(May 20): Consumer demand and global supply chains have taken a hit from the movement control restrictions and lockdowns imposed to curb the spread of the coronavirus.
And this has dented the supply of essential items such as medical and food supplies as some 94 countries have restricted or banned such exports.
Collectively, such impositions are slated to contract global trade by a third this year, according to estimates by the World Trade Organization (WTO).
Analysts at credit ratings agency Moody’s say this is a cause for concern especially for trade-reliant emerging markets such as Brazil, Russia, Mexico and South Africa. These countries are already experiencing a severe contraction in exports, it indicates in its May 2020 Global Trade Monitor Report.
Meanwhile, the agency points out that industrial production has remained weak globally amid restrictions on the number of employees on site, such that companies adhere to social distancing and safe management regulations.
The US’ manufacturing sector has been heavily impacted by such restrictions, as reflected by the 11.2% in industrial production in April – the superpower’s largest monthly drop in the 101-year history of the index.
Interestingly, China reported a 3.9% expansion in its April industrial production following a recovery in its manufacturing, mining and utilities sectors.
This is a reversal from March’s 1.1% contraction and indicates a revival of the world’s second largest economy.
Singapore too, reported a 16.5% expansion in its factory output for March – the latest data available. This comes from a surge in biomedical manufacturing amid the Covid-19 pandemic, notes the Singapore Economic Development Board (EDB).
However, the board is looking at rocky production levels in the months ahead.
“[A] more pronounced impact [on factory output] is likely to be seen from April 2020 onwards due in part to the implementation of the ‘circuit breaker’ measures,” it cautions.
See: Singapore's factory output makes a surprise 16.5% expansion, but expected to take a hit with 'more pronounced' impact of Covid-19 : EDB
Looking ahead, Moody’s observes that the health and economic crisis has introduced fresh challenges to trade negotiations, such as between US and China, US and the European Union (EU) and the Asia-Pacific free trade agreement (RCEP).
Negotiations for the US-China trade war had kicked off with Phase One on Jan 20, which saw a rolling back of some US tariffs on Chinese goods in exchange for China’s agreement to purchase more American farm, energy and manufactured goods. Beijing had also agreed to address the US’ complaints about its intellectual property practices.
Presently, tariffs of approximately 25% remain on some US$370 billion ($524.4 billion) of Chinese exports to the US. These tariffs were up for discussion at Phase Two of the trade talks between the superpowers which has yet to be scheduled.
However, tensions between the duo have been mounting with US President Donald Trump threating to reintroduce tariffs on Chinese products to ‘punish’ China for its alleged origin of the coronavirus at the Wuhan Institute of Virology.
See: Trump threatens tariffs on China for alleged origin of Covid-19
With this in mind, Moody’s analysts foresee a possible renegotiation of the terms of the Phase One truce.
Similarly, the talks on the US-EU dispute which originated from Trump’s frustration towards EU countries taxing American digital firms, has now been put hold.
And Moody’s analysts say this could trigger a spiral of trade actions, which already took off with the US raising tariffs on EU’s civil aircraft last month.
Lastly, the RCEP agreement aimed at creating the world’s largest free trade bloc, was scheduled to be signed by the end of the year.
However, amid the Covid-19 shock that has usurped trade patterns, participating nations appear to have different interests, which may possibly affect the signing of the agreement.
Covid-19 is indeed an unprecedented crisis that has torn trade patterns to shreds. While a revival is hard to imagine, market watchers are looking at a move towards domestic production especially for critical goods such as pharmaceutical and food. Countries such as Japan and India have already made provisions to move along this direction.
Aside from this, there could be an acceleration for regional supply chains as it may be easier to ship goods across less intricate trading routes.
This would include just-in-time supply chain management as companies move supply chains closer to their final market to avoid redundancies, observes Moody’s.
See: Covid-19 disrupts global supply chain, forces new trade patterns and policies