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Q3'21 Outlook: The fallout from pandemic planning, trade policy rivalry

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Q3'21 Outlook: The fallout from pandemic planning, trade policy rivalry

This report is one of three looking at the prospects for supply chains in the third quarter of 2021 and beyond. In this note, we consider the prospects for medical supply chains and the results of geopolitical rivalry in trade policy in the U.S., Europe and globally. The others analyze the impact of short-termism in corporate planning and the prospects for logistics after an extended period of underinvestment. They can be found here.

The fallout from pandemic planning

At face value, the impact on global trade from the COVID-19 pandemic has passed. Global trade activity has surged throughout the first half of the year while signals from the logistics industry, discussed in Panjiva's Q3'21 Outlook for the logistics sector, suggest that elevated demand and/or constricted supply will remain throughout much of the remainder of the year.

Global trade activity climbed 46.5% year over year in April and by 10.7% compared with 2019, Panjiva's analysis of S&P Capital IQ data shows. The rate of growth has accelerated in May, with the average of 27 countries that have reported macroeconomic data indicating growth of 65.5% year over year — a comparison with the worst month of the pandemic so far — and 19.6% versus 2019.

The most recent data suggests that growth may have crested. U.S. seaborne imports, a rough proxy for exports from most countries though missing key intra-Asia and Asia-Europe lanes, increased 29.4% year over year and by 18.7% compared with June 2019, Panjiva's data shows.

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Yet persistent recovery requires the continued rollout of COVID-19 vaccines globally. While significant progress has been made in most developed economies with domestic production — such as in the U.S., the U.K. and EU, as well as countries supplied by Russia and China — there are still low levels of vaccination in countries reliant on supplies from India. The latter's decision to strictly internalize supplies of doses through the end of the year, as flagged in Panjiva's research of June 15, has required significant commitments to deliveries from G-7 countries.

In total, the G-7 has undertaken to deliver around 1 billion doses in the next 12 months, which is still a long way behind requirements to fully vaccinate the global population. It also makes little allowance for the potential need for booster shots in countries that already have high vaccination rates. The G-7 commitments have some credibility, however, after the U.S. completed exports of 80 million doses to 46 countries.

That delivery can be seen in Panjiva's data for Mexican imports of vaccines, which increased 118.7% sequentially in the three months to May 31 and reached the highest since August 2018 in the month of May. Most of the increase came from shipments linked to AstraZeneca PLC, which accounted for 39.5% of shipments in the three months to May 31.

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Aside from commitments to produce vaccines for export, the U.S. will also need to boost shipments of active pharmaceutical ingredients, or APIs. That comes at the same time the Biden administration will be looking to develop long-term independence in pharmaceutical ingredients following its critical supply chain review discussed in more detail below.

U.S. exports of all APIs inched higher during the second quarter of 2021, most recently increasing 3.7% in May versus the prior three months' average. Shipments to India, however, dropped 12.1% having ramped up rapidly previously, probably reflecting a reduction in shipments after its decision to limit vaccine exports.

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The fallout from US-China rivalry

The largest unresolved issue of the Biden administration so far is relations with China. That will continue to evolve during the second half of 2021, though there are no hard deadlines at this stage. Initial calls between trade and commerce ministers have yet to yield formal negotiations or indeed the long-overdue assessment of the phase one trade deal, which was due in February. A more hawkish stance from the Biden administration regarding forced labor policies and Taiwan may reduce the likelihood of new agreements being reached.

From an economics perspective, the incentives are imbalanced. The main U.S. "carrot" to improve relations is to cut tariffs. Panjiva's analysis shows U.S. imports of products from China covered by Section 301 tariffs may have increased 7.5% year over year in the 12 months to May 31 but are still an aggregate 20.5%, or $69.5 billion, below the level of 2017 before the economic aspects of the trade war got underway.

China's "stick," meanwhile, is the cessation of increased purchases from the U.S. under the phase one trade deal. U.S. exports to China covered by the deal increased 54.2% year over year but were only $26.5 billion higher than 2017, Panjiva's analysis of official data shows. They should, at this stage, be $78.2 billion higher, while 2021 in aggregate should be $98.2 billion higher than 2017.

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Aside from relations with China, there are several detailed aspects of U.S. trade policy that have yet to be resolved. There may be congressional progress on the Biden administration's infrastructure package, which will include spending for ports and railroads, and the Endless Frontiers Act. The latter has become more pressing, given the need for investment in semiconductor manufacturing capacity and bipartisan support for tackling critical supply chains. The latter was partly addressed by the critical supply chain review published in June, and is due to be fleshed out over the coming months.

Renewal of the Generalized System of Preferences, which provides reduced tariffs for imports from emerging markets, and the Miscellaneous Tariff Bill, which enacts customs duties exemptions for specific businesses, has yet to occur after the programs ended in December 2020.

Trade Promotion Authority — a procedural component facilitating the negotiation of international trade deals — has also now lapsed and looks unlikely to be renewed. Trade Adjustment Assistance, or TAA, which includes payments to help workers facing hardship following the implementation of trade deals, has been extended by one month to the end of July.

A renewal of the TAA program may be necessary if the Biden administration wants to pursue further trade deals, given congressional Democrats' concerns regarding the treatment of labor.

The issue of treatment of workers may also flare up in ongoing United States-Mexico-Canada Agreement disputes. Those already include automotive components produced in Mexico as well as other cases such as renewable energy policy and dairy quotas.

The automotive components dispute focuses on the production of parts at Cardone Industries Inc.'s Tridonex plant in the Mexican state of Tamaulipas and may be a test case for other labor-related issues. The impact of the investigation does not appear to have had a significant impact on the firm's supply chain activity.

Panjiva's data shows that Mexican parts exports linked to Tridonex climbed 13.1% in April 2021 versus April 2019, the month before the case was announced, before dipping 29.3% in May 2021. Yet, shipments had already been in decline on that basis in the prior three months as the automotive industry sought to deal with the ongoing shortage of semiconductors for advanced components.

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The fallout from unresolved Brexit issues

On the other side of the Atlantic, the U.K. is scheduled to complete a consultation on potential actions to take against U.S. Section 232 tariffs on steel and aluminum in early July, which could yield action during the third quarter of 2021.

While an agreement between the U.S. and U.K. was reached on aerospace duties, a deal on metals looks less likely, if only because of U.S. domestic political considerations linked to capacity utilization. A similar issue faces U.S.-EU relations. The waning prospects of a wider trade deal between the U.K. and the U.S. further reduce the likelihood of a solution.

The EU and U.K. have agreed to extend a deadline for applying new, stricter rules for flows of packaged food from mainland U.K. to Northern Ireland to Sept. 30 from June 30. The brinkmanship that characterized that agreement has been a key feature of U.K.-EU relations, both during Brexit negotiations and since the application of the EU-U.K. Trade and Cooperation Agreement in January.

The agreement removes the near-term risk of retaliatory tariffs from the EU, which has indicated the delay is of "a temporary nature and with strict conditions attached" and requires progress toward "a broader agreement in the area of public, animal and plant health, based on alignment with EU rules."

Many elements of relations between the EU and the U.K., including the flow of medicines and treatment of services, have yet to be addressed and will continue to cast a pall over cross-border supply chains for the remainder of 2021.

Signs of normality at all levels will come from the flow of medical supplies. Thus far, U.K. imports of medical supplies from the EU are well below pre-pandemic levels, with imports in April 2021 down 6.3% compared with April 2019 while those in March slumped 56.4%, Panjiva's analysis of official data shows. That has been partly offset by rapidly increasing imports from the U.S., India and China.

Some care is needed with comparisons given 2020 represented the start of the pandemic and 2019 represented a period of concerns that there may be a "hard" Brexit (i.e., no ongoing trade or customs deal). Nonetheless, imports in each of the first four months of 2021 were lower than each of the prior five years. It may take much of the rest of the year to determine whether there has been a permanent shift in supply chains or just a Brexit- and pandemic-related temporary distortion.

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The fallout from slow-moving multilateralism, fast-moving carbon decision

The nature of multilateral trade policy deal-making means timetables are measured in quarters rather than years. There may nonetheless be three important waymarkers to watch during the third quarter of 2021.

First is the potential for a deal regarding sustainable fisheries at the World Trade Organization. While global trade in fish only represented 0.7% of global export volumes in 2019, reaching an agreement may be a test case as to whether WTO-wide deals are possible. More pertinent is the reform of the dispute resolution process, which is currently nonfunctional. A special ministerial meeting on the topic is scheduled for July 15.

The second issue relates to the implementation of global corporate taxation rates. The matter became entangled with global trade as a result of the U.S. Section 301 review of digital services taxes and resulting plans — currently suspended until early December — to apply retaliatory import duties against countries that implement them.

A recent agreement by the Organisation for Economic Co-operation and Development provides some hope that further disruptions can be avoided and that multinational economic deals can be reached. The devil will likely be in the details, though. The deal provides two pillars so far: Corporations that will be subject to minimum tax rates will have global revenue over $20 billion and profit margins over 20%, and the minimum tax rate should be 15% on earnings in a given country.

Potential exemptions including the finance and shipping industries are being negotiated while formal rescission of digital services tax plans has to be made by countries that have already applied them.

The third and potentially most significant policy development will be the EU's reformed greenhouse gas emissions mitigation strategy. An announcement is due in mid-July and comes ahead of the United Nations Framework Convention on Climate Change's next Intergovernmental Panel on Climate Change report in August and the U.N. Climate Change Conference in Glasgow, Scotland, scheduled for November.

The EU Parliament has committed to publishing a set of 12 legislative packages in its "Green Deal" plan during July 2021. Aside from capturing the marine shipping industry for the first time, there will also likely be a carbon border adjustment mechanism, or CBAM, to ensure there would not be a flood of "dirty" imports from outside the EU. The EU's plans could draw a wide range of retaliatory measures should they be applied without international consultation and agreement.

A key data point needed to assess the impact of a CBAM is sector coverage and baseline carbon price to calculate the tax. Sectors covered will include metals such as steel and aluminum, cement, fertilizers and electricity, with implementation phased in between 2023 and 2026, Bloomberg News reports. It is not yet clear whether only the products themselves will be covered (e.g., steel plates) or whether products made with them will also count (e.g., cars made with steel bodies).

Whether or not a CBAM is applied to a given country may depend on (a) whether there is a carbon trading scheme in place and (b) whether the carbon pricing scheme is deemed to be strict enough, or highly priced enough, to imply there is no disadvantage for EU manufacturers.

Panjiva's data combined with the International Carbon Action map of carbon trading markets would suggest that only three of the top 10 exporters of steel and aluminum to the EU (the U.K., Switzerland and China) already have some sort of nationwide carbon trade schemes, while Ukraine has a scheme under development. The largest headaches for the EU will therefore likely come from Russia and Turkey, which accounted for 10.2% and 9.1% of EU imports of steel and aluminum, respectively, in 2020.

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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.