Reflections on International Trade in a Post-pandemic Perspective: The Power of Routines and Adaptation
By Lorenzo Bona and Vittorio Bona
Relevance of international trade
International trade is a fundamental factor for economic growth and development.
The expansion of such form of trade tends to reflect a strategic goal for most countries, as they can significantly increase their gross domestic product (GDP) through the selling of more goods and services to foreign markets.
International trade shares many similarities with trade that occurs domestically, as both of these forms of exchanges are a mirroring image for mutually advantageous transactions of goods and/or services between two or more parties. Despite this basic element of similarity, trades that take place within the contexts of international markets are generally linked to greater complexities than those related with trades within domestic boundaries: for example, the existence of different languages, business practices, currencies and regulations usually corresponds to new and additional challenges for those who aspire to expand their business operations from a national to an international scale.
Efforts for an expansion of business operations from a national to an international level have deep roots in the history of economic development, as perhaps it can be best symbolized by the creation – many centuries ago – of transcontinental trade routes like the legendary Silk Road that for a long time helped to connect many parts of Europe with several regions in the Middle East and Asia. It is however in much more recent times, which perhaps can have some correspondence in the period that saw the emergence of the Industrial Revolution, that international trade starts to be increasingly perceived as a key factor of economic growth and development.
Some impacts of the current pandemic
Unfortunately, today – at the time of this writing – the current pandemic related with the spread of the Covid-19 is greatly weakening international trade, in terms that appear much worse than those experienced in the realm of domestic trade. As different studies and analyses suggest, a pandemic doesn’t affect economic activities in the same way: many goods that are not necessarily traded on international markets – like utilities and services for the housing and healthcare sectors – may not experience a relevant decline in the level of their exchanges, and tend to keep an important role in the economy. The same is not completely true for goods whose production and distribution are more largely dependent on international trade, like electronics, products for the automotive industry, services for the tourism sector: usually, during the uncertain times of a pandemic, global supply chains that allow the creation and sale of these types of goods become more fragile and less efficient; at the same time, consumers tend to become more cautious and, for this reason, postpone their purchases of internationally traded goods, as often perceived as non-essential, until the advent of less uncertain scenarios.
The emergence of situations like these appears especially concerning in the context of the current pandemic, which – on a more general level – is largely producing extremely heavy costs: first of all, in terms of loss of human lives, and – secondly – in terms of depression of the entire global economy.
As it is well known, several new rules and measures have been proposed and introduced by public and health authorities in response to this health and economic crisis, in order to minimize the spread of the virus: for example, social distance, self-isolation, good hygiene practices and suspension of numerous economic activities when not related to something considered essential for society.
Fortunately, at the date of writing, many places around the world seem to experience some incremental and cautious improvements with regard to the current health and economic emergency, and – in addition to this – a relatively rapid arrival of different vaccines has been also recently announced; but sadly, at the same time, it is not entirely clear when things will return to a state of complete normality everywhere.
Challenging situations resulting from an unprecedented uncertainty
The challenges that all this creates for a full recovery global trade may appear even more difficult if we think that important changes in manufacturing processes – primarily linked to a strong advancement in automation and to a rapid growth of the internet of things – were already introducing a series of complications in the area of international trade well before the outbreak of the Covid-19 pandemic.
In other words, the organization of clear strategies for a full and rapid revitalization of international trade appears as a task extremely problematic: the widespread presence of exceptionally high levels of uncertainty emerges as a critical obstacle that must be overcome to effectively organize those strategies.
Reasons for a cautious optimism
Although many comments introduced so far in this writing might create some sense of discouragement, there is however more than one reason to keep looking at the future of global trade through the lenses of a cautious optimism.
This cautious optimism can find a sort of anchor in at least two main lines of reasoning.
One of these lines, as already quickly mentioned above, concerns the development of vaccines, which – according to what has been reported by many newspapers and other mass media – should be available within a relatively short period of time and help take under control and minimize the spread of the virus, in ways that should also favor a return to some semblance of normalcy around the globe.
One other line of reasoning in support to a cautious optimism about the future of global trade may have some connections with some ideas that have been developed at the intersection of economics and organizational theory in order to help a better understanding of phenomena that are particularly problematic to interpret using the theoretical tools of the economic science in its mainstream version: for example, the existence of entrepreneurship and firms in uncertain scenarios.
These ideas at the interface between economic and organizational studies attempt to reconcile the hyper-abstract logic of mainstream economics – where everything happens simultaneously in contexts of perfect information that allows each market participant to maximize their own wellbeing – with more realistic interpretations of reality, in ways that may also appear as an encouragement to look at the emergence of entrepreneurship and firms as a sort of automatic or possible remedy that tends to come to surface in response to market disfunctions, like those associated with high levels of uncertainty.
An encouragement like this can perhaps find some of its most solid foundations in pioneering researches like those of the Nobel laureate in economics Herbert A. Simon, which could be summarized – with some simplification – in three main interconnected themes. First, humans don’t necessarily aim at optimal results, but more simply at satisfactory outcomes for their decisions. Second, in accordance with this criterion for decision-making, humans tend to find advantageous to design and adopt behavioral routines and standardized schemes of interaction, in order to minimize the risk of endless and largely unrealistic transactions for a fully perfect accomplishment of ideal goals. Third, the benefits that humans may obtain from a combination between standardized models of interaction and decision-making strategies for satisfactory solutions tend to translate in powerful incentives for the formation of organizations and firms.
In other words, situations with high levels of uncertainty can stimulate the emergence of new firms, which are able to discover and implement organizational routines in ways that can also help transform the existence of uncertain environments in opportunities for the creation of value and economic dynamism in national and international markets. And it is also on the basis of thoughts like these that it may appear reasonable to keep a cautiously optimistic view about the future of global trade.
Business strategies in contexts of uncertainty
Trying to translate all this in terms that can have a more practical relevance for business leaders operating or aspiring to operate on international markets, it may be also added that firms – when confronted with high levels of uncertainty due to external factors, such as the current ones associated with the Covid-19 pandemic – must adapt their behaviors in favor of strategies that allow them to preserve their market presence and/or increase their chances of success in the global economy.
As mentioned above, what matters the most is not the organization of optimal plans of actions, but rather the adoption and implementation of behaviors that can lead to satisfactory outcomes.
On the other hand, with some connection to the studies of another great economist, Armen A. Alchian, it could be also observed that in conditions of uncertainty it doesn’t make much sense for a company to aim at the maximization of profits, as it is more important to focus on adaptation in order to preserve its vitality on the markets, i.e. its ability to implement strategies that can lead to a profit situation with a positive value, although this may also be at minimal levels.
As it can be easily understood, when normal market conditions resume – i.e. when external sources of uncertainty have ceased to exist – the companies that have been able to preserve their vitality will find themselves fully ready to benefit from the economic recovery, without having suffered big losses in terms of market shares and/or without having deliberately opted for a reduced activity in the marketplace that, for them, could translate in the creation of an undesirable outcome for the benefit of competing companies.
As a general guideline for the adoption of business strategies for the attainment of satisfactory goals, it might be relevant to consider that external factors that have a negative impact on the international trade system usually have a temporary nature, that is they have a limited duration over time. On the other hand, the firm can find it largely beneficial to preserve its presence on international markets as long as possible or, more precisely, until it is in a position to cover operating costs and investments.
And very likely, the advantages deriving from this type of strategy will become even clearer to all of us, at the moment when a vaccine against the virus that is producing the current pandemic is introduced in the marketplace.
This moment seems not too far away, as many newspapers are saying. Just the necessary time to stick to the prudent motto “estote parati” (be ready).