In March 2022, WTO members and representatives of shipping, trading and logistics companies met at the virtual Global Supply Chains Forum. The topic: the impact of the pandemic and the Ukraine war on global supply chains. The Diplomatic Magazine spoke with WTO Senior Economist Coleman Nee and WTO Senior Analyst Emmanuelle Ganne.
DM: Which branches, industries and companies have experienced the most dramatic impact from the global supply chain disruptions caused by the Covid pandemic and the war in Ukraine?
Coleman Nee: Support by the government led to a very strong economic recovery after the initial shock of the pandemic. Combined with changes in consumer behavior, this created unanticipated problems for suppliers of intermediate goods, most notably semi-conductors that are used intensively in the electronics and automotive sectors. As people in some professions increasingly worked remotely, businesses invested in upgrading IT infrastructure, while households spent more of their income on home entertainment (televisions, exercise equipment, gaming consoles, etc.). Many of the semiconductors used in these products were diverted from alternative uses, particularly in automobile production. As a result, car manufacturers experienced production stoppages and long delays in deliveries.
As household spending shifted toward goods and away from in-person services, demand for imported goods exceeded the container handling capacity of ports in many countries, but most notably on the West Coast of the United States. New waves of COVID-19 also interrupted shipments of goods through ports in China and elsewhere. This created significant backlogs of ships waiting to unload cargo and misallocation of containers far from where they were needed, all of which contributed to rising shipping costs. A global index of container shipping costs rose from $2,250 on 2 October 2020 to $10,517 on 1 October 2021, nearly a 5-fold increase.
Just as these issues were gradually being resolved, the outbreak of the Russian-Ukraine conflict threatened new setbacks. Russia and Ukraine are important suppliers of some industrial inputs that could have significant further consequences for the automobile sector. Russia is an important supplier of palladium, which is processed in Ukraine and used to make catalytic converters. Russia accounts for a large fraction of imported palladium in Korea (38%), the United States (43%), Japan (45%), Italy (45%) and Canada (56%), all major automobile producers. Russia and Ukraine together account for a large fraction of wheat imports in many Middle Eastern and African countries, including Lebanon (86%), Egypt (74%), Senegal (56%) and Uganda (49%). The WTO will continue to monitor the impact of the conflict, which is expected to exert a significant drag on world trade growth in 2022.
DM: Smaller firms and developing economies have been disproportionately affected by global supply chain disruptions. What ideas does the WTO have to support them?
Emmanuelle Ganne: Because of their limited resources, small businesses find it more difficult to cope with supply chain disruptions. The most common supply chain concerns faced by micro, small and medium-sized enterprises (MSMEs) include delivery delays and failure, cash flow issues, rising costs of logistics services, and lack of air freight capacity – concerns that are amplified by small businesses' lack of access to market information.
To address the challenges that small businesses face to trade internationally, an Informal MSMEs Working Group in December 2017 was launched, which now counts 94 members. In December they adopted a package of 6 recommendations covering areas such as transparency and information sharing on MSMEs, trade facilitation, access to finance and crossborder payments, access to market information and inclusion of MSMEs in regulatory developments. In December 2021, the Group also launched the Trade4MSMEs' platform, a tool aimed at helping small companies find trade-related information that improves their ability to trade internationally. A Digital Champion for Small Business initiative was also launched last year to help MSMEs go digital and through this help mitigate the impact of the pandemic and resulting supply chain disruptions. Discussions are ongoing on issues such as access to finance, cyber readiness and imports of low value shipments. The heads of the WTO and the International Finance Corp. also agreed to work with small traders and financial institutions at the local level to better understand the ecosystem of trade finance. They pledged to improve access to trade finance training programmes in emerging markets, mainly in Africa.
DM: What measures need to be put in place to prevent or to reduce future disruptions related to e.g. climate change as well as future unexpected events?
Coleman Nee: Given the multidimensional nature of disruptions, there are a broad range of tactics and strategies that companies and households can adopt to prevent or reduce the impact of disruptions. Risk prevention and reduction can be achieved through relevant and well-designed infrastructure, monetary, trade, social, health, energy and environmental policies. The scope of these policies can be broad, depending on the types of hazards, exposure and vulnerability. Explicitly integrating risk management into business decisionmaking, including the financial appraisal of risks. Business preparedness includes developing early warning strategies, disaster responses and contingency planning, identifying priorities, stockpiling key inputs, training employees on emergency preparedness, enhancing digitalization, and reviewing insurance coverage. Trade policies promoting diversification and new markets can help mitigate the impact of disruption. Pooling resources, such as information and expertise sharing between firms, can also contribute to preparedness at the industry level.
DM: And what role could the WTO play in this?
Coleman Nee: The WTO already contributes, through trade cooperation, to make economies more resilient by supporting the smooth, predictable and open international movement of goods and services, including essential goods and services. The WTO also supports strategies aimed at diversifying supply sources and exports. WTO members could make an even greater contribution to economic resilience by strengthening their cooperation on various issues, including transparency, export restriction and electronic commerce.
DM: To what extent can digitalization help to achieve more stable and inclusive global supply chains in the future?
Emmanuelle Ganne: Trade remains very labour and paper intensive. Some studies have shown that handling the paperwork required to ship goods internationally can be more expensive than moving the container itself. Moving from paper to digital can generate substantial cost savings, and through this significantly benefit small companies. A recent Commonwealth Secretariat study found that digital trade facilitation across borders could increase trade across the Commonwealth by around US$90 billion, and that legal reform to support the digitalisation of electronic records could increase trade by as much as US$1.1 trillion, bringing the total benefits from paperless trade to nearly US$1.2 trillion by 2026. The analysis suggests a reduction in Commonwealth exporters’ cost base of around 75 per cent on average.
The sheer number of trade documents places a heavy burden on small business seeking to trade internationally. Hence, they are expected to benefit the most from trade digitalization. According to a 2021 study by the ICC UK and Coriolis Technologies on the impact of trade digitalization in the UK, the digitalization of trade documents could lead to a 35 per cent improvement in small business efficiency savings and a 13 per cent increase in international business revenues.
Interview Peter Jakob