Covid-19: A Win for Regionalisation?

Published on 9th June 2020

Covid-19, along with the related disruptions to the movement of goods and people, has compounded the challenges facing globalisation. With the breakdown of supply chains leading to concerns over the provision of key goods during the crisis, some emerging markets had moved towards regionalisation in an effort to share risks.

In some cases, regional-level responses to Covid-19 have helped supplement international efforts led by institutions such as the World Bank and the IMF.

For example, in April the African Development Bank announced a $10bn Covid-19 Response Facility to help member countries fight the pandemic, of which $3.1bn was allocated to sovereign and regional operations for countries in the African Development Fund. Meanwhile, in May the Asian Development Bank tripled the size of its assistance package to $20bn to help its members weather the economic fallout.

Beyond multilateral financial institutions, in some cases Covid-19 has also resulted in inter-governmental cooperation in an effort to overcome shared challenges. For example, in April the foreign ministers of ASEAN's 10 member states endorsed several collective initiatives to fight the pandemic, including the establishment of a common Covid-19 response fund to enable a rapid response to medical emergencies. 

Changing global and domestic demands

Notwithstanding these regional responses, the disruptions have led some countries to explore more localised supply chains and focus their attention on boosting domestic resiliency, particularly when it comes to the provision of essential goods.

“We expect the current disruption in international trade to encourage African countries to start looking inwards,” Yofi Grant, CEO of the Ghana Investment Promotion Centre, told OBG.

This could result in countries adding more value domestically, as well as also offering more products directed towards domestic and regional markets, in addition to existing global trading partners.

“Africa remains one of the most attractive investment destinations in the world, with over 30% of global mineral resources. Therefore, I think that there will still be an opportunity for global trade, but I also recognise that there will be a significant drop in these numbers,” Grant added. “Looking at the potential of the continent to boost domestic production, I think this is a great opportunity for different countries to take advantage of the situation.” 

In light of current events, markets around the world are likely to prioritise localised supply chains for medical goods and pharmaceuticals in an effort to hedge against global supply disruptions.

Governments in so-called “yellow slice” countries – those high-potential, emerging markets that make up OBG’s portfolio – are being encouraged to incentivise investment in such areas to enhance domestic resilience but also develop new avenues for export earnings. After all, emerging economies that previously enjoyed long periods of high growth will not be able to return to previous expansion levels if they focus only on their internal markets.   

"Myanmar has a large domestic market, but we are likely to see domestic demand decline in the short term as our consumers scale back discretionary spending,” Thurane Aung, vice president of Myanmar Japan Thilawa Development, told OBG. 

"In addition to focusing more on manufacturing for domestic consumption, the government should look to capitalise on our LDC (least developed country) status and improve the investment incentives outside of special economic zones, in an effort to attract more international investment in areas like agrifood and pharmaceuticals, where we can cater to international as well as local demand."

Regional scale

In some cases, a regional market may offer an economically viable solution for pooling the supply and the demand of these essential goods.

The demand for medical supplies in Africa is a prime example of the benefits of scale that a regional market can offer.

Two-thirds of African countries are net importers of medicine and food. However, due to restrictions on the exportation of goods during the pandemic, orders for essential medical supplies from some countries on the continent have been rejected – with international media reporting that priority was in many cases given to the larger orders placed by Western states.

To help overcome the issue in the short term, a digital platform that pools orders from across the continent has been developed.

Facilitated by African Union’s Centres for Disease Control and Prevention, the initiative coordinates efforts with Chinese counterparts to ensure an efficient medical equipment supply chain, along with negotiating set prices with Chinese suppliers.

Looking further ahead, pooling the region’s demand could create a sufficient scale for the region to create its own generic medicine industry. Indeed, the results of OBG’s latest Africa CEO Survey, released in May, suggest that the region is likely to see increased local production beyond just medical supplies: some 66% of respondents reported that the ongoing crisis is either likely or very likely to boost industry and manufacturing in their respective countries.

AfCFTA

Amid plans for manufacturing expansion in some countries, the African Continental Free Trade Agreement (AfCFTA) could play a key role in enhancing the regional market for signatory countries and external partners.

With a combined GDP of $3.3trn, the AfCFTA region is set to become one of the world’s largest free trade zones. Some analysts suggest that easing the movement of goods between member states could boost trade by more than 50%.

While originally slated to enter into force in July 2020, implementation has been delayed by the onset of the coronavirus. The next round of discussions, which had been due to take place in May, has been pushed back to the end of the year.

The agreement will require members to develop infrastructure that facilitates cross-border trade, while a sub-committee will oversee the implementation of these measures. The Covid-19 pandemic has underscored the benefits of such a system in enabling the delivery of essential supplies, particularly medical equipment and food products.

Indeed, the AfCFTA could do more than ease the flow of goods. Wamkele Mene, secretary-general of the AfCFTA secretariat, told local media in March that the agreement is an opportunity to not only restructure supply chains, but also catalyse the creation of regional value chains.

GCC and the common challenge

The GCC has also banded together to address some common regional challenges associated with Covid-19.

For example, in mid-April members of the GCC, including Qatar, agreed to establish a food supply network to safeguard the region.

Alongside the economic impact of the virus, the recent fall in oil prices has posed an additional challenge to GCC member states. This has placed renewed emphasis on the importance of economic diversification and accelerating non-oil revenues.

Indeed, the pandemic has highlighted the success of some recent investment in the region’s entrepreneurial space.

For example, Abu Dhabi has enhanced its reputation for medical technology innovation during the pandemic, and MENA welcomed its largest ever agri-tech investment in Kuwait, while the region's strong digital infrastructure supported the transition to working and studying from home as lockdown measures were enforced.

Industrialising Asia

In Asia, the major growth engine of the global economy in recent years, 60% of total trade is regional, according to global management consultancy firm McKinsey.

In a report published in September last year, before the outbreak of Covid-19, McKinsey referred to the standout growth of the region’s industrialisation network, and how rising consumption and improved domestic value chains had led to a rise in “Asia-for-Asia” supply chains.

Since the onset of the pandemic, there has been further potential for countries to capitalise on a manufacturing shift away from China. This change was already under way, with rising Chinese labour costs and increased tariffs from the US-China trade war leading some companies to move their industrial operations elsewhere in Asia.

However, disruptions caused by Covid-19 seem to have accelerated the move, with the EU, Japan and the US all making public statements about the prospective relocation of companies with China-based factories.

Vietnam has been a clear winner so far, with significant manufacturing capacity shifting to the country in recent years. However, other countries within the region are poised to benefit from easier trade flows under the Regional Comprehensive Economic Partnership (RCEP).

The RCEP, which negotiating parties hope to sign off on before the end of the year, is a proposed free trade agreement between the 10 members of ASEAN and regional partners China, Japan, South Korea, Australia and New Zealand. India may also join but it has previously indicated reluctance, mainly over fears that Chinese exports could have a detrimental impact on domestic producers. 

If ratified, the zone would create one of the world’s largest free trade areas, accounting for 30% of global GDP and population.

This would not only facilitate trade within the region, but it would also make the ASEAN bloc more attractive to foreign investment.

The future for regionalisation

In some cases, regionalisation could be the solution to mitigating global shocks, with countries developing more efficient and agile supply chains with neighbouring countries that reduce the risk of over-reliance on trade with the world's largest industrialised economies. In addition, we can expect to see increased localisation of essential medical and food supplies to boost national resilience in the event of emergencies.

While global trade will continue to be an important tool for emerging economies to boost economic growth and revenues, Covid-19 could help invigorate efforts to boost supply chain resiliency, enhance the diversity of trade relations and foster wider cooperation between trading partners.

Courtesy: Oxford Business Group


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