Global Trade: Combating protectionism and the pandemic

Katherine Evans | Senior Partner

International Trade: Global and regional trade in the post pandemic

The past 18 months were a huge shock to international trade as increasing protectionism and Covid-19 wrought havoc with all previous forecasts and economic roadmaps.

Many business analysts predicted that the double whammy of protectionism and pandemic would spell an end to globalised trade.

Indeed, if we roll back a few years many economists were already warning that international trade was tapering off even before President Trump, Brexit and the coronavirus. As older, more established economies converted to the new digital economy, less goods were being shifted around the world. This coincided with the rise of China as an economic superpower, the proliferation of international laws, regimes and treaties governing trade and the increasing interconnectedness of supply chains.

But this complex global trading pattern was also the architect of its own undoing, creating financial instability, a trade imbalance, climate change, a rise in cyberattacks and the spread of the pandemic through trade networks. These crises then reverberated across the globe, appearing in different jurisdictions and spreading across local borders.

The Trump administration’s moves to address the trade imbalance with other trading partners was a catalyst for the resulting rise in protectionism – overnight he was using tariffs as a tool. This was particularly the case with China, where supply chains were impacted as businesses had to work around the tariffs, causing supply chain diversification and huge issues around the rules of origin.

This imposition of tariffs has now forced US businesses to take on higher costs at exactly the wrong moment, ie during a global pandemic. This has also had a knock-on effect with other US trading partners such as Canada, Mexico and the EU, which are all re-evaluating their trading relations with China, particularly around the rules of origin to ensure products are not using mainly Chinese components.

Ironically, for many years businesses had been encouraged to invest in their China supply chain, along with the use of other developing countries, to provide cheap manufacturing goods for Western markets and their consumers. With the Biden administration taking up the cudgel from Trump regarding the US-China trade war, companies large and small across different jurisdictions are now aware of the exposure they have if they rely on China components for their products. Supply chain resilience is suddenly the order of the day and that has an impact on funding, and liquidity issues affecting many businesses. In addition, the pandemic has compounded the problem of supply chain reliance as more companies look for suppliers closer to home.

In the UK the economy was already suffering aftershocks from Brexit before the pandemic arrived. Despite the polarising effect of Brexit, all analysts agree that leaving the EU trading bloc has been bad for business. UK exports alone to the EU dropped by 24% between April and December 2020, according the EU’s statistical office, Eurostat, and experts are still unsure if this is a result of Brexit or the pandemic or both. Regardless, most economists agree that the long-term impact of Brexit alone will be to lower the UK GDP by 4%.

Elsewhere, on a more optimistic note, international trade agreements are already in the offing for the UK with countries such as Australia, and during the next five years the UK is predicted to put a lot of energy into the emerging Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This could signal a huge change in international trading opportunities for the country; the treaty deals with 11 countries and has some 15% of global trade and accounted for £110 billion worth of UK trade in 2019. Joining the club would remove tariffs on 95% of goods traded between members and will result in a shift away from the reliance on trade with the EU to trade with non-EU countries.

For crystal ball gazers looking at international trade in the next five years, the unravelling of protectionism through trade treaties and the spread of vaccines will be important for the recovery of global economies. The role of digitisation and industry 4.0 will change business significantly, with the rise of remote working as standard practice and companies’ increasing use of technology, such as AI, across their operations. Likewise, logistics could change because of increased e-commerce and the readjustment of supply chains away from China and other developing nations.

The biggest risk for international trade will be continuing protectionism where – in the case of the US – this is dressed up as national security protection.

In the following pages, IR Global members take a fascinating look into the future of international trade, protectionism and the long-term effects of the Covid-19 pandemic on globalisation.

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