Coronavirus chaos can prompt a needed rethink on global trade and economic integration
- Confidence in the benefits of trade and integration has suffered as trade wars highlight the risks of interdependence, and tech advances weaken the economic rationale for far-flung supply chains
- The coronavirus and its disruptions might finally push the world to consider a new trading order
In other instances, alternative or workaround solutions will be found but they will be, by definition, suboptimal and more expensive. This will embed higher costs throughout the supply chains and could ultimately result in higher inflation.
The picture is no less grim for countries which supply intermediary products to China’s shut factories. The two economies most affected are Taiwan and South Korea; their top export to China is the electronic integrated circuit, which accounts for 5 per cent of Taiwan’s gross domestic product and 2 per cent of South Korea’s.
Coronavirus chaos lays bare the price of being a linked global economy
Before this, businesses and government had tremendous confidence in trade, in its ability to deliver mutual benefits, and in the ability of the multilateral trade system to reduce trade barriers, resolve conflict and inculcate a sense of stability and trade fairness.
This confidence allowed trade to grow at roughly twice the rate of global GDP growth for most of the post-war era and led to steadily deeper economic integration.
In recent years, however, this confidence in the benefits of trade and integration has suffered several body blows. As a result, we seem to be inching towards a tipping point in which the conventional wisdom begins to reverse and the risks of deepening integration and trade are judged to possibly outweigh the benefits.
This did not happen overnight or was precipitated by a single development. It has been the gradual accumulation of several factors of which the coronavirus is only the most recent – but which threatens to be the straw that broke the camel’s back.
China’s exports to the US dropped 12.5 per cent last year, while China’s imports from the United States plunged 20.9 per cent in 2019 from a year earlier, according to data from China’s General Administration of Customs.
The US continues to weigh other substantial trade actions that will surely beget commensurate retaliation. Given all this, it is perhaps unsurprising that, last year, global trade suffered its worst performance ever outside a recession, growing by only 1 per cent.
The painful experience of the epidemic is unlikely to be quickly forgotten by corporate risk managers or government officials pursuing greater national economic resilience. Also, the trade landscape has become more like a battlefield and technology is eroding the underlying economic rationale for trade.
If we wish to ensure the sustainability of trade, the challenge will be to recognise and confront the new and sometimes uncomfortable realities of imbalanced trade outcomes, rather than rely on the assumptions, structures and conventional wisdom that have defined our approach to trade in the post-war era.
Two threshold questions cannot be avoided: is more trade always of benefit to an economy? And, is reliance on a single trading partner ever sustainable?
The tough questions we need to ask should not cause us to overlook or diminish the beneficial role trade can continue to play, both in terms of the economic benefits it can generate and the geostrategic stability it can help cement.
Ultimately, the most enduring legacy of the coronavirus might be in helping to necessitate a reconsideration and recalibration of our approach to trade.
Stephen Olson is a research fellow at the Hinrich Foundation