Emerging from Lockdown: Threats to the international trade system

As COVID-19 curves flatten globally and policymakers’ attention turns to resuming economic activity safely, attention is inevitably focused on domestic matters. What is the trade-off between the economic costs of caution that delays economic revival and the health costs of over-hasty removal of measures that are holding back the spread of the virus?

The decision is likely to vary from country to country influenced by the severity and timing of the national epidemic.  Implications for international trade are unlikely to have high priority, although they could be serious. Past negative economic shocks have led to measures to insulate countries from the global economy with harmful consequences.  The most famous example is the depression of the 1930s.

The origins of the depression in 1928-9 did not lie in trade policy, but the US Smoot-Hawley tariff of 1930 and rapid retaliation by US trade partners is universally recognized as contributing to the depth and length of the depression.  Could this be repeated as the world emerges from the COVID crisis?

IS IT DIFFERENT THIS TIME?

Globally, resumption of normal service may repeat features of the initial policy responses to the COVID-19 pandemic, which were driven by uncertainty and asynchronous impacts and were far from uniform. No government can boast a perfect record in dealing with the pandemic, in part because they were all making policy in the dark.

Initial responses were often too slow, reacting to reported cases in March rather than taking proactive measures after the virus was identified in January. When actions were taken, there was only limited agreement on how to test and track and insufficient equipment to implement desired measures.

Among the responses, it was common to blame foreigners, in part to deflect attention from governments’ own failings, and to retreat into trade restrictions. Governments attempted to prevent export of key equipment or to obtain preferred access to imports.  Such actions undermined potential gains from trade and, for more complex products such as ventilators, disrupted production along international supply chains.

Initial trade policy conditions were not good. Before COVID, the USA and China were engaged in a trade war and, after the virus started to spread in the USA, bilateral relations deteriorated rapidly. The propaganda war reached its nadir on 25 March when G7 foreign ministers were unable to agree a joint communique after the US insisted Covid-19 be described as the Wuhan Virus.  US refusal to ratify appointments to the WTO’s appellate body makes a WTO-centred response more difficult.



Other political leaders’ reactions were nativist, even in the European Union, where seven states (Poland, Slovakia, Denmark, Cyprus, Latvia, Lithuania and the Czech Republic) unilaterally closed their borders at the start of the emergency. France and Germany initially blocked the supply of protective medical equipment to other European countries.  Such measures were soon rescinded, but it was a sharp reminder of the extent to which leaders look to their own defences regardless of international commitments.

EMERGENCY MEASURES MAY NOT BE TEMPORARY

A major concern for the post-COVID global economy is that such nationalist measures will resurge and become embedded, resulting in a new era of protectionism in breach of WTO trade law. Even if emergency measures may be justified on health grounds, long-term retention of trade restrictions will be harmful.

Vigilance is necessary because restrictive measures come in different forms.  During the Global Financial Crisis of 2008-9 countries were keen to subsidize exports while in 2020 countries have banned exports of medical products.

A new book edited by Simon Evenett and Richard Baldwin highlights the threat of export restrictions, and the Asian Development Bank describes the global shortage of personal protective equipment, while a 29 April article by Chad Bown warns of  the more usual threat of increased tariffs.

The cost of trade barriers is well-established, and must ultimately be borne by the consumer. Global production of personal protective equipment and other medical supplies can be maximized by countries specializing according to comparative advantage. The existence of international supply chains increases potential world output and increases the costs of disruptions to trade.  Restricting exports is as harmful as restricting imports; both reduce the gains from trade.

The resumption of normality will occur at different speeds.  In broad terms, if Asian economies return to normal activity first, we may expect a surge of exports from those countries and calls for protection from producers in countries where they are still hampered by restrictions on activity.

In some cases, policymakers may try to justify such measures on security grounds – a claim no less strained than President Trump’s imposition of aluminium and steel tariffs on national security grounds – but once in place the protection may be hard to remove.  On 3 April, President Trump invoked the Defence Production Act and instructed the Federal Emergency Management Agency (FEMA) to limit American exports of respirators, surgical masks, and hospital gloves to Canada, Mexico, and a host of other countries.

WHAT CAN BE DONE?

A recent ‘Global Trade Alert’ report views the problem as centred on trade in medical supplies, and advocates for a bargain between exporters and importers to maintain trade flows. The problem, however, is likely to be much wider than a single sector as governments try to kickstart economic activity. To the extent that this will be a global problem, ideally the solution should be through the WTO, although that is hard to envisage under President Trump.

One potential option may be to work through regional fora such as ASEAN. Another, is for ground-up organic coalitions of the willing to lead the way against the protectionist urge, such as the recent pledge by a group of seven countries including Australia to keep trade lines open during the crisis.

US leadership and action could be decisive, as George W. Bush showed in November 2008, by convening the G20 and achieving global agreement to avoid protectionism in the aftermath of the 2007-8 financial crises. This time action may depend on an incoming rather than an outgoing US president, but the concern must be whether January 2021 will be too late to stop a recrudescence of protectionism.

Richard Pomfret - Professor of Economics & Jean Monnet Chair Economics of European Integration, The University of Adelaide

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