A quick health check on the global trading system

It’s become a cliché to say that the world will never be the same after the Covid-19 pandemic. Social and economic activities have been disrupted as never before. Priorities are being re-ordered and it’s hard to avoid concluding that a tectonic shift is taking place in our views of the world.

The WTO has estimated that in 2020 world trade will decline by between 13 per cent (optimistic scenario) and 32 per cent (negative scenario). UNCTAD forecasts downward pressure on FDI flows of 30-40 per cent.

In mid-crisis as we are, it’s also hard to form an objective view of the likely longer term consequences. What do we know so far about how governments and businesses are reacting?

On the governmental side, the picture is mixed. As ever, the G20 has talked a good game. Their Trade Ministers have committed to working actively to ensure the continued flow of vital medical supplies and equipment. Any necessary emergency measures, they say, must be targeted, proportionate, transparent and temporary. They are working together to mitigate the impact of the crisis on international trade and investment – but can they contain discord as each country fights its own corner?

Some governments are attempting to match words with action. New Zealand and Singapore have attracted a degree of support for an initiative to remove tariffs and non-tariff barriers on a list of Covid-19 related products. Canada is working on a plan which would keep agricultural supply chains open and discourage export restrictions. So far about 20 countries have signed up.

Interestingly, these initiatives come primarily from mid-sized economies. However EU Trade Commissioner Phil Hogan has also recently raised within the EU the idea of an international undertaking to suspend tariffs on Covid-19 related products and facilitate access to medicines.

On the other side of the ledger, according to the WTO over 80 economies have taken action to restrict exports, most often in relation to medical equipment, medical supplies and pharmaceuticals. WTO rules on export restrictions are relatively weak.

At national level, will Governments see international trade as a way out of the crisis and to deal with demand spikes, or will they draw the conclusion that self-sufficiency and stock-piling is a better pathway? The debate has only just started. In a recent address, French President Emmanuel Macron, while also calling for more international cooperation, said (in translation):

“France must keep its financial independence and rebuild our agricultural, sanitary, industrial and technological independence. We must have more autonomous strategy at European level.”

Looking more broadly, western governments have been highly critical of state-sponsored and state-subsidised trade and economic growth models such as China’s, and have launched an initiative to re-write the WTO rules on subsidies. Where will this stand now that those same western governments have had to intervene massively to prop up businesses in many key sectors?

For many businesses, the crisis has highlighted the fragility of global supply chains – not only in terms of reliability of suppliers but also logistical bottlenecks. The answer for some may be de-coupling and increased localisation of production; for others diversification of supply chains; and for others yet increased automation and digitalisation. When this is added to other pressures that were already evident before the Covid-19 pandemic, we may be seeing globalisation thrown into reverse. Or is it to be a new form of re-globalisation?

Another trend that was clear before the pandemic was the movement away from consumers shopping in physical stores towards online retail. That has only been accelerated by the current crisis. Has there been a permanent shift in consumers’ habits and, if so, what are the implications for future business and employment?

It is in areas such as digital trade that the nexus between business practice and trade policy is thrown into sharp relief. For example, do we need more harmonised global rules to foster the growth of e-commerce and digital trade? An initiative is currently underway in Geneva with that in mind. But subjects such as data flows and privacy are proving hard nuts to crack given the different approaches of major players such as the US, the EU and China.

Developing countries are sometimes in an invidious position in this debate. Some rely on tariffs on physical goods as a significant source of revenue, and have hosts of small-scale shopkeepers to protect against the giants of the online marketplace in goods and services. As a result they are contemplating the novel and technically challenging idea of imposing customs duties on electronic transmissions across borders – which is currently subject to WTO moratorium. This may well turn out to be counter-productive in the longer term.

Emerging markets and developing countries also have about $8 trillion in external debt. A large number of these countries – as many as 80 – have approached the IMF to access emergency financing instruments. There have been calls for a temporary debt standstill to enable vulnerable developing countries to weather the pandemic.

Finally, what for the trade war and ongoing FTA negotiations?

Before the crisis hit, the US and China agreed a ‘Phase I’ deal that committed China to a number of market access openings and sizeable purchases of US goods and services in 2020. Despite both sides reportedly continuing dialogue, it is hard to see how China can meet its commitments with Covid-19 still in full swing. It is harder still to see how progress can be made now on a ‘Phase II’ deal with China involving deeper structural reforms.

Whilst the revised NAFTA (the ‘USMCA’) is expected to enter into force on 1 July after a lengthy ratification process, other deals the US was hoping to agree with the EU, UK and India will now also surely be delayed.

For the EU, the biggest challenge is making progress in talks on a trade deal with the UK before the self-imposed deadline of 31 December 2020. Major stumbling blocks emerged pre-crisis on issues such as fisheries and level playing field commitments.

It is unclear how either side will be able to move past their respective red lines, not least given the short window for negotiations made even shorter by Covid-19 as well as the UK Government’s refusal to countenance an extension to the current transition period. The spectre of a ‘Hard Brexit’ looms on the horizon yet again.

Other FTA negotiations the EU is conducting with the likes of Australia, New Zealand and Indonesia are reportedly progressing slowly behind the scenes via videoconference.

It is hard to ignore the fact that we are living though a trade collapse. The multilateral and bilateral trade agendas have been dealt a significant blow. It may be too early to be able to say with any clarity how quickly we can recover, or what the lasting effects will be. However, almost wherever we look, the potential ramifications are without doubt of enormous significance for global trade and commerce.

The big question is whether the global response will be coordinated and cooperative, or fragmented and self-centred.