Interview

The Pandemic's Impact on Trade
The Pandemic's Impact on Trade
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The Pandemic's Impact on Trade

April 18, 2020

1. The Pandemic's Impact on Trade

2. The Slowing of Globalization

3. Is a Breakup Coming?

4. The Pandemic's Impact on Supply Chains

5. More Inventory, More Resiliance, More Cost

6. Redundancy & Resiliance

1. The Pandemic's Impact on Trade

‘Demand has collapsed, supply chains have collapsed, the transportation system is crippled. Everything is down.’

'Everything is Down'

On Tuesday, I had a great interview with Bill Reinsch, a top expert on trade and trade policy.

Bill holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) and is a senior adviser at Kelley, Drye & Warren LLP.

  • Previously, he served for 15 years as president of the National Foreign Trade Council.
  • He concurrently served as a member of the U.S.-China Economic and Security Review Commission from 2001 to 2016.
  • During the Clinton administration, he served as the under secretary of commerce for export administration during the Clinton administration.

Read more of our interview on the nitty-gritty of supply chains, inventory management, and more in the next issue.

  • And we’ll publish the video of the full interview as soon as it’s edited.

Malcolm Riddell: ‘Bill, what is the impact of the pandemic on the trading system?’

Bill Reinsch: ‘Well, in the short run, it's turned everything upside down.’

  • ‘Demand has collapsed, supply chains have collapsed, the transportation system is crippled. Everything is down.’

‘Unlike an earthquake, or an event that's over right away and you can immediately go to cleanup, this one's going to be uneven.’

  • ‘We didn't all get sick at the same time, and so we're not all going to go well at the same time.’
  • ‘It’s going to be a rolling crisis. It's going to affect different parts of the world in a different pace.'
  • 'That's going to slow supply chain reconstruction down.’

‘The Chinese may all be going back to work this week, but if there's nobody available to buy their products and a transportation system that can't get them here, it doesn't matter.’

  • ‘So supply chain reconstruction really is going to depend on both ends and the middle of the chain being available.’
  • ‘And I think we're in for a long period of uncertainty.’

2. The Slowing of Globalization

‘The tools of globalization - enormous reductions in the cost of transportation and communication - remain. But the marginal utility actually of further advances is declining.

Globalization is Retreating, But the Tools are Still There

Malcolm Riddell: 'How do you think the trading system is going to look broadly after the pandemic?’

Bill Reinsch: ‘There are some people who would say that there was already a retreat from globalization underway.’

‘The tools of globalization - enormous reductions in the cost of transportation and communication - remain.’

  • ‘But the marginal utility actually of further advances is declining – that would be one way to put it.’

‘What's going on in China has made it more difficult - and not just because of COVID-19.’

  • ‘The relationship overall is getting worse at multiple levels, and has been getting worse, really since Xi Jinping came in.’

‘The Chinese government has been pursuing policies that are less comfortable for Western companies.’

  • ‘And they're moving back to more state control, which makes it harder for companies to operate there successfully.’

‘But they're also pursuing non-economic policies.’

  • ‘They're persecuting their minorities, their journalists, their academics, they're pursuing a very aggressive foreign policy in the South China Sea and the East China Sea.’

‘So all of this is contributing, I think, to a slowdown in global economic integration, and the virus contributes to that.’

  • ‘But the tools are still there.’

3. Is a Breakup Coming?

‘One way to address the issue is for the countries that do believe in an open, rules-based system to get together and pursue that system.’

A 'Rules-Based' Trading Bloc?

Malcolm Riddell: ‘There's also been talk of the world breaking up into regional trading blocks. Do you see any indication that that's really going to happen?’

Bill Reinsch: ‘There has been a continuation of efforts to develop regional agreements.'

  • ‘For example, EU-Canada is now going to be implemented. EU-Vietnam is on the way. EU-Mercosur has been sort of on and off, but seems to be moving forward. The RCEP agreement in Asia was reached late last year minus India, but still a significant development.’

‘The missing piece in all of these is the United States.’

  • ‘We're not a party to any of them.’

‘So the biggest danger of regional breakdown is that we end up in kind of an East-West thing, based on a fundamentally different approach to the rules.’

  • ‘The West, meaning Europe, United States, Australia, New Zealand really, but also Japan and Korea, are a part of the Western rules-based economy.’
  • ‘China really doesn't pursue a rules-based system. They don't pursue it domestically, and they don't really pursue it internationally.’
  • ‘That's a fundamental difference.’

‘The Trump administration argues that the WTO is not really equipped to deal with a problem that is as big and as complicated as China.’

  • ‘You can debate whether that's right or not.’

‘But one way to address the issue is for the countries that do believe in an open, rules-based system to get together and pursue that system.’

  • ‘Then basically tell the countries that don't - and China's not the only one but it's the biggest - "If you want access to our markets, you need to adhere to the rules." ’

‘We may be moving in that direction.’

4. The Pandemic's Impact on Supply Chains

‘You’re going to see a decline in “just-in-time” manufacturing and a return to some level of inventory buildup.’

Of Pandemics & Supply Chains

Malcolm Riddell: ‘What is the pandemic’s impact on supply chains?’

Bill Reinsch: ‘Well, short term, basically they're blocked.’

  • ‘And it doesn't make a huge difference in a lot of cases because demand has collapsed,
  • ‘So the fact that people aren't making anything doesn't matter so much because there's nobody around to buy them anyway.’

‘But I'm more concerned about the longterm - longterm, you're going to find people restructuring their supply chains.’

  • ‘It used to be all price quality and delivery, and now you have to build in resilience and redundancy, and managers are going to want to make sure that they've got not only a plan A, but plan B and C that includes, usually, some domestic sources of supply just to make sure.’
  • ‘You’re going to see a decline in “just-in-time” manufacturing and a return to some level of inventory buildup.’

5. More Inventory, More Resiliance, More Cost

‘So efficiency and cost savings, which is what you get with just-in-time and no inventory, create a vulnerability.’

From 'Just-in-Time' to Inventories

Malcolm Riddell: ‘You mentioned keeping increased inventories. How is this going to change the overall way manufacturing looks today?’

Bill Reinsch: ‘Well, as I said, I think it's going to roll out over a period of time. It's not something that's going to be immediate.’

‘From an inventory perspective, it's actually kind of a retreat.’

  • ‘We used to do it that way.’

‘Automobile manufacturers again are a good example.’

  • ‘They used to have mountains of parts, all in Dearborn or wherever their assembly plant was.’
  • ‘And when they needed more, they'd just go out to the store room and get more and bring them into the assembly line.’

‘Now it's all just-in-time, and stuff goes back and forth across the border, from Windsor, Ontario in particular, daily.’

  • ‘Parts are shipped in the morning, they arrive in the afternoon, and they’re incorporated into the car that day.’

‘We saw the dangers of this in 9/11 when the, then custom service closed the border.

  • ‘The result: a multi-mile backup of trucks on both sides of the border trying to get in,
  • ‘And the result was assembly lines stopped.’’

So efficiency and cost savings, which is what you get with just-in-time and no inventory, create a vulnerability.’

  • ‘If you want to eliminate the vulnerability, you go back to storerooms and go back to inventory, but that costs you money. It costs you money in space, it costs you money in theft, storage costs, and so on.’

6. Redundancy & Resiliance

‘What is going to happen is the supply chain managers will get new priorities.’

Building Supply Chain Redundancy & Resilience

Malcolm Riddell: ‘When you say that we're going to see a more redundancy and resilience built-in, how does that actually work?’

  • ‘How do you build in redundancy and resilience?’’

Bill Reinsch: ‘Well, not easily.’ If you're going to do something as simple as change a supplier of a critical component you have to deal with, you have to identify other sources, you have to test them, you have to certify them, you have to have some experience with them.’

  • ‘We did a study a year ago on how supply chains are affected by changes in rules of origin, and we looked at NAFTA automobile rules as an example, and we had one automobile company tell us it takes them seven years to certify a new supplier.’

‘What is going to happen is the supply chain managers will get new priorities. And they're going to be:’

  • "Get me backup options."
  • “I want to have two or three backups for each part and component, and I want those backups to be closer to the United States than Asia.”
  • “I would like them to be onshore. I would like them to be in Mexico or Canada.”
  • “I would like them to be in a reliable place, preferably an ally and not somebody that might cut me off for political reasons."

Malcolm Riddell: 'Okay, I'm a manufacturer, and I have built-in redundancy. How does that work?’

Bill Reinsch: ‘What companies do now is have existing multiple sources for the same part.’

‘So, for example, if you're an automobile manufacturer, and you're assembling your vehicle in Mexico, all the vehicles you're assembling are going to get a transmission.’

  • ‘Your transmission might come from any one of two or three different countries. And those manufacturers all have specifications. They're all producing now. They're all selling now.’

‘The theory is that if even if one factory blows up, you can go to the others and they can ramp up production.’

  • ‘Now that's not foolproof, but you have an existing relationship with all of them and that's how you balance it.’

‘This is not an optimal outcome from an economic standpoint. This is going to be a series of sub-optimal outcomes.’

  • ‘Manufacturers are going to have to pay more.’
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