Remember January 2020?
We thought the trade war had turned into a truce. We had mildly positive expectations for global economic growth based on IMF forecasts. We thought financial markets would continue their bull run with the only risks the same as those evident throughout the period since the Global Financial Crisis: US dollar denominated debt in emerging markets, the strength of the US dollar, the sustained effects of extraordinary monetary policy and the speed at which trade and growth would recover from the China-US trade spat.
Now, according to the usually conservative IMF and the optimistic World Trade Organisation (WTO), global GDP growth this year will fall by nearly 1% (against a forecast for growth of 3.5%) and trade will fall by anything between 13% and 32%. Up to 195 million jobs could be lost world wide. Despite international trade agreements, 91 countries have now imposed restrictions on exports of medical equipment and key national security sectors, like food. Before Covid, one of the main sources of dispute between the EU and the UK, and between the US, its allies and China was the so-called “level playing field” – in other words, state support that favoured domestic over international businesses. The IMF now estimates that some $8tn has gone into fiscal stimuli to support businesses and consumers and shore up economies globally. The argument now that one country or another may be distorting competition is simply no longer valid.
The world’s retreat to nationalism and protectionism is just one reason why the world of trade will never be the same again. International institutions like the World Health Organisation, which should have led the multilateral and coordinated approach to the pandemic, has been materially damaged by the suspension of US funding to it. We can’t expect multilateralism to survive in its current form and this will have a profound effect on the rules and structures that govern world trade. The WTO is weakened and scarred by the failure of the US to support it over the past few years; its founding principles of open borders, most favoured nation status and non-descriminatory treatment of one country by another are materially damaged by this crisis as Donald Trump’s re-escalation of the conflict with China during late April showed. While the EU may well hold together as a customs union and single market, the fact that Germany is the only country within the Union to liberalise exports of medical equipment tells its own story.
The second reason is distributive and will be aided by digital technologies. The trade sector has been talking about the need to digitise its manual processes for the last five years at least. This would streamline processes, reduce time and save money, all of which will become more important in a world of simultaneous extraordinary monetary and fiscal measures. But more than this, supply chains are likely to become more distributed around the world with a greater reliance on digital printing alongside digital payments in order to ensure that just-in-time supply chain management never falls prey to dependency on just one or two countries. When China’s manufacturing stalled, we saw executives from Jaguar Landrover flying to Beijing with suitcases to acquire key components and make sure their own manufacturing could continue. Banks and corporates are using this moment to build technology solutions that mitigate this risk in the future.
The final reason is financial. It is likely that interest rates will remain low for some considerable time, not least because the scale of government debt currently has been incurred under this assumption. The central banks have taken off all financial and macroprudential brakes to enable large scale borrowing by governments; it is unthinkable that rates would rise again quickly for the very simple reason that it would push the cost of that debt too high. Against this backdrop, trade finance will remain low yield for the foreseeable future, if it survives in its current format. We have seen inventories collapse and the potential is that traditional methods of trade finance, like letters of credit, will also collapse because contracts or invoices are not honoured. This puts pressure on the credit insurance sector, as we are already seeing and without that insurance, these trade finance instruments will not be able survive without government support.
All of this will put unsustainable pressure on two things: first on SMEs because they all imply additional investment, cost or compliance. Yet these businesses often play a small but high value-added role in global supply chains. The $1.5tn trade finance gap globally will undoubtedly grow. Second, it puts pressure on the momentum behind sustainable trade that was building at the beginning of the year. While shipping businesses, corporates and banks are trying to ensure their economic sustainability, their concern for environmental sustainability may take a battering.
Yet this is also an opportunity for the world of trade to take stock of these challenges and adjust constructively to them. Trade relies on effective multilateral structures and rules and practitioners within the sector should work closely with national and supranational organisations to ensure that multilateralism is maintained – after all, economic and trade recovery is surely now the most pressing question of our time, and no one nation can do this alone. Similarly, there were always dangers that technology would develop in a non-standardised way; if global supply chain risk is to be eliminated, now more than ever we need common standards and rules – we cannot see China and the US go their separate ways on this. Technology now exists to manage smaller invoices at lower risk so that SMEs can be onboarded and financed by banks and non-banks alike – the costs associated with compliance should not be an excuse for shutting these businesses out any longer.
Finally, and perhaps most importantly of all, before the pandemic, it was argued that if the world of trade was to adjust to sustainable supply chains, the cost would be an unacceptable 30% of revenues. Now that that share of revenues is already lost, is there really any excuse for a return to business as usual?