Opinion

How global trade will fare post-Covid

R Seshasayee | Updated on April 27, 2020

China holds many critical links in the manufacturing supply chain, none of which can be replicated in another location in the short term.   -  REUTERS

China isn’t likely to lose its pre-eminent position soon. India, for one, will need to make manufacturing globally competitive

Global supply chains supporting manufactured products in developed countries have taken deep roots over the last couple of decades, leveraging the lower cost of labour in China and other Asian countries.

A typical automobile manufactured in the US has, perhaps, the labour of love from ten different countries; nearly all of iPads and iPhones, the quintessential symbols of American technology, are assembled outside the US, with significant value of components sourced from or assembled in China or other Asian countries.

Ironically, while global trade, that leapt from 52 per cent a decade ago to about 60 per cent of global GDP in 2019 was widening its reach, at the same time, globalisation, as an ideological answer to the development aspirations of nations and people, has been losing its appeal, both at class and mass levels.

Income disparity has been widening in developed countries and the anticipated growth momentum has failed to materialise in developing countries. Immigrants and foreign tongues from call centres located in distant lands have become objects of provocation, which the political leaders have been quick to exploit for short-term gains.

The World Trade Organisation, which was seen as a guarantor of fairplay and a perfect architecture to promote rule-based trading amongst nations, has slipped to ennui, mimicking it’s older siblings of Bretton Woods, all being burdened by bureaucracy and power play. Regional coalitions, such as the RCEP, threaten to erode the relevance of the more complex and stodgy WTO.

The trade war between the two heavyweights of global trade, the US and China, has made coercive action a preferred tactic and reasoned debate an irrelevant exercise in trade negotiations. The terms of engagement on global trade were already getting frayed, and then Covid broke out.

Impact of the pandemic

The immediate impact of the pandemic is devastating. The WTO expects the decline in global trade will likely exceed the trade slump brought on by the financial crisis of 2008. World merchandise trade is set to plummet by between 13 and 32 per cent in the current year. Nearly all regions will suffer double digit declines in trade, with exports from North America and Asia being hit the hardest.

Predictably, trade is expected to fall steeper in complex value chains, particularly automobiles and electronics.

According to OECD, the share of foreign value added in electronic exports is around 10 per cent for the US, 25 per cent for China, more than 30 per cent for Korea, greater than 40 per cent for Singapore and more than 50 per cent for Mexico, Malaysia and Vietnam. Trade in these products are bound to get seriously derailed for some months. If it is any consolation, declining demand will race with disrupted supplies.

One of the biggest casualties will be the service sector, especially aviation, shipping, tourism and the like. It would only be the incorrigibly adventurous, who would think of an overseas holiday, for many months from now.

More than the physical loss in global trade, the loss of trust and cohesion amongst the nations of the world in facing the pandemic is perhaps far more damaging to the rapid revival of global trade and its supporting institutions. In particular, China has suffered in trust and credibility.

However, global trade is far too entrenched to be dislodged quickly. Every developed country’s economy and the competitiveness of its products and services are inexorably intertwined with trading with other nations. Mistrust will inform terms of trade in the short term, with consequent turbulence and unpredictability, but enlightened self-interest will knock out solutions, however infirm they might be. Global trade will recover in the medium term, albeit in a wobbly way. It’s too naive to imagine that China will lose its pre-eminent position in global trade, because of the mistrust generated by the pandemic.

China holds 50 per cent of global steel capacity, 40 per cent of APIs of pharma, and 23 per cent of all global exports of electronics, and just too many critical links in the manufacturing supply chain, none of which can be replicated in another location in the short term. There will simply be no capital available, even if there is an intent to create alternative sources.

While multilateral institutions will remain the preferred institutional framework for developing countries like India, they will have no enthusiastic sponsor amongst powerful nations.

India’s agenda

India has to carefully chart its course on international trade in the kaleidoscope of challenges and opportunities in the post-Covid world. Firstly, it is critical that Indian exporters don’t lose their customers, because of production constraints precipitated by the lockdown. An early and orderly resumption of manufacturing activities is essential to ensure that business is not lost to other prowling Asian competitors.

Secondly, Government of India should quickly come out with a well-thought-out strategy to attract investors who might be scouting to establish an alternative source to China. This could take the form of Special Manufacturing Zones, but that will not be the only route for attracting investments. There are cost penalties in locating manufacturing in India, that would require clever and defensible ways to neutralise.

Thirdly, despite the allegations, the mistrust, and consequently some attempts to shift manufacturing out of China, there is little doubt that China will emerge stronger, and not weaker from the pandemic shock. China’s isolation is a fantasy. The phenomenal technological lead that China has managed to register, its strong macroeconomic fundamentals, its early lead in the recovery from the pandemic and, more relevantly, its authoritarian regime will ensure that China will continue to stride strongly as a global power. India needs to craft a careful strategy of engagement with China, without endangering our sovereignty and independence while securing a place in the global supply chains. In this context, entry into RCEP needs careful reconsideration.

As a counterbalance, India needs to consolidate its position in its top two export destinations, the US and Europe. It would be useful to fast-track the stalled India-EU Bilateral Trade and Investment Agreement.

Fourthly, India needs to focus on her traditional strengths in technology services, and emerging opportunities such as in pharma and other medical services.

Fifthly, and most importantly, India needs to launch on a plan to make Indian manufacturing globally competitive at the level of each and every input — raw material, power, logistics, land, labour, interest — that will result in compelling reasons to source from India. This will require massive reforms in critical economic activities.

But then, isn’t it unpardonable to waste a crisis?

The writer, formerly with Ashok Leyland and IndusInd Bank, is a leading corporate director and advisor

Published on April 28, 2020

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