Covid-19 has thrown supply chains into disarray, fuelled trade disputes between countries and forced governments around the world to take on more debt. Elizabeth Stephens, managing director of Geopolitical Risk Advisory, a global political risk insight and data company, gives GTR a geopolitical overview of what’s going wrong, and how trade is being impacted.


GTR: Which regions are being worst hit by the Covid-19 crisis in terms of their trade? How do you think trade can begin to recover post-pandemic?

Stephens: Different countries are being impacted in different ways. Those that export commodities, particularly oil, have been impacted by the significant drop in consumption, with export volumes down. Economies in Europe are globally the most integrated into international supply chains, and they’re hit not because of commodities, but rather because they can’t get the imports of intermediate goods that they use in production – the car manufacturing industry in Germany is a case in point. No country has been immune, it’s just that they are all impacted in slightly different ways, depending on their position in the manufacturing and supply chain.

There will be a restructuring of supply chains because countries will think about producing more domestically and in the regions in which they’re based. We’ll see less just-in-time production and more just-in-case manufacturing. The length of supply chains and the complexity of them will be reduced. It is not that things can’t go back to how they were, it is that companies will know that international disruptions can – and are likely to – occur again in the future.

It also depends on how relations pan out between the US and China, because there is potential for many trade barriers to be erected between those two countries. Technology is a big sector in these disputes, and we’ll see more restrictive policies in this area, as well as other countries falling almost between the two camps in terms of how they’re going to align themselves. There is real potential for a US-China ‘Cold War’ in the tech space.


GTR: Producing more domestically could present some nations with a massive challenge. For example, a lot of the pharma industry is based in India, and it would be difficult to move that. How can this be achieved?

Stephens: Challenges to control are more palpable now we’re seeing disruption to global supply chains, so if something is produced domestically, you can control it in a different way. That will be far more important to governments than it has been in the past. We’ll see a slightly higher level of co-operation than we have once the health emergency abates, but unless Joe Biden wins the presidential election, and he has a very different approach to the US’ place in the world, we’re not going to see the levels of international co-operation of the past.

On reshoring, many industries are incredibly difficult to reshore. There will be a move in that direction but it’s not going to be 100%. However, even if five or 10% was brought back into domestic markets, that is a significant change. There will also be pressure on governments in the developed world to do this to ameliorate high unemployment, whilst companies that have benefitted from government financial support during the crisis will be expected to demonstrate their nationalist credentials.


GTR: How do you think that political issues, which have come about as a result of the pandemic, will impact trade? We’ve seen Donald Trump blame China and threaten more tariffs over the virus, and we’ve also seen China put tariffs on Australian barley, for example.

Stephens: Australia’s position, mirrored by the EU, is that there should be an investigation into the outbreak of the coronavirus, which is very valid and fair. One of the reasons it’s been received quite as negatively as it has in China is because of the US describing coronavirus as the ‘China virus’. That’s antagonistic.

If the US would take a more conciliatory approach, we might have received a more favourable response from China. China will try to assert itself more vociferously on the international stage – tariffs on Australian barley will be just one example.

We’ll see this repeated as we go forward and countries challenge China over the virus, but on other practices as well. Look at what’s happening in Hong Kong, for example. China is undermining democracy in Hong Kong, and while they think, ‘oh the world is preoccupied with coronavirus, they don’t notice’, it is being noticed. I think there will be increasing concern about China’s authoritarian tendencies.


GTR: The pandemic has also increased debt, putting pressure on countries fiscally. How will this play out?

 Stephens: International debt is huge; the US, the world’s first or second-largest economy depending how we count it, has a tremendous amount of debt, which has increased exponentially since the financial crisis of 2008. China has a considerable amount of debt; Japan, the world’s third-largest economy, is struggling under a heavy debt burden and then we have Italy, Germany, France and the United Kingdom.

The transfer of debt to governments will now happen again, potentially on a much larger scale than we saw during the financial crisis. Compounding this picture, the International Monetary Fund (IMF) has predicted the potential loss of US$9tn in global gross domestic product (GDP) as a direct result of the pandemic this year and next. To provide context, that amount is larger than the economies of Germany and Japan combined. We’re living through unprecedented times in a whole variety of ways, particularly in terms of global debt.

Countries with high external debt and low external reserves are particularly vulnerable. Perhaps the weakest country in this regard is Argentina. We’re in a situation where Argentina is defaulting on its sovereign debt and trying to renegotiate debt repayment terms with its creditors. It is citing the coronavirus as the reasons for these issues, but every economist will tell you the underlying issues were there prior to the outbreak. Ecuador is suffering significantly, as are Egypt and Venezuela. With oil prices incredibly low, Venezuela’s finances are in complete disarray. Much of Sub-Saharan Africa is in this situation as well. There are obviously exceptions to the rule, but many countries in Sub-Saharan Africa have high external debt and low external reserves.

Countries and regions with high public debt and low reserves include Brazil, Central and Eastern Europe, Egypt, Italy, Jordan, Nigeria, Pakistan and Turkey, and that is now being exacerbated by the pandemic.

In these areas, chronic fiscal weakness has severely limited government support to individuals and businesses during the crisis.


GTR: How should supply chains, traders and countries make themselves more resilient in the long term?

Stephens: There will be fewer steps in supply chains. The fact that it takes 2,500 parts to make a car – and only one part to be missing to not make a car – means that there needs to be far fewer suppliers for each product that is manufactured.

Company leaders need to understand all the elements of their supply chains and not just the top 10 suppliers – because if the supplier at the bottom is unable to deliver, you will not have your product to sell. Supply chains that are shorter and geographically closer are obviously more resilient.

The trillions of dollars which have been put into bailing out companies mean that governments, in effect, are going to own many companies and probably financial institutions after this pandemic, technically if not legally. Particularly in the US, if Trump wins re-election he will promote an ‘America first’ policy and it will be, ‘you will manufacture in the US and you will employ Americans’. We’ll see that in Europe too – there will be a push in that direction, because unemployment is going to be incredibly high, and jobs will need to be created to prevent civil unrest. The repatriation of manufacturing and call centres, for example, will help alleviate unemployment.

We will see overall changes to supply chains. They might be subtle to begin with, but this will change how international trade is conducted, with the rationale being that we’re likely to have other pandemics in the future.