There is a shift in global trade. But 2020 is not 1930 or 2008 | Analytics
There is a general sense, both among policymakers and observers, that trade in the post-Covid-19 world will undergo fundamental shifts. Two factors seem to have led to these conclusions. The first is the nature of trade during the crisis and the second is the dramatic decline in global trade and employment. However, what is most critical is that the global crisis has focused attention on the required changes in the multilateral trade order.
The special World Trade Organization (WTO) section on Covid-19 reveals a striking similarity in the response of countries. All of them tightened export restrictions on medical hardware and eliminated all duties on imports and medicines. However, the nature of the pandemic enforced co-operation. Producers of medical hardware (developed countries) needed to co-operate with pharma exporters (for example, developing countries such as India) to control the pandemic. The end result was a remarkable degree of cooperation among both sets of countries. This was never a feature of global restrictions during the trade wars after 1930 and 2008.
The nature of the pandemic, which has sharpened the focus on global public goods, sets this period apart from meltdowns of the 1930s and 2008. This is not surprising as the previous two episodes of recession were the consequences of an endogenous failure of expectations after a decade or more of global expansion. The current trade crisis is completely exogenous, driven by government action and the fear of the unknown which has separated buyers from sellers.
For example, multilateral agencies estimate that global employment in the Covid-19 period will fall by as much as 25% to 30%. Consequently, global trade will also decline by about 15% in the second quarter of 2020. Closer to home, India’s exports declined by about 60% in the first couple of months of the crisis. Globally, most economists have suggested typical Keynesian pump priming measures.
However, the causal factor today is not economic and hence Keynesian demand stimuli will not work and will lead individuals to increase their savings. The real problem is the fear psychosis, which will only disappear once a vaccine is made available and/ or the impact of the pandemic wanes over time. The recovery from the pandemic will manifest itself in a V-shape pattern rather than the U-shape associated with endogenous trade cycles.
The most significant change is in the nature of trade since the 1960s and 1970s. By and large, since the General Agreement on Tariffs and Trade (GATT) 1948, countries have largely traded manufactured goods. In addition, these manufactured goods were distinct so that if one country exported food products, it imported computers and cars. This is why GATT was devoted largely to rules regulating merchandise trade. However, in the last four decades, the nature of commodity trade has changed dramatically.
For one, the type of commodities now traded fall in the category of so-called Intra Industry Trade (IIT): Here trade is largely in intermediate inputs rather than in final consumption goods. Second, since about 2008, global merchandise trade has reached its peak as a share of global trade (around 60%) and the growing segment is now trade in services. In fact, technological developments in the last two decades and fragmentation of production imply that it may be difficult to separate one from the other. The moot point is that typically protection via nominal tariffs may be outdated as a country is simultaneously importing and exporting commodities in the same industrial category.
The second change in the nature of global trade is the nature of actors involved: 60% of trade today is intra-firm and 50% between subsidiaries of the same transnational company. Yet, WTO is a forum in which only countries can participate. Future multilateral and plurilateral agreements will have to address these issues.
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