Source: The Guardian
Date: 8 Apr 2020
As crisis rages, governments must plan for its aftermath, says WTO’s director general
Coronavirus – latest updates
See all our coronavirus coverage
As country after country is compelled to shutter non-essential businesses and order people home to curb the spread of the Covid-19 pandemic, the ongoing public health crisis is becoming an economic and social crisis that demands a policy response.
Millions of people already afraid for the health of their loved ones now confront the prospect of unemployment and prolonged economic misery. Dozens of emerging economies face financial and humanitarian distress as commodity prices and export earnings plummet, foreign investors flee and remittances from overseas workers decline.
Deep supply and demand shocks have severely disrupted international trade. Multi-country value chains have been interrupted by emergency factory and border closures. Travel and tourism have collapsed.
Cancelled flights have diminished air freight capacity. Ocean container shipping, which transports the bulk of trade in manufactured items, food, energy and raw materials, has thus far been comparatively spared, but crews have been caught up in pandemic-related travel restrictions. Credit market stresses are reducing the availability of trade finance, making it harder for willing traders to strike deals.
In estimates unveiled on Wednesday, World Trade Organization economists project world merchandise trade volumes this year will fall by between 13% and 32%. Their calculations are subject to uncertainty about how Covid-19 and its economic impact will evolve.
But to put these figures in perspective, the optimistic scenario would be worse than the 12% drop seen at the height of the global financial crisis in 2008-09. The pessimistic scenario would be on par with the fall in world trade seen during the first three years of the Great Depression, from 1929 to 1932.
Governments and central banks are trying to mitigate the pandemic’s economic fallout with multi-trillion dollar packages of fiscal and monetary support to prevent debt default, bankruptcy and job losses. Yet the unusual nature of this recession complicates the immediate policy response. Instead of spending money to get people working and consuming again, countries need to incentivise non-essential workers to stay at home.
Even as the crisis rages, governments must start planning for its aftermath. On the economic front, this means laying the foundations for a strong and socially inclusive recovery. Trade – and international coordination more generally – will be important ingredients here.
The positive news is that a strong recovery is possible. The fundamentals of the economy remain solid even though the fuel line to the engine has been cut off. What we need to do is make good policy decisions, and give businesses, households and would-be 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.
Trade is no silver bullet. But it is a valuable complement to fiscal and monetary measures. In the wake of 2008-09, the fact that governments kept the global economy broadly open helped offset some of the shortcomings of fiscal and monetary policy. Countries were able to tap into each other’s growth. Households and companies did not have their struggles compounded by higher prices and supply shortages.
This time, in response to an even deeper crash, all three forces – fiscal, monetary and trade – must pull together. Unfortunately, trade entered this crisis in a fragile state: weighed down by protectionist measures and continued tension, merchandise trade was already falling in the final quarter of 2019, before the pandemic.
Responding to this crisis by turning further inwards would add self-inflicted economic shocks to those we are currently enduring.
While some favoured industries might benefit from heavy-handed attempts to create wholly national supply chains, many more would lose, and so would consumers already hit by the recession. This would place a brake on the recovery. In the longer term, the loss of specialisation and scale would lower growth and productivity.
We are seeing right now how trade restrictions and tariffs are impeding efforts to ramp up the production of urgently needed protective equipment and ventilators. When countries start preparing for the next pandemic, being able to source equipment and components across borders will help them build stockpiles more cost-effectively. More and more governments are telling the WTO about Covid-related trade measures. This information, which is public, will help everyone understand how the market is evolving.
The notion that less interdependence makes economies more resilient is wrong: autarky in food and other essentials would make countries more, not less, 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 than by haphazard protectionism.
Where globalisation’s critics have a point is that when goods and people move around the world, pathogens move with them. But this has been true for millennia. And solutions cross borders too: the smallpox that crisscrossed the Roman empire was eradicated in the 1970s by a global vaccination effort.
Sharing ideas internationally will help scientists develop and roll out Covid-19 treatments and vaccines more quickly. In the economy, too, if countries work together, all of us will see a much faster recovery than if each of us acts alone.
Robert Azevêdo is the director general of the World Trade Organization