The pandemic exacerbates international tensions and will make it very difficult to recover previous levels
The covid-19 pandemic has caused the largest contraction in the global economy in nearly a century. Current forecasts suggest that world GDP will fall by 4.9% this year, the worst record since the Great Depression and a deterioration much greater than that suffered during the 2008 financial crisis. The worst, as the Monetary Fund recalled in June International (IMF), is that this “unprecedented crisis” is conditioned by an uncertainty also unknown about the evolution of the coronavirus and the path that the pandemic will have on economic activity.
The synchronized nature of the recession has severely hit commercial exchanges, which have been damaged both on the demand side, derived from the confinement imposed to control the virus, and on the supply side, due to the impossibility of maintaining levels. production and its transport. The scenario drawn in June by the World Trade Organization (WTO) still maintained some confidence in the recovery of trade flows, although its calculations place the decline in global trade between 13% and 32% this year alone. Foreign direct investment will fall between 30% and 40% and air traffic, both passenger and freight, will be reduced between 44% and 80%. Figures that make a quick trip around the world as it was very difficult.
But the trade crisis came from further behind. About the trade wars opened by the United States in recent years and its particular confrontation with China. From growing economic nationalism and the imposition of trade barriers. On the review of the taxation of large corporations. The deglobalization process that these and other elements have unleashed. In fact, global container shipping had already been on a downward path since the end of 2018; the exchange of goods fell 3% in the first quarter of this year, before the health crisis exploded in all its harshness, and the exchange of services fell by 7.6%, according to data from the Unctad, the United Nations agency United for Trade and Development.
Historians agree that the great shocks Economic trends tend to accelerate trends that are already underway, rather than drive major structural changes. In this case, the pandemic has added layers of complexity to global trade amid growing geopolitical tensions and realignment of value and supply chains. “The pandemic may end up redrawing the map of world trade,” says the Boston Consulting Group (BCG) consultancy in a report under the same title.
Since the end of World War II, trade has been one of the engines of global growth, growing three times more than GDP between 1950 and 2008, according to Boston Consulting, at a time when there were notable reductions in tariffs and numerous liberalization trade agreements were promoted at the multilateral level. It is the most recent stage of economic globalization that continues to this day. Progress towards free trade came to a halt well into the 2000s and, coinciding with the outbreak of the international financial crisis and the questioning of the economic model, reversals of that opening began to be considered. After the economic and social debacle that caused the Great Recession, the political climate also changed: the United Kingdom voted in favor of leaving the European Union and the arrival of Donald Trump to the White House caused the renegotiation by the first world power of the commercial treaties in force and the relationships with both its partners and its competitors.
Those changes were already there before the pandemic and had materialized in the form of setbacks in globalization and nationalism and in an emerging new bipolar order led by the United States and China, as explained by Cliff Kupchan, director of analysis at the consultancy Eurasia Group and senior official of the US State Department during the government of Bill Clinton. “The main reason for the state to exist is to protect its citizens. And the pandemic makes it even more evident. The leaders become basically concerned with employment and do not have the time or money to devote to international affairs. It is then that barriers are erected to the movement of people and capital. And the State begins to play a growing role at the expense of the system, ”says Kupchan in an email exchange.
Deglobalization and rising nationalism had already slowed the growth rate of world trade to slightly above, but very close to, the increase in global GDP. The pandemic, as Kupchan rightly says, has accelerated this trend and the consequences of the new bipolar world. The disconnection between the US and China that began in 2018 has picked up speed and trade tariffs and import and export quotas have now added strong limitations to the exchange of high-tech products, the movement of people and even within the academic world . “The pandemic is the driving force behind the 2.0 disconnect. Now is when global trade will be most affected because countries will try to be more self-sufficient. Healthcare products, the data industry and tourism will be hit hard. Health is going to become a strategic sector and the States are going to accumulate supplies of ventilators, protective masks and medicines and they are going to want to reduce their dependence on countries like China and India ”, emphasizes Kupchan.
By mid-April, more than 80 countries had decreed prohibitions on the export of medical supplies and personal protection products necessary to fight the coronavirus. While most of those barriers have since been lifted, that reality has ushered in a change that promises to be lasting in global trade. This is what French President Emmanuel Macron defined as the need to guarantee “health sovereignty” with a new industrial and commercial policy. Or Donald Trump’s appeal to national security to restrict trade with China, a pretext that can be used for many economic sectors. All of them, different ways of calling greater protectionism in the commercial sphere and examples of the growing role of the State in the economy.
A role that is here to stay and that takes many forms. The response of the governments to cushion the impact of the crisis has resulted in an increase in public spending and loss of income for the G20 countries equivalent to 6% of their joint GDP, to which must be added another 6% injected in the form of loans, participations and guarantees, according to a note by Joanna Konings, international trade expert at ING Economics. Although this public support has been essential to keep companies afloat and avoid even more devastating consequences of the economic collapse, “many of these public aid may end up having long-term consequences that are felt on trade flows”, Konings points out.
It is true that not all the subsidies approved by the pandemic have an impact on international trade – aid to hairdressers or cultural activities, for example – but those that do already affect 3% of global exchanges, according to Global Trade Alert, the initiative launched by the Center for Economic and Policy Research in November 2008 to monitor the interventions of different countries that can affect foreign trade. That 3%, Konings emphasizes, is a similar percentage to that of the trade affected by the trade war
US-China, which will not weigh so much on consumer and business expectations, but it will be an added burden for the recovery.
Changes can also be expected that may impact trade on the tax side. Because the pandemic has expanded the powers of governments, but it has also changed what voters expect in return. Among other things, better public health and that will require new and higher revenues to finance it. Since the 1980s, liberalism and globalization have fueled a global race to the bottom of corporate taxation that may be coming to an end. Technology companies were already in the sights of the States before the pandemic, bogged down in obsolete tax structures that do not correspond to the current relocation of production and the way of providing services. The needs derived from the coronavirus add argument to this review of structures, especially since technology has been some of the companies that have benefited the most from the pandemic.