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Air cargo preparing to leave. (Image: Patrick Campanale via Unsplash)

The pandemic through a trade lens

Global trade has proved to be less vulnerable than many initially feared and may help drive the recovery.

 

By Daniel Gros

Trade is recovering robustly alongside the uptick in growth in major economies. This good news deserves more attention. Less than 12 months ago, many observers predicted an end to globalization. The pandemic disrupted supply chains, and governments, suddenly confronted with the resultant vulnerabilities and dependencies, called for the “reshoring” of production of critical goods.

Today, the outlook is much brighter. There is little indication of a sustained movement away from global supply chains. Many governments seem to have realized that trade is more of an opportunity instead of a threat to national sovereignty. Consequently, the World Trade Organization (WTO) expects the volume of global trade to increase by 8 per cent in 20211, more than offsetting last year’s decline in trade of 5.3 per cent.

Merchandise trade volume

Note:  Figure for 2021 is a projection.

Source: WTO.

It is true that foreign direct investment (FDI) is still lagging behind, after plummeting 35 per cent in 2020.2 In fact, Europe recorded a negative FDI flow. The pandemic’s differential impact on trade and investment should not come as a surprise. The transport of goods around the globe requires little physical human interaction. Giant cranes, often operated remotely, load and unload containers, and supertankers pump oil ashore.

By contrast, acquiring a firm or establishing a new production facility in another country requires travel to meet with potential partners, and in many cases, involves close contact with foreign governments to obtain permits, among others. Pandemic-induced border closures and travel restrictions obviously made such endeavours far more difficult.

FDI is notoriously volatile, often plunging one year and recovering the next. In other words, it might still bounce back strongly in 2021. In fact, the OECD has already detected signs of recovery.3

Total world FDI inward flows (quarterly)

Note: Figures for 2020 are estimates. 

Source: OECD.

 

Moreover, global supply chains have proved to be less vulnerable than many initially feared. The notion of a “supply chain” conjures up an image of a fragile arrangement, with each enterprise depending on inputs from the adjacent link. And, after all, a chain is only as strong as its weakest link.

The global trading system’s vulnerability to choke points seemed to have been driven home in March of this year, when a single large freighter blocked the Suez Canal after sandstorms restricted visibility, transforming the huge stack of containers on board into sails. But this incident, which was resolved relatively quickly, is not representative of how global trade actually works.

It is more accurate to speak of interrelated networks of suppliers rather than supply chains. Most enterprises have more than one supplier of key components, and multinational companies with operations in several countries source supplies from many other countries. Instead of triggering a retrenchment from the division of labour, the pandemic has reinforced multi-sourcing.

Governments around the world interfered in trade during the pandemic to address acute shortages of key products, such as personal protective equipment (PPE) in 2020, and COVID-19 vaccines during the first few months of 2021. Yet both of these products, while crucial in the context of the pandemic, have played only a marginal role in the wider economy. The rich countries could, in fact, vaccinate the entire world population for less than a dollar a week from each citizen.4 

The biggest risk is that governments, fearing similar dependence on foreign suppliers for a number of other key products, will introduce protectionist measures. Prompted by the European Union’s (EU) concern that such dependence could leave the bloc vulnerable to political pressures from hostile governments, the European Commission recently published an insightful study on strategic dependencies and capacities.

The study examines over 5,000 products and identifies only 137 imports in the most sensitive sectors, which the EU is highly dependent on from outside the bloc, accounting for about 6 per cent of all EU imports by value. For 34 of these products, representing only 0.6 per cent of total imports, the EU might be more vulnerable owing to the low potential for further import diversification or substitution through EU production.

In other words, for the overwhelming majority of products, large economies or trading blocs such as the EU have a sufficiently diversified supply base to ensure that the supply of such products is not dependent on any single supplier. Broad protectionist measures such as tariffs or quotas would have little impact on the few goods for which only a single source may exist.

Moreover, most of the 137 sensitive products the European Commission identified are raw materials and related commodities which are easy to store. It would thus be relatively straightforward for the EU to build up strategic stockpiles of those goods.

Ultimately, governments do not appear to have resorted to protectionism in response to the COVID-19 crisis. Although no detailed data on new trade barriers erected last year are yet available, the strong expansion of trade in 2021 implies that the use of such measures must have been limited.

In fact, some governments have been eager to create more trade opportunities to help drive recovery. A group of 15 countries in the Asia-Pacific region, accounting for 30 per cent of the global economy, has signed the Regional Comprehensive Economic Partnership, a new free trade agreement. Meanwhile, the EU has concluded two important agreements: the Comprehensive Agreement on Investment with China and a free-trade deal with the Mercosur bloc in Latin America. The ratification of the two agreements is uncertain, but not because of concerns about the economy.

The overall picture that emerges is that global supply chains have weathered the pandemic intact, and that the deep global recession has not unleashed a wave of protectionism. That is a good sign for global trade, and most likely for FDI as well, suggesting that the predictions of the demise of globalization were premature.

This opinion piece is based on a commentary published on Project Syndicate on 8 June 2021. 

  • Daniel Gros is Director of the Centre for European Policy Studies (CEPS) in Brussels. 

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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