Monday 6 July 2020 7:19 am

Act now to save free trade

Professor Syed Kamall is academic and research director at the Institute of Economic Affairs. He served as an MEP for London 2005–2019. ​

Free trade is a cornerstone of the global economy.

It has lifted billions out of poverty and enabled the highest living standards than at any point in human history.

It is therefore worrying — although not surprising given the impact of coronavirus on economic activity — that we have seen a stark drop in global trade volumes since this pandemic began. The World Trade Organisation (WTO) predicts that global trade in goods will drop by between 13 and 32 per cent in 2020.

Can global trade recover and, if so, how fast?

The good news is that, when trade volumes last dropped substantially during the financial crisis of 2008, they did indeed recover. The bad news is that they did not return to pre-crisis rates of growth, and worrying trends suggest that today’s recovery may be hampered even further.

It is with this in mind that WTO forecasts consider both pessimistic and optimistic future scenarios. And a new briefing paper from the Institute of Economic Affairs — Freight Expectations, published today — examines the factors that will determine the strength of the recovery.

Three of these are directly related to the coronavirus lockdown: the nature of the global recovery, ongoing temporary restrictions, and shocks to supply chains.

A strong rebound is more likely, for example, if the pandemic is seen as a short one-time shock leading businesses and consumers to quickly resume investment and spending once lockdowns ease. In contrast, longer lockdowns or any subsequent waves of infection will weaken the recovery.

But the economic bounce back is only half the story. We also need to look at political factors, or barriers to trade, that could cause long-term disruption to supply chains.

Take the 80 countries and customs territories that have imposed temporary Covid-related restrictions on exports of medical supplies, medical equipment, food and toilet paper. Hopefully, these restrictions will be lifted. But we should all heed Milton Friedman’s warning that “nothing is so permanent as a temporary government program”.

How countries — and, indeed, private companies — respond to the unprecedented disruption we’ve seen over the past four months remains to be seen. There are differing views. The World Economic Forum claims that “the coronavirus crisis has revealed the fragility of the modern supply chain,” while others consider supply chains in the private sector to have held up remarkably well. Still, we can be fairly certain that some companies will diversify their international supplier base, while a few will look to reshore production entirely.

And we cannot overlook the pre-Covid trend towards protectionism. After years of growth, global trade in goods fell slightly in 2019.

Even before lockdown, we saw a US President renegotiating or withdrawing from international trade agreements, as well as imposing a slew of import tariffs. And after the withdrawal of the relatively free-trading UK, one Brussels-based newspaper warned: “Here comes European protectionism”.

Meanwhile, long-standing concerns over the Chinese government’s record on human rights, foreign policy, intellectual property rights, cyber attacks, technology espionage and currency manipulation have been exacerbated by its opaque and aggressive response to the Covid-19 outbreak. Any backlash from governments, consumers and companies will affect trade with China, which accounted for 12 per cent of global trade in 2018.

And then there’s the climate factor. Consumers are increasingly demanding more locally produced food. As more governments set net-zero carbon targets, production is being shifted to countries with lower environmental standards, leading to calls for carbon border adjusted import tariffs.

Finally, we should also not forget the role of technology — as great a disrupter as pandemics. An ING report predicts that sometime between 2040 and 2060, 3D printing could account for 50 per cent of all manufactured goods, potentially reducing international trade in manufactured goods by between 23 per cent and 40 per cent.

For those who believe in the power of global trade to spur progress and prosperity, there are some reasons for optimism. While trade in goods fell in 2019, for example, trade in services increased. Already, 49 countries have signed a pledge to ensure that Covid-19 restrictions are temporary, indicating that governments understand the benefits. And the UK’s quest to strike fast and sign trade agreements of its own may encourage the EU to up its game.

But the stakes are high. As trade secretary Liz Truss put it: “Rules-based free trade has done more than any single policy prescription in human history to advance human progress and alleviate poverty. The world needs more of it now, not less, and a fully functioning international system underpinned by countries who play by the rules.”

Let’s hope recovery from this pandemic spurs more positive moves to encourage open trade.

Freight Expectations: Post-pandemic prospects for global trade is available on the IEA website.

Main image credit: Getty

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