Trade and Connectivity in the Post-COVID-19 World

Pascal Lamy
President of the Paris Peace Forum of the French Committee of the PECC
Former Director General of the WTO
&
Eduardo Pedrosa
Secretary-General, Pacific Economic Cooperation Council*

Even as some economies begin to relax their lockdowns, it is too early and too much is unknown to realistically assess the economic impact. The consequences of this crisis have been and will be felt across every aspect of human life. Although many uncertainties remain, whether sanitary, economic, social or political, we must make our best efforts to figure out what a post-crisis life might look like and prepare for it.

A challenge for global and domestic institutions alike
On 11 March 2020, the WHO determined that COVID-19 was a pandemic. To try to contain the spread of the virus, governments adopted a range of measures such as limiting public gatherings, stopping travel, closing schools and lockdowns.

An underlying risk is one of narrative, that COVID-19 may be interpreted as a crisis of globalization rather than that of domestic institutions. While there is no doubt that the ability of the virus to spread so quickly was amplified by hyper-globalization, it is not the WHO that provides hospital beds, doctors and nurses, nor is it the World Trade Organization (WTO) that buys medicines, ventilators and personal protective equipment. Those duties lie with our domestic institutions. We live in a world of sovereign states that determine their own policies. International organizations can provide early-warning mechanisms, technical assistance when needed and, through mutual agreement, disciplines on state behaviour – such as the WTO dispute settlement mechanism.

Trade risks from path dependence
The WTO expects the volume of merchandise trade to fall between 13% and 33% in 2020, and even worse for trade in commercial services. At the time of writing, the IMF’s forecast of a 3% contraction of the world economy in 2020 looks optimistic. The depth of the drop is as unprecedented as its genesis. Never before have governments had to step in and effectively put a stop on almost all economic activity. The risk on the trade side is path dependence. Once governments set down a certain path, it will be very hard to turn course.

Of necessity, the movement of people has been restricted. As the virus spread, limited measures that helped prevent infections gradually became ubiquitous. More questionable has been the use of export restrictions. In 2020, as of 27 March, 60 governments had placed some form of export curb on medical supplies¹ , with accusations that some of these actions are tantamount to piracy and hijacking. There are risks that more economies adopt this approach, not only to medical supplies but also food.

In this context, government crisis-response policies need to be separated into those taken to stem the spread of the virus, and those taken to bridge the gap between supply and demand of key products to fight the disease. While the problem of path dependence applies to both of these, gauging “when” the first set might be lifted is harder. As Anthony Fauci, Director of the US National Institute of Allergy and Infectious Diseases, has said most articulately: “The virus makes the timeline.”

Unlike normal protectionism on imports, actions being taken now on the export side need to be monitored closely and removed as quickly as possible. G20 trade ministers agreed that “the emergency measures designed to tackle COVID-19, if deemed necessary, must be targeted, proportionate, transparent and temporary, and that they do not create unnecessary barriers to trade or disruption to global supply chains, and are consistent with WTO rules.”²6 The point that these measures should be temporary is absolutely critical.

Others have gone further; for example, the Joint Ministerial Statement on Supply Chain Connectivity from a group Asia-Pacific economies in which signatories commit not to impose export controls, tariffs or non-tariff measures and to continue removing trade barriers to essential supplies.³7 Moreover, this initiative goes beyond trade policy to ensure connectivity by opening the supportive infrastructure that allows trade to flow. The value of this approach is that the more economies join, the greater its value. This initiative has been gaining momentum with more members joining. If even more economies were to join, it would provide a major confidence boost to businesses seeking to invest in productive capacity in the very sectors that the world so badly needs.

ASEAN leaders endorsed this approach when they met on 14 April 2020, instructing their ministers and officials to explore “an arrangement to preserve supply chain connectivity”⁴. These initiatives are at an early stage, but their success is critical to ensuring the supply of COVID-related products. While there is no doubt that government support and intervention are required, national security should not be equated with self-sufficiency – they are far from the same thing. The same applies to restrictions on food trade which, if they were to proliferate, may cause as many victims as the virus in developing economies; a possibility that was recognized by a coalition of WTO members including Brazil, China, the EU and the US.

Win-win alternatives to protectionism
Notwithstanding the fact that export controls could be necessary to secure domestic supply, they risk backfiring in the form of retaliation from trading partners, who, in turn, are suppliers of other necessary products and services. Moreover, such measures disincentivize private investment in productive capacity. This might be made up with public investment, which would be a poor use of public funds at a time when finances are limited and need to be used to help people directly, rather than subsidizing otherwise efficient industries. Public stockpiles and other safety measures can be used without distorting international markets.

The initial restrictions on international trade that were put in place were not export restrictions but travel bans. Under the circumstances, this was understandable, but as domestic lockdowns are ended, international travel must restart. This is an issue the international community should begin to address. The idea of an immunity passport needs to be taken seriously, at least for international transportation workers (pilots, air crews, sea crews). A digital- age equivalent of the WHO Yellow Card9⁵, which uses blockchain technology to ensure the robustness and accuracy of the data, should also be explored. This could be a public-private initiative that includes the WHO and the International Civil Aviation Organization, using the APEC Business Travel Card as a pilot. Such an initiative would provide a medical and scientific (rather than a political) basis for facilitating travel.

Paving the road ahead
Stimulus packages totalling trillions of dollars are being spent to support businesses and people across the world, but without clear rules, they could distort the playing field and lead to trade friction. WTO disciplines on state aid are presently too shallow to provide guidance on how to minimize distortions. They should be reviewed to address exceptional circumstances. Should governments seek to pursue policies not necessarily of outright protectionism, but of precautionism, distortions may be compounded. The world currently has insufficient understanding for managing the international ramifications of such policies in an unprecedented crisis, but we should disabuse ourselves of the notion that none is needed.

Prior to the COVID-19 crisis it had proved difficult to move discussions forward on reform of the WTO Agreement on Subsidies and Countervailing Measures. Now, with massive state aid across many economies, one can hope that common sense will prevail, governments will come to the table and have an honest conversation on this difficult subject – without the finger-pointing that has made this so difficult in the past.

While best practices in supply-chain management have long warned against over-emphasis on speed and efficiency, for many reasons these admonitions were all too often ignored or swiftly forgotten.⁶To avoid such a repetition, the business community, governments, workers and consumers need to consider the alignment of risks in supply chains in the aftermath of the crisis. Options to address fragility range from accepting more inventories to diversification and to reshoring; but all these carry a cost.

It should also be clear to everyone that the lack of clarity on WTO rules on export restrictions does no one any favours. As we move from a world of growing protectionism to precautionism, this will also be an area ripe for discussion.

Multilateral action is imperative
Prior to the pandemic, globalization was in crisis. Today, with borders shut, planes grounded and ships in harbour, it may seem as though the integration that has lifted hundreds of millions out of poverty is coming to a sharp end. However, as a counterpoint, more than any other episode in the history of humanity, this is a shared experience.

The enemy is a virus that can only be defeated by concerted multilateral action. No matter how successful one economy is at “flattening the curve”, unless we flatten the curve globally, there is always the risk the virus will reinfect our populations. This is the absolute and clearest argument in favour of multilateral cooperation.

Out of every major crisis, new institutions have been born. The League of Nations came out of the destruction of the First World War; out of the Second World War the UN and the Bretton Woods institutions; from the Asian financial crisis the ASEAN+3; and after the global financial crisis the G20 was elevated to the summit level.

There are clearly gaps in the international institutional architecture for dealing with emerging risks. A new international organization in charge of precaution is needed, one that takes charge of risk assessment, monitoring and notification. Such an institution could also include governance of strategic buffers, removing the need for overly precautious policy on the part of nations. At the risk of sounding cynical, we should not allow this crisis to go to waste. To come out of these events and learn nothing would be a disservice to our and future generations.

*The views expressed here are his own and do not necessarily reflect those of the PECC or its members.

This essay was a contribution to an Insight Report of the World Economic Forum on Challenges and Opportunities in the Post-COVID-19 World and is published here with their permission. To view the full report please see: https://www.weforum.org/reports/covid-19-risks-outlook-a-preliminary-mapping-and-its-implications

1. Simon Evenett, Tackling COVID-19 Together: A Bottom-Up Approach to Trade Policy, https://www.pecc.org/blog/entry/tackling-covid-19-together-a-bottom-up-approach-to-trade-policy
2. WTO Director General statement, 20 April 2020, https://www.wto.org/english/news_e/news20_e/ddgaw_20apr20_e.htm, accessed on 6 May 2020
3. https://www.mti.gov.sg/Newsroom/Press-Releases/2020/04/Joint-ministerial-statementensuring-supply-chain-connectivity-amidst-the-COVID-19-situation
4. https://asean.org/declaration-special-aseansummit-coronavirus-disease-2019-covid-19/
5. https://www.who.int/ihr/ports_airports/icvp/en/
6. Hau Lee, The Triple-A Supply Chain, Harvard Business Review, https://hbr.org/2004/10/the-triple-a-supply-chain