The coronavirus pandemic has cast a dark shadow over global trade. In the short term, lockdowns across the world have caused an unprecedented collapse in cross-border commerce, a rational response, guided by public health considerations. But the fear is that these negative effects will persist long after the crisis has passed. This, though, shouldn’t be a foregone conclusion.
There are good reasons to believe that while the web of international economic relations is likely to change, perhaps significantly, trade won’t be damaged catastrophically. Instead, some of the flows of physical goods will be replaced by digital services. Meanwhile, supply chains are likely to broaden and become more regional.
Undoubtedly, international integration was a major factor in the speed at which this pandemic spread. The virus originated in a central Chinese marketplace, probably sometime in the final quarter of 2019. By the end of the first quarter of 2020, all the world’s leading economies were in some degree of lockdown. That's no surprise in an era of mass tourism: today, thousands of flights connect the most disparate parts of the world and huge cities double up as major international transport hubs.
Governments coming out of this crisis will undoubtedly think twice about the benefits of global integration and interdependence. Barriers to travel are likely to prove sticky, much as security measures have in the wake of 9/11.
China could be the target of new restrictions – populist politicians elsewhere have argued that it needs to be “punished” for being the source of the infection.
Meanwhile, global supply chains have been heavily disrupted by the lockdown as factories have been shut down for the duration. Companies could well respond by taking measures to reduce their vulnerabilities.
But while there are risks to globalisation in the post-coronavirus world, the likelihood is that international trade takes on new forms rather than being undermined.
There could well be less trade in physical goods and less mobility of people. But digital globalisation will undoubtedly become more important. The global lockdown has shown both companies and governments how much can be achieved through the internet – whether it’s the effectiveness of remote working and the practicality of online services. Video-conferencing can be much more efficient and time-saving than in-person meetings. E-learning can be effective, potentially opening up high quality education to many more students.
Although companies may be inclined to bring some production home, the principle of comparative advantage will still hold. It will always be more economically efficient to source some goods and materials from other countries. Instead, companies could shift to being less reliant on single sources, making their supply networks more resilient by diversifying their supplier networks and building in some redundancy. That might increase the cost of production somewhat, but companies could well see this as insurance against broken supply chains.
Shortening supply chains could make trade more regional – as has happened in Asia over the past three decades, including since the GFC. Intra-Asian trade represented 28 per cent of total Asian exports, rising to 42 per cent in 2008 and 46 per cent in 2018. Where this raises labour costs, companies can compensate by moving towards greater automation.
As for China’s role in the world, its alacrity in providing medical aid and emergency supplies to many countries will surely have won it friends around the world, showing the necessity of multilateral cooperation, even at a time when, in other respects, countries have been closing themselves off. This pandemic has fostered unparalleled international collaboration in medical research. China has been pivotal to this effort, having been the first to suffer the virus and given the scale of its scientific community and facilities.
Yes, trade relations always come with risks. Yet the benefits of globally interconnected economies mustn’t be understated – they are far greater than the costs. Recent decades of rising global trade, prompted by falling barriers like tariffs, have lifted hundreds of millions of people out of poverty – not just in Asia, but across the world. We mustn’t allow the pandemic to undo all that’s been achieved.
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