Expert briefing: Keep trade flowing while borders are closing
During the Covid-19 pandemic, the supply chains that move medical goods and keep the world fed are under duress. But the crisis underscores the need to support trade to not only move medical supplies but also to bolster economies, says Steven Beck, ADB’s head of trade finance.
The global Covid-19 pandemic is a reminder that our world is an intimately connected place. Global issues need global solutions and clear thinking.
Physical borders can be closed to those who might pass on the virus, but the crisis underlines the need to streamline other important connections, such as trade. How can we maintain trade flows at a time when everyone’s attention seems to be focused on tightening borders? How can we keep goods moving when the financial systems that companies rely on are under stress?
Apart from the everyday importance of global trade, countries need easy access to medicines, medical equipment and other goods vital to the health of their populations. Few countries make everything they need themselves, which means the flow of trade in those goods needs to be through gates that are opened wider, not shut.
A recent study found that out of 164 members of the World Trade Organization, only 50 do not tax imported medical devices. Seventy-nine governments went into the crisis taxing imported soap at rates of 15% or more, noted the study by Professor Simon J. Evenett of the Swiss Institute of International Economics and Department of Economics.
“A tax on soap is a tax on hygiene and hastens the spread of coronavirus,” the study states.
Governments should take action to eliminate trade barriers on goods and component parts for goods critical to fighting COVID-19.
Global economies and financial systems, plus intimately connected supply chains, are already under pressure. Factories are closed, movement has been restricted in many countries and worries are growing that the health crisis could spawn a repeat of the global financial crisis of 2008-2009 or worse.
The outbreak will have a significant impact on developing Asian economies through numerous channels, including sharp declines in domestic demand, lower tourism and business travel, trade and production linkages, supply disruptions, and health effects, according to a recent ADB study.
The magnitude of the economic losses will depend on how the outbreak evolves, which at this point is, of course, highly uncertain.
Still, this isn’t a repeat of the global financial crisis. That event resulted from burst financial bubbles coupled with mounting bad debts and undercapitalization.
This crisis is rooted in a short-term supply/demand shock, or at least it could be limited to that if well managed. We need to watch closely as it reverberates through the real and financial supply chains. Some adjustments are called for and some are already being made.
To help the financial and real sectors ride out a short-term shock without spinning off into a medium and longer term economic and financial crisis, the banking sector should consider a 3-month grace period for obligations, between banks themselves and between banks and their commercial and retail clients. Of course, the same would apply to trade loans.
And governments should consider a guaranteed minimum income for 12 months. That would help people ride this out and dampen a potentially devastating economic impact from extremely low demand, with consumers stuck at home without income.
A pandemic is when vibrant cross-border trade is most needed.
It has been inspiring to see people rising to the challenge they now face. Compared with the financial crisis 12 years ago, the amount of coordination and oversight in trade finance today means problems can be spotted and attended to much more quickly.
ADB is working to support companies manufacturing and distributing medicines and other items needed to combat the virus. This support, working in partnership with commercial banks, will provide companies in Asia and the Pacific with additional working capital to meet expansion and other requirements.
Our support includes $200 million through our Supply Chain Finance Program to help companies in the supply chain that are critical to fighting the virus to ramp up production of items such as test kits, N95 masks, and ventilators.
Given that a single pool of supply chain finance is typically used for a subsequent delivery over a period of 120–180 days, this facility could support more than $400 million of financing over the next 12 months. Fifty-fifty risk sharing from partner commercial banks could boost support under the facility to $800 million over the same period.
We are also working with our partners to map the entire supply chain for these types of goods, including the companies that are involved at each and every component phase. Once we have some of the products mapped, we intend to release information to the public so that banks and investors can support companies along the entire supply chain.
ADB’s Trade Finance Program is soon to announce a major increase in its financial resources, which will boost our fire-power to support banks’ ability to ensure sufficient trade finance is available to keep trade flowing. It will act as a powerful crisis response vehicle, as it did during the financial crisis 10 years ago, because of its many agreements with hundreds of banks in dozens of countries, which is a great channel to inject urgently-needed support. We plan to expand the mandate of the program to include support for domestic transactions in times of emergency.
This isn’t the time to panic. Our actions now will make the difference between a short, sharp shock and an extended downturn.
