Globalization and international trade: what the pandemic has taught us
International trade has been heavily affected by the effects of the pandemic, also for what concerns logistics, means of transports and payment systems. Some recent data can better summarize these consequences and suggest an effective response
At the end of August, the OECD published the latest data on national product and exports. In the OECD area, GDP fell by 9.8% in the second quarter of 2020 compared to the first, and in the Euro area the decline was 12.1%. Furthermore, the same source also noted that in the second quarter of this year, also compared to the first, the G20 countries experienced a drop in exports of 17.7% and imports of 16.7%.
In reality, something deeper happened behind the collapse of international trade which, according to the author, will lead to a paradigm shift for companies.
In the March-April 2020 period, i.e. in the dramatic initial phase that saw Italy among the most affected countries, Italy exporters, importers, and our multinational companies had to face new and unexpected difficulties.
For example, in logistics. The essential interruption of civilian air links also had a very serious effect on freight transport. The difficulty of finding carriers, the need to turn to cargo shipments for example, significantly increased transport costs. Furthermore, during the most acute phases of the pandemic, some countries (e.g. Persian Gulf countries) also blocked transport by ship.
Also in logistics, another critical issue with a significant impact was the heavy pressure on the spaces dedicated to the storage of goods. In this case, several factors acted jointly: collapse of global demand, longer handling times (for compliance with health protocols), and pressure caused by the strong demand in e-commerce mode. Road transport was also heavily hit by border blocks, health checks on workers … The result was often the saturation of warehouses and the increase in storage costs. Not to mention the delays in the agreed delivery times of the goods.
In the case of couriers, the delay and inefficiencies mainly concerned the sending and receiving of documents. In some countries, even the leading international couriers were subjected to days if not weeks of stoppage. One of the effects was to undermine the entire system of international payments based on commercial documents, namely those that are used on the one hand for the customs clearance of goods and on the other hand to finalize some specific international payment methods (Letters of credit and cash against document) or to participate in international tenders.
Having mentioned the payment instruments in international trade, we can also mention the critical issues related to banking activities. First of all, during the pandemic peak, many countries saw a reduction of working hours in banks, resulting in delays in transaction processing times. In other cases, the banking system had to implement government measures aimed at postponing customer commitments, and this also had effects on the irrevocable commitments that the bank issues to foreign counterparties of their customers.
If we look at the level of commercial and production relations between companies from different countries, the effects were equally disruptive: it is impossible to make a comprehensive list of the various critical issues. Let’s try to identify the most frequent complaints by companies.
The measures taken by the authorities of many countries in terms of limiting mobility made it impossible, for example, to carry out tests on machinery sold abroad or to carry out the usual commercial business on the core market by employees from other countries.
We must also add the effects of the production block: the lockdown and the infectious outbreaks in construction or production sites sent haywire the international supply chain of many of our companies. In summary, the Italian companies included in a CGV (global value chain) suffered greatly from the shortage of intermediate goods and services caused by the lockdown, the reduced mobility of personnel between the various countries, and the increase in transaction costs.
From the point of view of international competition, the unfair practices caused by the provisions of various governments have expanded. For example, there were episodes reported by the press such as the blocking of exports of personal protective equipment (PPE) by some countries or the seizure of PPE in transit and destined for example for the Italian market.
From a financial point of view, there were behaviours that changed the competition system. Here too we can give some examples: the prohibition of repatriation of profits produced abroad by our companies or the granting of financial aid for Covid-19 only to local companies (with penalties for subsidiaries of foreign companies, including Italian ones).
The very disruptive effects that Covid-19 had on international trade also prompted jurists to ask themselves whether protection and conciliation mechanisms can be envisaged to handle events of this nature (Covid-19, but also other undesirable futures events that could arise with a similar disruptive capacity on trade).
Clearly, in international trade the issue of non-fulfilment of contracts due to force majeure presents extremely complex aspects, since it is not possible to automatically refer to the law and to the Italian Civil Code. This is because the contract is not always based on Italian law and in many circumstances it has explicit references to the laws of other countries or to international regulations (e.g. the International Chamber of Commerce of Paris).
In this essay we limit ourselves - on this specific aspect - to draw the attention of operators to carefully assess this issue in drafting new contracts. The exceptionality of this event should not be taken for granted. After all, the last event that had a disruptive effects on trade - certainly in much more limited geographical and temporal terms - was in April 2010, with the eruption of the Icelandic volcano Eyjafjöll which paralysed transport in Europe for many days.
Since the topic here is not a legal study of the matter, anyone interested can read an article by the lawyer Alessandro Albicini regarding the effects of the Coronavirus on commercial contracts with foreign counterparties, published by the economic news magazine of the Emilia Romagna Region - www.econerre.it - last June.
Faced with the critical issues that the pandemic caused and continues to cause on international trade, given that in the various countries we are still witnessing phases of different severity, it seems to us that some measures on corporate strategies may allow companies operating abroad to compete better in this new scenario.
Certainly an initial element of reflection concerns the international supply chain. This needs to be rethought by focusing on well-established relationships, but also on recovery and diversification strategies (with domestic or foreign partners). Risk diversification seems to us paramount compared to the cost variable. The internationalization strategies of companies with offices/plants abroad will have to focus on more regional supply chains, which are better able to withstand the impacts on logistics and those deriving from the measures enacted by the authorities. We can summarize this new path in the English expression that is beginning to spread among the experts: shorten supply chain.
The second element on which we must focus to close the gap with our competitors is digital export. In essence, the coronavirus has given even more importance to the digital channels for selling abroad (e-commerce, marketplaces...) and adequate digital marketing infrastructure. In recent months, the gap between companies that make more efficient use of digital channels and those that have maintained a more traditional organization that favours the physical presence and mobility of employees has widened. The summary element is that the growth rate of online sales has grown further compared to traditional sales.
On the digitalization front, companies will also have to rely more on platforms for international payments and for the management of commercial contracts. These are services made available by the major e-commerce players, but also by the banking system. They have the advantage (highlighted in particular by the pandemic) of minimizing the use and transmission of commercial and payment paper documents.
Last but not least, trade exhibitions will change profoundly even after the pandemic. Exhibitions will transform into both physical and digital events, allowing a B2B connection both during and after the event. A prime example is the Smart 365 Exhibition initiative recently launched by the ICE Agency. The EIMA Digital Preview also works in this same direction, with a platform that from 11 to 15 November 2020 will allow a virtual and interactive connection with the over 1600 companies that will be the protagonists of EIMA International in February 2021.
Allow us to close this essay by providing some elements, albeit partial, on the trend of the markets that certainly interest our exporters of agricultural machinery. The WTO recently noted that the export of agricultural products and food had a more resilient trend to the pandemic than the other sectors in the first half of the year. However, this does not translate into an increase in demand for investment goods due to the effects of Covid on the economies of the various countries. Even China, the only country of the G20 which in the second quarter of 2020 recorded an increase in exports (+ 9.1%), continues to record a decline in its imports (-4.9% in the same quarter).
The forecast scenario for the various non-EU regions confirms a generalized decline in economic growth. For example, it ranges from -8.2% (source OECD) for the Republic of South Africa to Turkey, where, depending on possible new lockdowns, the fall in GDP is estimated between -5% and -8.5%.
In South East Asia, the World Bank now estimates a GDP contraction of -0.5%, while the Asian Development Bank is revising its forecasts for the growth of the Asian economy downwards.
In this difficult reference framework - especially in this final part of 2020 - the companies in the agricultural machinery sector will have to focus on the dynamics of individual markets rather than on macro forecasts. An example is the ability to seize the opportunities offered by the industry incentives implemented by local governments and by some international funding bodies such as the EBRD (for Eastern Europe and the Mediterranean), the Asian Development Bank for some Asian countries, and the African Development Bank.