by Pablo Arroyo | August 3, 2021
The COVID-19 pandemic has brought about tremendous challenges. Companies in the United States were not isolated from the effects of the pandemic. The hardships faced by business owners here were replicated around the globe. Specifically, firms dependent on global trade for acquiring components, inventory, or selling their products faced several hurdles they had to overcome to keep their operations going.
Demand for many US products decreased, and several manufacturing operations worldwide came to a halt in light of lockdowns and restrictions. These events forced many global companies to rethink their operations while they tried to answer the following question: How can businesses dependent on trade deal more effectively and prepare for this or any other future challenges?
Today’s world is so interconnected and interdependent that no one is immune. All businesses are affected from disruptions in world trade, to a larger or lesser degree. But those companies that sell a tangible product whose raw materials or components are sourced from overseas, need to have a strategy to deal with these disruptions.
Even before the pandemic, tariffs imposed on imports from several countries had a direct effect on the manufacturing and importation of products. This brought about a new discussion regarding global supply chains, the importance of trade agreements and the increased roles of trade in services.
Global Supply Chains Are Key
Global supply chains are a key topic when talking about trade. Basically, it is a network that spans across the globe for sourcing and supplying goods and services. More importantly, the viability and resiliency of those global supply chains becomes more relevant, and it becomes imperative to optimize global supply chains.
The quest for efficiency and leanness has reduced the numbers of suppliers for companies, however it now becomes evident that we should diversify the supply chain and expand the number of suppliers available. At the same time, customer expectations are increasingly more demanding, such as faster delivery and customization options. Thus, focusing solely on cost reduction is not the best strategy. During a webinar of the Tampa Bay Organization of Women in International Trade (OWIT, 6/18/2020), Donna Davis from the USF Center for Supply Chain Management & Sustainability, noted that we must strive for an efficiency-service balance. She added that, “It is not just a case of widespread and more frequent disruptive events but each event is having a more unpredictable impact on increasingly complex supply networks.”
As we establish strategies to improve our supply chains, we should aim at reducing risks, exploring options for adapting products and embracing technological solutions.
Importance of Trade Agreements
Disruptions to trade in recent years should lead us to re-evaluate the importance of free trade agreements (FTA). A FTA shows openness of a market toward American goods and services. It means that there are none or minimal trade barriers such as tariffs and quotas. It makes US products more competitive as the reduction of trade barriers and the creation of a more stable and transparent trading and investment environment makes it easier and cheaper for U.S. companies to export their products and services to trading partners markets.
The United States has FTAs in force with 20 countries. These are Australia, Bahrain, Canada, Chile, Colombia, Israel, Jordan, Korea, Morocco, Mexico, Oman, Panama, Peru, Singapore, Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. When enacting trade agreements, the focus can be on multilateral or bilateral agreements. According to Husch Blackwell, potential trade agreements and those under negotiation in 2021 include:
- Trans-Pacific Partnership (TPP) – signed by 11 countries; Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam in 2018. Potentially, the U.S. could try to renegotiate and join.
- Transatlantic Trade and Investment Partnership (TTIP) – negotiations planned with European Union countries
- U.K. – bilateral U.S. & UK negotiations underway
- Japan – market access for certain agriculture and industrial goods reached
- Kenya – talks began in July 2020
Trade in Services
The increased role of trade in services is more relevant than ever. Traditionally, the concept of trade alludes to tangible products that are manufactured in one location and exported elsewhere. However, an increasingly growing number of exports relates to services such as education, financial, medical, engineering, and financial and insurance services, as well as a range of digital services, software and consulting in general. In fact, while the U.S. carries a deficit in the exports of manufactured goods, there is a surplus in the export of services. This means that we are exporting more services than we are importing but in the case of durable goods, the reverse is true.
The COVID-19 pandemic saw an increase of cross-border services in digital technology since there is no physical barrier to trade. However, digital trade is regulated like any other activity. All of this implies that a strategy for businesses in global trade is to look beyond the traditional export of goods and to start diversifying into services, which clearly are easily exported and might bring in higher margins. The added benefit of being immune to shipping and logistics issues makes them more relevant. Dr. Sarita Jackson, President and CEO of the Global Research Institute of International Trade, states that, “while COVID-19 exacerbated the use of protectionist policies such as the ones enacted for medical supplies and personal protective equipment (PPE), the use of cross-border services has been helpful in spreading information more quickly about the virus and offering medical assistance from a distance.”
This importance of digital technology is apparent and U.S. companies able to offer such services through that medium should take advantage of that.
As clients and companies begin to strategize from this point moving forward, they should keep in mind the role of global supply chains, the relevance of trade agreements and the amplified role that trade in services will play. The objective should be to optimize global expansion efforts in designing a road map for the growth of the business.