Business

Manufacturing: Grappling with costs amid disruptions

The World Trade Organisation (WTO) has released a new report warning of possible increases in trade costs globally due to COVID-19 disruptions. The impact on Nigeria’s economy is imminent as manufacturers face some risks such as movement of goods across the globe as well as raw material sourcing. TAIWO HASSAN reports

No doubt, the last one year has been the most difficult for the country’s manufacturers following the twin issues of border closure and COVID-19 outbreak with the country’s manufacturing sector being impeded severely it struggles to combat, weather and exit the storms. In real fact, the storms are yet to be over, not only in Nigeria, but globally, following reports on the impacts of the pandemic on businesses, especially on trade costs and financing of businesses following the latest report released by the World Trade Organisation.

LCCI’s comment

Following the twin issues enumerated above, the Lagos Chamber of Commerce and Industry (LCCI) had stated that it was important to reckon with the costs, supply chain disruptions and losses that businesses and individuals have suffered as a result of border closure and COVID-19 on corporates, large number of informal sector players and individuals doing legitimate businesses across the country. Particularly, the LCCI Director- General, Dr. Muda Yusuf, pointed out that the pandemic and border closure had become the biggest business challenges confronting manufacturing sector in the country presently, as both pose dilemma even though government means well for business operators.

Effects

The chamber noted that there was every reason to evaluate the implications the pandemic and border closure have caused on businesses by counting the costs on manufacturing sector. For instance, jobs have been lost, prices have skyrocketed, legitimate exports to the sub-region and abroad have been halted, intermediate products for some manufacturers have been cut off, some multinational companies have been delinked from their sister companies in the ECOWAS subregion. Also, it added that the economies of border communities had been paralysed with consequences for unemployment and poverty. Yusuf said: “Over 90 per cent of Nigeria’s trade with the West African sub region is by road. We export manufactured products as well as agricultural products – detergents, toothpastes, plastic products, steel products, kitchen utensils, grains, ginger, onions, among others. We also undertake many re-exports to the sub region. These are sources of livelihood of Nigerians doing legitimate businesses. “There are also thousands of transporters who make a living from these legitimate trading activities. These are costs that would run into hundreds of billions of naira. We must weigh the costs and benefits. Most often, we do not count the cost of government policy on the citizens and businesses.” In other words, LCCI noted that the country should not underestimate the contribution of trade and commerce to the economy, as the distributive trade sector accounts for about 15 per cent of the nation’s GDP, which is estimated at N20 trillion.

WTO report

However, the World Trade Organisation in its latest report examined the pandemic’s impact on key components of trade costs, particularly those relating to travel and transport, trade policy, uncertainty, and identifies areas where higher costs may persist even after the pandemic is contained. Indeed, the report estimated that travel and transport costs account for as much as a third of trade costs depending on the sector, with manufacturing sector at the epicenter. Pandemic-related travel restrictions are, therefore, likely to affect trade costs for as long as they remain in place. For example, global air cargo capacity shrank by 24.6 per cent in March 2020, as passenger flights account for around half of air cargo volumes, the WTO report indicated. However, the resulting increase in air freight prices is likely to subside only with a rebound in passenger transport, according to the report. While sea and land transport have not faced comparable shocks, maritime transport has seen a decrease in numbers of sailings, while international land transport has been affected by border closures, sanitary measures and detours. Moreover, business travel, which is important for maintaining trading relationships and managing global value chains, in addition to being a significant economic activity in its own right, is being disrupted. The quality of information and communications technology (ICT) infrastructure and digital preparedness will be important in determining how well economies can cope.

Trade barriers

The WTO report further stated that trade policy barriers and regulatory differences are estimated to account for at least 10 per cent of trade costs in all sectors. They include tariff and non-tariff measures, temporary trade barriers, regulatory differences and the costs of crossing borders, as well as other policies that impact trade, such as a lack of investment facilitation or of intellectual property protection. The report notes that while COVID-19 has motivated both trade-restricting and importfacilitating changes in tariffs and regulatory practices, these measures have so far affected only a small subset of products. A crisis-induced shift towards the digitalization of customs and regulatory procedures to reduce physical contact could potentially lower the associated trade costs in the long-term. The report also pointed out uncertainty as a factor that magnifies the impact of existing trade-related costs, weighing on trade finance flows and dampening the appetite of businesses to invest in researching new markets, acquiring language skills and prospective partners, and conforming with foreign standards.

Last line

Looking ahead, the report notes that many governments have implemented measures to mitigate pandemic-related disruptions to economic activity, for instance by exempting certain transport crew from travel restrictions, or by enhancing the quality of and the access to ICT. These are expected to shape uncertainty related to trade costs in future in Nigeria and other countries.

 

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