By Paul Hannon and Stu Woo
Global trade flows tumbled in the first quarter, a preview of
what could be the largest contraction in international commerce in
decades, as the coronavirus pandemic causes policy makers and
multinationals to reconsider globe-spanning supply chains that have
become a defining feature of the world economy.
A Dutch body considered an authority in world trade, CPB
Netherlands Bureau for Economic Policy Analysis, said flows of
goods across borders were 1.4% lower in March than a month earlier,
bringing the decline in the first quarter to 2.5%. That was the
largest drop since the global financial crisis.
"We expect a strong decline in trade in April and May," CPB
said. "Leading indicators point to a stronger decline in global
trade in the coming months."
Few expect exports and imports to rebound strongly as
restrictions intended to limit the spread of the coronavirus are
lifted. Instead many expect a rollback in intricate cross-border
supply chains.
The World Trade Organization's economists estimate that flows
will fall by between 13% and 32% during 2020 as a whole. A decline
of a third would be equivalent to the collapse associated with the
Great Depression -- but concentrated in one year rather than spread
over three.
Trade flows are likely to rebound next year if economic activity
returns to normal and the virus is contained.
But the sudden halt in trade has exposed how interdependent
countries are in sourcing and manufacturing everything from cars to
ventilators to smartphones. Individual countries have become nodes
in vast supply chains whose vulnerability became clear when the
pandemic sliced them apart.
As a result, the coronavirus -- along with previous tensions
between China and the U.S. over trade and technology -- is forcing
multinationals and policy makers to consider ways to bring
production closer to home, safeguard the production of essential
goods and reduce their reliance on China as a manufacturing
base.
Scania, a giant Swedish maker of trucks, buses and engines, has
tried to have at least two sources for most of the 21,000
components it uses, said Chief Executive Henrik Henriksson. That
helped it weather nationwide shutdowns pursued by China and then
Italy to limit the spread of the virus.
But Scania uses about 35 components that are unique and for
which it has only one source, including welded, casted and
electronic parts. It couldn't obtain some of them from France after
the country was locked down in March. That was enough to shut down
global operations for a couple of weeks.
"We were standing still completely," Mr. Henriksson said. With
factories idle, Scania and other auto makers stopped buying parts,
a decision that cascaded through its sprawling network of
suppliers, which in turn slowed production and purchase of
components from sub-suppliers in Asia and Europe.
Since the 1980s, a steady reduction of tariffs and other
barriers, along with improvements in logistics and communications,
has encouraged businesses to break down production processes and
spread them across a number of countries.
The movement of parts between countries before a finished
product is delivered to the final consumer led to a surge in trade
flows, which regularly grew at a faster pace than global output
until the global financial crisis. The United Nations estimates
that a third of global trade happens within multinational
companies.
The pandemic, which closed factories and transport links around
the world, has compounded growing doubts about the reliability of
long supply chains -- particularly those involving China -- at a
time when tariffs and other trade barriers are on the rise.
The coronavirus "has led firms to re-evaluate their global value
chain strategies, and specifically the degree of reliance on supply
chain partners in China," said Davin Chor, an economist at
Dartmouth College.
But it isn't easy for businesses to ensure they have alternative
sources if China or any other critical supplier goes through
another lockdown or is hit by a different natural disaster.
Pol AntrĂ s, an economist at Harvard University, says that a key
feature of many modern supply chains is that they are "relational"
in that producers of finished consumer goods rely on suppliers for
highly customized parts that are ordered to precise
specifications.
"Suppliers don't come out of thin air," he said. "You can't
easily substitute away."
Whatever the challenges, policy makers expect supply chains to
be altered because of the pandemic and what are likely to be
long-lasting trade tensions between the U.S. and China.
Supply chains were already changing because of the China-U.S.
trade war. Some companies were shifting manufacturing out of China
to countries like Vietnam to avoid tariffs on goods destined for
the U.S.
Moreover, the technology industry was also caught in the middle
of the U.S. government's efforts to cripple Huawei Technologies
Co., which it regards as a potential security threat -- something
Huawei and Beijing deny.
The Trump administration has introduced measures that make it
hard for U.S. companies as well as foreign companies using American
technology to sell supplies to Huawei.
The U.S. campaign against Huawei is driving China to work on its
own processor designs to reduce its reliance on foreign
technology.
During the global rush to secure adequate supplies of protective
clothing and other medical essentials, governments have also
increased their scrutiny of supply chains because of fears that
they could fail when most needed.
According to the Geneva-based trade-monitoring group Global
Trade Alert, 85 countries have imposed 186 new controls on exports
of medical equipment and medicines since the start of this year,
while 27 countries have imposed 37 new restrictions on food
exports.
A number of governments, including the U.S., are taking steps to
increase domestic production of those essentials, while the U.K. is
searching for ways to cut its reliance on imported medical
supplies.
The U.K. government says Project Defend, as it is known, isn't
specifically aimed at China, and Japan's government has made the
same assertion about a $2.2 billion project to help companies get
around supply-chain blockages. But in both cases, Chinese suppliers
are likely to be among those for which alternatives must be
found.
Meanwhile, some countries spy an opportunity as policy makers
and multinationals diversify sources of supply. For instance, the
European Bank for Reconstruction and Development is helping the
eastern members of the European Union to promote themselves as
stable supply bases.
"Could this crisis create an opportunity for diversification?"
asked Beata Javorcik, the EBRD's chief economist. "There's a lot of
discussion about shortening global supply chains, about building
resilience. Countries that have not been at the top of foreign
investors' lists may get some investment."
Write to Paul Hannon at paul.hannon@wsj.com and Stu Woo at
Stu.Woo@wsj.com
(END) Dow Jones Newswires
May 25, 2020 10:44 ET (14:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.