
Beyond Covid: Protectionism and deglobalisation
Graham Hook. Head of UK Government Relations & Public Policy and Elizabeth Gilliam. Head of EU Government Relations & Public Policy
“Protectionism is back”
So proclaimed The Economist in March 2018 when President Trump signed into law tariffs on steel and aluminium imports to the United States. That verdict reflected a broader concern about the ‘politicisation’ of the terms of global trade, of which the US-China trade war was just the most prominent symptom.
For much of the period since WW2, the trend in global trade has been towards liberalisation. The rising number of signatories, first to the General Agreement on Tariffs and Trade (GATT) and then to the World Trade Organisation, steadily expanded the reach of the multilateral trading system to cover countries responsible for almost the totality of global trade. Through a combination of bilateral and multilateral agreements, tariffs on goods have declined steadily, with the average global tariff falling from 8.5% in 1994 to just 2.5% in 2017.1 Against that backdrop, the volume of world trade has increased significantly, boosting living standards and increasing stability in the global economy.
However, since the Global Financial Crisis, the willingness of national leaders to ‘weaponise’ global trade for political ends, combined with a grassroots backlash from those who feel they’ve born the dislocation costs of trade liberalisation while others have reaped the benefits, has created a more permissive environment for national protectionist measures. Between 2010 and 2018, the number of trade measures deemed ‘harmful’ by global monitoring organisation World Trade Alert increased by almost 60%.2 More recently, the trend of tariff reduction has begun to reverse, driven in large part by the US-China trade war. And, for the first time in a decade, global merchandise trade registered a decline in 2019 according to the WTO.3 Such was the world trade backdrop to the outbreak of COVID-19.
Has COVID accelerated protectionist trends?
In a host of different areas – from flexible home-working to the growing salience of sustainable development – the current pandemic has acted as an accelerant of pre-existing trends. And the story for global trade is no different. Ironically, at the same time that millions of people across the globe switched to conducting their business and social affairs via Chinese-owned Zoom or American MS Teams and Houseparty, many G20 governments were moving to introduce trade restrictions – over 90% of them consisting of export bans on medical products.
At the same time, as economic and social lockdowns came into force in many major economies, global trade flows started to fall off a cliff.4 But while the hit to global trade is expected to be temporary – and G20 countries have already unwound over a third of their health-related restrictions5 – governments across the world have taken advantage of the pandemic to introduce more permanent restrictions on foreign trade flows.
In the name of national security, EU countries such as France, Germany, Spain and Italy have all tightened their processes for screening foreign investment and, in the cases of France and Spain, have stretched the definition of sectors deemed “strategic” to include the media and financial services. The UK Government has rolled out powers to intervene in corporate acquisitions deemed to threaten the response to a public health emergency – with even broader powers in new legislation expected later this year. And a sceptical British Parliament is likely to foist greater restrictions on the provision of critical infrastructure by state-backed Chinese firms on a Government caught between the demands of its long-standing Atlantic ally and future trading potential with China. Outside Europe, Australia, Japan, the Republic of Korea and the United States have all introduced measures relating to national security to put additional hurdles in the way of foreign investors.6
An era of de-globalisation?
So, does the recent wave of protectionist measures indicate we’re on the cusp of a period of de-globalisation?
It’s clear that at a global level, the multilateral trading system faces significant challenges. The future credibility of the WTO as a proponent and arbiter of free trade remains in doubt, particularly while its senior Appellate Body lacks the members to function.
At a regional level, US trade tensions with China look unlikely to diminish following November’s election, with both candidates trading blows over relations with Beijing out on the campaign trail.
In Europe, new Commission proposals to tackle the state subsidy of foreign companies operating in the EU, effectively seeking to export its state aid regime to the rest of the world, could represent a dramatic shift away from trade liberalisation. Combined with the EU’s wider agenda for “strategic autonomy” – effectively a means through which to build up “EU champions” and tackle the market dominance of US tech giants – it has the potential significantly to add to global trade tensions in the years to come.
And at a local level, the post-COVID political imperative to safeguard critical medical supplies closer to home is likely to see supply chains shortened, if not re-shored.
But the outlook is not all doom and gloom. While the WTO remains hamstrung, it’s clear from CETA, USMCA and the many FTA negotiations currently in progress that the potential benefits of bilateral and plurilateral trade agreements remain well understood by national governments.
While immediate protectionist measures have risen, G20 leaders made clear in March their collective commitment to keep markets open and “realize a free, fair, non-discriminatory and stable trade and investment environment”.7
And while a change in US administration wouldn’t, on its own, solve tensions with China, American re-engagement with its traditional allies could deliver much-needed coordination among Western powers – which could itself create a more stable global trading environment.
So, while the volatility of the pre-COVID period may persist for some years yet, it’s also clear in our view that the era of free trade is here to stay.
Footnotes
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1 Bank of England, Monetary Policy Report, November 2019.
2 Global Trade Alert. ‘Harmful’ measures include subsidies, tariffs, export subsidies. In 2010, 1,387 harmful measures were recorded; 2,205 in 2018.
3 WTO, Reports on G20 Trade and Investment Measures, 29 June 2020.
4 The UN Conference on Trade and Development (UNCTAD) and the OECD predict that global flows of Foreign Direct Investment will decrease by as much as 40% this year due to the pandemic.
5 WTO, Reports on G20 Trade and Investment Measures, 29 June 2020.
6 OECD, UNCTAD, 23rd Report on G20 Investment Measures, June 2020.
7 Extraordinary G20 Leaders’ Summit Statement on COVID-19, 26 March 2020.
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