Wednesday, 25 March 2020

Corona: We're going to need a bigger boat

As far as the mainstream debate goes, trade has gone on the backburner. There just isn't the bandwidth. It is, though, about to become more important as a matter of survival. For the moment we are trying to lock it all down but there soon comes the somewhat urgent question of how the UK feeds its people at a time when household incomes will be taking a pasting.

Here we see that reassurances are not too convincing.
Freight carriers are struggling to deliver goods by land, sea or air as the coronavirus pandemic forces Western governments to impose lockdowns, threatening supplies of vital products including medicines into the most affected areas, such as Italy. While China's draconian steps to stop the spread of the virus are now allowing its economy slowly to come back online, supply chains are backing up in other parts of the world. Problems ranging from finding enough truck drivers to restrictions on seafarers and a lack of air freight are hitting the smooth flow of goods, freight logistics operators say. Stockpiling and panic buying by consumers are also adding to strains.
I urge you to read the whole report. It doesn't look good.
While truck drivers in Spain are managing to deliver goods like food and medicine, there are more queues at border crossings, said Dulse Diaz, spokesman at the Spanish Confederation of Goods Transporters. "Perhaps the most worrying problem is that we don't have enough masks and gloves for all the drivers. Although many businesses predicted this situation and put in orders, all production is now destined for hospitals," he said.
Luis Marin, manager at Asociafruit, which represents producers and exporters of fruit, vegetables, flowers and plants in the southern Spanish region of Andalusia, said transporters were already passing on costs to farmers for journeys. "Normally we send a truck of, say, oranges to Germany and the truck driver comes back with another cargo of anything from ... domestic goods to chairs to compensate the return journey," Marin said. "But production in many sectors has absolutely dried up. So, there is no return cargo. If the producer has to pay for the two-way journey, costs go up."
Patrick Hasani, chief of staff with Britain's digital freight forwarder Zencargo, said stockpiling of goods by British consumers was requiring an extra 35% of capacity on deliveries from the European Union to keep up with the demand. "Lead times are also impacted, with up to one day extra delay from products coming from Poland, Germany and France given disruptions and traffic as driver health and cargo come under border scrutiny," Hasani said. On ocean freight, there are shortages of containers – as many as tens of thousands in Europe and the United States - as shipping lines struggle to send enough equipment after disruption caused by China's shutdown. A shortage of crew for ships is also affecting maritime supply chains.
Helpfully the EU is urging members to create green lanes. As EU countries quickly reinstalled border checks in an effort to slow the spread of the virus, long queues have formed in the past week on the internal borders of the bloc, slowing down supply chains across the continent.

All the same it could still be problematic for the UK which is heavily dependent on imports. Even if supply chains can be safeguarded we may find an unwillingness to supply demand for strategic reasons. Russia has suspended exports of all grains for ten days due to the coronavirus pandemic, it announced on Monday. Russia cites biosecurity concerns.
The Russian Federal Service for Veterinary and Phytosanitary Surveillance introduced for a period of 10 days "a temporary ban on export of all kinds of grains until specific instructions of the emergency team of the State Council of the Russian Federation on the prevention of coronavirus infection spreading in Russia," said the service, which is responsible for imports and exports of agricultural products.
And if you believe that you'll presumably believe China has Coorona under control. More likely Russia is keeping a strategic reserve not only as a domestic safeguard but also because food is political leverage. We will likely see similar scenarios emerging over vital medical supplies. We have already seen a lorry load of face masks destined for the UK intercepted in France. European solidarity doesn't appear to exist right now. 

Then if we are following the same trajectory as Italy, and taking the same quarantine measures, we will likely see a strategic decision to close petrol stations in motorway service stations where only sanctioned shipments can make it around the country. We really ought to have done this already in my view to slow the rate of infection in the regions as people take whatever measures they can to get out of London. Travel restrictions, border closures, air travel cancellations and ports quarantining ships for 14 days or more are now commonplace but it's sure to get worse. I won't be at all surprised to see an emergency rationing system and a huge explosion in the black market as people start to trade their personal stockpiles.

Then in the longer run we will probably see a massive programme fo bailouts and state appropriations as container shipping collapses. Meanwhile the dry bulk sector, which is responsible for shipping cargo such as iron ore, coal and grains, is still struggling under rates far below break-even levels for ship owners. The era of cheap consumables is well and truly over and food prices will necessarily skyrocket even accounting for the drop in the oil price.

The bigger picture looks even more uncertain. We were already seeing a return to near-shoring in response to global trade friction, while the "bipolar structure of the world economy" (the US and Europe consumes, and the rest of the world provides inputs for that consumption as cheaply as possible) has forever broken down.
China has not only joined the US and the European Union as a major global consumer market, but also plays an indispensable role in supplying intermediate goods for manufacturers worldwide. A recent UNCTAD report noted that 20 per cent of all intermediate inputs originate in China, with the US, Europe, Japan and South Korea the most dependent: “Chinese manufacturing is essential to many global value chains, especially those related to precision instruments, machinery, automotive and communication equipment.”
So the globalised economy is not so much being decoupled as being reconfigured. As China’s domestic consumer market has grown on the back of rising wages and enhanced spending power, so more of the supply chain is being “domesticated”. Supply chains are simplifying and becoming shorter to make them less fragile and vulnerable. They are also likely to become more regional – though an audit of which countries have China as their main export market and their main source of inputs makes it unclear just how large that China-dominated region will be.
This reconfiguration has massive implications for airlines, and for the ports and shipping lines that have underpinned the logistics that knit global supply chains together. With that, nations and blocs will need to completely rethink their global and regional trade strategies, not least to adapt to the new order of powers - whatever that may be. Corona has already scuppered Africa's mega regional trade deal ambitions. Trade talks aimed at launching the African Continental Free Trade Area (AfCFTA) on July 1 are now on hold. Though the intention to resume talks is clearly present it may never see the light of day again when the dust settles.

Worse still, we are sure to see a period of regulatory uncertainty. Everyone will now be reviewing their food safety and biosecurity standards. Due to internal and global pressure even China is undergoing a complete overhaul of its meat hygiene regime. This presents challenges for exporters (assuming anyone is left able to export after this) and even bigger headaches for trade negotiators. 

Priorities and red lines are sure to change. The UK is going to have to radically rethink its "global Britain" strategy and reassess its divergence priorities as regards to Brexit. Decisions have to be taken on the basis of informed speculation based on trade norms - but all the old norms are now out the window. Even the current new model FTA might well be dead as questions are asked about supply chain resilience and the need to keep a strategic reserve agricultural and manufacturing capacity. And that's going to mean tariffs and protectionism - after after Corona, we shall have to take stock of who our real friends are. 

Irrespective of underlying trends in trade, as far as geopolitics and trade is concerned we are now in the Corona era. The data might tell us one thing put public sentiment will demand much more stringent controls on visas and border controls and for a time all governments will be skittish about liberalising any trade. Corona does not respect borders so we are going to have to look very carefully at how other countries continue to manage outbreak control - which as far as South Asia goes, is nonexistent. There was already grounds for terminating air travel from the region - but especially so now for the foreseeable future. Liberal immigration dogma is now a biosecurity threat.

They say decades pass where nothing happens and then weeks where decades happen. As regards to Corona, that is something of an understatement. We are now in a state of emergency that will lead to further emergencies while bad actors, individual and national will seek to exploit the turmoil, and our reactions are sure to transform our politics and our institutions. 

Britain is moving toward a quasi-democratic autocracy, in part thanks to the collapse of coherent opposition, but the role of local government is set to re-establish its importance as we learn the lessons of Corona. With that comes opportunities to rethink our industrial and societal order which has long been stressed by hyper-globalisation, immigration, internet and deindustrialization. There is now a question mark over everything and we have yet to wake up to the scale of the challenges. It's both exciting and terrifying. This is the end of everything as we have known it. Somehow a stockpile of tinned tuna and spaghetti hoops looks somewhat inadequate. We're going to need a bigger boat. 

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