Silver lining for trade post-Covid-19
• Global trade will face the maximum contraction and this will be even worse than 2008 financial crisis. This means global trade will be get shrink by US$ 2.5-5.5 trillion in coming couple of years.
• WTO suggests that services trade might be the most badly affected by COVID-19 due to transport and travel restrictions, mainly under mode 2 and mode 4.
• India has begun work to plan and design a policy document on exports, once the country emerges from the shadows of the Covid-19 pandemic. This plan focuses on curbing import dependence, especially from China
• Opportunities may also expand manifold in crypto currency, Fintech, Artificial Intelligence and Machine Learning (AIML), Blockchain technology, to mention a few. Countries will seek for faster, cleaner, safer transportation, instead of an ordinary FTA, which talks just about trade liberalisation and ‘shallow’ trade facilitation.
Everyone is familiar now that COVID 19 is currently shattering the economic growth and will continue to do so even in the post-pandemic period. Economists have a similar outlook for global trade, which was anyways experiencing sluggishness before the spread of COVID 19.
Demand for goods and services has drastically reduced and will reduce further due to lost income and uncertainty about the future. Restrictions on international travel and increased border controls will escalate international trade costs and prevent tradeable services from being supplied or consumed. World Trade Organization (WTO) anticipates that global trade could fall by 13-32% in 2020 as the COVID-19 pandemic disrupts normal economic activity and life around the world.
According to this estimation, global trade will face the maximum contraction and will be even worse than the 2008 financial crisis. It could shrink by US$ 2.5-5.5 trillion in the coming couple of years, much higher than the GDP of a majority of economies. Services trade might actually be the most badly affected by COVID-19 due to transport and travel restrictions, mainly under mode 2 and mode 4.
Figure 1: Global Trade Outlook as per WTO
Source: WTO Secretariat
Undoubtedly, this loss seems colossal enough for many countries to redesign their trade policy, which may also spur some degree of deglobalisation. India has commenced efforts to plan and design a policy document on exports, once the country emerges from the shadows of the COVID-19 pandemic. This plan focuses on curbing import dependence, especially from China, by practicing import substitution and simultaneously improving quality and safety compliance of products to gain global market share.
The government is planning to set up groups to draw up strategies for sectors where China and European economies have vacated space and opportunities for emerging economies. Now, if economies start designing policies like import substitution, then globalization will be negatively impacted. It’s absolutely normal for any economy to reduce import bills, as they already might be facing several expenditure constraints post the pandemic while attempting to support the domestic economy.
In the current year, nearly all regions would suffer double-digit percentage declines in trade, with exports from North America and Asia the hardest hit. Sectors with complex value chains, such as electronics, mechanical equipment and automotive products, would also see steeper falls due to plummeting global demand.
So, do we simply accept that deglobalization will be the new normal as trade figures will shrink? We have to first see and understand the export baskets of several developed and developing economies. During the pandemic and post-pandemic phases, it seems evident that premium segments like luxury cars, high end smartphones and top electronic gadgets will face a blinkered demand globally. But what about medicines, medical equipment, health services, food, chemicals which are essential? Since these products have inelastic demand, they will face least volatility in their global demand. A country like India, whose competitiveness is strong in these necessity products can ameliorate its trade balance by focussing on export promotion of these essential products, and simultaneously reducing imports through import substitution.
Since trade is considered to be the engine for growth, especially in the post-pandemic period, the discouraging global trade outlook should not be just accepted by global leaders as a new normal. They need to frame positive policy decisions, which will give businesses, households and aspiring entrepreneurs reason to be confident about the future. WTO economists estimate that if the pandemic is brought under control relatively soon, trade and output could potentially rebound nearly to their pre-pandemic trajectory as early as 2021.
We need to understand the proven fact that less interdependence does not make economies more resilient. Rather, autarky in food and other essentials would make countries more, vulnerable to the economic consequences of localised crises such as droughts, hurricanes and earthquakes. Supply chain diversification, a more reasonable objective, would be better served by predictable global trade rules rather than by haphazard protectionism.
On the sunny side
In the post-pandemic period, along with new trade standards and certifications, e-commerce and new value chains may pick up pace, where trade facilitation means connecting countries over digital platforms (e.g. interoperability of digital interfaces) and paperless trade. The freight forwarding market is one of the major evolutions. In this new situation, according to the recently launched Global Freight Forwarding Report, continued automation and inclusion in fully-encompassing platforms that manage all modes of transportation and data analytics will dominate freight forwarding in the years ahead. Opportunities may expand manifolds in crypto currency, fintech, artificial intelligence and machine learning (AIML) and blockchain technology, to mention a few.
Countries will seek faster, cleaner and safer transportation, instead of an ordinary FTA, which talks just about trade liberalisation and ‘shallow’ trade facilitation. Countries may opt for safe and secure trade than “free” trade. New “pandemic” related trade barrier(s) may replace the traditional quota and other tariff and non-tariff barriers. The new global order will also create new jobs and skills. Global institutions require reforms to deal with the emerging situation.
At the same time, countries might undertake reform to strengthen the digital economy and e-commerce not only to manage the pandemic but also to facilitate trade. Trade barriers should be discouraged to trade in goods and services particularly those feed the health science, medical and hospitality sector.