Global Trade: Please ship me if possible!
Due to pricing and capacity constraints, global trade has recovered quicker and more robust than projected this year, particularly in value terms (+8.6 per cent q/q in Q1 2021 vs +3.4 per cent q/q in volume terms). Despite peaking in 2021, in 2022 because reduced tariff rates will not compensate for sluggish normalisation and structural shifts in trade flows. While global supply and demand accounted for most of the yearly reduction in trade in 2020, they only account for around 15% of the average year-on-year rise in global trade value since the beginning of this year. Input restocking, on the other hand, accounts for almost half of the increase.
More precisely, US and European firms manage their inventories in response to a strong comeback in domestic demand, dependent on inputs and commodities created and transported out of Asia.
The global battle for inputs is driving up trade volumes and, more critically, prices. The race results in more widespread adoption of the just-in-case inventory management approach, leading to a type of micro speculation in which enterprises hurry to buy supplies to hedge against additional price increases. Such a plan exacerbates the current worldwide supply-demand mismatch, exacerbated by fresh Covid-19 limitations and power shortages in Asia-Pacific and growing demand from the grand reopening in the United States and Europe.
Vessels are now being utilised practically to capacity, and suitable containers are in short supply. After steadily increasing in the second half of 2020, there are hints that marine shipping delays are levelling out. Still, overall performance remains the worst in 10 years of data.
As a result, importers are likely to be ready to pay extra for their orders. Indeed, traffic volume from Asia to North America increases significantly, indicating robust demand, but freight rates from Asia to Europe grew sooner and quicker. As a result, North America is grabbing containers from Asia, which compelled Europe to pay higher fees to acquire shipping capacity.
Trade flow structural changes may also lead to higher transportation costs than before the crisis. Notably, according to our projections, e-commerce appears to be acquiring a higher part of worldwide marine container shipping capacity. More consumer-driven E-commerce products often have more considerable tolerance for cost rises than industrial items. In the United States, e-commerce and retail sales of items traditionally imported from Asia have been exceptionally high since the beginning of 2021.
The continuous price rise will also severely impact enterprises that entered the crisis with minimal inventory. For example, the just-in-time strategy, which tries to reduce the need for stockpiling, has been widely embraced in the automobile industry. We discover that inventories in the transportation sector, textiles and clothing, and computers and electronics are dropping from pre-crisis lows.
Beyond this year, global manufacturers will face the top of the demand cycle (around mid-2022), at a time when inventories will be above average due to the ongoing competition for inputs.