Will COVID-19 Lead to the Death of Free Trade?

A global shift from free-trade towards protectionism has surfaced in recent times as emanation of changed political ideologies and international relations. Will the emergence of the pandemic add fuel to this fire and act as the last nail in the coffin of free trade?

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n the era of globalization that we live in, economies worldwide are interlinked and interdependent more than ever before. Ideas, latest technology, researches, services and goods move across borders and drive the global economy. According to the World Trade Organization, there are around four hundred and twenty regional trade agreements in place that facilitate purely-free trade or negotiated free trade. A large part of the economics academia favors free trade because it allows for an expansion in domestic markets and reach; fosters competition that leads to better quality goods; and allows a free functioning of global markets. However, in recent years, there has been a perceptible global shift away from pure-free trade towards protectionism and mercantilism with the intent of protecting domestic jobs; increasing exports while minimizing imports by stepping up domestic production; and augmenting national incomes. This shift can be attributed to a reposition in political ideologies and reshaped international/regional relations along with sparked trade wars. 

On top of complicated world trade scenarios and an ongoing global economic slowdown, the unforeseen emergence of Covid’19 has brought the world to a sudden standstill. Factories and offices have been shut in compliance with lockdowns being imposed by different governments in their respective countries in an attempt to curb the transmission of the coronavirus. This has had a detrimental impact on production and a subsequent slump in trade. The leading exporters of the world [see Table (1)] including China, the United States, Germany, United Kingdom among others have been hit hard by the pandemic. The World Trade Organization (WTO) has reported that – "In an optimistic scenario, the volumes of global trade in goods volumes could tumble by 13% in 2020. If the pandemic is not brought under control, and governments fail to coordinate policy responses, the decline could be 32%, or more". Fifty-billion-dollar worth of exports have been wiped off in the month of February owing to the coronavirus. Reports from the WTO predict that the looming economic crisis will be worse than the 2008 crisis [as shown by Figure (1) below]. 


In light of the dire economic circumstances approaching the world, countries would scramble to protect their interests. Trade agreements are also likely to become casualties of the pandemic. Export prohibitions and restrictions, prominently on essential medical supplies, are already under way. According to the WTO, almost eighty countries have imposed export restrictions. The proposed African Continental Free Trade Agreement (AfCFTA) which had to come into effect from 1st of July is likely to be postponed as per the recommendations of its secretariat.

With a plunge in production and an export-import hiatus, global value chains will be disrupted leading to demand and supply-chain shocks. This can lead to an imbalance in demand and supply of essential commodities which can severe the ongoing crisis. Moreover, the disruption of transportation will be a big blow to the free and smooth movement of goods and services across the globe. Countries that depend heavily on imports will experience shortages and those that depend highly on exports will witness a downturn in their incomes and a consequent slow growth. In the aftermath of the crisis, countries are likely to reduce their over-dependence on trade. Import-substitution can be resorted to by countries to ensure that they do not face a demand-supply imbalance of this magnitude again and are more self-reliant. 

This brings us back to the question- “Will Covid’19 be the last nail in the coffin of free trade?”. The severity and the duration of the pandemic are the two pivotal factors that will shape the upcoming events in terms of world trade. While the pandemic will certainly prove inimical to free-trade, there is still some uncertainty looming around how acute the damage will be, as it is contingent on many factors. If some major world-trade players resort to trade negotiations with its partners after the crisis, other countries will follow suit to protect themselves. If countries breach their trade agreement terms, then it can lead to collapse of such pacts. Moreover, if air travel and other means of transportation stay grounded, then it will hamper free flow of goods and services. The shift in free-trade to negotiated trade that had already been set in motion before the pandemic is likely to be expedited in time to come. However, there is a silver lining to this cloud of pandemic looming above us. 

While tragic news and despondent forecasts about the economy surround us round-the-clock, there are still certain uplifting and optimistic progresses that offer respite. Medical scientists are rigorously working to come-up or identify a viable vaccine for the coronavirus and many vaccine trials are under-way. If a cure is found in a reasonable time, then it is possible for economies to recover quickly without having to bear a long-term slowdown by putting in place a dedicated policy action. The pandemic curve has been successfully flattened in some countries and they are already on a path to recovery. In those places, production has been revived. Moreover, with the demand for medical supplies and protective gears shooting up, we have seen a coming together of firms and manufacturers that were previously not engaged in production of these goods now switching to their production to alleviate the crisis. Even countries are reaching out to help each other. A news reported that- "India will export 285 million tablets of anti-malaria drug hydroxychloroquine (HCQ) to 40 countries on a commercial basis, while five million tablets are being gifted to a number of nations to help the world fight Covid-19, a government source has said. Exports of 500 million tablets of paracetamol to 60 countries have also been approved while 1.32 million tablets are being given for free, the source said on Thursday". While the pandemic has led to a downturn in trade of certain goods, there are sectors which have witnessed a growth. Information technology, internet services, online banking, et cetera have expanded due to increased demand. 

In all, the final impact of Covid’19 on world trade is subject to the unfolding of events in near term. The response of governments including relief packages and policy actions can mitigate the potential damage to economies. Free-trade is likely to transition into negotiated trade during the pandemic. However, post the pandemic, countries and international organizations may work towards facilitating cooperation among nations and a resumption of free-trade.

Bibliography

  1. https://www.wto.org/
  2. https://news.un.org/en/
  3. https://www.worldatlas.com/articles/exports-by-country-20-largest-exporting-countries.html
  4. https://www.dailymaverick.co.za/article/2020-04-24-africas-free-trade-agreement-gets-locked-down-for-the-year/
  5. https://www.thehindubusinessline.com/news/india-to-export-hydroxychloroquine-paracetamol-to-over-40-countries/article31417872.ece 
This is the winning essay in the EconEssay competition organized by team Economiga. For more details click here{alertInfo}
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Author bio (Guest Author)

Tulika Agarwal is a final year student of B.A (Hons) Economics at Jesus and Mary College (JMC), University of Delhi. She aspires to pursue higher studies in economics and contribute her skills towards research as her areas of interest include macroeconomics, development, public policy and governance.

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