COVID-19 is complicating global trade debates

Julia Grübler,
Vienna Institute for International Economic Studies (wiiw),

Trade policy used to be a niche topic of limited interest to the public. Recently, however, it has received a much wider audience, making it to the front pages of newspapers. By the end of 2019, the hot topics in international trade were manifold and characterised by distinctly different policies pursued by the three biggest economies in the world: the United States, China, and the European Union caught in the crossfire.

China’s fast economic development, partly attributed to unfair competition (e.g. state-owned enterprises, price-dumping, violation of intellectual property rights), ultimately resulted in the declaration of a ‘trade war’ by the Trump administration. Import tariffs, which were thought of as a trade policy tool becoming obsolete, experienced a dramatic comeback that continues to hurt both economies and subsequently their trading partners. Analysis by the Peterson Institute for International Economics shows that China’s tariffs [i] on US exports increased from 8% in January 2018 to 21.1% in December 2019. During the same time, US tariffs on Chinese exports soared from 3.1% to 21.0%. The ‘Phase-I Deal’, signed in January 2020, might have propitiated the disputing parties, but managed trade (e.g. requiring China to increase imports of certain goods by about USD 95 billion compared to a 2017 baseline) is a danger to the multilateral rule-based trade order and may cause huge negative trade diversion effects for other economies. For example, estimates published by the Kiel Institute for the World Economy suggest a loss of about USD 11 billion (or 5%) in EU exports to China as a result of the deal.

Although China seems to be a particular thorn in the side of the US, it is not the only target directly attacked by US trade policy. Threats of imposing tariffs on cars and car parts recur in addition to increasing US tariffs on steel (25%) and aluminium (10%). On 24 January 2020, President Trump extended these tariffs to other product categories worth almost USD 450 million of US imports, affecting inter alia the EU and China.

In fact, the US is not only affronting its major trading partners, but all 164 members of the World Trade Organisation, by blocking the appointment of new members to the Appellate Body. By 10 December 2019, the terms of two judges expired. These agreed to continue their work on three appeals for which oral hearings have been completed – after that, with only one judge left, the WTO Appellate Body will be dysfunctional.

The slow progress in multilateral negotiations (‘Doha Development Round’) combined with frequent US assaults against the WTO, spur the conclusion of bilateral and plurilateral agreements. The EU is at the forefront in negotiating free trade agreements. The year 2019 proved particularly eventful: On 1 February 2019 the EU-Japan Economic Partnership Agreement entered into force. It is considered the most ambitious trade agreement with any Asian economy, relegating the agreement with South Korea to the 2nd rank. In addition, the agreement with Singapore entered into force in November. In June, the agreement with Vietnam was signed and an agreement in principle was reached with the Common Southern Market (Mercosur) comprising Argentina, Brazil, Paraguay and Uruguay. A dozen other negotiations are ongoing.

While the protectionist turn by the US and the EU’s greater focus on bilateralism had significantly shaped global trade debates, the current global uncertainty that is crippling the world economy may shake up globalisation even more profoundly. Today, the virus SARS-CoV-2 causing the disease COVID-19 is dominating all policy agendas.

Within a month, the main concern has shifted from a negative economic impact of COVID-19 in China trickling through global production and supply chains to a worldwide economic downturn. The ‘factory of the world’ has already been cautiously restarting its engines, while the pandemic is bringing the economies of EU and the US to a hold and confronting their health and social security systems with an enormous stress test.

In light of current developments, major trade policy issues as of end-2019 temporarily receive little attention; however, they will reappear once the biggest uncertainty has been tackled. But when they do, the impact of COVID-19 will have placed an additional layer of complexity on top: National security concerns might shift from imported cars to dependency on imports of pharmaceuticals and personal protective equipment. Strategies to overcome trade dependencies may vary considerably from incentivising domestic production to internationally diversifying production even further. Steps towards liberalisation in services trade might be revoked to reduce the risk of person-to-person transmission of diseases… Without question, the year 2020 will leave its mark on the global economy and international trade policy debates.

[i] Tariff data weighted by exporting country’s exports to the world in 2017, i.e. prior to the tariff escalation.

Twitter: @JuliaGruebler

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