How COVID-19 is going to change the future of Free Trade

As the COVID-19 pandemic continues disrupting socio-economic, political and psychological well-being across the globe, governments have been forced to direct their attention entirely towards immediate crisis response. However, now is also the time to acknowledge that this pandemic has the potential to change some significant global realities, as we presently know them. The geographical and temporal persistence of the virus seems to suggest that these changes, if not permanent, would linger on long after the virus itself has been dealt with.

This pandemic has exposed the inherent weaknesses of state functioning and questioned the very structure on which modern economies have been thriving. One of the most pertinent questions that has come up is regarding the future of free trade and whether the principle of global economic interconnectedness – as opposed to that of self-sufficiency – would still remain relevant post this shock and to what extent, thus posing a major challenge to the very structure on which modern economies have been thriving. The idea of self-reliance has started gaining ground in the context of the pandemic having exposed some of the deepest and least known inadequacies of state functioning and prioritization. “If we learn anything from this crisis…never again should we have to depend on the rest of the world for our central medicines and countermeasures, and at the same time we will deregulate so we can get the [Food and Drug Administration] and [Environmental Protection Agency] to facilitate domestic manufacturing,” said Peter Navarro, the White House director of trade and manufacturing policy, during a coronavirus task force briefing in early April. He seemed to echo President Donald Trump’s sentiment of how trade alliances haven’t been of much help during this crisis, adding that “50 countries have already imposed some forms of export restrictions in their country against the rest of the world.” (1)

Free trade has already been weathering storms since this millennium started, as concerns about its association with inequality are much debated in developing nations and the fairness of regulations are put to question by the developed world. This has further been reinforced since Trump arrived at the White House and made his protectionist stance evident to the rest of the world – particularly China – through the imposition of numerous tariffs, renegotiation of or withdrawal from agreements and regular threats directed towards numerous countries and even bodies like the World Trade Organisation (WTO). Since 2018, when the Trump administration set into motion a series of events that have now come to be known as the USChina trade war, US has imposed $550 billion worth of tariffs on Chinese goods. China has also retaliated with its share of tariffs amounting to $185 billion on US goods. (2) It is noteworthy that this protectionist sentiment isn’t just exclusive to the US, but has been simmering across the West, albeit in much subtler ways – finding its voice in evolving political representations, such as in the European Parliament that seems to be gradually turning hostile towards China, denying it a market economy status. The rising popularity of anti-trade populist parties such as the Front National in France and Podemos in Spain, further supplements this narrative. (3)

Added to all this, the global coronavirus outbreak, which has distinctly underscored the value of self-reliance for any country, seems to have delivered a jarring blow to free trade. Medical supplies like reagents, essential for making testing kits, are in short supply the world over and production is failing to keep pace with the surging demand, leading to significant delays in testing. Some countries have even been hoarding medical necessities. China, for instance, during the initial phase of the outbreak, imported much larger quantities of masks and respirators than it needed, which is now leading to shortages in other countries. Countries like Russia, Turkey, Germany and France, have forbidden the export of masks and respirators (4), while India has done the same for sanitisers and ventilators. (5) The World Trade Monitor showed a decline of 1.5% in global trade (by volume) and 0.4% (by value) in February 2020 itself. (6) The bubble of “being there for one another” seems to have burst, and it’s been made adequately clear that national interests would supersede global interests when countries find themselves neck-deep in crises.

Another unprecedented consequence of the pandemic may be long-lasting changes in consumption patterns. Spending weeks in lockdowns, consumers may finally learn important lessons on having to make do with minimal necessities. Skepticism regarding the virus being extremely prone to a rebound may make the general populace extra wary about not indulging in commodities or services that can be avoided. Macroeconomic consumption, even after easing of lockdown restrictions, may take time to return to its previous levels due to an extremely slow restoration of the economy’s purchasing power, which would have been significantly eroded during the lockdown period. This long-drawn recovery process may mean an incomplete recovery, with the consumer base getting enough time to mould itself into newer and relatively minimalist consumption patterns. Governments, who would by then be rallying to make themselves more self-sufficient than before, would now also have to deal with a demand slump that may potentially cause unemployment to augment. Depending upon the scale of this phenomenon, it would make sense for them to pursue a policy of import substitution to as large an extent as possible, to cut domestic job losses.

However, as dim as the prospects for free trade may seem today, before dismissing it as absolutely unnecessary, we must delve into the factors that have managed to sustain it for centuries. Comparative advantage is one of the primary factors that has always stimulated trade over the ages. It is pretty simplistic to assume that a crisis-ridden economy would function in the same manner as a stable economy, which is what leaves the self-sufficiency argument inadequate. It is understandable how, in the unprecedented current scenario, where each country urgently needs and is short of the same medical supplies, the principle of comparative advantage may seem redundant. However, as normalcy starts getting restored, countries will once again need to diversify their respective consumption bundles, which is when comparative advantage would again take centre stage, simply because of its relative economic viability over self-sufficiency, in it being mutually advantageous for the engaging parties. This becomes even more critical for countries that lack adequate resources to be able to manufacture everything domestically and are majorly dependant on imports.

Linked to this are the concerns relating to the huge costs that revamping supply chains would require. Replacing or modifying a major chunk of the capital stock, retraining or re-hiring workers, arranging for new clientele, suppliers and transporters as well as acquiring new permits, would require a huge deal of investment – monetary, temporal and research-oriented. Repurposing of entire industries would only make sense if these combined costs do not exceed the present and future benefits accruing out of lucrative trade ties.

But most importantly, is the world itself truly ready to abandon free trade? Even though US pulled out of the Trans-Pacific Partnership, the remaining members implemented most of it, even granting US an unlimited window to rejoin if it wants to in the future. Further, more countries have expressed interest in joining it as well. EU has been working on many Free Trade Agreements (FTAs), most notably with the ASEAN. The Regional Comprehensive Economic Partnership (RCEP) has recently been formulated with the promise of enhanced trade ties in the Asia-Pacific region. The African Union is working towards the Continental Free Trade Agreement (CFTA). As much as countries rally against WTO regulations or fight tariff wars, they know how crucial trade is to their economic lifeline.

Interestingly, countries share a bittersweet relationship with trade. They do create a lot of hue and cry about it, but ultimately, appreciate that they cannot do without engaging in it. As disruptive as the COVID-19 pandemic may be, it’ll be a challenge for it to entirely do away with the topmost tier of mutual advantage, a principle that forms the basis of human civilization. However, what must be drawn from this vital experience is the central lesson that an economy must set its own limits for how much it’s willing to rely on free trade. It must strengthen its capacity and ensure self-sufficiency, at least in essential goods and services, to the extent that it can sustain itself through times of crisis. How finely this balance between free trade and self-sufficiency is struck, would largely determine our competence in mitigating the effects of any future setback.

References
1. Delaney R. (2020) “Coronavirus: White House trade adviser vows to cut reliance on foreign medical supplies.” South China Morning Post. https://www.scmp.com/news/china/article/3078027/coronavirus-mike-pence-tries-blamechina-and-own-us-health-agency-slow
2. Wong D, AC Koty. (2020) “The US-China Trade War: A Timeline.” China Briefing. https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/
3. Zuluaga D. (2016) “Public opinion is turning against free trade and globalization.” Institute of Economic Affairs. https://iea.org.uk/blog/public-opinion-is-turning-against-free-trade-and-globalisation
4. Farrell H, A Newman. (2020) “Will the Coronavirus End Globalization as We Know It?” Foreign Affairs. https://www.foreignaffairs.com/articles/2020-03-16/will-coronavirus-end-globalization-weknow-it
5. ET Online. (2020) “The effect of coronavirus pandemic begins to show up in India’s foreign trade numbers.” Economic Times. https://economictimes.indiatimes.com/news/economy/foreign-trade/the-effect-of-coronaviruspandemic-begins-to-show-up-in-indias-foreign-tradenumbers/articleshow/74806259.cms?from=mdr
6. World Trade Monitor. (2020) “How has the trade volume changed last month in the world?” CPB Netherlands Bureau for Economic Analysis. https://www.cpb.nl/en/worldtrademonitor