Covid fallout: Sinking trust in world trade

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Published: May 11, 2020 5:00 AM

As China falters to provide smooth supply of intermediate products to feed the global supply chain, the future of global trade has come under threat.

Global confidence in trade and integration has dwindled with Covid-19, which is disrupting trade and economic potentiality of not only individual countries but also regional groupings and world economy.

Global confidence in trade and integration has dwindled with Covid-19, which is disrupting trade and economic potentiality of not only individual countries but also regional groupings and world economy. The most debilitating impact of this pandemic is the dislocation in the global supply chain. As China falters to provide smooth supply of intermediate products to feed the global supply chain, the future of global trade has come under threat.

China accounts for one-fifth of global manufacturing. Intermediary products produced in China are in categories of electronics, cars, machinery, textiles. Non-involvement of Chinese inputs from these supply chains, in some instances, will lead to production coming to a grinding halt, as was the case with Hyundai in South Korea. In other instances, alternatives will be found but they may be suboptimal and lead to lower volumes of production with higher cost—and will embed higher costs throughout the supply chain and could ultimately result in higher inflation.

The picture is equally grim for countries that supply intermediary products to China’s shut factories. The two economies that are most affected are Taiwan and South Korea; their top export to China is electronic integrated circuit, which accounts for 5% of Taiwan’s GDP and 2% of South Korea’s.

The virus has been disruptive to services areas such as tourism, temporary movement of skilled workers and movement of professionals delivering expertise and advisory services. Chinese tourists travelling to Southeast Asia have dropped; in countries such as Thailand, Chinese tourists account for 2.7% of GDP.

A long-term consequence of Covid-19 might be its impact on the already faltering confidence in trade. Prior to Covid-19, there was some semblance of trade conflict and trade skirmishes, but business and government had never lost hope in trade and integration. They had confidence in trade, in its ability to deliver mutual benefits, as trade grew roughly twice the rate of global GDP growth.

But now this confidence in the benefits of trade and integration has suffered several blows. The latest is the global crude oil prices (hitting below zero), followed by twin crises of demand and supply due to Covid-19. This combination threatens to destroy all possibilities of regaining the momentum of trade and integration.

But this perception didn’t spring up overnight. Consider what immediately preceded Covid-19? Global steel and aluminium tariffs imposed by the US in 2018 were a shock to the global trade system and produced almost immediate in-kind retaliation. The escalating US-China trade war began to ramp up later that year, taking the average US tariff on Chinese imports from 3% at the onset to almost 20% now.

China’s exports to the US dropped 12.5% last year, while China’s imports from the US plunged 20.9% in 2019 from a year earlier, according to data from China’s General Administration of Customs. The US continues to weigh other substantial trade actions that will beget commensurate retaliation. Given this, it is perhaps unsurprising that, last year, global trade suffered its worst performance ever outside a recession, growing by only 1%.

These bilateral trade tensions and disputes are unfolding as the multilateral trade system is, to a large extent, simply proving to be futile or breaking down. In the quarter century of its existence, the WTO has failed to conclude even a single round of multilateral trade negotiations, and its dispute settlement function has been derailed by an impasse over appellate judges.

If we wish to ensure sustainability of trade, the challenge will be to recognise and confront the new and uncomfortable realities of imbalanced trade outcomes, rather than rely on assumptions, structures and conventional wisdom that have defined our approach to trade in the post-war era.

The author is professor, LBSIM, and former senior faculty, IIFT Delhi

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