The effect of Corona virus on cross-border trade

the effect of coronavirus on cross-border trade
5 MINs

Many of the large companies of China are seeking loans to survive the impact of the coronavirus and Investment Bank Nomura’s analysts feel that the virus has indeed had “a devastating impact” on the economy and ‘appear to be significantly underestimating the extent of disruption’… indeed a worrisome scenario for world trade.

The deadly coronavirus or COVID-19 already has and will have far-reaching consequences on cross-border trade. “The outbreak has the potential to cause severe economic and market dislocation. But the scale of the impact will ultimately be determined by how the virus spreads and evolves, which is almost impossible to predict, as well as how governments respond,” said Neil Shearing, Group Chief Economist at Capital Economics. China is the pivotal point on which many industries revolve, are dependent on and even survive upon. Due to the life-threatening virus which suddenly erupted in the winter months the supply chains of many global companies have suddenly ruptured. From car manufacturers who source spare parts from China to smartphone makers have all been affected. Stocks have tumbled, anticipating the adverse impact of the virus on the Chinese economy and has had a ripple effect worldwide. JP Morgan analysts have downgraded the growth for China in this quarter and said that the virus outbreak has ‘completely changed the dynamics’ of the Chinese economy.

Many of the large companies of China are seeking loans to survive the impact of the coronavirus and Investment Bank Nomura’s analysts feel that the virus has indeed had “a devastating impact” on the economy and ‘appear to be significantly underestimating the extent of disruption’; indeed a worrisome scenario for world trade. In fact, it is a potential spillover to the rest of the global economy affecting everything from oil to tourism to components of leather, auto and other industries plus, ecommerce and brands giving the world a taste of what it could mean if ever there was a trade embargo imposed upon China, with the whole supply chain management system invariably going for a toss.

Ecommerce has also become a casualty of the deadly coronavirus and with Amazon withdrawing from the tech show in Europe amidst fear of the novel coronavirus; it is indeed something to worry about. Even though a Chinese fashion designer says “We’re thinking of launching our own e-commerce platform, and developing our online reach. While the government and the world are trying to contain this, we’ll need to use it as an opportunity to try something new.” Yet the truth is that many brands which sell through marketplaces will take a beating because the crux of the matter is that production has stopped which will lead to delays everywhere in the whole supply chain. Ultimately congestions at ports and added business pressures are set to take a toll on the entire ecommerce industry as on others. Finally added costs will trickle down to customers and the whole revenue growth will be affected.

According to a research blog Euro monitor the coronavirus has had the following impact on supply chain so far:

China’s production share in selected industries, 2018
Industry % Share of Global Production in China, 2018 Industry’s Exports Share % of the total 2018 Impact on Global Supply Chain
Household Goods 35% 33% High
Hi-tech Goods 46% 27% High
Textiles and Apparel 54% 23% High
Machinery 38% 14% Moderate
Rubber and Plastic 38% 8% Moderate
Pharmaceuticals and Medical Goods 29% 8% Moderate
Chemical Products 42% 7% Moderate

In our part of the world, Indian Diamond traders have been affected as well as Tata Motors due to the shutdown of its subsidiary Jaguar Land Rover plant in China since the Lunar New Year in January. The diamond industry is staring at huge losses after the protests in Hong Kong in 2019. Exports of cut and polished diamonds are said to have fallen by 17.14 % in the first 9 months of the current fiscal year. Added to this is the fact that 35% to 40% of the diamond trade is with mainland China. With the outbreak of the coronavirus, the diamond industry seems to have been the hardest hit so far and as Mavji Patel, The MD of Kiran Gems, a diamond export firm says he expects that “Exports will be down 30%-35% in the next two months.” The statistics, therefore, do not seem to be very bright and it might take the industry some time to recover again. The shutdown of shipments has already started affecting cotton and yarn prices and the price of rajma is predicted to rise with lack of imports. Exporters and importers are both affected and markets are dull and even with the production starting at Chinese factories it will take time to attain a balance. The good news for India might be the prospect of markets from the West looking towards India to replace China in acquiring certain goods.

In India, it has also affected solar energy projects because 90% of solar modules and panels are imported from China and Malaysia. So far the delays have been from a week to ten days but the virus is predicted to die out only in April so no one can as yet predict its impact on global trade for sure. A leading rooftop solar developer has been quoted as saying “There is a delay in the procurement which will cause further delays in our commissioning deadlines.” So if a ten-day delay can be this alarming we can just imagine what a month’s delay could do and can only pray for the Chinese Government to curb the virus at the earliest especially in a scenario where international oil prices have also been pushed down.

The adverse effect of this virus is that even the sales of certain brands will be affected from April to June 2020 because Chinese component suppliers of electronics, smartphones and some white brands would take another ten days to resume their production. The impact is on the supply chain because production is delayed and this has a spiralling effect which is likely to create a set back on the April-June segment when finished goods may not be available as per demand.

In this scenario, exporters to other countries of Chinese goods who have been affected by the coronavirus because China has forced many manufacturers to shut down have already started to safeguard their legal rights by applying for ‘Force Majeure’ certificates from the Government to avoid penalties for not keeping to deadlines. In fact, Nissan Motors called a halt to its production unit in its Kyushu factory in Japan as the impact of the coronavirus on the supply chain has started impacting its production. The good news, however, according to Eunimart is that Global markets rose as China reopened again on Monday after the forced closure disrupting many more supply chains. It is however still not clear when the plants will be fully operational with many cities still under clampdown. However, a ray of hope is that since the number of online consumers has almost doubled, more businesses are opting for omnichannel adoption and increasing their reach and optimising fulfilment with the use of cutting-edge intuitive automation and AI-powered business models helping them not just survive this crisis, but come out stronger. The full extent of the impact that the coronavirus will have is estimated at around 82 trillion dollars according to a Cambridge study. We suggest businesses to optimise their omnichannel management and logistics and warehousing with solutions like Eunimart’s AI-suite at the earliest and protect your business against disruptions in a world obsessed with social distancing.

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