The last 12 months has been a turbulent time for global trade, with many products seeing supply chains disrupted due to the effects of the Covid-19 pandemic and the economic uncertainty this has caused.
But as vaccines begin to be rolled out around the world, there are a few sectors that will be especially important to the global recovery from these shocks. And one area in particular that will have a key role to play is the chemicals industry.
The importance of the chemicals sector to world trade
This was highlighted recently in a new report from the World Economic Forum. The body's Chemical and Advanced Materials Industry Action Group noted that chemicals and the goods they are used to create will be at the heart of the response to global shocks such as the current pandemic.
It observed these products are the building blocks behind many of the essential items that will be necessary for a strong recovery, including personal care, digital communications, safe packaging and pharmaceuticals.
The report said: "It is fair to say that a global health, economic or social recovery won’t be possible without the essential ingredients behind protective masks, mattresses or wind turbine blades being available globally."
However, it observed this can't be achieved without an effective global supply chain to ensure the efficient flow of goods and services.
Challenges facing the chemicals sector
The WEF highlighted several challenges facing the global trade of chemical products. Between 1998 and 2008, the worldwide market for these goods increased from $400 billion to around $2.1 trillion, assisted by trade agreements and harmonization of standards. These allowed chemical manufacturers to situate their facilities in lower-cost locations or closer to areas of high demand, while still having strong access to global markets.
However, since the 2008-09 financial crisis, chemical trade has been on a steady decline, falling by around 1.4 per cent between 2009 and 2018.
The WEF observed there are multiple reasons for this, including "a loss of momentum in some growth markets, the impact of trade interventions, the reduced influence of global institutions, and more scrutiny over foreign direct investments".
What's more, the Covid-19 pandemic has created further challenges for the sector. These include increased politicization of the flow of goods, with many nations implementing export restrictions on key products.
For example, in March 2020, India banned exports of ten per cent of its pharmaceutical products, including paracetamol, antibiotics, hormones and vitamins. This resulted in shortages in destination countries and retaliatory measures before the ban was partially lifted.
Meanwhile, governments around the world have been creating more incentives for manufacturers to restore their operations to local facilities, while on a wider socioeconomic level, the increased frequencies of shocks to the market, caused by climate disruptions and political volatility, among others, have also incentivized local production to boost resilience.
Despite this, however, the production of many key chemical products is still heavily concentrated in a few key areas. For example, 80 per cent of the world's ascorbic acid (vitamin C) capacity is located in China. Therefore, there will still be a strong need for efficient global supply chains to support essential trade in these items.
Key pillars to support recovery
The WEF highlighted three key pillars that will be essential in supporting the global chemicals sector: diversification, collaboration, and a functioning global trade system.
Diversification is an important defense against highly-concentrated supply chains, the WEF noted, as well as those that have become overly long or opaque.
The report added: "Diversification of supply sources also mitigates risks from export bans, trade conflicts or disruptions caused by shocks like Covid-19."
However, this does not necessarily mean total reshoring of production is the answer, as in many cases, this will not be a practical solution.
"Truly local value chains require multiple production steps, resources, technology, funding, functional transport and service ecosystems, and sizable local demand to allow for scale," the report noted. Therefore, the ability to trade freely is a fundamental part of success in this sector.
The WEF highlighted the importance of a framework of international collaboration to support an open, fair trade system based on clear rules for all stakeholders. This is crucial in ensuring access and promoting resilience for the sector.
At a time when chemical products are expected to be in high demand to help economies around the world climb out of Covid-related issues, the right tools to facilitate trade in these products - such as export control solutions, customs filing tools and help with calculating various duties - are more important than ever.
