holds advantages available nowhere else: unmatched scale; abundant skilled and unskilled labour; sophisticated automation, engineering and sciences; world-class infrastructure and logistics; closely synchronized and integrated supplier networks both in-country and across Asia. Twenty-five years ago, leaving China meant leaving a low-cost manufacturing centre. Today, it would mean giving up on the world’s largest consumer market and an economy growing at twice the rate of the US before the COVID-19 crisis.

Other attempts to build resiliency also defy easy answers. For instance, businesses that see the pandemic as a reason to beef up future inventory through the addition of “safety stock” will probably think differently when the historically low cost of capital begins climbing.

Once the COVID-19 threat recedes, businesses across virtually all industries will have to find a new balance between efficiency and resiliency, because the latter carries a cost. Rather than trying to ‘deglobalize’ or shorten the physical length of far-flung supply chains, they should consider the resiliency offered by accelerated digitalization and deeper integration of technology.

From its earliest days, the pandemic separated digital leaders from laggards. Leaders had tools that gave them accurate visibility into supplier status, orders, shipments and inventory. They could make data-driven decisions quickly because they had trusted supply chain partners – especially freight forwarders and third-party logistics providers (3PLs) – sharing fresh information in near real-time and hunting down available production and shipping capacity. Laggards floundered and continue to flounder.

One obvious lesson from the pandemic is that digital capabilities such as predictive modelling, big data and partner integration are driving business flexibility. When things are relatively stable, those digital capabilities provide a competitive advantage. In times of disruption, they give companies the ability to optimize schedules, ports, modes, vendors and other variables, adjusting on the fly to events that could otherwise prove calamitous, even ruinous.

True resiliency means being ready for any kind of disruption: political, economic, cyber, conflict-based or, yes, pandemic-related. Knowing where to find it is what will separate tomorrow’s leaders from laggards.

Originally published on the World Economic Forum’s Agenda blog

From 2007 to 2014, trade by ASEAN nations grew by a value of nearly US$1 trillion to a total of US$2.5 trillion. A quarter (24 percent) of ASEAN’s total trade was within the region, followed by trade with China (14 percent), Europe (10 percent), Japan (nine percent) and the United States (US) (eight percent). During the same period, foreign direct investment (FDI) rose from US$85 billion to US$136 billion.

Initiatives such as the ASEAN Economic Community (AEC) and the highly anticipated signing of the Regional Comprehensive Economic Partnership (RCEP) in November demonstrate ASEAN’s commitment to regional and global business. Efforts are paying off: today the region commands a combined gross domestic product (GDP) of about US$2.4 trillion; GDP per capita increased 63.2 percent from 2007 to 2015. If it were a single country, ASEAN would be among the top 10 economic powers in the world.

A crucial role to play

Small and medium-sized enterprises (SMEs) in ASEAN account for more than 50 percent of a country’s GDP and up to 30 percent of its exports, according to a report from the United Overseas Bank, Dun & Bradstreet and EY that focused on the six largest ASEAN countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. SMEs are often the largest source of local employment across all economic sectors. In Thailand and Vietnam, for example, SMEs account for nearly 99 percent of all registered businesses and employ more than 70 percent of the workforce.

The future success of ASEAN’s SMEs, and to an extent the success of the region, will depend on the ability of these businesses to deepen their participation in global trade. SMEs expect revenues from North and South Asia to increase, and those from the Americas and Europe, the Middle East and Africa (EMEA) to double, by 2020. This reflects an appetite for international growth among SMEs more globally. In a recent study by Shipa Freight, an online forwarding platform which enables businesses to quote, book, pay and track freight online, examined the trade patterns and barriers of SMEs, and found that 89 percent expect their exporting revenues to increase in the next three years while 71 percent are concentrating on international growth over their home markets. However, roadblocks to international trade remain with 42 percent of SMEs saying that the costs of shipping abroad are too high, or they do not have an accurate picture of costs; and 40 percent find it difficult to understand documentation requirements.

Breaking down barriers

Fortunately, the technological innovation of the Fourth Industrial Revolution (4IR) is enabling SMEs, both globally and across ASEAN, to break through these barriers. What’s more, they’re embracing this pace of change: 86 percent of SMEs recognise that technology is “levelling the playing field” for them to operate globally.

Technology is transforming the logistics industry and easing the process of doing business overseas for SMEs. Logistics providers now offer online freight forwarding platforms for SMEs, that remove the challenges of exporting abroad by providing instant quotes, ensuring full cost transparency and compliance, and enabling SMEs to keep a secure digitised record of all paperwork.

Digital innovations are providing cost-effective answers to the first and last miles in logistics, enabling SMEs to be more competitive when it comes to customer service. Drones are operating in warehouses. AI (artificial intelligence) is automating processes and improving route planning, resource allocation, scheduling and condition monitoring. The gig economy, through platforms like Amazon’s Flex, is driving greater utilisation of existing vehicles, infrastructure and storage facilities when it comes to delivery.

A number of other technologies are also being piloted by the sector, such as autonomous vehicles for deliveries, and the secure, distributed-ledger innovation known as blockchain, which has the potential to transform decentralised supply chain functions.

E-commerce is another 4IR technology opening up international trade for SMEs. It gives SMEs the ability to offer products and services online and enables them to reach a global consumer base. For SMEs to take full advantage of this trend, it will be crucial for governments to ensure that the high-quality internet infrastructure they require is in place. Although e-commerce remains relatively underdeveloped in ASEAN today, accounting for less than one percent of total retail sales, this will soon change as internet penetration spreads and ASEAN’s “consuming class,” some 67 million households, continues to grow and nearly doubles to 125 million by 2025.

With 4IR technologies developing apace, the process of doing business overseas will only continue to ease for SMEs across ASEAN. Given the contribution these businesses make to the economies of the member states they belong to, and the region as a whole, this is an extremely positive, and important, development.

Toby Edwards is the CEO of Shipa Freight, the new online platform powered by Agility that makes it easy to get air and ocean freight quotes, book, pay and track your shipments online.

This article was originally published by The ASEAN Post in collaboration with the World Economic Forum.

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