Supply chain disruptions during the pandemic accelerated logistical trends

From national lockdowns to closed airspace and borders, Covid-19 resulted in unprecedented disruption to the mechanics of most economies, regardless of their size or stage of development. In particular, such barriers placed a major strain on global supply chains. This was felt most keenly in the case of essential linkages for food and medicine, and the global distribution of such products became a key focus of response efforts during the early stages of the pandemic.

Medicine & Food

In the first months of 2020 China – the world’s largest producer of active pharmaceutical ingredients – severely curtailed industrial production to limit the spread of Covid-19, causing a shock along the entire medicine value chain. Although India is a global leader in the production of generics, 70% of its raw materials come from China. Of these, one-third come from Hubei, where the outbreak originated.

Response to the disruption varied by country: some repurposed civilian aircraft to bring in pharmaceutical supplies, while others turned to technology to minimise the impact. Dubai Customs, for instance,  introduced new practices, technologies and equipment to speed up the clearance of medical supplies into the emirate. In March 2020 Dubai International Airport reported a 49.4% year-on-year increase in the volume of pharmaceutical cargo handled.

Looking beyond immediate responses, the pandemic could result in a significant realignment of supply chains away from China and India, and lead to long-term benefits for the local industries of other emerging markets – particularly those with large domestic consumer bases relative to others in their immediate region, such as Egypt, Indonesia, Saudi Arabia and Mexico.

The global network of food supply chains was also heavily affected by the pandemic. As with pharmaceuticals, a combination of complex value chains and production processes made management challenging. Recognising the potentially serious impact of the breakdown of such networks, in April 2020 the UN Food and Agriculture Organisation, the International Fund for Agricultural Development, the World Bank and the UN World Food Programme issued a joint statement on the impact of Covid-19 for food security and nutrition: “Agriculture and its food-related logistic services should be considered as essential. Increased efforts are needed to ensure that food value chains function well and promote the production and availability of diversified, safe and nutritious food for all.”

Many governments reacted with new efforts to facilitate the movement of food. For example, that same month all members of the GCC agreed to establish a food supply network to meet needs in the region. Moreover, in Sharjah reefer container imports – primarily of foodstuffs – grew by 13.5% during the crisis, according to Gulftainer. Going forwards, this trend could result in countries adding more value at home to offer a greater variety of products directed at local and regional markets, instead of exporting further afield.

While the initial shocks of the pandemic resulted in short-term solutions and rapid realignments, it is becoming increasingly clear that the crisis will also give rise to broader, long-term structural shifts. Among these is a move away from an over-reliance on China as a production site and supplier of raw materials.

New Production Bases

Even before the onset of Covid-19, rising Chinese labour costs and increased tariffs related to the US-China trade dispute in 2018 and 2019 were leading some companies to move industrial operations to other countries, while maintaining production bases in China – a strategy referred to as China +1. The pandemic has served to accelerate this trend, with the EU, Japan and the US all making public statements about the possible relocation of companies with China-based factories. Many international firms were looking to diversify their supply chains to reduce future risks by shifting to countries in the Association of South-East Asian Nations (ASEAN) like Vietnam, Thailand and Malaysia. Other manufacturers began to bring their production capacity closer to home, a trend known as nearshoring.

In addition to increasing resilience to supply chain disruptions, nearshoring offers a range of potential advantages over traditional offshoring, including fewer cultural, linguistic and time-zone differences, greater regulatory alignment and lower risk of intellectual property theft. Due to its proximity to the US, Latin America has seen some benefits from this trend, with two countries in the region standing out as affordable nearshoring options: Mexico and Colombia. Mexico, in particular, has several characteristics that make it an advantageous nearshoring location, including many cities with the necessary infrastructure, a developed labour pool and a shared border with the US. The US-Mexico-Canada Agreement that entered into force in July 2020 further cemented this potential.

Asian countries are likewise well placed to benefit. Prior to the pandemic, Vietnam had already absorbed much of the manufacturing capacity that China had lost. The former has also signed a raft of international trade deals and invested heavily in industrial infrastructure in recent years. In Indonesia, meanwhile, the Omnibus Bill on Job Creation became law in October 2020. The legislation allows for increased corporate flexibility in hiring practices and opens the door to labour-intensive industry. This stands the country in good stead to attract regional and global multinationals seeking to apply the China +1 strategy.

On a similar note, manufacturing hubs in North Africa are competitive nearshoring destinations for European industrial firms. With well-established trade links to European markets, Morocco is a particularly attractive proposition. The country has been recognised for its response to the pandemic, which has seen it leverage its industrial capacity to produce medical supplies.

AfCFTA

Beyond accelerating the trend of nearshoring, 2020 saw significant activity on regional trade deals. In Africa the pandemic has sped up the adoption of various measures associated with the African Continental Free Trade Area (AfCFTA). Initially agreed upon in March 2018 and subsequently signed by 54 of the 55 African Union member countries, the deal aims to create a single market across the continent. The AfCFTA requires members to remove 90% of tariffs on goods, facilitate the movement of capital and people, and take steps to create an Africa-wide Customs union to substantially boost regional trade. When fully operational by 2030, the trade bloc is expected to cover a market of 1.2bn people with a total GDP of $2.5trn.

In late September 2020 Wamkele Mene, the secretary-general of the AfCFTA Secretariat, told a business conference in South Africa that negotiations over e-commerce and digital trade would be fast-tracked, given that the Covid-19 pandemic heightened the need for an adequate legal and governance framework. Talks on these topics – initially planned for phase three – will now take place in 2021 as part of phase two, alongside competition policy, intellectual property rights and investment protocols. Per international media, the 54 signatories are also moving ahead with talks on the taxation of e-commerce platforms, which have seen substantial growth during the pandemic.

RCEP

In Asia, meanwhile, the Regional Comprehensive Economic Partnership (RCEP) was finally signed in November 2020 on the sidelines of the annual ASEAN summit. Marking a significant regional milestone, it is hoped that the deal will help its signatories recover from the economic fallout of the pandemic by boosting trade linkages, and making it easier for companies to establish a production base in an ASEAN member state for exporting to other members of the bloc.

The deal’s signatories – the 10 ASEAN members plus China, Australia, Japan, New Zealand and South Korea – together constitute 30% of the world’s population and just under 30% of its GDP. The 510-page agreement should provide a substantial fillip to regional trade, lower tariffs, standardise Customs procedures and improve regulatory harmony among its members. The 20 chapters cover topics such as digital procedures, financial services and intellectual property rules. “We acknowledge that the RCEP agreement is critical for our region’s response to the Covid-19 pandemic, and will play an important role in building the region’s resilience through an inclusive and sustainable post-pandemic economic recovery process,” the Joint Leaders’ Statement noted on the occasion of the signing.

As the deal had been under negotiation for some years, it is widely thought that the pandemic accelerated the signing of the RCEP and convinced sceptics of the benefits associated with greater regional integration. The pandemic has indeed underlined how multilateralism and regionalisation can help to mitigate global shocks. By developing more efficient and agile supply chains with neighbours, countries have reduced the risks that stem from an over-reliance on trade with the world’s largest economies. Going forwards, lessons learned from the health crisis should sustain efforts to boost supply chain resiliency, diversify trade relations and foster wider cooperation among trading partners.