Coronavirus is unlikely to challenge the dollar’s dominance

Hello from Brussels. The big news of the past few days, apart from the revelation overnight that UK prime minister Boris Johnson has gone to hospital with coronavirus, is the extraordinary series of revelations, or at least allegations, about governments battling each other for protective gear and ventilators to combat the pandemic. Right from the beginning, as we argued, international co-operation in the trade of medical supplies — or anything to do with trade — has been largely absent. Maybe when production of emergency kit worldwide has ramped up enough to eliminate shortages, it will become less of an issue. But that doesn’t look likely to happen very soon.

Our main piece today looks at whether the current crisis will challenge the dollar as the dominant global currency (Tl; dr — not so much). Today’s Charted Waters looks at declining trade at Ceva Logistics, while our Tit for Tat guest is Anahita Thoms, head of the trade practice in Germany at Baker McKenzie.

Chronicle of the dollar’s death wrongly foretold, again

Its economy hammered and its moral authority weakened by its woeful response to coronavirus, the US can no longer claim to be the world’s leading strategic and financial power. Last week, Europe struck a long-planned blow against the global dominance of the dollar and its political abuse by a dysfunctional administration. The overstretch of US financial power is at last bringing its decline, etc. You know the drill. The end-of-the-American empire routine. Carl Bildt, former Swedish prime minister, always available to do the Wise European Elder Statesman act, has called the pandemic “the first great crisis of the post-American world”.

Wise people have made a broader case against such performative despair. We’ll focus on the economics and particularly the dominance of the US dollar.

No one can deny that the Trump administration’s response to coronavirus has been an organisational shambles and a moral outrage. But for the global economy the really important actor is the Federal Reserve. The Fed has reacted very quickly with rate cuts and has reactivated emergency weaponry from the global financial crisis (GFC) including extending swap lines to other central banks to keep the global dollar funding system going.

We’ve seen this picture before. During the GFC, the US was if anything in an even worse position strategically and morally than now. Apart from a lame duck president and the self-destructive US Congress, it was itself the origin of worldwide financial contagion. Nonetheless, in the end, the Fed’s emergency plumbing work did more than anything else to save the global economy. The swap lines, under-appreciated at the time, were vital. They were a clear international signal: your dollar funding is safe.

Donald Trump has gone after Meng Wanzhou, pictured, chief financial officer of Huawei, for allegedly breaching Iranian sanctions © AP

There was a burst of blustering ambition from the EU back then about challenging the dollar as the world’s pre-eminent international currency. It went nowhere, but since then, Europeans have only become more resentful of the US’s ability to go after companies it doesn’t like via the global dollar payments network and its connection to the US banking system — whereby the US can, in effect, can cut a company off from the dollar payments system by threatening the banks that do business with it.

EU policymakers reckon that Donald Trump has made a strategic error in his politicisation of the dollar payments system to enforce sanctions on Iran, including deterring European companies from doing business there. In fact, they say, he’s tried to kill two scapegoats with one blunderbuss by going after Meng Wanzhou, the CFO of Huawei, his least favourite company, for allegedly breaching Iranian sanctions.

The EU’s big idea was to set up Instex, a barter-type arrangement for European companies to sell goods to Iran. But few companies (or indeed governments) want to risk angering the US, and so it has struggled to take off. Last week, a year after conception, Instex did its first deal, of a princely €500,000, for medical equipment from a company whose name apparently had to be kept secret for fear of US reprisals. It’s not exactly the passing away of the old world and the birth of the new.

Meanwhile, European policymakers are still resolutely refusing to take the actions that might genuinely internationalise the euro. Jointly-guaranteed eurobonds could create the requisite large pool of safe government assets to lure investors. But no. Usually it’s Germany being the biggest pain about eurobonds. On this occasion it’s the Dutch, whose performatively hardline stance is apparently being driven by internal political imperatives. The internationalisation of the euro is being undermined by the domestic politics of a country with a smaller population than Florida.

It’s during great crises that there are often big shifts in economic and monetary power. The dollar had been gradually and unevenly supplanting the British pound over decades but it was the UK’s overstretch and massive indebtedness following the second world war that definitively ended sterling’s position as a dominant currency. The GFC was not that moment for the dollar against the euro, still less the renminbi. In fact, it was the opposite. And there is little so far to suggest the coronavirus pandemic will be any different.

The disease may upend governments. It may fundamentally change the social compact — our colleagues on the editorial board think it should. It may remodel the world trading system. But challenge the dollar as the dominant global currency? No sign of it yet.

Charted waters

Amid the general disruption to supply chains around the world, Ceva Logistics declared a force majeure at the end of last month — temporarily relieving the company of its normal contractual obligations. Its handling of US imports from China and the rest of Asia had already dipped in January and February. It wasn’t the first logistics firm to do so — ports have also been invoking the clause — and it is unlikely to be the last. 

Tit for tat

Anahita Thoms says companies are busy detecting difficulties in the supply chain but adds that it is short-sighted to focus only on short-term measures

Anahita Thoms, head of the trade practice in Germany at Baker McKenzie, joins us to answer three blunt questions.

Will it be business as usual for companies in terms of their supply chains once the pandemic is over?

The coronavirus outbreak has hit supply chains hard. As the pandemic continues to unfold, businesses are only beginning to grasp the multi-faceted challenges to their supply chains.

Supply bottlenecks arise from a multitude of factors, including logistical issues, higher demand for certain products, hoarding by customers and limited availability of raw materials. Currently, a wide variety of products are affected, from raw materials for the production of disinfectants, other hygiene products such as paper products, to products needed for the production of automobiles. There is also lack of manpower, whether it be workers in production or in the transport industry.

Between supply shortages and countries throughout the EU reintroducing internal border controls, companies are busy detecting and overcoming difficulties in the supply chain. But it would be short-sighted to focus only on short-term measures. Now is the time to rethink supply chains.

What are some of the weak links in supply chains that the crisis has exposed?

When thinking about redesigning supply chains, lessons can be taken from the 2007/2008 financial crisis. Just as that crisis exposed the shaky base on which financial institutions conducted their risky business, the Covid-19 crisis now reveals how vulnerable global supply chains and the corresponding high degree of specialisation have become.

Today, there are hardly any generously stocked warehouses left. Since stocking warehouses ties up capital, it was reduced in favour of a “lean production” approach, whereby only what is currently required is purchased and produced. Moreover, the highly specialised components are often purchased from a single supplier. The resulting high dependencies and cluster risks are widely accepted, whether in car production or in the manufacture of essential medicines. Some were better prepared, most were not at all. The coronavirus outbreak has made it painfully clear: if a single supplier fails or delays production by a few weeks, the situation becomes critical. The production process, which is finely tuned in terms of time and logistics, comes to a standstill and the complex structure collapses.

The present situation provides an opportunity to reflect on how to make supply chains more robust in the future. Possible solutions may include supply chain diversification. Companies are already making use of those tools to minimise delays, but it is important to keep in mind that such measures can also be carried on into the post Covid-19 future.

Will the supply chain crisis hasten the use of digital technology?

Digitisation is an important aspect when it comes to the future of supply chains. Advanced technologies, such as the internet of things, big data analytics, and autonomous robotics are generally expected to further change supply chains significantly. At present, it is still difficult to predict the effects of those trends, which are generally discussed using the buzz term “Supply Chain 4.0”. While it is highly likely that supply chains will become faster and more efficient, the impact of these technologies on the length of supply chains remains uncertain for now. As for short-term crisis management, however, modern technology can be used to detect disruptions to the supply chain at an early stage and redirect the flow of goods, if necessary. 

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Source: Economy - ft.com