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Blogsite of the Institute for Legal Studies

The Covid-19 Pandemic and International Trade

2020. April 17. 16:21
Lukasz Gruszczynski
TK JTI

The Covid-19 pandemic is not only a public health crisis but also a serious challenge for international and domestic politics and for the global economy. The official data shows that the pandemic, as of April 17th, 2020, has already claimed more than 145.000 lives among 2,2 million confirmed cases (for up-to-date information see here). While so far most of the governments have seen an increase in popular support (for example, the approval rating for Giuseppe Conte has gone up by 27%, while for Angela Merkel by 11%, for addition details see here), this trend may soon revert when the economic and social effects of the pandemic will become more apparent. Most of the experts expect to see a deep recession in 2020. For example, the International Monetary Fund, in its latest World Economy Outlook, forecasts that the global economy will shrink by 3%, making the current situation the worst recession since the Great Depression. The advanced economies will be the most affected, with an average contraction of 6.1%, including 5.9% in the United States and 7.5% in the Euro Zone.

The above developments will obviously have consequences for international trade. Actually, the international exchange of goods was already slowing down in 2019 (while the service sector saw in the same period a minimal increase) as a result of the trade war between the United States and China and weaker economic growth. The pandemic will make the whole situation much worse. For example, the World Trade Organization envisages that global trade will fall this year by between 13% and 32%. Even in the most optimistic scenario, this will be a deeper contraction than that which took place after the 2008-09 financial crisis. 

It is possible that once the pandemic is brought under control, international trade will go back to its pre-crisis level. However, it is also imaginable that the current crisis may be the catalyst for deeper changes (at least in short and mid-term perspective) in the structure of international trade and the governance arrangements in this field. Actually there are certain signs which indicate that this might be a more probable scenario. In particular, the Covid-19 pandemic has shown that the economic benefits of the current system, which is based on specialization and long supply chains, come with their costs. As correctly noted by two commentators, “single-source providers, or regions of the world that specialize in one particular product, can create unexpected fragility in moments of crisis, causing supply chains to break down.” For example, China is a dominant global supplier of active pharmaceutical ingredients for many important medications. In 2018 it accounted for 95% of the United States imports of ibuprofen, 91% of hydrocortisone, 40-45% of penicillin, and 40% of heparin. This is also true for many other categories of goods, even if the consequences of possible disruption are not so dramatic. Such pattern is also visible for the service sector, which is dominated by the developed countries (think, for example, about the position of the United States and the United Kingdom in financial services, and attempts of Russia, China and Iran to break this dominance).

This newly discovered risk may eventually lead to profound changes in existing supply chains, consisting in the reduction of the reliance on a single country or region and shortening their length. The early signs of such a process have been visible over the last couple of years with the Trump Administration pressuring American companies (albeit for different reasons) to move their production back to the United States, or at least outside of China. These efforts have been only partially successful, but the current outbreak may trigger a more strenuous response not only from the US government but more generally.

The pandemic, rather than increasing the global solidarity, can also strengthen the current geopolitical tensions between countries, in particular between the world superpowers. More specifically, the countries may compete more openly for limited resources by imposing trade restrictions or pressuring each other for release of specific types of goods. The United States is once again a good example, with Donald Trump recently imposing restrictions on exports of masks and other medical protective equipment (which have been eventually eased), and threatening India over its export ban on hydroxychloroquine (i.e. an antimalaria drug produced by India that may also be used to treat Covid-19). The European Union has also introduced its own controls on the export of certain critical supplies. Moreover, export food restrictions have become more common these days, as some countries are concerned with the security of their food supplies (a good online tracker of such restrictions can be found here).

It neither should come as a surprise that the global superpowers try to strategically capitalize on the pandemic. For example, the American President consistently refers to SARS-CoV-2 as the ‘Chinese virus’ and blames both China and the World Health Organization for the scale of the outbreak in the US, the underlying argument being that if the world had known the real size and severity of the Covid-19 epidemic it would have been better prepared for its global spread. On the other hand, the Chinese authorities have implemented its ‘mask diplomacy’ in the attempt to present itself as a saviour rather than a contributor to the pandemic. More recently it has also started to censor research into the origins of the Covid-19 pandemic by requiring Chinese scientists to get individual approvals from the Ministry of Science and Technology. A very similar approach has been taken by Russia towards the European Union. In particular, Russia has organized a systematic fake news campaign aimed at undermining public confidence in the Union and the current governments of the Member States.

All these strategies clearly aim at building up specific narratives over the role played by individual countries/governments in the current health crisis, strengthening or weakening their perceived legitimacy. These developments seem to indicate, among the other things, that the trade ceasefire between the US and China is only temporary and the tension will strike back with a vengeance once the pandemic is under some control. The recent decision of the EU to implement tighter investment controls to protect European companies struggling due to the Covid-19 pandemic from the hostile non-EU acquisitions (for the Commission policy paper see here) also shows that strategic rivalry between the EU and China may be on the rise.

Consequently, the new world that may emerge in those circumstances will be characterized (in its economic dimension) by tighter immigration rules, newly-erected trade and investment barriers, and technological decoupling, with a central role reserved for States rather than for international institutions (think here about the progressive marginalization of the World Trade Organization and the Trump Administration’s media campaign against the World Health Organization). While the seeds of such a process were sown some time ago, the Covid-19 pandemic may exacerbate existing tendencies for States to turn inward and compete more openly for economic and political dominance in the world. Whether this actually happens will much depend on the length and severity of the current pandemic. The bigger is its impact, the greater are chances that we will see a paradigm shift in international trade relations and governance.

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This blog post is based on the article entitled ‘The Covid-19 Pandemic and International Trade: Temporary Turbulences or Paradigm Shift?’ published in the special issue of the European Journal of Risk Regulation on the Covid-19 pandemic.

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The views expressed above belong to the author and do not necessarily represent the views of the Centre for Social Sciences.

 

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