Q: Taking a look at global trade through two lenses – how has the performance been before the COVID-19 period and secondly over the past 10-12 weeks?

Global trade was already in a pretty bad way before the COVID-19 pandemic got started, in part due to the U.S.-China trade war and in part due to the hangover from the U.S. stimulus package applied by the Trump administration in 2017. There was a year-over-year drop in global exports every quarter in 2019.

The solution to the trade war presented by the U.S.-China phase 1 trade deal should have led to a recovery in business confidence as well as bilateral trade between the two. However, the pandemic has put paid to that.

The global trade data shows the impact of the first two phases of COVID-19. In February and March we can see the slowdown in China’s trade, with a drop in exports of 17.2% in January / February and by 6.6% in March, as its economy closed. That’s since been followed by a more widespread downturn in a second phase with widespread demand destruction. Taking the 23 countries together that have already reported data for April, Panjiva’s data shows there’s been an average 12.6% drop in exports globally in April after an 8.9% drop in March.

The third phase of reopening will likely prove faltering as increased in demand in some markets goes unfilled by others that remain closed. We’ve seen plenty of evidence of that in the automotive sector for example. The fourth stage, of strategic planning for the future, will likely only become a factor in Q3.

Q: Could you provide an overview of the current state of the U.S.-China trade war? Are there signs that it is heating up?

The trade war is technically on hold following the phase 1 trade agreement, but there are plenty of signs that relations are deteriorating and that the scene is set for a breakdown in the deal. China’s purchasing of U.S. goods as agreed under the deal from mid-February is already $27 billion behind schedule as outlined in Panjiva’s research of June 5

From a political perspective the differences of opinion over blame for the COVID-19 outbreak and the U.S. reaction to China’s new security laws for Hong Kong provide at a minimum a blockage to further talks and could rapidly lead to a reversal of the existing tariff standstill if further flashpoints emerge.

With all that said, the Trump administration may choose to leave the phase 1 deal in place and instead focus on other areas of action, particularly in relation to the exports of high technology goods. The adjustment of rules regarding Hong Kong may provide an opportunity for such an update.
Q: Is it likely that we’ll see a focus on near-shoring / reshoring as a result of COVID-19 and the trade war?

In many ways COVID-19 may act as a force multiplier for corporate decisions regarding long-term supply chain planning that were first raised by the trade war. Unlike the trade war though the effects of COVID-19 may be related more to risk than the increased costs related to tariffs. In that regard companies during the COVID-19 aftermath have at least three strategic decisions to answer.

First, what is the right level of inventory levels to survive both short / narrow and long / wide supply chain disruptions? Restocking inventories to meet the recovery in demand is proving to be a challenge for firms in industries ranging from big-box retailing to autos and capital goods.

Second, how much geographic diversification is needed? For example will one alternative production base outside China be sufficient, or are more needed? There’s a trade off between risk mitigation and losses of economies of scale here. So far it appears that many companies have taken on just one extra location.

Third, should one of those locations be a reshoring to the U.S. The concept of producing in-region, for-region may better help risk hedging in terms of the local economy and risk events like COVID-19. However, it doesn’t appear that the level of tariffs applied so far have been high enough to push companies into reshoring to the U.S. A mixture of higher tariffs or more likely a mixture of local incentives including tax breaks and reduced regulations will be needed, as flagged in Panjiva’s May 20 analysis.

Q: The potential for increased tariffs presents a host of challenges for global shippers – are we going to see pre-buying or rushed shipping in the coming months?

In theory yes, particularly given we are entering the normal peak shipping season with imports of apparel, toys and electricals which are not currently covered by tariffs reaching the U.S. in higher quantities from July onwards which means outbound shipping from June onwards. However, we’re not in normal times. Toy retailers are having to judge whether demand will return to normal levels or whether consumers will remain cautious. As at the end of May, Panjiva’s preliminary seaborne shipping data shows that U.S. seaborne imports of apparel and electricals from China are 49.9% and just 0.6% lower respectively in May, and 31.9% and 16.4% lower than a year earlier on a year-to-date basis.