Global Trade, Digitalization and Post-Pandemic Recovery

The global spread of the Coronavirus not only disrupted international value chains. It has also accelerated the digitalization process in many countries around the globe.

According to the OECD (Organization for Economic Co-operation and Development), digital trade has an essential role in helping to mitigate some of the consequences of Covid-19. The benefits of digital trade were already apparent before the pandemic, but the current crisis has accelerated the digital transformation. “These developments underscore the need for governments to further enable digital trade to mitigate the economic slowdown and support a more rapid recovery,” the brief on “Leveraging Digital Trade to Fight the Consequences of Covid-19” underlined in July last year.

The physical distancing measures to tackle the spread of the virus had resulted in a considerable reduction in workplace mobility – declining by 55 percent relative to the period January-February 2020 – and an increase in mobility around residential areas, the OECD gave account. “For many people, this has resulted in job losses, with wider economic and social consequences. However, others have been able to continue working remotely.” The ability to work from home not only depends on the extent to which job functions can be performed remotely, but also “on the capacity to leverage digital technologies, the degree of adoption, and the stock of skills needed to thrive in a digital economy”. Working remotely also would require access to information and communications technology (ICT) goods and reliable digital networks – an area where trade could play an important role.

Furthermore, the pandemic had an impact on how and what people consume. “With many bricks and mortar businesses experiencing temporary closures, consumers have turned to online solutions to purchase the goods and services they need. The type of goods and services purchased has also changed,” the OECD pointed out. “The demand for medical and ICT goods, many of which are transported across different borders and arrive directly at home in parcels, has grown. At the same time, the demand for services, including many that are digitally deliverable such as streaming media or teleconferencing services, has also increased.”

The intergovernmental economic organization, which has 37 member countries representing– along with key partners – about 80 percent of world trade and investment, is convinced that international trade, and in particular digital trade and related policies, “can play an active and important role in supporting economic activity in times of confinement and in launching the wider economic recovery”.

Global value chains
As is well known, the worldwide lockdown due to the pandemic has disrupted the global value chains (GVCs). Moreover, it has resulted in a change to industrial production networks, Xiaolan Fu, University of Oxford (Technology and Management for Development Centre), wrote in the official UNCTAD document “Digital transformation of global value chains and sustainable post-pandemic recovery”. Together with the trend before the Covid-19 crisis, “especially driven by the Fourth Industrial Revolution and trade protection, the pandemic is set to reinforce the regionalization, localization and diversification trends of GVCs, and business leaders are now thinking about changing the way business is organized,” he underlined. According to the information provided by WTO and UNCTAD, it was estimated that the cost of world trade could increase as much as one-third and that of global foreign direct investment (FDI) by 30 percent to 40 percent. In early March last year, when the pandemic had not yet expanded globally, UNCTAD reported that the coronavirus had already cost GVCs 50 billion US-Dollar, Xiaolan Fu described the situation. “Such a deep drop in global trade and FDI has far-reaching implications for economies and societies.”

Unlocking the Potential of Circular Economy
Digitization concerning the circular economy is not new. In 2018, the knowledge and innovation community (KIC) – EIT Climate-KIC – already published the study “Digitalization – unlocking the potential of the circular economy”.

As pointed out by the community, supported by the European Institute of Innovation and Technology (EIT), digitalization is progressing rapidly. “For the first time, we have the opportunity to scale up circular economy business models swiftly and widely to put us on course for a more sustainable future.” With sustainability becoming a key part of the global agenda, the circular economy would be a crucial tool for decoupling economic growth from further unsustainable resource use and increased CO2 emissions.

In the survey, the researchers interviewed 14 EIT Climate-KIC start-ups and innovation projects to learn more about the benefits of adopting circularity. Moreover, the aim was to understand the challenges that hinder its uptake better.

The study identifies four key drivers in the digital circular space: technology, market structure, policy and skills, and knowledge – evidenced by the real-world experience of the partners. “Their insights reveal tremendous opportunities, but also expose the systemic barriers, which need to be addressed before we can fully benefit from the potential of innovative circular business models,” the press release said.

www.climate-kic.org/wp-content/uploads/2018/08/ClimateKICWhitepaperFinalDigital_compressed.pdf

In 2020, the pandemic hit the global value chains in three ways. Firstly, it had disrupted transportation systems and almost cut off access to the logistics of supply chains in some cases. “In the past several decades, multinational enterprises (MNEs) have sliced their production processes into fine segments and relocated these small parts of the process to different locations around the world in order to maximize their profits,” he stated. Intra-industry trade of spare parts and components within global value chains would account for more than 60 percent of global trade. “In such a production and trade model, stable and on-time logistics is very important to the supply chain. When any part of the chain is blocked, all the subsequent production activity is affected.” For example, in Japan, car manufacturing was hampered because some outsourced spare parts could not be delivered on time, and no stock had been maintained due to the lean production system. According to the author, in the first half of last year, 1,675 sailings have been canceled, representing 13 to 17 percent of the proforma sailings for the major shipping alliances. As a result, supply chains had been disrupted. Furthermore, also measures like the closure of workplaces and public transportation put significant constraints on labor inputs into production.

Additionally, there was a sharp fall in demand. “It was not significant in January and February when China was the epicenter,” the author wrote. However, from March 2020, as the virus spread globally, cancellations of orders were widely reported. Another result was a decline in commodity prices (20 percent). The total amount of trade was predicted to fall by 50 percent, he referred to information from UNCTAD.

According to Xiaolan Fu, the pandemic has had different impacts on different sectors and countries. The magnitude of the effects was depending on four factors: the contact intensity of the industry, the degree of fragmentation of the value chains, the extent of digitization in companies and countries as well as the distancing measures adopted by a country.

Automation and digitization support economic recovery
For the post-covid economic recovery, automation and digitization are likely to be the star features, Xiaolan Fu is convinced. These two sectors had already played an essential role in the global fight against the virus. Several novel services have emerged during the pandemic, he stated. These would include remote tracking and detection (including infections), robotic cleaning in hospitals, and the delivery of medicine, live materials and notices by drones. “Tele-health, e-business, online education, online entertainment, and online conference and office systems have also grown rapidly and are contributing to the global response to Covid-19 and thus to society and the economy.” Due to increasing demand, some sectors – and even “new” domains such as the online provision of various services – have grown rapidly during the pandemic. “Some countries will fill the gap of relocated GVCs by investing heavily in star future sectors in the digital economy, innovation in digital applications in traditional industries, and the development of digital infrastructure,” he argued. “These sectors will be new engines of economic growth.”

Furthermore, lessons from the pandemic and the trade war “will push business to build more resilient production systems and supply chains”. Digital transformation of industries and production systems would be a popular choice for companies in both the manufacturing and services industries, he predicted. Engineers could manage the production process by remote control. That would make the production process less contact-intensive, hence less affected by social distancing and restrictions on human mobility. “Therefore, digital transformation – including smart manufacturing, smart services, e-government and digitized green transformation supported by 5G, Big Data, cloud technology, the Internet of Things and blockchain technology – will transform or even revolutionize manufacturing and the provision of private and public services.”

(Published in GLOBAL RECYCLING Magazine 1/2021, Page 4, Photo: Gerd Altmann / pixabay.com)

2,322