Geopolitics, Trade and Protectionism: Covid-19’s impact and paths forward

At no point in modern history, outside of wartime, have the countries of the world retreated into self-isolation to the extent they have today owing to covid-19.

In an era of rising nationalism, re-emergent ideologies of autarky, and the return of great power rivalry, this forced isolationism in response to the coronavirus outbreak has the potential to amplify and entrench destructive trends in the global political economy.

Nevertheless, the crisis also offers an opportunity for building relationships. If, as the expression has it, “a friend in need is a friend indeed”, then many friendships stand to be forged or renewed during this crisis. However, given geopolitical tensions between the U.S. and China the most likely leadership group – the G20 - is unlikely to grasp the nettle with both hands in the crisis phase.

Instead, a bottom-up organic process of building or maintaining mutually beneficial trade networks is the likeliest path forward. Reflecting on Australia’s position, I argue below it should take leadership and forge a commitment with like-minded partners to ensure trade can most fully play its crucial role in supporting economic well-being.

An unprecedented crisis

The unprecedented and almost instantaneous triple shock to demand, supply and financial liquidity that is now unfolding across national economies is causing an unprecedented contraction in global output and consumption. The IMF has forecast that the effects will be at least as severe as the Great Recession of 2008/09.

This may yet turn out to be an optimistic prediction. Data for China shows that industrial output plunged by 13.5% in the first two months of the year, the worst drop on record, while the country’s GDP as a whole contracted by 13%. These figures represent the most drastic of reversals for China’s decades-long run of positive GDP growth. While there are signs of recovery in the Chinese economy, these will confront the sharp recessions already underway in its main markets.

Goldman Sachs has predicted the U.S. will experience a 24% contraction in GDP in the second quarter, on top of a 6% first quarter decline. Such predictions are simply stunning, and have no historical comparison. Likewise, the EU is heading for similar territory, with all its members in lockdown, and its third and fourth largest economies, Italy and Spain respectively, in particularly dire straits.

Nobody knows for sure how long governments will have to maintain lockdown, or whether there will be further waves of infections to follow when restrictions are lifted. To say we are in uncharted territory is a failure of words. This is so far beyond the pale of economic reality as we have known it, that predictive power regarding the coming consequences is largely nightmarish guesswork.

Nonetheless, we must take some hope from the vastly reduced rates of new infections in China, South Korea, Hong Kong and Singapore after a period of intense social distancing and lockdown, which shows these methods work in the short term to flatten the curve, and offer some positive news in an otherwise bleak environment.

Amplifying existing trends in geopolitics and protectionism

As the virus has spread from China to the rest of the world, particularly the U.S., existing geopolitical tensions between the two largest global economies have been inflamed. The U.S. and China have engaged in a battle to control the narrative of covid-19. Trump has criticised the PRC for failing to act fast enough during the initial outbreak in November 2019 in Wuhan, and inflamed tensions by referring to covid-19 as the “Chinese virus”.

The PRC’s foreign ministry spokesman Zhao Lijian, has in turn incensed the Trump administration by pushing outlandish  conspiracy theories that the U.S. military released the virus in Wuhan during the 2019 world military games, which were held in the city in late October.

As tensions build, both sides have begun expelling journalists, with some commentators now viewing the U.S.-China rivalry moving into a “cold war” phase of full separation. This development bodes ill for any multilateral efforts to combat the global depression that now looms large, as well as further crippling the capacities of multilateral institutions such as the G20 that rely on leadership and cooperation amongst members.

Another trend amplified by the covid-19 crisis is the protectionist tendencies entrenched globally since 2009. As reported by the Global Trade Alert in its ‘Tackling Covid-19 Together’ report, from 1 January through to 21 March 2020, 54 governments had placed 46 export curbs on medical supplies, with 33 of those instigated since the beginning of the month.

Even within the EU’s common market, countries such as France, Germany, and the Czech Republic, all producers of medical supplies, imposed export limitations in early March on crucial equipment, impacting Italy’s ability to respond to the crisis unfolding there. On March 15 the EU Commission stepped in to undo national restrictions in favour of EU-wide measures, thus ensuring Italy and Spain could gain access to medical supplies within the EU.

Commentators have been critical of unilateralism within the EU and EU-wide restrictions, arguing that they will ultimately hurt both the EU and third countries. This view arises from the potential for retaliatory export controls could mean EU producers will lose access to imported parts supplied from outside the EU.

While I am sympathetic to this argument, and fully support the view that maintaining open trade will be crucial to surviving and recovering from this crisis, a more nuanced consideration of the extraordinary circumstances governments are currently dealing with is needed.

Two points are relevant. First, national governments are legally bound to first and foremost ensure the safety of their citizens. We are in a time of crisis that is upending all norms, trade will not be immune to this. No citizen will forgive a principled position on free trade that results in their government sending domestically needed medical supplies to far-away (or nearby) countries. In the post-crisis post-mortem, evidence of such actions would further undermine citizens’ faith in globalization.

Second, governments must distinguish between export restrictions that ensure they keep a reasonable amount of medical supplies for their own needs on the one hand, and panic-induced hoarding of supplies on the other hand, which impose huge costs on others. Put another way, political leaders should operate under the maxim “keep what you need” and “trade what you do not”. China is currently following this path, and will increase its global stature as a consequence. Others, including Australia, should follow its example.

Trade policy leadership during the crisis: a chance for Australia to lead by example

Those who can implement pragmatic trade policies that secure both national needs and support the needs of other nations as far as possible, can help cultivate a positive geopolitical environment characterized by cooperation and collective action.

Australia is already beginning to adopt such an approach. On March 25 Australia, along with Canada, Chile, New Zealand, Myanmar, Singapore and Brunei, released a joint ministerial statement: "We recognise that it is in our mutual interest to ensure that trade lines remain open". The ministers further stated that "We are committed to working with all like-minded countries to ensure that trade continues to flow unimpeded, and that critical infrastructure such as our air and seaports remain open to support the viability and integrity of supply chains globally".

Australia should build on this initial commitment by further developing regional leadership that encourages others to not only pledge, but implement, a similar approach to maintaining the sinews of international trade upon which we all rely. Like all other developed economies Australia is dependent upon, and benefits greatly from, international trade.

Consequently, whatever long-term effects on globalization result from covid-19, in the short-term maintaining established trade relations will be central to avoiding a catastrophic global depression. If Australia can balance national needs by demonstrating regional and international leadership on trade policy, it stands to secure both vital trading activity to aid its economic recovery, and enhance its soft power in a fast changing geopolitical landscape.

By Dr. Naoise McDonagh - Lecturer in Political Economy, Institute for International Trade