The COVID-19 outbreak across the world has caused a global health and economic crisis simultaneously and will reshape the global trading system and the market, permanently.
Before COVID-19, global trade had been hit by protectionist measures by certain countries over the last two years, and governments were busy devising strategies to cope with the uncertainty. Early January 2020, the World Bank noted that over US$1 trillion worth of global trade, around 7 percent, had been affected and global demand continued to decelerate, notably in Europe and Asia. Throughout 2019, trade tensions between the United States and China escalated and contributed further to global trade contraction.
The first and foremost thing to do is address the health crisis. This respiratory virus is highly contagious, marching around the globe at extreme speed and causing deaths by the minute.
To make it worse, there is no vaccine available yet. To get ahead in the fight, governments around the world have imposed policies of rigorous social distancing in most sectors. It has become the new norm of social interaction and reshaped life as we know it.
Restrictions on the movement of people have consequently forced businesses to shut down, causing massive unemployment, diminished consumption, halting the flow of goods, production, distribution and severely disintegrating supply chains, which delivered the second hit to global trade. The World Trade Organization (WTO) expects global trade to plummet by a range of 13 to 32 percent in 2020 as a result of supply chain disruption.
Sectors characterized by complex value chain linkages will face greater contractions than before. The worst affected area is trade-intensive automobiles and technology products as they are produced on the most complex web of a global supply chain.
Group of 20 leaders are committed to implementing a free, fair, nondiscriminatory, transparent, predictable and stable trade and investment environment. Ensuring that trade-related measures taken during this outbreak are targeted, proportionate, transparent and temporary.
However, international coordination is being put to the test, as trade measures responding to COVID-19 tend to be divided. Around 50 members of WTO have issued around 130 trade measures related to COVID-19. Around 55 percent of the measures are trade facilitation for reducing or eliminating import tariffs and nontariff measures for certain medical equipment, medicines, disinfectants, raw materials, food products and relevant essential supplies against COVID-19.
In contrast, 45 percent of the measures tend to be trade restrictive, imposing quantitative restrictions (QRs) such as quotas, export licensing procedures or export bans, for similar products, particularly on medical-related supplies. Note that during normal times, QRs are not allowed to be instituted by WTO members. However, exceptions apply during certain circumstances to safeguard human life. Therefore, this development runs counterproductive to the need to fight this battle in a global setting.
As there is no supreme authority above nations to determine trade policy for collective purposes, each government naturally puts its own national interests first above others. The WTO’s goal of ensuring that trade flows as smoothly, predictably and freely as possible, is being challenged.
Going forward, global trade will be restructured and reshaped. Both in terms of its rules-based trading system and the dynamics of the market, respectively.
First, restrictive measures may continue after COVID-19 and “spread” further to other products. Requirements such as licensing, standards, labeling etc may increase, especially for a wide range of consumer goods and food products on the premise of human safety and health. Moreover, protectionists may view the crisis as a rare opportunity and use it as a pretext to impose technical requirements on imported products to address trade deficits.
Second, while barriers prevail, governments and businesses may rethink and restructure their dependence on supply chains. Realists and protectionists will argue that the current disruption proves the vulnerability of offshore supply chains and this crisis demonstrates the urgency of bringing supply chains back home. Otherwise, national interests will be at the mercy of foreign governments. At least for health and food products, as they closely relate to national security interests from this moment onward.
Meanwhile, liberalists and trade proponents will push to diversify supply chains and import sources further but will introduce a certain trade discipline to manage and secure supply chains. Either way, trade discipline will be different than before and more on the protective side.
Third, the market will be shifted in many ways. Companies will heavily rely on technology more than ever as they learn to do more with less human interaction. Retail will see a surge in e-commerce and harm bricks-and-mortar even further. Demand for web-based services and information will be off the roof. Industries will swiftly turn to automation and less labor to ensure predictable operations even in times of crisis. Importantly, consumer behavior will shift and demand higher product standardization due to health and safety concerns.
Accordingly, the way industry works will be shifted and forced to meet higher standards. The market will set its own regime.
Ultimately, the world cannot fight in a fragmentary way. Countries must be able to coordinate their trade measures and ensure complementarity with national policies. Further, countries may consider exchanges of information on national needs for essential goods and address them collectively through a planned supply chain set on a global scale. The rules-based trading system is being challenged and countries may need to rewrite the guidelines to a certain extent. After all, national interests come first.
As for the market, change is coming one way or another. It just got propelled faster and it requires many adjustments. Among others, countries need a facilitative digital economy environment such as strong broadband capacity and friendly policies to support e-commerce, and profound logistics infrastructure for seamless distribution and excellent delivery services. A combination of this wish list may catapult a trade rebound in the new normal.
Deputy director for America at the Trade Ministry's Directorate of Bilateral Trade Negotiation. The views expressed are personal.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.