What just happened?

The COVID-19 outbreak is affecting 210 countries and territories around the world and two international conveyances.[1] The pandemic has resulted in a global economic shock as the world’s largest economies are divided by trade disputes.[2] There has been a dramatic fall in global stock prices and bond yields.[3] The disruption in the economy is likely to result in a recession, which will potentially result in a currency war between the countries.

What does that mean?

The World Trade Organisation (WTO) had forecasted that the global trade would fall in 2020 by between 13% and 32%, which is significantly higher than the height of the financial crisis in 2009 when the trade dropped by 12.5%.[4] The pandemic has resulted in a rise in the activities of a few sectors such as food production and healthcare; the lost output in other sectors would dwarf an increase in these sectors.[5] The weakening of the world’s economies caused by COVID-19 is expected to wipe out 6.7% of working hours globally in the second quarter of this year, which is equivalent to 195 million jobs worldwide.[6] An increase in unemployment is likely to cause a recession.

To recover from the recession and to strengthen the economies, there is a possibility of the countries entering into a currency war to gain a comparative advantage in international trade. Currency war will result in the central bank of the states to use expansionary monetary policies to lower the value of their national currency.[7] The states would aim to have cheaper but increased exports and more jobs to gain profit.[8] At LawMiracle, we support the notion that a currency war may lead to fluctuations in the currency, creating economic uncertainty, affecting capital flows and cross-border trade because of an increase in currency volatility and trade protectionism.[9]

How does this affect the legal industry?

The currency war will threaten global supply chains, and corporate sectors concerning international trade and cross-border litigation will also be significantly impacted. This is because of fluctuations in the foreign exchange market.[10] The number of trading disputes recorded by the WTO in 2008 rose by almost 50% compared with figures in 2007.[11] It follows, the countries will try to protect their domestic sector against services from other countries, which will result in increased trading disputes, resultantly more pressure on commercial law firms.

Depreciation in the currency because of currency war will impact the law firms as it would mean writing down all the wages and prices in the country. Law firms would have to consider reducing partner profits, salaries for all non-partner attorneys, cuts for associates, and hiring freeze. International commercial law firms will adopt strategies such as hedging against currency volatility rather than speculating, where the matter concerns investment.

Economic uncertainty will significantly impact the commercial clients, giving rise to disputes and cross-border litigation. In regards to the contracts between the commercial parties, the event that falls short of constituting a force majeure event can still render an obligation to be difficult for one party to perform.[12] This will make it hard for some commercial clients to get relief under the principle of frustration as the availability of relief varies significantly across jurisdictions.[13]

Written by Samriti Rudhra

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References:

[1] Worldometer < https://www.worldometers.info/coronavirus/ >

[2]Robin Harding ‘Coronavirus risks the return of currency wars’ (The Financial Times, 10th March 2020)

[3] Robin Harding ‘Coronavirus risks the return of currency wars’ (The Financial Times, 10th March 2020)

[4] Philip Blenkinsop, ‘Coronavirus could reduce world trade by up to a third, according to the WTO’ (World Economic Forum, 9th April 2020)

[5] Larry Elliott, ‘The Coronavirus crisis may lead to a new way of economic thinking’ (The Guardian, 22nd March 2020)

[6] Stephanie Nebehay, ‘Layoffs, closures to wipe out 6.7% of working hours worldwide in second quarter: ILO’ (Reuters, 7th April 2020).

[7] Elvis Picardo, ‘What is a currency war and how does it work?’ (Investopedia, 22nd August 2019)

[8] Reuters in Geneva, ‘COVID-19 to wipe out equivalent of 195m jobs, says UN agency’ (The Guardian, 7th April 2020)

[9] Dun & Bradstreet Limited, ‘A D&B Special Report: Country Risk Services’ (D&B Special Report, October 2011)

[10] Dun & Bradstreet Limited, ‘A D&B Special Report: Country Risk Services’ (D&B Special Report, October 2011)

[11] Dun & Bradstreet Limited, ‘A D&B Special Report: Country Risk Services’ (D&B Special Report, October 2011)