Global trade: Don't miss the bus again

Back in days, the saying was "when the US sneezes, the world catches a cold"; today, coronavirus from China is pushing world economy in a recessionary phase. The economic woes travelled faster across global stock and commodity markets than the Covid-19 itself. The virus seemingly touched its peak in China, this could imply that in a few months, the fear of spread may die down. However, the implication on global economic order could last longer.

There are economic implications in the short run (say for six months) and others could last longer. In every crisis there lies an opportunity. Pakistan can benefit from both, but there could be adverse impact in the short run too. There are opportunities and challenges in both trade and financial flows.

In trade, export orders from West (routed from China) can move to Pakistan; but for value addition chemicals and dyes etc are imported from China. This can be disrupted. Around 40 percent of Pakistan's non-energy imports are from China that includes raw materials for numerous goods manufactured. With virus spread increasing in West, the goods demand which Pakistan exports may take a dip. In short, both exports and imports could be lower for Pakistan. Being a net importer, it is net beneficial for external account.

Fall in oil prices is good for Pakistan. It is good for both inflation and external account outlook. Central banks around the world are cutting rates. Carry trade is becoming more lucrative. But there is some outflow, in line with emerging market trends. Current account savings may improve. Inflation outlook is better. With no shift in underline credit risk of Pakistan, there is a case of rate cut by 50 bps in March.

In long term, it seems that coronavirus can expedite the shift of global manufacturing from China. The simple argument is to not put all of your eggs in Chinese basket. This has a spillover effect on other emerging economies. Countries like Vietnam, India, Bangladesh, Indonesia, Malaysia etc have share in global production. Pakistan has lagged behind.

The prime reason for Pakistan not becoming part of Global Value Chain was its bleak security situation. This all starts with travelling frequency in and out of the country. The smooth flow of goods through ports is imperative. The services flow is dependent upon ease in moving capital in and out. Pakistan was geared to do so in early 2000s before the war on terror isolated the country. The second biggest reason for Pakistan's sluggish performance was energy shortage.

Last decade was a lost case in terms of global trade integration. Now the security situation of the country is improving. Travel advisory has improved. Airlines are eying a comeback in the country. Cricket is back. The visa regime in true sense has to be opened up. In case of energy, the shortage is behind us. The issue is of pricing and distribution inefficiencies which is creating circular debt. The government is now attempting to solve it under the pressure of the IMF.

The likely pandemic of coronavirus can catalyze the efforts of taking tiny share of global production from China to Pakistan. Western buyers are eyeing to diversify their vendors. For instance, in textile, China is becoming uncompetitive due to growing production cost. Indian Hindu nationalism is making buyers uncomfortable. Too much concentration in Bangladesh is riskier. Pakistan is all set to create its own basket. Buyers are showing signs of urgency. A big textile player currently visiting the US said that every buyer he goes to is asking for higher supply. "Don't talk on pricing, double the volumes," he quoted one. Many other industries have potential to exports.

The problem is of capacity. Sooner the capacity is built; better it is for Pakistan. The manufacturers at home are wary about energy pricing in the long run. Sooner the government resolves the energy pricing and efficiencies issue, better it is for Pakistan to capitalize on changing world order. Else, Pakistan will miss the bus again.