Dealing with the Butterfly Effect of a Pandemic

Covid-19 has massively disrupted global trade. The use of Smart Compliance Technologies can, however, give companies a strategic advantage.

Next time you see someone spreading a bit of Nutella® on a pancake, think of the Global Value Chain (GVC) behind it. Ferrero International SA, which owns the brand, is headquartered in Luxembourg. It has factories in the EU, Russia, Turkey, North America, South America and Australia. While some inputs like skimmed milk are locally sourced, others come from around the world.  Hazelnuts come mainly from Turkey, palm oil from Malaysia, Papua New Guinea and Brazil, cocoa from Ivory Coast, Ghana, Nigeria and Ecuador, sugar from Europe and vanilla flavour from the United States and Europe. Nutella® is then sold around the world.

For technology products, GVCs are even more complicated. Apple Inc. lists 200 companies spread across 43 countries in six continents as its suppliers. Irrespective of whether a product is simple (apparel) or complex (laptops, smartphones, cars), today they are all a result of GVCs.

The share of GVCs in global trade, according to the World Bank’s World Development Report 2020 peaked at more than 55% in 2008, the year of the global financial crisis. While it has dipped since then, GVCs, in 2018, still accounted for nearly half of all global merchandise trade of USD 19.5 trillion.

Complex Systems

In a typical GVC, components are sourced from multiple countries, spread across different continents – each intermediate stage reaching the next, “Just in Time” to enhance efficiency. Global trade managers, therefore, have to figure out sourcing, customs duty optimization, freight optimization and trade facilitation while retaining visibility across the entire value chain.

All these factors make GVCs among the most complex human-made mechanisms. As with all such systems, a small change at one end can result in massive divergence at the other. Scientists sometimes refer to this as the ‘Butterfly Effect’, best summed up in a lecture by Edward Lorenz who first postulated the mathematical principle underlying such systems. The talk was titled, Does the flap of a butterfly’s wings in Brazil set off a Tornado in Texas?

Perfect Storm

The Covid-19 pandemic is has come as the worst shock to the system of GVCs since their evolution in the 1990s. Even before the outbreak, global trade was going through one of its most turbulent periods since the end of World War II, thanks to a tariff war between China and the United States (US), renegotiations of trade agreements in North America, EU and the Asia Pacific, Brexit as well as sanctions against a host of countries like Iran, Venezuela and Russia.

The pandemic has added several new layers to this complexity. Take just three aspects as an example. First is that global enterprises have had to identify new suppliers located in areas free from lockdowns, and conduct their due diligence on these new suppliers, while most likely, their trade managers are working from home.

Second is the near-collapse of air freight and increased challenges with ocean shipping. The third is the disruption of seemingly stable Free Trade Areas like the EU as governments scrambled to husband supplies of scarce drugs and personal protection equipment. All these factors will, and are, changing rapidly as the virus rips through nations and economies.

Technology Imperative

These developments underscore that enterprises invest in a Global Trade Management (GTM) system that combines a robust technological platform, reliable implementation processes, up-to-date content, full customs compliance vision with a focus on accuracy and value-added activities.

Such a system can increase supply chain velocity with timely and accurate data and avoid delays needed to prevent delays due to customs inspections. It will also, most likely, reduce total duty spend by helping with strategic sourcing and by taking advantage of preferential duty programs. The other benefits include managing supply chain risk while safeguarding the company’s reputation and achieving productivity gains through automation.

Covid-19 has already infected millions and killed hundreds of thousands. As the second spike in cases in China, South Korea and Singapore – countries which had seemingly tamed the pandemic — shows the virus will continue to cause disruptions until a cure and/or vaccine is found over the next 24 months.

For global enterprises looking to deal with the “Butterfly Effect” of the pandemic, investing in a global trade management technology platform is the best option.

Thomson Reuters, a worldwide trusted provider of answers, helps professionals make confident decisions, run better businesses and gain competitive advantage in complex arenas – law, tax, compliance, government and media.

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