This Ain’t Business as Usual: Eight Ways the Pandemic Shook Up the Global Trading System in 2020
With contributions from: Marta Bengoa, Professor of International Economics CUNY and UJ, and Executive Vice-President of the International Trade and Finance Association (USA); Sylvia Chen, Berlin-based International Trade Policy Consultant; María Belén Gracia, Buenos Aires-based trade expert and trade negotiator; Anna Jerzewska, Founder and Director of Trade and Borders, and an associate fellow of the UKTPO; Euijin Jung, Research Fellow at the Peterson Institute for International Economics; Kholofelo Kugler, Counsel at the Advisory Centre on WTO Law; Hanna Norberg, Founder Tradeeconomista.com, Ignitor TradeExperettes.org and Co-Founder TPRForum.org; Debra Steger, Professor Emerita at the University of Ottawa Faculty of Law, former Director of the WTO Appellate Body Secretariat; and Maria V. Sokolova, Geneva-based “trade nerd” economist, lecturer at IUG.
The COVID-19 pandemic has shocked the global economy, and also likely altered the global trading system for good. While we are all counting down the days to the end of 2020, some TradeExperettes reflected on the key changes to the global economy this year, and ways in which we can learn from this experience. Although we do not offer a crystal ball, we provide some thoughts on the issues we expect to linger and those that will dominate the trade debates in the year ahead.
Trade multilateralism should improve
On its 25th anniversary this year, the World Trade Organization (WTO) was in crisis. The Appellate Body, by which Members can appeal decisions from panels, has been disbanded, leaving WTO dispute settlement considerably weakened. Members have grown accustomed to using unilateral measures (ie. Section 232 tariffs by the United States) and subsequent threats of retaliation (ie. tariffs on specific products).
Apart from the U.S. blocking appointments of a new WTO Director General (the post became vacant in September 2020) and Appellate Body members, and U.S. threats to leave the WTO, Members are concerned that WTO rules have not kept pace with developments in the world economy. In fact, the negotiation of large plurilateral trade agreements in Africa, Asia and the Americas eclipsed the lack of progress at the WTO.
With the new U.S. administration in 2021, hopefully WTO members will be able to work together on WTO reform. There is potential for a multilateral agreement on fisheries subsidies and plurilateral agreements on green goods (and services), investment facilitation for development, and digital trade. Members have made progress in many of these areas and recently launched a new working group on trade and gender. If approved by Members, a new female Director General from Africa, Dr. Ngozi Okonjo‐Iweala, who hails from Nigeria, will inject much needed optimism and energyinto the ailing organization. With good will and cooperation, Members may even take steps to fix the broken dispute settlement system.
Faster digitalization with lagging regulation
While the pandemic has forced us to isolate physically, the wide adoption of digital technology, which manages to bring us together virtually, has certainly been the figurative silver lining. The disruption of our day-to-day lives has ushered in a new digital reality faster than anyone could have imagined, enabling us to work from home, video conference with colleagues, and meet with doctors digitally. Bill Gates’ prediction of a 50% decrease in business travel and a 30% decline in days spent in the office post-COVID-19 is an indication of how much “normal” is already expected to change.
These trends will shape the future of the global economy and trade, presenting a timely opportunity for policymakers to create an enabling regulatory environment fitting the needs of digitalization and development. While the pace of the adoption of digital tools will slow down, the digitization snowball is already in motion. That said, there are still significant changes to be made to improve the current set up, breach the various forms of digital divides (ie. gender digital divide) and reap the benefits of the new technology for trade. With this in mind, policy makers should keep up the momentum and work together on creating enabling regulation even when the emergency of the current situation is behind us.
U.S.-China trade tensions will persist
The beginning of 2020 saw some signs of thawing in the chilly U.S.-China trade relations through the signing of the Phase One Deal. The pandemic, however, derailed these seemingly improving trade relations as China fell short of meeting its purchase commitments.
In addition, China’s handling of the COVID-19 outbreak and its more aggressive, proactive style of diplomacy during the pandemic backfired, and has deepened anti-China sentiment in the United States. Both sides have introduced further trade restrictions. The Trump administration imposed a slew of unilateral export control measures on semiconductors and restrictions on information technology-related transactions, which led to the introduction of bans on Chinese social media apps TikTok and WeChat. China, reacting to U.S. actions, has taken steps to replace foreign technology with indigenous emerging technologies, notably in the IT industries. While the decoupling of the U.S. and Chinese economies may have begun as early as 2018, the pandemic has accelerated it – with increasing calls to diversify and shorten supply chains, especially in light of the numerous supply disruptions brought on by various pandemic lockdowns and restrictions. Although political sentiment has grown hawkish towards China, the Biden Administration is expected to involve trading partners in tackling shared issues and possibly return to a multilateral approach when addressing its trade disputes with China.
Trade protectionism might stay in vogue
Since the early days of the pandemic, countries have adopted a myriad of export restrictions, mainly on food products and COVID-19-related medical and pharmaceutical products. Thus far, over 98 countries have adopted some type of export restriction. In 2021, most countries will continue to eliminate their food-related export restrictions, although supply-chain disruptions, due to employee illness and transportation/logistical challenges, will likely persist.
The top exporters of COVID-19 related medical and pharmaceutical products, including China, the European Union (EU), Switzerland, and the U.S., will eventually eliminate their export restrictions; however, the U.S. and China will likely maintain their measures for longer (as has happened already historically). Paradoxically, countries that depend heavily on the importation of these products will maintain their export restrictions for at least as long as the pandemic rages. Concurrently, many of these countries will mitigate acute shortages by manufacturing the easier-to-produce medical products, such as personal protective equipment (PPE), face masks, sanitizers, and low-cost testing kits.
Skepticism about globalization from the major economic powers will persist
The “America First” policy ushered in by the Trump administration is likely to continue in 2021. First, President-elect Biden has signaled that he is committed to bringing back domestic production and reshoring supply chains of medical and high-tech industries, to support his Buy America initiative. Second, Biden will continue using tariffs as leverage to deter China’s trade practices in industrial subsidies, its violation of intellectual property rights, and forced transfer of technologies – measures that the U.S. considers unfair and unlawful. Third, U.S. re-entry to the Comprehensive Progressive Trans-Pacific Partnership (CPTPP) is unlikely in the first year of Biden's administration because the plurilateral trade agreement is not on his priority list. Instead, Biden may wait until U.S. geo-security concerns about China reach a critical point before re-engaging with Asia via regional trade pacts.
After signing the Regional Comprehensive Economic Partnership (RCEP), China will not only strengthen trade and investment relations with neighboring countries, but also redouble its efforts to revive a trilateral trade pact amongst China, Japan, and South Korea. Additionally, the RCEP could resolve some policy impediments, such as high import tariffs, customs delays and investment restrictions, that the Belt and Road Initiative has faced. However, there is a growing concern amongst Asian countries about being dominated by China’s economic power, especially as China has been increasingly using trade measures to express its displeasure with trading partners’ foreign policy (e.g. China’s import duties imposed on various products imported from Australia). An increasing number of countries have also started to grapple with the risks associated with China’s growing influence, and hope that the Biden administration will consider returning to the region.
The catchphrase “strategic autonomy” has circulated for years in Brussels and EU Member State capitals but has proliferated in the past year, extending this concept from defense concerns to include economic and technology dimensions. Caught in the crossfire of the U.S.-China trade war, in the wake of the pandemic, the EU’s economic ties with both the U.S. and China expose a vulnerability to trade disruptions and geopolitical coercions. The EU reprioritized its interests by proactively formulating the concept of “strategic autonomy.” Although a long-term advocate for free trade and multilateralism, Brussels has proposed a host of “strategic autonomy” initiatives, ranging from tougher trade defense instruments to a revamped industrial strategy and competition policy. The Trade Commissioner, Valdis Dombrovskis, recommends a combination of “[o]nshoring, nearshoring, stockpiling, diversifying, shortening supply chains” as part of toolkit to strengthen the EU’s economic resilience. But questions remain on the implementation side of things. As experience shows, policymakers’ proposals do not always translate to business realities.
Such rapid multidirectional changes in the sentiment of major powers are definitely a signal of changing attitudes towards current trajectory of globalization. How it will change, remains to be seen, but these moving geo-political forces will not leave a single area of global cooperation untouched.
Re-shoring is not a viable policy option
According to estimates by the WTO, trade in goods is set to decline by 9.2% in 2020. The fall in trade has mainly hit sectors with complex global value chains such as aircrafts, automobiles and medical equipment, where firms experienced difficulties in absorbing the shock at the beginning of the COVID-19 outbreak. The decline in trade during the first two quarters of 2020 called into question the nature of globalization – with some advocating for reshoring policies, to move businesses back home. However, during the third and fourth quarters, trade rebounded and the widespread supply disruptions have not permanently materialized given the strength of the trade networks around the globe.
Most exporters during the Great Recession in 2008 and now during the COVID-19 crisis have been able to absorb the shock by sourcing from local producers, by introducing more diversification, and by pursuing better control of inventories. It is extremely costly for firms to re-organize or re-shore production and processes as a large number of these activities tend to raise business uncertainty. In a recent survey performed on 1,753 Swedish firms concerning supply-chain problems during the pandemic and preferred solutions, only 2% of those companies said they were planning to re-shore production. Trade has been forecasted to recover by the end of 2021. The speed of the recovery will depend on the duration of the outbreak, vaccine outreach and the size of the economic stimulus. At the end of the day, businesses know best how to endure shocks and efficiently operate supply chains.
New appetite for a more sustainable trade
The move towards achieving the goals of the European Green Deal has accelerated during the pandemic. Launched in December 2019, the Deal aims to make the EU’s economy sustainable and to help the EU reach its climate neutral goal by 2050. One of the ideas behind the Green Deal is that economic growth can be decoupled from resource use. This idea is reflected in the Circular Economy Action Plan. The goals of the Plan seek to stop environmental degradation, but there is a risk that the measures taken in the name of the Green Deal will have a trade-restrictive effect. For example, conditioning third countries’ access to the EU market on the compliance of future European standards related to production practices or establishing a carbon border adjustment tax that covers sectors such as food, could become a barrier for developing countries’ exports. To mitigate trade restrictiveness, coordination at a multilateral level is a must in order to balance the actions that need to be taken to achieve climate change goals while complying with trade rules. In 2021, the new WTO initiatives on trade and environment may serve as a platform to analyze whether this balance can be achieved, should it involve relevant stakeholders (such as some of the biggest CO2-dependent economies of China, the US, India, and Gulf countries) and commit to achieving progress.
The pandemic will not stop Brexit
2020 also marked the culmination of the four years of Brexit debate and talks on the future relationship between the United Kingdom and the EU. These four years have been riddled with uncertainty, frustration, and continued disputes on the political front. The combination of other factors such as several missed Brexit deadlines and inflammatory rhetoric have left companies, in particular, SMEs, confused and occasionally overwhelmed. Even with something like border formalities – which are to be applied no matter whether the UK gets a deal or not – many firms waited until the very last-minute hoping for more clarity, guidance and even support. Yet, 2020 was about something else. The shock of the global pandemic, in terms of demand, financial impact as well as additional pressures on supply chains, made it difficult for many British SMEs to focus on anything else other than survival. Unfortunately for UK companies, the end of 2020, the end of the Transition Period is just the beginning. The real difficulty starts now. The new question is: whatwill the post-COVID-19 recovery in post-Brexit UK economy look like?
The way ahead for trade in 2021
Trade debates on these issues will continue in 2021, providing food for thought for policy makers and practitioners alike. It is hard to predict the precise outcomes, but whatever they are, one thing is certain – 2020 has changed the global economy and how businesses and consumers see trade. Trade came quick from being in a state of paralysis to a lifeline in maintaining the global economy in a time of crisis. Once the COVID-19 pandemic moves away from the daily headlines, the question we should be asking now is not “Can trade do good?” but “How can trade do more good?”.
The views and opinions expressed in this blog are solely those of the original authors and contributors. These views and opinions do not necessarily represent those of TradeExperettes, the TradeExperettes editorial team and/or any or all contributors to this site.