When the COVID-19 outbreak surfaced, global trade was already being disrupted more severely than at any other point in our lifetimes. In past few years, we’ve seen nationalism and protectionist policies spread across the globe, tariffs used for negotiation and retaliation like never before, and multilateral cooperation giving way to unilateral free trade deals. Ongoing disputes, led by the US and China, were opening a widening east/west split in the world trade order.
While I can’t pretend to know how these trends will play out in as recovery sets in, I expect current trends are likely to continue. At the same time, responses to COVID-19 may prompt changes to business and operating models that could influence how business and trade is conducted for years to come.
Today’s top challenges
Current travel restrictions, social distancing and other COVID-19 measures are depressing global trade, but the impact is less than you might expect. While cross-border shipments are down, goods continue to flow. Customs authorities and others involved in customs declaration processes in North America, Europe and much of Asia are processing entries at close to normal cycle times.
From what I see among the international businesses I work with in the US firm, here are some of the biggest challenges I believe are affecting global trade right now.
- Many jurisdictions have restricted exports on pharmaceuticals, personal protective equipment, and other critical medical products. Some jurisdictions have eliminated tariffs on these goods to accelerate imports, while others may confiscate them at the border for government use.
- Transportation delays are creating logistical challenges, affecting factory capacity and leading to transportation delays and stoppages, and lack of warehousing space.
- Quarantine orders and financial concerns are reducing consumer demand for many non-essential goods.
- Business strategies are being undermined as rising prices and declining profits affect transfer pricing policies.
In this environment, all companies involved in cross-border trade should give top priority to deepening their understanding of their supply chain, improving its flexibility, and developing plans that cover all contingencies.
It’s also a good time for companies to check they are taking advantage of the many established methods of managing their tariff costs. The most common tariff management tactics allow companies to reduce, defer, recover or even often simply avoid tariffs. For example, if declining profits cause downward transfer pricing adjustments in some locations, bear in mind that some jurisdictions offer tariff refunds to reflect the adjusted value.
Outlook for the long term
As the world moves into recovery, I expect many of the trends underway in previous years will accelerate:
- Protectionist trade policies will probably continue to increase, with more licensing or restrictions imposed on medical products and goods, and less priority given to free trade negotiations.
- Companies are likely to continue shifting to domestic production for critical goods, and an increasing number of jurisdictions may adopt requirements like the “Buy America” order being considered in the US.
- Supply chain risk management may draw more focus as companies seek to broaden their supplier base, reduce their reliance on Chinese supplies, and devote more attention to supply chain visibility and contingency planning to address supply chain and transport risk.
- The shift in retail toward digital models will accelerate, increasing priority on warehousing flexibility.
I also expect changing international corporate income tax policies will significantly influence global trade after the recovery. In the near term, tax issues may arise due to collapsing revenues and losses in some industries and profit windfalls in a few others.
Looking to the medium term, the acceleration of trends underway before COVID-19 that change the location of value drivers, such as remote and online sales, digital delivery models, virtual teams and shorter supply chains, will drive associated trends in tax.
Given the direction of travel before the pandemic and the disruption that has come in its wake, international companies engaged in global trade may need to rethink all aspects of their supply chain and tax planning structures. This includes where to locate manufacturing operations, where to hold their intellectual property, and where to put people and activities.
Above all, companies should look ahead to how they can maximize their ability to seize the tremendous opportunities that we widely expect to arise in the post-COVID-19 world.