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Endings and beginnings – global supply chain outlook for Q4'20

COVID-19: Hoping and planning for stage 4

The COVID-19 pandemic has been the defining driver of global supply chain activity in 2020 with our prior Outlook report identifying four stages: supply chain disruptions, demand destruction, uneven reopenings and long-term adjustments.

There are signs that the worst, at least in terms of economic activity, has passed at the end of the third quarter. The downturn in global trade activity has slowed once again in August, with the 21 countries that had reported data at the end of September showing an average 1.7% year-over-year improvement, following an average 7.5% drop in July and a 28.7% slide in the second quarter. 

There are also signs that the acceleration in trade has continued in August with U.S. seaborne imports having improved by 16.0% year over year in September. 

There are also indications that corporations have seen the worst in terms of their performance, with Electrolux stating that "negative impact initially seen related to the pandemic will largely be recovered in the operating profit" in the first nine months of 2020.

Should that phenomenon be widespread, it is possible that more companies will report an upbeat outlook for the rest of 2020 and into 2021, as well as starting to discuss long-term plans to build resilience in supply chains. Uncertainty in trade policy (more below) may lead firms to be more circumspect, however.

Before getting too excited though, it should be borne in mind that most of the recovery at the global level has been driven by Chinese exports, pandemic case levels continue to accelerate in many countries and most firms are still suggesting a full recovery, particularly in capital goods such as robotics, is unlikely until later in 2021. 

Panjiva's data shows that U.S. seaborne imports of industrial goods have started to pick up in the first half of September, with a 19.9% year-over-year increased compared to a 9.3% improvement in August.

Machinery led the way, with imports of agricultural and industrial machinery rising 44.3% and 23.0%, respectively. Components have expanded more slowly, with industrial components rising by 16.6%. Shipments in the construction and trucking industry have lagged with a rise of 6.4%.

There may be a degree of inventory rebuilding after stage 3 disruptions from factory reopenings as well as stockpiling against the risk of further closures in the event of a resurgence in the pandemic over the northern hemisphere winter.

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U.S. elections: Trade policy has little to do with trade, lots to do with jobs and rivalry

Global trade policy in the past four years has been roiled by the actions of the Trump administration. The U.S. general elections in November will determine what the complexion of U.S. involvement in the policies behind global trade will look like. As outlined in Panjiva's Basics report of Sept. 30, there are five main issues to differentiate between the two candidates.

First, both campaigns see trade policy through the lens of geopolitics and employment rather than as a stand-alone objective. President Donald Trump's 50 campaign commitments include six relating to trade, all of which are jobs-focused. Administration policy has been focused so far on renegotiating trade deals to cut the trade deficit.

There have been successes in the renegotiation of United States-Mexico-Canada Agreement and the United States-Korea Free Trade Agreement as well as the phase 1 trade deal with China, but the goods deficit rose to $831 billion in the 12 months to Aug. 31 from $737 billion in 2016.

Biden's "Made in All of America" campaign uses similar tax and onshoring measures to Trump's but with a lesser focus on tariffs and larger emphasis on multilateral dealmaking, though new deals may not be forthcoming in the short term.

Second, rivalry with China is on the agenda for both sides. A second Trump administration may extend decoupling between the two sides if the phase 1 deal cannot be extended. China's purchases under the deal are $43.8 billion behind schedule as of July 31 even though agricultural and energy purchases are accelerating.

Biden sees "China kind of as a competitor" and will look at alliance building with the EU and others rather than being bilaterally driven. A Biden administration will nonetheless "use tariffs where they are needed."

Relations with the EU face the starkest contrast. While the Trump administration has Trade Promotion Authority approval for negotiations toward a wide trade deal, there are potential tripwires that could rapidly lead to a deterioration and widening tariff war including aerospace subsidies, digital services taxes, carbon border taxes and national security considerations in metals and autos.

Biden campaign commitments on the environment, including rejoining the Paris Agreement on climate change, could provide a joining point with the EU in the form of carbon border taxes. The steel and aluminum sector may be a particular focus in that regard.

Most big steel exporters to the U.S. have seen a downturn in shipments as a result of section 232 tariffs with ArcelorMittal and Vallourec SA's shipments down 60.9% and 51.8%, respectively, in the 12 months to Aug. 31 versus calendar 2017.

Fourth, Biden's more multilateral approach may be more conducive to restarting Transatlantic Trade and Investment Partnership talks with the EU as well as advancing the reformation of the World Trade Organization and perhaps returning to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership trade deal in Asia. None will be forthcoming in the near-term as Biden is committed to dealing with domestic economic issues first.

Trump remains committed to bilateral negotiations including deals with Brazil and Kenya on the way, as well as with the U.K. The latter may struggle to sign a deal with either candidate given new U.K. government legislation relating to the Ireland-Northern Ireland customs border.

Finally, both candidates are committed to reshoring manufacturing capacity and early action is likely from both in medical supplies in the wake of COVID-19. Reducing dependence on China will also be a priority for both.

U.S. seaborne imports of pharmaceuticals from China surged 73.7% year over year sequentially in April and by 34.2% in May but have since fallen. Total imports of pharmaceuticals by sea fell in the first half of September, underscoring the need for improved domestic sourcing whomever the president will be in 2021.

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Localization goes global: The rise of reshoring plans

The next U.S. President will not be the only politician outlining reshoring/localized manufacturing plans in the coming months. These may well clash and result, in the longer term, in WTO complaints about subsidies both explicit and implicit. In the near term, however, they will provide opportunities for manufacturers and buyers to reconsider their supply chain structures.

The most significant will be China's 14th Five Year Plan, scheduled for discussion on Oct. 26,  which will set out the course for President Xi Jinping's "dual circulation" strategy, according to the South China Morning Post. 

The strategy involves an increased reliance on domestic consumption to drive demand as well as self-reliance in key industries. The latter point will also likely be set in the context of a new set of "Economic and Social Development and future targets for 2035," Xinhua News Agency reported.

If these include specific targets for key high-tech industries, they may attract further action from the U.S. on technology access and accelerate the process of decoupling between the two economies.

The Japanese government has already outlined a specific plan, similar to those hinted at by both U.S. presidential candidates, to make specific payments to assist firms that shift manufacturing back to Japan and away from China, according to prior Bloomberg News reports. 

The German government plans to promulgate an evolution to EU industrial strategy during its presidency, which runs through the end of 2020. The push towards a more cohesive internal market may encourage firms to pursue in-market, for-market strategies.

There is a similar driver for firms that have relocated already to India with the highly interventionist "Make in India" policy program of tariffs and export support programs. That has proven particularly successful in encouraging firms in the mobile phone industry to both onshore phone assembly as well as increasingly shift production of components to the country, too.

The poster-child for that policy has been Apple Inc. and its manufacturing partner Hon Hai, which have set up production of selected iPhone models in India rather than shipping from China.

That may start to cut into the $1.26 billion of Indian imports linked to the firm seen in the 12 months to March 31 after a 30.0% year-over-year increase, which included a 39.9% surge in iPhone shipments. The 62.2% drop in shipments in the second quarter compared to a year earlier reflects a halt in demand related to the pandemic with near-zero shipments in May.

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Getting deals done, dealing with the fallout

The development of multilateral trade deals is a matter of years, not quarters, with little movement in most dealmaking since Panjiva's Q3 Outlook. Many of the brush fires are still outstanding as risks. 

The great hope for the fourth quarter is a final signing of the Regional Comprehensive Economic Partnership, or RCEP, in an agreement that will include China, Japan, South Korea and the ASEAN group, among others, where talks began in 2012. The ASEAN group continues to hope for a signing by the end of 2020. Yet, frictions between Japan and South Korea, China and Australia, as well as a Japanese-led "supply chain pact," could yet derail a deal.

Even once deals are signed, they can yet fail to be ratified, as will likely be the case for the EU-Mercosur trade deal, unless relations regarding environmental protections are resolved.

The main event for the fourth quarter of 2020, however, is the ending of the saga of negotiations between the EU and U.K. to formulate long-term trade and customs arrangements once the Brexit withdrawal period ends. 

If, as seems likely, the two sides cannot reach a comprehensive agreement, then there will likely be significant disruptions to supply chains with stockpiling likely near year-end, followed by customs delays and complications in the first quarter of 2021 and a loss of competitiveness for exporters on both sides in the longer term. 

U.K. medical supply chains may be at particular risk given the highly regulated nature and time-sensitive supply needs involved. Indeed, there was already a sign that the EU is already deprioritizing supplies to the U.K. in extremis after the first stage of Brexit in January and during the COVID-19 pandemic.

Panjiva's analysis of official figures shows the EU represented 78.6% of U.K. imports of medicines in the 12 months to July 31. Shipments from the EU dropped by an average 36.4% year over year in the first quarter and only expanded 16.4% in the second quarter.

In July, there has been a renewed downturn of 16.6% ahead of the seasonal peak in October and November as winter medicines come into stock. For reference, prior Brexit "scares" led to a 103% year-over-year surge in imports in March 2019 and a 21.2% jump in October 2019.

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Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence. Links are current at the time of publication. S&P Global Market Intelligence is not responsible if those links are unavailable later.