Covid-19 may accelerate shift in global trade relations: Moody's

Moody's Investors Service on Tuesday said the coronavirus pandemic is likely to accelerate fundamental shifts in trade relationships and global supply chains.

According to Moody's the trend toward a more fragmented and protectionist global economy will likely accelerate as a result of the pandemic, with restrictions on trade, investment and technology transfers.

"The pandemic will likely result in some fundamental shifts in trade relationships and supply chains globally, further hardening attitudes against globalization," it said and noted that the supply chain shifts will occur in a multi-year process, particularly as China will retain a number of advantages over other economies.

Some Asian markets excluding China will benefit from the supply chain shifts, particularly as companies look to diversify their sources of supply, it further noted.

"Asian countries ex-China will stand to benefit from diversification away from China provided that these countries have sound economic fundamentals, reliable infrastructure, sufficient human capital stock, and low geopolitical and supply security risk," Moody's said in a report.

However, localization of production or reshoring that moves productive capacity out of the region to the US or the European Union will have negative effects for Asian producers, notably those in strategic sectors.

Moody's said as the global trade system becomes more regionally focused, each major region – Asia, Europe and the US – will likely have its own suppliers for strategically important products.

As these trends accelerate, some localization and reshoring of supply chains outside of Asia to Europe and the US will be likely, it said.

"Developing countries in Asia such as Indonesia, Cambodia and India stand to benefit from their preferential access to the EU and US markets for certain goods under the 'Generalized System of Preferences' and the 'Everything but Arms' initiative to support low-and middle-income economies," Moody's added.

According to Moody's, in a post-Covid world, ensuring supply security through enhanced supply chain robustness will become a key focus of governments and companies.

Supply chain robustness refers to the ability to maintain operations during a crisis, which can be achieved both by increasing inventories and increasing supplier diversification.

As this occurs, the global trade system will become more fragmented, leading to less efficient, less just-in-time supply chains at the global level but an increase in regionally focused production, it said.