Sales into which country this week presents the greatest credit or political risk to your company?   Answer Here!

What We're Reading:

Barbados elects first president, replacing UK Queen as head of state. Barbados has elected its first-ever president to replace Britain's Queen Elizabeth as head of state, in a decisive step toward shedding the Caribbean island's colonial past. (CNN)

Panic ordering by retailers is making the supply chain crisis ‘even worse.’ Retailers and manufacturers are overordering or placing orders too early amid panic over the massive supply chain crisis, and that’s making things much worse. (HSN)

US reaches agreement to end European digital services taxes. France, Austria, Italy, Spain and Britain have agreed to withdraw digital services taxes on US tech giants in 2023, while the US will drop retaliatory punitive tariffs. (DW)

EU leaders lambast Poland over its challenge to union. European leaders lined up to chastise Warsaw on Thursday for challenging the EU's legal foundations, but Poland's premier said he would not bow to "blackmail" as he joined a summit of the bloc's 27 nations. (US News & World Report)

IMF cuts Asia Pacific growth outlook on Delta, lagging jabs. The International Monetary Fund cut its growth forecast for the Asia-Pacific region due to a surge of the Delta variant of Covid-19 and lagging vaccinations. (Business Mirror)

BOJ says Japan’s banking system stable, warns of risks. Japan’s banking system remains broadly stable but financial institutions could face risks including from a possible increase in credit costs caused by a delay in the economic recovery, the Bank of Japan (BOJ) said in a report on Thursday. (HSN)

Why managing political risk is critical for exporters. Political risk is a topic often overlooked entirely or just given a cursory glance by many small- and medium-sized companies. (Shipping Solutions)

Digitalization could add $9 trillion to G7 trade by 2026, says ICC. Trade across the G7 could increase by an eye-watering $9 trillion in the next five years if the industry reaches full digitalization, according to a new report by the International Chamber of Commerce (ICC). (Global Trade Review)

Australia says EU has postponed free trade talks for second time. The European Union has postponed the next round of free trade talks with Australia for a second time, the Australian trade minister said on Friday, amid simmering anger over Canberra's decision to cancel a $40 billion contract with France. (Reuters)

What lies beneath? Hidden debt fears feed China’s property woes. The figures on the books sometimes don’t tell the full story. Since Beijing started clamping down on corporate debt in 2017, many real estate developers have turned to off-balance-sheet vehicles to borrow money and skirt regulatory scrutiny. (HSN) 

US Fed reports supply chain bottlenecks, labor shortages and inflation. The US Federal Reserve's "beige book" on economic conditions reports pandemic-related uncertainty. Supply bottlenecks and labor shortages have slowed US growth and contributed to inflation. (DW)

What’s the best way to give ground in a negotiation? How much should you change your offer at each round of a negotiation? The stakes can be high: Give away too much and you devalue your offer; give away too little and you risk getting stuck in an impasse. (Harvard Business Review)

China vows to open up market, but US sees no change. China on Wednesday promised the World Trade Organization it would further open its vast market, but the United States swiftly countered that Beijing showed “no inclination to change”. (EurActiv)

How one of Scandinavia’s biggest banks dismantled its correspondent banking network. Just months into the first pandemic in over a century, the top brass at Swedish lender Handelsbanken handed trade finance head Stefan Carleke a formidable task. (Global Trade Review)

When the Covid-19 pandemic crippled international trade, freezing supply chains, it was thought that global supply chain disruptions would be temporary. However, they are continuing to wreak havoc in many sectors. The difficulties arise from a combination of factors, some temporary, others structural. 

Consumer demand is there

With the reopening of the economies, the global demand recovered rapidly. This is partly explained by the savings accumulated during the pandemic, the very accommodative fiscal and monetary policies, and the huge recovery plans that emerged across the globe, with the objective of focusing in particular on green transition. The latter consumes a lot of metals, wood and energy (more gas and less coal). On the consumer side, many figures highlight the recent increase in consumer demand, such as the high number of vehicles sold in the United States (steel and aluminum-intensive) in April 2021 (a level not seen since 2005, according to the U.S. Bureau of Economic Analysis) and sales of new homes in the USA reaching a 14-year record and consuming a lot of wood and cement among other things. While demand is strong, supply is struggling to keep pace.

Supply is struggling to follow

The sharp demand along with limited supply has many consequences, among other things for commodity prices. Many commodity prices have surged since the beginning of the year amid supply/demand mismatches as well as weather conditions, Covid-19 disruptions, OPEC+ decisions, natural disasters and worker strikes at sensitive production sites. The surge in commodity prices is affecting the margin of manufacturers reliant on raw materials as inputs. The mismatch between supply and demand is affecting not only commodities but also the price and availability of intermediate goods (e.g., semiconductors) and labor.

Faced with this challenging situation, companies often have little choice but to pass on this increase, or part of it, to the consumer, fueling inflation. In some cases, they have no choice but to reduce production (amid among other things a shortage of materials and labor) or in exceptional cases stop production temporarily (e.g., the U.K.’s major industrial fertilizer plants and the automotive sector). The shortage of materials and/or equipment is the biggest limit to production, according to a survey of European manufacturers. This is a very exceptional situation. Globally, the sectors most affected by the shortages are the automotive, electrical equipment, materials, transport and construction sectors.

Longer distances amid disruption in production

According to an OECD analysis, the distance traveled by imported products increased in 2020. This is partly explained by the multiple lockdowns across the world, which affected production. Therefore, most importing companies turned to China (and the South East Asia region) to fill the supply gap left by Western/closer companies. 

This increase in distances traveled for goods, as well as competition between importers to secure transport from China, have therefore contributed to the increase in the cost of shipping. In addition to having to change suppliers, companies are facing difficulties in having orders shipped, which is leading to a further increase in cost. Indeed, global shipping continues to be afflicted by a shortage of ships, delays and congestion at ports as a consequence of the surge in demand for merchandise transport, which in turn means a lack of containers, as well as Covid-19-related issues forcing the sporadic closure of port activities. This situation worsened with the blockade of the Suez Canal in March 2021 and the closure of international ports, as we saw with the closure of a terminal at the Chinese port of Ningbo in August 2021.

Geopolitical tensions additional hurdle

Supply chains are also very much impacted by the geopolitical context. Technology in particular, in addition to shortages due to the very strong demand and supply issues, has become a geopolitical issue, with semiconductors being part of the battle between the USA and China, with Taiwan in the middle. Sanctions have been imposed by the USA on the sector, sometimes to the detriment of their own industry, to curtail Chinese tech development and this has led companies to review their logistics strategies.

In addition, supply chains are sometimes not very transparent, even for different stakeholders in the same supply chain. This makes it impossible to identify the different bottlenecks and therefore to solve the problem. Moreover, the supply chains are, depending on the sector, very geographically dispersed with a large number of suppliers. This is the case, for example, with automobiles, for which more than thirty thousand spare parts are required, which further complicates the supply chains.

Low inventories

As supply chains are disrupted, prices rise, basic or sophisticated materials are less available and importers compete to fill the smallest container on a cargo ship. As a result, companies’ inventories are at a low level. U.S. companies have 38 days of inventory (43 days for the ‘normal’ year 2019) and this number is pushed even lower for retailers (33 days in July 2021 vs. 44 days for the ‘normal’ year 2019), while at the onset of the pandemic, inventories were very high—given the unexpected Covid-19 outbreak.

What are the consequences of this disruption of the supply chains? 

In the short term, supply chain disruptions are likely to continue in 2022 but should gradually ease. However, any new setback could prolong it until 2023. All in all, while supply chain disruptions could cap the ongoing economic recovery, they are unlikely to stop it, as other factors such as large infrastructure plans in the USA, the Next Generation EU fund and strong demand are most likely to offset the impacts of supply chain bottlenecks.

Also, the Covid-19 pandemic and its consequences for the supply chain are leading companies to reposition themselves. The current just-in-time supply chain model with a variety of suppliers in a variety of countries has revealed some limitations. Nowadays, the question of the reshoring of industrial production seems to be gaining momentum. Although this theme of reshoring is not new—indeed it was already discussed and, in some cases, implemented by companies like Ford, Whirlpool, Harley-Davidson and Universal Electronics, following the trade war launched by Donald Trump—Covid-19 acted as the catalyst. However, the transition from global supply chain to regional supply chain is expected to take time, with many divergences across the regions.

The trade barriers (e.g., subsidies, tariffs, quotas, regulations, sanctions) put in place before the pandemic on the back of geopolitical tensions are not going to disappear anytime soon. On the contrary, such practices should intensify in the coming years. The transfer of tech design and equipment between economies and multinational firms in particular should become increasingly subject to government intervention. This should additionally lead to the development of regional production capacities, especially in the areas of technology (as shown by semiconductors) and essential drugs (as demonstrated by the current health crisis).

The transition to regional supply chains and development of regional production capacities should materialize with new investments in technology (internet of things, 5G, artificial intelligence, etc.) and automation. Entire sectors could restructure (e.g., retail, automotive, aerospace), leading to a mismatch in the labor market. In the medium to long term a reallocation of capital and labor on a large scale can therefore be expected. The adjustment could take time and the current economic transition could take much longer (as illustrated by Brexit).

Reprinted with permission by Credendo.

The dynamics of international trade may shift in response to the supply chain disruptions currently affecting world commerce, European Central Bank President Christine Lagarde said Saturday (Oct. 16), per a Bloomberg report.

“There are signs that the global economy could increasingly be a source of shocks for Europe rather than a stabilizer against volatility,” Lagarde said in a speech at the International Monetary Fund (IMF), the report stated.

Some global manufacturers already are holding higher inventories than they did before the pandemic due to concerns about disruptions, Lagarde said, per the report.

This would be a departure from the just-in-time inventory management that has been common in global trade for decades and which Lagarde said is vulnerable to shocks, according to the report. The euro area’s economy is especially vulnerable to bottlenecks because of its globalized nature, she added.

“Faced with historically long delivery times, global manufacturers’ stockpiling of inputs continues to run higher than before the pandemic,” Lagarde said, per the report.

The supply chain has been facing numerous strains as of late. Data from digital freight platform Transporeon showed that the cost of shipping went up as much as 10 euros per kilometer in January. The costs were a result of Brexit, the delta variant of COVID-19 and closed borders.

In the U.S., too, supply chains remain plagued by shortages of labor, commodities and transportation. In response, suppliers and retailers are trying new ways to move goods on cargo liners, trains and competitors’ trucks.

The grocery industry, for one, is taking additional measures. Some suppliers are shifting their limited production capacity to top-selling items; imposing allocations, or purchase caps; telling grocers to cancel promotions and issuing general warnings about limited availability.

The supply chain problems are in many cases related to the pandemic, with factories shutting down, ports experiencing delays and many parts of the supply chain facing shortages of workers.

Reprinted with permission by PYMNTS.

2020 saw a significant increase in the cost of construction disputes as the time taken to resolve disputes decreased, according to an Arcadis report, which reveals key themes and insights into the global construction disputes market. The average value of disputes globally rose from $30.7 million in 2019 to $54.26 million in 2020, while the length of disputes fell from 15 months in 2019 to 13.4 months.

Arcadis’ 11th annual Global Construction Disputes Report 2021: The road to early resolution illustrates industry-wide ripple effects of the COVID-19 pandemic. While trends in the value and length of disputes varied from region to region, all regions surveyed saw an increase in “mega disputes” related to bigger capital programs and private projects. Notably, more than 60% of survey respondents encountered project impacts due to COVID-19.

“Our research indicates there is a strong emphasis on increasing construction activity across the globe to jumpstart economies in the wake of COVID-19,” said Roy Cooper, head of contract solutions for Arcadis North America, in the report. “Bigger and more complex projects requiring coordination among multiple stakeholders will require sophisticated delivery methods and rapidly changing technology. In addition, the industry will have to overcome shortages of labor and materials that is being experienced globally.”

Owners, contractors or subcontractors failing to understand and/or comply with their contractual obligations became the leading cause of construction disputes in 2020, followed by owner-directed changes and third-party or force-majeure changes as the second and third-leading causes, respectively.

Highlights from the report include:

• Proper contract administration was a theme across the globe for the successful and early resolution of disputes.
• Most disputes were settled through party-to-party negotiation, and a willingness to compromise played a key role in early resolution.
• Among regions surveyed, the buildings (education, healthcare, retail/commercial, government) sector saw the most disputes.
• In North America, construction dispute value rose from $18.8 million in 2019 to $37.9 million in 2020, while the length of disputes shortened from 17.6 to 14.2 months.

“Continental Europe’s average value of disputes rose significantly in 2020 to $54.5 million, likely due to COVID-19’s additional impact on disputes,” the report states. “The average duration to resolve disputes was 14 months, continuing a declining trend since 2018.”

While cost and length have changed since 2019, risk management was still seen as the most effective claims avoidance tactic, while owner/contractor willingness to compromise was once again the top-ranked factor for the mitigation/early resolution of disputes.

“COVID-19 irrevocably changed every industry,” Cooper said. “Construction disputes experts will have to continue to adapt, even post-pandemic, as workforce expectations, climate events and government infrastructure funding change how projects are designed and contracted in the future.”

The research presented in the report was compiled by Arcadis based on survey responses, global construction disputes the team handled in 2020 and contributions from industry experts.

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief and David Anderson, Member Relations