Panelists Say Coronavirus Crisis Will Change Trade, but Disagree on How
Panelists tasked with envisioning how trade will change post-COVID-19 pandemic disagreed on what's most useful to avoid another shortage of critical supplies in an emergency, but said they expect that things will change. Nicole Bivens Collinson, a lobbyist at Sandler Travis, said clients are already planning how to reshape supply chains, after the painful experience of not receiving shipments as the pandemic hit China, then South Korea, then the rest of the world.
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“It wasn’t just that China shut down, or South Korea shut down, or Malaysia shut down, or the United States shut down,” she said, but that they did it in sequence. So she said companies don't want to have the semiconductor chip go from South Korea to China, then the assembly go to Malaysia. Instead, they want more vertical integration, and to have production done in one or two countries.
She said companies that want to burnish their brand around sustainability were already talking about how to produce with fewer shipments of components, so they could say the product had a lower carbon cost. “Imagine you’ve been supplying from five different countries, now you've got this even greater reason to have this vertical manufacturing process,” she said.
Beth Baltzan, a former top rules-of-origin lawyer at the Office of the U.S. Trade Representative, said seizing on vertical integration is the wrong lesson from the global public health crisis. “We have a global shortage of equipment that’s necessary to save lives,” she said on the Washington International Trade Association webinar April 23. “So the question for me is: How do we make sure we’re never in this situation again?” Baltzan, founder of American Phoenix Trade Advisory Services, said first, policymakers need to find out what medical supply chains are, as it's murky.
Anabel Gonzalez, a senior fellow at the Peterson Institute for International Economics, said that even companies don't have visibility into their supply chains when they're complex. She said they know their Tier 1 suppliers, but not Tier 2 and Tier 3. Gonzalez agreed with Bivens Collinson that there would be more vertical integration, and some regionalization of supply chains.
Baltzan thinks that doesn't make sense. China is all about vertical integration and monopolist approaches, and that didn't make their supplies resilient. “You want to diversify away from that concentration risk,” she said.
She said she's concerned that without more government intervention, companies will continue to focus on low costs. “We’ve got a lot of dead people because the whole model was around consumer prices.”
Gonzalez decried the push toward reshoring pharmaceutical or medical supply production to each country. “The first reaction seems to be let’s bring all production home,” she said. “This poses a number of questions. What happens if the next pandemic does not require ventilators but instead dialysis machines?”
She said the auto industry and others had gone to an extreme in seeking supply chain efficiency, with just-in-time delivery practices. “We are going to see this rebalancing between efficiency on the one hand and resiliency,” she said.
But fundamentally, she said, supply chain locations will be driven by the same factors as before the crisis -- access to raw materials, the presence of skilled labor, and transport costs.
She added: “In terms of what the world will look like after COVID-19, I think it would depend very much on the type of economy.” Will the recovery have a “V” shape, connoting a rapid decline and a sharp recovery? Or a “U” shape? Or a “W,” where another round of deaths leads to another closure of economies?
The European Union is talking about spearheading talks to eliminate tariffs on medical goods, and Gonzalez said that makes sense. “Tariffs on health as well as hygiene products like soap are really a regressive form of taxation that targets the sick,” she said.
Baltzan said the “muscle memory” in trade policy is lowering tariffs, and in her view, that would only reinforce China's dominance, which she thinks is less a result of comparative advantage and more a result of massive subsidies, exploited labor and currency manipulation. She noted that Japan would like Thailand to join the Trans-Pacific Partnership, in a way to change medical supply chains. She said the rule of origin for medical goods in TPP is only 30%, so that may not serve to move enough of the chain out of China.