Trey Barrineau

An award-winning editor and writer in the Washington, D.C., area who has covered everything from entertainment to commercial real estate.

Jun 25, 2020
2 min read

The novel coronavirus pandemic and the economic fallout surrounding it have gripped the world’s attention for most of 2020. However, Harry Broadman, Ph.D., of the Berkeley Research Group and Johns Hopkins University told attendees at NAIOP’s I.CON Virtual 2020 that they should also keep a close eye on the global trade environment, U.S.-China relations, Brexit, and rapid technological advances in supply chains and logistics.

“We have to figure out what are going to be transitory changes from the pandemic and what might stick and lead to structural shifts,” he said during the online event’s closing keynote address. “We’re seeing significant changes related to the pandemic, but they’re happening in an atmosphere of technological advancements. There are risks, but there are also tremendous opportunities. We are in for some structural shifts, so pay attention to the road signs.”

Broadman opened by noting that the International Monetary Fund (IMF) recently reduced its forecast for global growth in the wake of the pandemic by 1.9 percentage points. The IMF now predicts that GDP for the global economy will decline 4.9% in 2020. He also said lower wages caused by the massive wave of layoffs in the U.S. during the COVID-19 crisis will greatly increase the risk for deflation in the near term.

“That is pretty staggering,” Broadman said. “I think we are not going to see growth in a stable form anytime soon.”

Despite the bad news in the current market, he counseled attendees to stay calm amid the turmoil and uncertainty.

“This is where it’s important to have a rational, cool head going forward,” Broadman said. “Maintain relationships you have going forward. My own view is quite optimistic. We’re going to see a new round of growth and innovation. It’ll take time, but we’ll see it.”

Global Trade

Broadman said the pandemic is still top of mind around the world, but the U.S. trade war with China remains a major headline as well. Brexit and trade issues between the European Union (EU) and the U.S. are important, too, but to a lesser extent.

Broadman called President Donald Trump’s get-tough stance with China “a welcome change.” However, he said the administration’s go-it-alone approach is wrong-headed.

“That may work in the New York real estate market, but it doesn’t work in a global economy where supply chains are multinational and multilateral,” he said. “It would have been better to do it multilaterally and bring in Germany, the U.K., Japan, Canada and others.”

Broadman also said that tariffs are a shortsighted weapon against China.

“Tariffs are an at-the-border mechanism,” he said. “You need to look behind the border.”

According to Broadman, China’s economy has been slowing for several years for reasons unrelated to the trade war with the U.S. Instead, it reflects the fact that the ruling communist party isn’t interested in genuine market reforms.

“The Chinese need to be told through the World Trade Organization (WTO) that when they joined the WTO in 2001, the legal agreement codified structural reforms regarding pricing, intellectual property and other important issues,” he said. “The Chinese haven’t lived up to that agreement. China has a choice – leave the WTO or renegotiate their trade agreement.”

Ironically, Broadman noted that there is currently a resolution in the House and Senate for the U.S. to vote to withdraw from the WTO — an organization that the U.S. helped set up. It’s scheduled for a Senate vote in July.

“Those of us who watch trade matters are hoping it won’t pass, but the signal it’s sending is not very helpful,” he said. “It basically says that the U.S. is not interested in multilateral trade flows.”

On January 31, 2020, the U.K. officially left the EU, more than three years after a June 2016 national referendum on the proposal. Thanks to Brexit, Britain now has to renegotiate trade agreements with the rest of the world.

“The Brits are going to be spending a lot of time in the next couple of years trying to re-create what they had under the EU,” Broadman said.

He noted that the pandemic negatively affected trade between the U.S. and the rest of the world. It led to a lot of protectionism regarding health products, such as personal protective equipment (PPE).

“This was exactly the wrong time to put handcuffs on the free flow of goods,” Broadman said, adding that it had the added effect of strengthening support for the Buy American Act. First passed in 1933, the law requires the government to show a preference for U.S.-made products in its purchases.

“Trade policy regarding the pandemic has been pretty depressing,” he said.

Pandemic and Supply Chains

According to Broadman, emerging markets are the leading source of growth in the world economy. The World Bank and the IMF say that emerging markets represent 120 different economies ranging from tiny Burundi to powerful South Korea.

“It’s where there’s been the highest growth,” he said. “U.S. firms are seeking investments there.”

However, there’s been a major shift in recent years, and now emerging markets are also investing in other emerging markets.

“We’re beginning to see that globalization is changing from advanced countries going global to emerging markets also going global,” Broadman said.

When China shut down earlier this year because of the initial COVID-19 outbreak, it caused markets all over the world to freeze up. That, in turn, raised awareness about the degree to which tiered supply chains now dominate global trade.

“For example, something might be manufactured in China and then go to Thailand, where another component is added,” he said. “It then goes to Brazil for another component, then it comes to the U.S. consumer market. Supply chains are now incredibly complex and multi-tiered.”

Because of that, smart companies are diversifying where their supplies come from.

“I’m seeing the notion of peak and off-peak supply chains,” Broadman said. “We won’t see the closing of globalization; we’ll see greater diversification. If country X goes offline, there’ll be another country with some degree of manufacturing capability to keep things working. Clients are trying to figure out how to re-engineer their supply chains to do that.”

Broadman said Southeast Asian countries are among the emerging economies that could play a bigger role in trade with U.S. and North America in the future. These include Indonesia, Malaysia, the Philippines, Singapore and Thailand.

“They are fast growing,” he said. “It’s a region that works quite well. If you’re thinking about building another plant in Asia, I’d say take a look at Thailand or the Philippines. You don’t have the Communist Party problem you do in China.”

Broadman added that these shifts in supplier countries could end up favoring West Coast and Gulf Coast ports over those in the Northeast.

Despite that, Broadman said it’s currently not feasible to decouple from China.

“The notion that we can end up in a world economy where we have China vs. the other advanced countries, I don’t think it’s sustainable,” he said. “The supply chains are so intertwined. So how can we get China to enter into the rules-based regime that governs the rest of global trade? Right now China is the ‘world’s factory.’ Who’s to say in 15 years it won’t be India? This is an evolutionary process.”

He also doesn’t see a huge rush to reshore manufacturing back to the U.S.

“I think there could be, if it’s in the best interest of shareholders and management to do so,” Boardman said. “If government creates certain incentives to produce in the U.S. rather than overseas, they may well do that. But it could be quite a heavy lift for the government. I’d much rather have investors and businesses make those investment decisions. I don’t think it’s a very simple calculus. We may see some of it, but there will be a heck of a lot less than people think.”

Logistics

Broadman said the pandemic has created a new set of risks and opportunities in logistics. In particular, it’s highlighted the need for greater efficiency, which is spurring digitalization in the sector. Broadman thinks there is tremendous potential there.

“The pandemic has given yet another boost to why digitalization is important,” he said. “Digitalization could even occur at the last mile, where we are using drones and mechanized delivery modes. We’ll be able to accomplish social distancing while taking advantage of efficiencies. The pandemic has created an imperative to become more innovative.”

Broadman said one risk is a major shedding of human labor as digitalization matures in the sector. Another risk is potential antitrust issues created by marrying technology and logistics.

“When the dust settles and we’re only left with a handful of logistics companies, think about what’s going on with Amazon and others,” he said. “There’s always a trade-off in exploiting these economies of scale.”

This post is brought to you by JLL, the Social Media and Conference Blog sponsor of NAIOP’s I.CON Virtual 2020. Learn more about JLL at www.us.jll.com or www.jll.ca.