Crédito y Caución foresees permanent changes in the supply chains

This is the scenario that emerges from the most recent report released by the credit insurer on Asia, in which it warns of a future context marked by savings by families and companies and by fiscal consolidation of public spending.

"All over the world, government measures have limited the erosion of employee skills and the dismantling of companies. This has been crucial to keep supply more or less intact and to avoid a situation where pent-up demand cannot be met by the supply in the recovery phase. The longer the pandemic lasts and the greater its impact, the more scarring will occur," says the report.

The degree of expected healing, which varies depending on the structure of economies and the magnitude of the fiscal and monetary response, will be less in advanced economies than in emerging, low-income or tourism-dependent ones. Asia will be particularly affected by this. Although the region will show strong growth in the coming years, at 5% to 6% per year, the negative impact of the pandemic will be long-lasting in most of its markets. By 2025, on average, its GDP will be 3% lower than forecast before the pandemic. India, the Philippines, and Indonesia will be the Asian countries where COVID-19 will leave the greatest permanent after-effects.

EFFICIENCY VS. RESILIENCE

The trade war, the rising cost of medical products in the initial phase of the pandemic and the current shortage of chips have led public administrations around the world to place greater emphasis on self-sufficiency in strategic sectors such as high technology or pharmaceuticals.

The pandemic has also made companies aware of the vulnerability of their supply chains and many are being redesigned to mitigate the risks of future external shocks, sacrificing some of their profitability.

This trade-off of efficiency for resilience will have an impact on foreign trade, as strategies entail relying more on sourcing commodities and intermediate goods from nearby countries or regions: predictably, the pandemic will reinforce the relocation trend that started during the trade war between the United States and China.

DIVERSIFICATION AND GLOBALISATION

The last three decades of globalisation have facilitated the geographical diversification of supply chains outside national markets. Innovations and technological advances have enhanced logistics, while investment liberalisation and free trade agreements have reduced barriers between countries.

These advances have been beneficial from an economic point of view, as international trade facilitates the use of the comparative advantages of different markets, i.e. the ability of the economy to produce a given good or service at a lower opportunity cost than its trading partners. Asia, being at the centre of the evolution of the global supply chain, has benefited enormously from the increase in international trade in recent decades. The trade war between the United States and China and geopolitical rivalry seem to have ended this trend.

Under the current US administration, trade policy has become less volatile, but both tariff and non-tariff barriers remain in place. However, a complete decoupling of the world's two largest economies seems unthinkable. The United States and China are strongly intertwined and the complete separation of the two economies would greatly damage both countries and the world economy, says the same source.

The European Union, meanwhile, has become more critical of China's ambiguous trade policies and practices. On the one hand, focused on innovation and market reform; on the other hand, self-sufficiency and national security. Predictably, China will continue to hold back foreign investment and force foreign companies to trade Chinese market access for its technologies.

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This article is republished as part of a partnership with Supply Chain Magazine - Read the original text here.