Covid-19 has given further impetus to a large scale reorganisation of global production that was already underway. Some of this is due to countries wishing to bring production home – included in Japan's record fiscal stimulus package, for example, are measures to assist companies to relocate production from China back to Japan.
Meanwhile the idea of a $25bn reshoring fund is being discussed by US lawmakers with both Republicans and Democrats concerned about over reliance on China for supplies of essential products in the wake of the coronavirus pandemic.
But this trend is also being driven by changing technology that reduces the labour component of much manufacturing and so tips the balance in favour of regional production located closer to the end market. Banks need to prepare for this restructuring and provide support to their business customers.
In particular there are both risks and opportunities for small and medium-sized enterprises (SMEs). If production is more regional and less global, new suppliers of components will need to be found so that SMEs will both lose and gain contracts. There will also be a need for new storage facilities as multinationals seek to make themselves less vulnerable to disruption of global supply chains in future.
But all this does not mean that trade disputes will disappear and understanding the potential for trade disruption should be a key part of risk management for banks going forward. Underlying the trade war between the US and China is a tech race that Democrats feel as strongly about as Republicans and will not go away even if there is a change of president in November’s election. US house speaker and leading Democrat Nancy Pelosi, for example, has thrown her weight behind resisting Chinese firm Huawei’s role in 5G cellular technology.
In its latest move to thwart Huawei's progress, the US will require foreign companies using US chipmaking technology to get a licence before they can sell semi conductors to the Chinese firm. Such moves make it more likely that as well as different trade regions, the new post-Covid-19 world will have distinct tech regions for the US, Europe and China – again a trend that was happening anyway. Banks and companies need to prepare themselves for permanent disruption.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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