Global trade tensions were growing long before the COVID-19 pandemic threw the world's economy into chaos. The US and China had spent years bickering and engaging in tit-for-tat rounds of increasing tariffs. And multilateralism had taken a back seat, as the UK withdrew from the EU and the US pulled back from international institutions and opted out of the Trans-Pacific Partnership.
The pandemic has raised a number of new questions about trade policy as many countries have struggled to secure medical supply chains in their fight to control the spread of COVID-19. Furthermore, there are concerns that finger-pointing over the crisis from both the US and China will spill over into trade negotiations.
The impact of previous global crises on trade has been something of a mixed bag. Some have brought countries together and opened markets, while others have driven a wedge deeper between them. Will this pandemic lead to a positive re-evaluation of international trade and investment, or a withdrawal from globalisation and a new era of protectionism?
This was the focus of the third virtual episode of the Lee Kuan Yew School of Public Policy's "Asia Thinker Series" in collaboration with the Centre on Asia and Globalisation on the global pandemic.
Moderated by James Crabtree, an Associate Professor in Practice at the LKY school, the session saw a distinguished panel of experts discussing the impact of the pandemic on the future of trade in the region, and also globally.
"Temporary and proportionate" measures
Both demand and supply shocks have hit the global economy hard. The World Trade Organisation (WTO) expects world trade to plummet by between 13% and 32% in 2020.
Although there are some parallels to the Global Financial Crisis (GFC), the WTO stresses that "restrictions on movement and social distancing to slow the spread of the disease mean that labour supply, transport and travel are today directly affected in ways they were not" in 2008.
The Asia-Pacific Economic Cooperation (APEC) region’s growth is expected to decline by 2.7% this year, translating to an estimated output loss of US$2.1 trillion compared with the 3.6% growth in 2019.
The pandemic has disrupted global supply chains, and has left many countries scrambling to find the equipment needed to properly equip their health care workers as well as to guarantee essentials for their citizens. As a result, many countries are reconsidering the balance between security and the cost advantages of a global supply chain.
But does that equate to a more protectionist trade environment? Executive Director of the APEC Secretariat, Tan Sri Dr Rebecca Fatima Sta Maria said a number of countries have already responded to the crisis with protectionist measures, although she hopes they are temporary.
APEC's joint statement from its most recent ministerial meeting in Malaysia pledged support for "the flow of essential goods and services to fight the pandemic including medicines, medical supplies and equipment, agriculture and food products and other supplies across borders".
It also recognised the need to act quickly, in some cases with protectionist measures, but it urged member states to think carefully about how they're implemented, and how they might be repealed later.
"So what's important is having institutions like APEC, like WTO to ensure that these measures that you put in place are temporary and proportionate," said Dr Sta Maria.
Malign Mercantilism
Razeen Sally, a noted trade expert and visiting associate professor at the Lee Kuan Yew School had a darker view about the effects of COVID-19, describing them as "the biggest deglobalisation we've seen since the Second World War, possibly since the Great Depression."
Trade volumes plummeted in the wake of the global financial crisis, and there were similar contractions in foreign direct investment and remittances. Professor Sally thinks the impact of COVID-19 will be both greater and qualitatively different. After the GFC, shrinking trade hit manufacturing hard, while travel and tourism helped lead the revival. This time around it is trade and tourism that are most affected.
The GFC also hit western economies first, with much of Asia insulated from the worst effects. But the COVID-19 crisis is truly global and likely to last well into next year, he said. Beyond the pandemic, he worries about "the emergence of a more malign mercantilism than we've seen in the past."
This might come from protectionist measures being extended or domestic interventions spilling over into trade policy. Nevertheless, he thinks it's unlikely there'll be a sudden rush to unpick global supply chains, and that it's more likely that the current crisis will accelerate existing trends.
"Decoupling is a misleading term. Even with the current shock it's unlikely to happen in a headline sense," he added.
A new regional framework?
Dr Parag Khanna, author of The Future is Asian, thinks there is a chance that the current crisis will lead to stronger regional integration. Previous crises have steeled the political will of Asia's leaders to improve regional integration.
"That could be one of the benefits in some ways, to what happens after this pandemic because after all, the demand shock is certainly one aspect that is common between 2008 and now, and that's part of what convinced Asians to open up to each other, to substitute this global demand shock for each other's demand," he said.
About 60% of Asian trade already occurs within the region, and the numbers are even higher within Europe. The US, too, trades more with its neighbours than with China.
Those numbers aren't all down to trade hostility. There are many reasons why an increasing amount of trade is taking place within Asia. Much of it has to do with the maturing of the region's economies, especially among larger Asian countries. And because multinationals both build and sell in the same markets, it's unlikely that there will be a sudden withdrawal of investment out of the region.
"When it comes to western firms that want to have a strong presence in Asia… they need to still therefore make in Asia. And think about how GE has made large new investments in automotive plants in China and Indonesia. It's not going to mothball them. Tesla has plants and showrooms in China. It's not going to shut that down," said Dr Khanna.
Smaller countries lead
But if there appears to be increasing animosity between the US and China, that's not the whole story. Dr Sta Maria says some of the smaller countries have been pushing for a more multilateral and integrated approach.
She pointed to Singapore, New Zealand, Brunei as well as Canada and Chile as actors that have worked, "to set in motion this whole trade facilitation, keeping markets open mantra, especially for essentials, for medical goods, for food for agricultural production."
Professor Sally agreed that the silver lining is coming from the smaller states, and thinks the future of international trade could come from "coalitions of the willing" who negotiate agreements amongst themselves.
Lessons from the past and present
What lessons can policymakers learn from the current crisis, and could previous crises help them navigate the pandemic?
Professor Sally argued that the lesson of the 1930s was that protectionism made things worse, while the post-war lesson was that international cooperation was a far better alternative. However, he was not optimistic that the world's leaders were heeding that lesson.
"My fear as a Realist with a capital-R as it were, is that the world and its decision makers are not going to learn that lesson this time around. And we'll do something different," he said.
Dr Sta Maria says the pandemic has exposed some shortcomings with international trade agreements and global institutions, and a new approach is needed.
"These cannot be in their present form. Our traditional trade and investment agreements don't have that element of risk management, as it were, to take on board these developments," she said.
Watch the full recording of The Future of Asian Trade and Globalisation After Covid-19