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Global Business

Globalisation: Covid-19 and trade

26 Mar 2020

trade

The outbreak of the Coronavirus has had a profound impact on the global economy since the first cases were reported to the World Health Organisation three months ago. More than 50 central banks have slashed interest rates. Over 100 countries have imposed travel restrictions. The OECD has downgraded global growth forecasts from 2.9% to 2.4% - and has indicated it may go even further in the months ahead.

It seems astonishing that a situation which saw the first cluster of cases linked to a food market in Wuhan, China could unfold so quickly around the world with unprecedented and wide-ranging consequences. Yet, the rapid spread of COVID-19 is demonstrative of just how globalized the world has become.

Take ease of mobility, for example. Three days after Chinese authorities confirmed that human-to-human transmission was possible, Wuhan’s population fell from 14 million to ten million – presumably as inhabitants scrambled to evacuate the area. On any given day, an estimated 500,000 people travel by train around the Hubei province and a further 200,000 take flights from mainland China to other countries. The ability to travel so easily, quickly and cheaply within and outside international borders has become part and parcel of the modern global economy. 

Globalisation has also had a significant impact on international supply chains and the way in which businesses choose to trade. One of the major shifts in the world economy in recent years has been advancements in technologies and communications. These factors have contributed to a rise in global supply chains. Businesses have sought to take advantage of these - for example, by choosing one more competitive supplier over another in order to maximize revenue, or by conducting one stage of the manufacturing process in one country before sending it for final assembly in another.

China’s role at the centre of the pandemic is significant, not least because the country is at the heart of global value chains. China is the world’s biggest exporter of intermediate goods – that is, components that are used in the production of finished goods – and is responsible for 35% of such inputs worldwide. The Hubei province alone constitutes about 10% of China’s car manufacturing sector. A recent Financial Times article which looks into the ramifications of the virus quotes a former Tesla executive saying “It takes 2,500 parts to build a car, but only one not to”. Improvements in technology mean supply chains are increasingly complex, in every way from ‘just-in-time’ processes to product sophistication.

Why is globalisation and China’s prominent role in global value chains relevant to UK business leaders? Policy Voice surveys suggest IoD members are a particularly internationally-engaged cohort of the UK business population – almost two-thirds trade internationally, compared to the national average which hovers at just under 10%. Moreover, around one-in-five members report that their business is engaged in trade with China. It’s no surprise, then, that in a recent survey half of members said the outbreak poses a moderate, high or severe threat to their company’s supply chain.

What are UK directors’ duties at this time? According to the UK Corporate Governance Code, company directors have a responsibility to assess current and emerging risks posed to their organisation. Business leaders must demonstrate to their boards that they are taking heed of these risks and taking appropriate steps to mitigate them. We would encourage company directors to evaluate their supply chains and identify any exposure points that are particularly sensitive to their organisation. Does your product contain any intermediate goods sourced from China? Is it in a supply chain with those that are? Are there any contingency plans you can draw up to cushion potential disruption? Understanding your company’s place within the international trade ecosystem is crucial.

We don’t know yet know how long-term the challenges raised by COVID-19 will last. What is clear, however, is that its implications for the global economy are severe now – and globalisation has played a part. 

How IoD can help

These are undoubtedly unprecedented times for UK business leaders, but the IoD is here to help. Please refer to our new IoD Coronavirus Support Hub for the latest guidance and information on COVID-19, including press release, factsheets and useful links. Get in touch to let us know what steps you think Government should take to support company directors. We are in direct contact with the heart of Government, and want to make your voice heard.

Useful link

Governance in crisis: responding to coronavirus

The corporate governance of coronavirus: how boards can respond 


claudia catelin

Claudia Catelin, EU & Trade Policy Advisor

Claudia joined the IoD in August 2017 to work on EU and trade policy. Previously, she worked at the American Chamber of Commerce in Belgium and in the Board of Directors at the European Bank for Reconstruction and Development.

Claudia also formerly worked for Newsfirst as French news editor. Claudia has Australian and British citizenship and a Master of Science in European Studies from the London School of Economics. She is fluent in French and Spanish.

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