By Business Unusual Writer
Global trade reached a record high in 2021, about $28.5 trillion, an increase of almost 13% relative to pre-pandemic levels” according to a February 2022 report by the United Nations Conference on Trade and Development (UNCTAD). This was a marked global trade expansion considering that its pre-COVID-19 growth was modest averaging 4% between 2011 and 2019. COVID-19 global public health emergency had a dire impact on all healthcare systems and economies.
Countries adopted harsh restrictions on domestic and international economic activities in a bid to limit community transmission and prepare healthcare systems for the inevitable demands on it. These measures affected global supply chains and trade.
Relaxation of these COVID-19 restrictions and the economic stimulus packages in many jurisdictions had a positive global demand shock. The 13% trade expansion recorded in 2021 is thus a function of increased demand for commodities that has driven prices up, and pent-up demand for goods and services stimulated by economic stimulus packages in many jurisdictions. None of the measures implemented by governments across the world post-COVID pandemic addressed the pre-pandemic factors that stalled trade expansion.
“Before the pandemic, global trade was already experiencing a long-term slowdown because of protectionism and a changing structure of supply chains”, the Institute of Chartered Accountants in the United Kingdom (UK) noted in a report titled ‘Global Economic Outlook Report: Trade outlook weaker in the post-virus global economy’. Hence, they expected the impressive 13% trade growth to stall. Most countries have pursued trade-restrictive policies during recessions in periods when their competitiveness deteriorated.
The 2008 financial crisis is the most notable incidence of such an occasion. The level of trade openness as measured by the sum of world exports and imports divided by world GDP declined after the 2008 financial crisis (see exhibit 1). Whilst there was a recovery from the 52% trough of 2009, ever since 2011, the index has dropped by 8% to 52%
The widely covered US trade policy towards China during President Trump’s four-year term symbolised the stalled momentum of trade tariff reduction and liberalization policies in the 1990s and 2000s. The Trump administration used various legal-rational including the National Security Act to impose tariffs and/or quotas on imports. In 2018, the US had a deficit of $375 billion against China, which accounted for 64% of its $580 billion total trade deficit.
The Trump administration also attacked the international trade systems and its institutions, though the US has historically played a crucial role in their creation. Much of the criticism was aimed at the International Monetary Fund (IMF) and the World Trade Organisation (WTO). These institutions were instrumental in driving globalisation which has had negative consequences for unskilled labour in the US manufacturing sector.
Manufacturing plants and companies relocated to emerging and low-cost markets like India, China, and other countries leaving low-skilled workers jobless. Trump’s “Make America Great Again” policy that ascended him to the highest office in the US, was premised on the idea that the US trade deficit with China was due to globalisation.
Unfortunately, the US trade policy to reverse these trends had unintended consequences as China’s trade policy targeted the US agricultural sector in response to US tariffs.
In 2019 The Wall Street Journal reported that “A wave of bankruptcies [was] sweeping the U.S Farm Belt as trade disputes [added] pain to the low commodity prices that have been grinding down American farmers for years”. According to this report, farm bankruptcy filings increased in the US Midwest region in 2018.
Despite evidence that imports are not necessarily bad for an economy especially when the local costs of providing products and services are high and require higher prices so that costs are recovered, the temptation to adopt mercantilist policies to rebuild the local industry is too hard to
Because of the COVID crisis, calls in many countries for increased national self-sufficiency through import substitution and near-shoring of supply chains will continue to exert pressure on openness policies that accelerated globalisation. Even in South Africa (SA), the Minister of Trade, Industry and Competition, Ebrahim Patel has been proposing an import substitution policy as the backbone of SA’s reindustrialization policy.
“This is where industrial policy has wound up – in a dead-end with a Minister trying to barter his way into investment,” wrote Peter Bruce former editor of Business Day and the Financial Mail in SA. He further warned President Cyril Ramaphosa that “…his man [Minister Patel] has failed. If he doesn’t, Patel won’t stop until there’s not a factory left”.