ECA

Will COVID-19 have lasting effects in Australia’s international trade?

01.05.2020 Tamara Oyarce

Short answer - yes.
Covid-19 is causing widespread disruptions to shipping and air freight, and wreaking havoc on global supply chains across Europe, America and Asia which are critical to the supply of goods. Toilet paper and PPE shortages, profiteering from hand sanitizer and empty shelves in grocery stores were common around the world right from the start of this pandemic.

 
For Australia, the impact was felt initially due to slowing demand from China. This had a strong impact on sectors such as agriculture, forestry and fisheries. However the subsequent global spread of the virus is now impacting global markets and supply chains, making the short-term outlook for Australian trade somewhat uncertain.
Experts, businesses, Government agencies and industry associations all agree that the crisis caused by Covid-19 will have far-reaching and long-lasting effects on trade. Australian industries and governments are still battling to prepare in case more supply chains come under threat in the global economic fallout from Covid-19. This has led the Australian government to establish initiatives like the International Freight Assistance Mechanism (IFAM)to assist exporters from certain sectors to re-establish global supply chains and keep goods moving across borders to some of our main trading partners while we all adjust to this ‘new normal’.

The fall out of global supply chains has made visible the inherent weaknesses of the system, exposed a lack of resilience and brought into question the fundamentals of global supply chains.

As we slowly re-emerge from the dark and light can be seen at the end of the tunnel, there are two critical issues to be considered by Australian businesses involved in trade: rethinking the geographic diversity of supply chains and revisiting the ‘just in time’ approach to sourcing.

Geographic diversity in supply chains

The current crisis will, without doubt, lead companies to rethink their global supply chains and seek more geographical diversity. This is not only due to Covid-19 but other factors also such as climate change, geopolitics, and other elements that could lead to a shock for the system.

Already a trend is emerging, Australian companies are reducing suppliers and moving away from locations like China, where the increase in labour and other costs make it less competitive. They have begun to explore other countries in the Asia-Pacific region. Regardless, rebuilding a supply chain is not an easy task and it involves significant costs that many Australian exporters are not in a position to undertake.

Meanwhile, as different countries battle the pandemic, global supply chains will continue to be unreliable. This means organisations should start to consider the global versus local mix of their supply chains, and look to diversify their access and risk moving forward.

How just in time, do you want your ‘just in time’ to be?

Delays, unreliability and shortages will undoubtedly lead companies to rethink how much they need in the warehouse. Putting things on pallets and having immediate delivery is fantastic, until things stop being delivered and they don’t arrive for a week or longer. Maybe most goods have been delivered but if THAT piece, widget or component doesn’t arrive, production might be stopped altogether. Companies may realise they have become too lean and having a bit of ‘fat’ for the bad times might actually be a good idea (maybe that’s what I tell myself when I sit down for dinner these days).

In practical terms, this means companies may need to keep larger inventories and absorb the associated costs. Promoting a greater degree of domestic or regional self-sufficiency is another option up for consideration.

One thing is clear: when the crisis eases, countries will want to rebuild with a revitalised interest in self-sufficiency — especially in critical areas such as medical equipment, essential goods and technology — reducing the risk of reliance on imports and global supply chains in an emergency. The good news is that this could open fresh opportunities for local manufacturers and transport logistics operators to be key partners in the post-pandemic era of trade. This will open new avenues not only to survive, but to thrive in the ‘new’ world of trade.

 
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