AAM Advisory: Why supply chain pain will be temporary
The coronavirus crisis has had a dramatic impact on global supply chains. Never before in the history of post-war capitalism have the cogs of the global economy halted, and government mandated lockdowns prevented shops from opening, manufacturers from producing and services from serving. This, in turn, is bad news for investors.
But there are two big reasons that suggest the Covid-19 induced supply chain disruption will be a temporary phenomenon, and that the long-term looks bright for supply chains and export markets.
First, the temporary supply chain disruption should not become a long-term barrier to economic activity and growth. Looking at the elements that constitute supply: capital, labour and the efficiency by which these factors can be combined, it becomes clear why.
Unlike wars or natural disasters, the economic shutdown caused by the pandemic has not resulted in significant damage to capital stock. It’s true that some sectors will fare much worse than others in this regard, none more so than the airline sector which will have planes sitting idle on the tarmac, but the capital stock has been made temporarily redundant rather than being destroyed altogether. Productive capital stock, the engine room of the economy, is relatively undisturbed.
With human capital too, any crisis runs the risk that unemployment becomes rampant and the quality of work suffers as skills degrade and are lost. In the case of the current pandemic, however, there has only been a limited reduction in the size of the workforce and unemployment, so far, appears to be temporary. As a consequence, economies should avoid a wholesale loss of skills as workers lose their jobs and seek employment in different industries.
Looking at the efficiency by which both labour and capital are combined to produce goods and services, otherwise known as productivity, it is clear that this could suffer as a result of the pandemic. Clearly, the requirement for social distancing will make supply chains less efficient, but there is also now an incentive for firms to shorten and localise their supply chains by reducing the geographic distance between stages of the chain and reducing the number of stages in the production process.
Second, looking long-term, businesses and supply chains located in Asia will benefit enormously from the Regional Comprehensive Economic Partnership (RCEP) agreement once it is ratified by member states. Signed at the AEAN Summit on 15 November, the free-trade agreement spans the Asia-Pacific region incorporating the ten AEAN states as well as Australia, China, Japan, New Zealand and South Korea.
The RCEP agreement is the world’s largest free trade agreement, comprising 30% of global GDP and around a third of the world’s population. Crucially, the agreement will ensure tariff elimination of at least 92% of goods traded amongst signatories, with additional preferential market access for Singapore’s exports. The agreement also covers the service sector, and at least 65% of countries’ services sectors will be fully open, including financial services.
For investors in the region, this means they should be able to benefit from the enhanced trade opportunities, as well as the liberalization of investment markets which would lead to new investment opportunities emerging in ecommerce, Asian small and medium enterprises and Asian consumer trends.
In summary, the world is experiencing considerable disruption to our normal way of life and this looks set to continue for some time to come. But while the disruption is temporary, supply chains should not just bounce-back, but bounce-back stronger. Permanent supply chain disruption can be halted, output can return to a similar path as before the crisis and, the world’s largest trade agreement, combined with the roll-out of an effective vaccine should supply a shot in the arm for supply chains and businesses located in Asia.