The coronavirus pandemic has triggered an economic crisis such as the world has never seen. The economic downturn was followed by an unprecedented rebound. It all happened so fast. It left us with a torrent of numbers and seemingly unanswerable questions.
Welcome to PCR, a special limited series by The National in which we try to make sense of the numbers and answer important questions about the Post Covid-19 Recovery.
Listen to prominent economists and business leaders as they explain the challenges and opportunities of a unique and often complex economic recovery.
Join Mustafa Alrawi, assistant editor-in-chief as he explores the many features of the Post Covid-19 Recovery.
Episode 3 : Trade disruptions and the future of globalisation
Fact No 1: no one really predicted the recovery to come with supply disruptions and bottlenecks.
Fact Number 2: there is a consensus that supply-chain disruptions are transitory. But what caused these bottlenecks in the first place? And what happens to the recovery if these disruptions persist longer than expected?
Could the pandemic and the recovery signal the end of globalisation as we know it?
Guests:
Petya Koeva Brooks, Deputy Director in the IMF's Strategy, Policy, and Review Department
Simon MacAdam, Senior Global Economist at Capital Economics
Silja Baller, Insights Lead, Frontier Insights, the World Economic Forum
Mahir Rasheed, US economist at Oxford Economics
Narrated by: Mustafa Alrawi, The National's assistant editor-in-chief
Episode transcript:
0:07 A backlog of ships in the port of Savannah becoming the latest logjam to hit America's overwhelmed supply chains…
The problem is there's a number of weak links in the supply chain right now.
Lots of containers in the wrong places.
You're starting to see store shelves seem a little more empty.
You have this enormous, enormous amount of demand that's coming from the US economy.
Well, it's all because of the global supply-chain crisis that’s happening right now. It's an economic fallout from the pandemic.
Mustafa 00:47
Empty shelves in grocery stores and supermarkets across the US and the UK. An armada of backlogged cargo ships waiting to dock at Long Beach, California. Container congestion in Vancouver, Canada, long queues at UK petrol stations and a power crisis in China; car makers and electronic companies struggling with long delays in delivering new models and products. These could be snapshots of the crisis at the start of the pandemic back in 2020. But they're not. These are some of the recent scenes of the post Covid-19 recovery. What in the world is going on? What's causing these shortages? Is this how the recovery is supposed to be? Welcome to PCR. I'm Mustafa Alrawi, your host on this special podcast series from The National, where we try to get a better understanding of the post Covid-19 recovery. On previous episodes, we've explored some of the features of the economic recovery that make it unique. We talked to prominent economists and leading experts and discussed the unevenness of the recovery, as well as labour market shortages and new job trends. If you haven't listened to the previous episodes of the PCR series, please check them out. On this episode, we tried to discuss one of the most striking side effects of the economic recovery: the disruption of the global supply chain. The impacts of these disruptions are felt across all sectors, from construction to retail to electronics and food to energy supplies. The post Covid-19 recovery comes with many shortages and supply bottlenecks. Are these disruptions just the aftershocks of the post-pandemic sudden rebounds? Or is there something fundamental that is wrong with global trade? And what caused these disruptions in the first place? Listen to Simon McAdam explaining the roots and causes of the problem and how the untypical nature of the crisis is having unusual consequences on consumption and trade.
Ayesha 03:09
Simon McAdam, senior global economist, Capital Economics.
03:14
When the pandemic kicked off, there was a particularly sharp drop in demand for traded goods. There was an awful lot of uncertainty. You've got to cast your mind back; this was before a lot of governments in more developed economies in particular, but also the richer emerging world as well, offered support to households and financial support to support consumption. So there was an immediate drop-off in demand. And at the same time wide-scale factory closures meant that a lot of goods just weren't being produced. So both production and consumption of traded goods collapsed last year. And consequently, trade itself fell very sharply. Now, that's sort of typical. When you have a global downturn, when you have any sort of recession, you expect goods demand to fall, you know, our demand for goods is usually more variable than our demand for services, which is more constant and stable over time. And so you expect trade goods trade to do badly, and to be depressed as long as the recession is ongoing. And for it to rebound once the economy starts to get itself onto its feet. This was obviously very different this pandemic, because what actually happened in lockdown was that households’ preferences for consumption shifted away from services towards goods. You couldn't go out to restaurants to spend your money. You couldn't go out to the museums or any sort of leisure or hospitality venues. But you were still being paid. You still had, your income was supported in various ways in different countries. Sometimes through government support, outright government support, which meant that people shifted their spending. They didn't spend particularly a lot less. They spent more on goods and a lot less on services. So consequently, everybody was caught off-guard, economists included. Nobody really foresaw what was going to happen, which was a ridiculously strong rebound in goods trade, starting in the middle of 2020. Really got going in the second half of last year, and just kept going at the very beginning of this year. A very rapid turnaround such that by the beginning of this year, world trade was actually 5 per cent higher than it was before the pandemic. So there's actually more trade activity, significantly more trade activity going on, than there was before the pandemic. Now, what we've seen since the beginning of this year is actually a stagnation in world trade. So since about March, the level of world trade hasn't really changed. So this is what we've seen, we've seen a very sharp drop last year, a very, very, very strong rebound that caught a lot of us off-guard, and then something more recent, which is more interesting, is an amount of stagnation at high levels.
Mustafa 06:08
Economists now explain the why and how of these shortages. But the fact is no one really foresaw huge supply bottlenecks and disruptions of these magnitudes. As it stands today, global trade is stagnating at significantly high levels, putting tremendous strain on clogged supply chains and trade routes. It's worth noting that the problem is not so much in the production capacity, as much as it is in the distribution capacity of the goods. One can argue that if the supply shortages were to persist, production will ultimately be impacted. In fact, production of goods is already affected in some sectors. One example is the shortages of semiconductors and microchips, where the problem is already affecting the production of cars, and electronic devices, forcing many factories to shut down. But let's go back to the supply-chain problem. So we know how and when it all started. We also know that the situation is not improving yet. In fact, in some aspects, the situation is made worse with a recent hike in energy prices. So the question is: when will the situation end? And how much is it correlated to the pandemic?
Ayesha 07:19
Mahir Rasheed, US economist at Oxford Economics
07:23
Supply-chain disruptions that we're seeing right now have been an issue. And, you know, again, this is very tightly correlated to the pandemic. We've seen that, particularly in China, many of these countries have very strict, you know, a no-tolerance policy for Covid cases. So we'll see that if there's an outbreak in a port, they’ll be quick to shut everything down, which will create a backlog which will, you know, start to affect all of the trade partners that are doing trade with these countries. The difficult thing is that it's hard to say when these supply-chain disruptions will be ending, it's very unlikely that they’ll be ending by the end of this year. And it certainly has made trade more expensive. But encouragingly, we have yet to see these costs really be passed down on to consumers. It seems that businesses have to this point absorbed them with the understanding that they are still temporary and will not be this long-term, three or four or five-year process. Ultimately, we certainly view the risks of additional supply-chain disruptions to be a headwind to trade flows, but ultimately, we view the situation improving gradually moving into 2022.
Mustafa 08:37
When discussing global trade bottlenecks and supply-chain disruptions, one should remember that shipping is the backbone of global trade, and that it accounts for 80 per cent of global trade by volume. The recent supply shortages have sent shipping costs skyrocketing, adding more uncertainty to the post Covid-19 recovery. Listen to Simon McAdam, senior global economist at Capital Economics, as he breaks down the entire supply chain, outlining the causes and consequences of rising shipping costs on global trade.
Simon McAdam 09:11
One of the elements of uncertainty with this is the issue of shipping costs. Now traditionally, shipping costs don't vary a huge amount year to year. So it's never really been on economists’, macro-economists’ radar, particularly a global macro-economist, because it doesn't usually feed through to the consumer prices in any meaningful, significant way. Today is different, or at least it's potentially different. And this is the point because it’s unprecedented what we've seen with shipping costs. That the cost of shipping a 40-foot equivalent container has risen eightfold since pre-virus levels, eight times higher. And when you've got shipping costs rising by those sorts of magnitudes, there's a chance that some of this will pass the feed through to consumer prices. Now the extent of that is uncertain. As I say, we haven't seen this sort of dynamic happen before. So we haven't got very much in the way of historical precedent to lean on to give us a really sort of accurate gauge about how inflationary shipping costs will be. That said, there are some reasons to think that the risks might have the upside to the inflation in early next year, just as all these other factors that I mentioned, like commodity prices, will be dragging on inflation, shipping costs could be boosting it and offsetting those factors. So, this is ultimately the reason why I'm arguing that the risks are that inflation is higher for longer than most people are anticipating.
Ayesha 10:52
Simon McAdam, senior global economist, Capital Economics
10:56
There haven’t been physically enough ships and containers on those ships to be able to ship goods around the world in the sort of volumes that are required at the speed that is required. And something else with shipping, because a lot of the goods have been flowing disproportionately from Asian manufacturers towards western consumers. Because it's western, developed economies where the governments have offered the biggest stimulus packages to households. So there's been this almighty trade flow from Asian goods-manufacturers towards western consumers, which has meant that all the trade has been very much going in one direction. And when the ships bring over the goods to the west, those western ports have been very slow to fill up these containers and send them back towards Asia. We need to sort of globally recycle these containers, we need to send them off from China, send them over to the west, and then send them back to China to fill them up to bring them back again. But that global operation logistical bottleneck has been very difficult to overcome. And then even when you get to the port, and you offload the goods, you need truckers and hauliers to be able to take those goods to depots and warehouses. But the shortages of truckers and disruptions to the trucking industry globally and caution about the virus, particularly in some of the virus hotspots in parts of Asia, mean that there's not enough truckers to be able to take things to warehouses. And then even if you managed to get the goods off the ship, through the ports on to the trucks and to the warehouse, there's a shortage of warehouse staff. So, all these different parts along the global distribution network, there are problems with staff, equipment, social distancing, things being in the wrong place at the wrong time, not enough resources and not enough capacity to deal with such strong demand. So that's what's caused all these bottlenecks.
12:45
The future does not belong to globalists. The future belongs to patriots. The future belongs to sovereign and independent nations.
12:55
The Biden administration faces another crisis amid a growing backlog in the global supply chain.
13:02
From cars to shoes, electronics to furniture, manufacturers across the board warn they're facing higher costs and slower delivery times.
13:10
The biggest threat to globalisation is not coming from the pandemic itself, but rather from the policy changes that may follow
13:19
Inflation for the month of September hit 5.4 per cent over the past year, matching a 13-year high.
Mustafa 13:42
With current supply disruptions, experts are now warning Christmas shopping is at risk. But there are bigger risks. Supply shortages and rising shipping costs are likely to boost inflation during the post Covid-19 recovery. I’m Mustafa Alrawi, your host on this special podcast from The National, where we discuss the post Covid-19 recovery, PCR. On this episode, we're trying to understand the scale and magnitude of the supply-chain disruption. This is one of the side effects of the fast and strong rebound following the pandemic. At the start of the pandemic, many political leaders and experts predicted that the pandemic could signal the end of globalisation. Today, with global supply chains clogged and disrupted, the future of globalisation is once again under the spotlight.
Ayesha 14:33
Simon McAdam, senior global economist, Capital Economics
14:38
I think a lot of that is rhetoric. I mean, the first actual point to make is that people talk about, suggest that the pandemic might bring about or usher in an era of the end of globalisation. Well, rather interestingly, if you think of globalisation in terms of the amount of sort of trade connectedness and trade flows around the world economy, and the extensiveness of trade pacts and deals between countries and what have you, on all these sort of measures, globalisation peaked a decade ago. You know, it's sort of old news, in a sense. And after the financial crisis, that was the peak of the globalisation wave, that started after the fall of the Berlin Wall, and as China became ever-increasingly involved in the world economy, sort of integrated in the world economy, and there's only so much you can do to break down trade barriers. Tariffs were already extraordinarily low across most of the world. There are all sorts of trade deals and trade had never been such a huge share of the world economies. Now, where does the pandemic feature in all of this? Well, I think that a lot of the arguments that are made about the consequences specifically about the pandemic for globalisation are over-done. It's worth remembering that the president of the United States, the former president of the United States, Donald Trump, launched a deliberate protectionist campaign against China. And despite the world's two largest economies at loggerheads over trade and hiking tariffs to levels not seen in a hundred years since the Great Depression, despite all of that the actual lasting consequences of that for the world economy and globalisation have been negligible. So, I think the idea that the pandemic’s going to usher in this new sort of another push towards protectionism, and this will have a lasting effect on supply chains, I think the lessons of history would suggest that's probably just not going to happen. Not least because supply chains were what was the saving grace in this pandemic. You know, China was supplying the world with face masks and PPE equipment and all the lateral flow tests that we take here in the United Kingdom. They all say “Made in China” on them.Supply chains have been remarkably resilient, in this sense. They've been pushed out to the limits as we're seeing with shipping costs going through the roof, but they have done an awful lot to help out in the struggle against the pandemic.
Mustafa 17:11
Could global shortages and higher energy prices push governments and companies to reconsider different value chains closer to consumers and markets? Could the post Covid-19 recovery lay out a new model for international economic integration?
Ayesha 17:32
Silja Baller, insights lead, Frontier Insights, the World Economic Forum
Silja Baller 17:37
Globalisation was already on the retreat before the pandemic. We saw, for example, that negotiations for regional trade agreements were stalling. There were also tensions between major trading nations that were kind of coming in and out. Then, the crisis hits. And as you say, global value chains were interrupted by the pandemic and they continue to be interrupted as countries are getting hit by subsequent waves of the virus, especially countries where vaccine supplies are low, in which you're forced to re-enter lockdowns over and over again. And I think another point is that when the pandemic first hit, governments and firms realised the risks of value chains that are too concentrated. So I think in the medium term, we can expect to see some retreat in global value chains as companies invest in greater resilience. And also governments might push to bring production chains for strategic industries closer to home. And then there's of course a danger that the dynamic will be compounded by protectionism, protectionist measures, as some governments might try to solve domestic divisions by turning inward. There's another aspect which is going to become relevant in the longer run and very different from the previous ones. And that's considerations about the environment. Of course, you know, if we want to reduce emissions, they're also majorly coming from transport. Also, for environmental reasons, firms should be looking to be producing closer to the market, or closer to home. So those are all forces that are pulling on globalisation at the moment. And we asked our chief-economist community in the most recent survey whether they see fragmentation as transitory or a longer-term phenomenon, and there is an expectation that some of this fragmentation will definitely clear as the supply chains are restored. So, there's more vaccinations and fewer lockdowns, some of the supply problems that we're currently seeing will disappear. Some of it, though, is likely to stay. So over the longer run, there is an expectation that supply chains will be more differentiated or more diversified, for resilience reasons, and potentially also for strategic reasons. And then of course, there's the environmental imperative to reduce transport distances. And I think there's also a big desire in a way to keep global co-operation and collaboration alive, because this will be very much needed in order to solve the climate crisis. So even though on some levels, we're seeing some global fragmentation, overall, there's really a need to keep global integration alive and potentially rethink it and redesign it in new ways, in order to be able to address both the divided recovery, and so making sure that low and middle-income countries continue to have access to global markets, and also to make sure that there is a global agreement and global co-operation on how to tackle climate change.
Mustafa 20:45
The pandemic has proven to be an enormous disruptive force for the world economy. The recovery is now testing the international economic integration and posing unprecedented challenges to global supply chains. The situation is likely to have serious economic fallout, mainly on inflation.
Ayesha 21:09
Petya Koeva Brooks, Deputy Director in the IMF strategy, policy and review department,
21:15
You know, it has been a very unusual recovery. So there are just a lot of factors playing out. And it's not just the base effects that you are referring to, or the energy prices, or the supply bottlenecks. It's basically a situation where supply and demand are coming to a head and right now, supply is lagging the demand that there is for goods for services and such in various sectors. So while we expect those mismatches to play out and to resolve by the first half of next year, there certainly are risks that they could last longer. And more generally, there are risks, and they're significant risks, that inflation could turn out to be higher than what is in our forecasts. And this is exactly why we emphasise the need, and we make the call, for central banks to be particularly vigilant and to keep a very close attention to what's happening with inflation expectations, and be ready to act if some of those risks materialise.
Mustafa 22:32
Supply-chain disruptions we are witnessing during the current recovery have actually started building up during the pandemic, when support schemes and stimulus checks sustained high consumer spending on goods. The crisis was unique in so many ways. This is probably the first economic downturn that ends with consumers around the world sitting on $5.4 trillion in excess savings. High consumption, mainly in Europe and the US, has created massive imbalances and trade flows. These massive disruptions are more than just logistical problems. It is still not clear when these disruptions will end. But economists tell us that the longer the situation persists, the greater the risks on the economic recovery. Thank you for listening. If you've enjoyed this show, please do subscribe on Apple Podcasts, Spotify, or wherever you get your audio content