Talking Trade blog
The future of trade
Published 12 March 2020
The global economy is entering a crisis mode. First, COVID19 is wreaking havoc. It has hit global supply chains, leading to large disruptions in supply that will last for months, even if the virus were suddenly stopped. In addition, government policies and corporate and individual decisions to stay home are causing serious drops in demand for most goods and many services.
The virus is also taking a considerable toll on government resources, including time and money. Because the situation is so fluid and changing so rapidly, it can appear to be the only situation worth tracking.
There is, however, a second challenge to the global economy that predates the spread of the virus. The global regime that manages trade is breaking down. The virus, in fact, is accelerating the collapse, as critical meetings are not taking place at the World Trade Organization (WTO) to resolve important issues.
The WTO has been in a state of near-paralysis because key countries, notably the United States, are uncertain about how carefully the rules should be followed. As protectionist barriers are erected in one economy, it can be harder for other governments to resist the same urges to support their own businesses and shut down trade borders to others.
If each government follows a similar path, trade will grind to a halt. Nearly every country will be considerably worse off, with limited raw materials, parts and components and finished goods made domestically.
In a world of fear and panic, compounded by a global rulebook that is increasingly being suspended, firms are struggling. Companies do not manage increasing risks and growing uncertainty very well. The natural inclination is to suspend all decisions—to not hire any additional staff, to retrench, to cut costs, and to limit future investments.
Contraction by firms only exacerbates the challenges. Companies that are in shutdown mode are not buying goods or services. Suppliers are caught, unable to manage their own costs.
Many of these issues are going to be hard to manage, no matter what responses governments provide. Companies and citizens will make their own decisions about employee and personal health risks. Individuals that end up with radically altered lifestyles as a result of prolonged periods at home or out of work may permanently change their buying patterns.
Unlike companies or households, government cannot simply shut down. It has to do two things that are hard: manage the immediate situation and plan ahead to limit future damage. Understandably, the former task occupies most of the time and attention for officials. But the latter also needs focus or countries will come out of this current crisis unprepared for accelerating growth and supporting future development.
The virus unlikely to last forever. Or, perhaps more accurately, the current state of panicked response to COVID-19 will resolve into something more manageable. Eventually, medical facilities will figure out how to handle cases more effectively. A vaccine will probably be found. The virus may simply subside for whatever reason.
In the meantime, the larger threat to the global economy presented by the collapsing WTO and serious strains in the system will likely remain.
It is possible, of course, that the virus causes governments to recommit to the global trade regime. A change in leadership in the United States might help. The size and scale of the final disruption to trade will make a difference.
As governments gear up to deal with the immediate situation, it is also worth spending the time (perhaps while at home?) pondering future plans. The virus has exposed challenges in the current structure for many firms and supply chains that were not resilient enough.
While it can be tempting to say that the virus has reinforced the message that trade is “bad,” the opposite lesson is actually on full display. The reaction to the spread of this virus has caused trade to collapse. When that happens and when firms and customers retrench, the economic fallout is considerable.
The reason the WTO was created in the first place (back when it was called the General Agreement on Tariffs and Trade or GATT) was precisely to ensure that markets remained open on terms that were fair to foreign and domestic firms. This lofty ideal has never been perfectly attained, but the broad pattern of supporting and encouraging open markets has brought lower costs and greater choices to individuals in nearly every part of the globe.
The virus demonstrates in real-time what happens when trade shuts down. Shelves end up empty and critical supplies are unavailable. Even firms in far-flung places end up suffering as the movement of people, goods and services grinds to a halt. Places that are actually clear of the virus (or appear to be clear of health risks for the moment) are impacted.
Consumers face limited choices and skyrocketing costs. Firms are going to be shedding workers as they cannot meet payrolls. (Tax relief does little good to bankrupt firms and unemployed workers.)
In short, a global contraction should not encourage governments to push for more closure of markets in the future. A world of limited trade is unlikely to be better. It will, instead, be considerably worse.
Governments need to think carefully about their responses. The immediate crisis should not close off options for future decisions. An interconnected world matters to all.
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