By Jamie Adams, Director, Global Trade Consulting
Without question, 2020 exacted a heavy economic toll characterized by widespread unemployment and the paralysis of supply chains as production and transport shut down around the world. At mid-year, global trade volumes had seen a year-over-year plunge of 12.2% for the second quarter. Yet, by the end of Q3, a rebound was in full swing with a 12.5% increase in trade, much of which was being driven by demand for consumer goods in the West, as well as in China where the economy had recovered quicker than anywhere else. And by October, the U.S. had witnessed a rise in both import and export activity for its fifth consecutive month.
Not Out of the Woods
To be sure, trade flows have not returned to pre-pandemic levels and it is difficult to predict when they will, particularly since no one knows definitively the timeline for the containment of the COVID-19 virus, and availability and reliability of vaccines.
In many ways, the pandemic has served as a wake-up call to a global community of businesses engaged in global trade, many of which had been walking somewhat of a tightrope in an attempt to navigate various disruptors in recent years. If there was any doubt left in the minds of business decision makers at the outset of 2020 that they needed to guard against risk in their global value chains, it is now gone.
For those organizations, it has been true for some time that the only certainty is uncertainty. For their leaders and decision makers, the incentive to invest lies in the restoration of stability, order and agile contingency plans for the unpredictable. And that’s where they’ll have their sights set in the coming year.
Still Some Rough Waters Ahead
Relief won’t come immediately. The pandemic will continue to force lockdowns and interrupt business activity. This will have extreme impact at the local, micro-economic level and continue to have adverse effects at the global, macro-economic level. The U.S.-China trade war will linger and drive up landed costs, prompting businesses to consider sourcing elsewhere. Even with a new trade agreement, the implementation of Brexit is anticipated to create severe disorder in trade within Europe. And an escalating dispute between Washington and Brussels has the potential to create barriers to trade across the Atlantic.
Yet, even amongst all the turmoil, there are opportunities for policymakers to put investors’ minds at ease. The most critical will be the restoration of the role played by the World Trade Organization. The Geneva-based body has been rendered impotent since 2019 when Washington – a frequent critic of the WTO – refused to approve the appointment of new judges to the WTO’s appellate court. The subsequent resignation of its leader called into question the future of the institution and that of the rules-based global trading order it was mandated to oversee. The frontrunner to take on the leadership role, Nigeria’s Ngozi Okonjo-Iweala, has been rejected by the Trump administration in Washington, putting the fate of the leadership selection into a state of limbo.
Rendering the WTO rudderless has come at a particularly inopportune time. Not only are trade matters of critical importance in the wake of the disorder wrought by COVID-19, there are specific issues to which the WTO must turn its attention, such as fisheries subsidies and a host of other issues, not least of which is keeping in check the rise of global protectionism (more on that further down).
Perhaps the lowest hanging fruit for policymakers in Washington in terms of restoring investor confidence in the global trading order is to re-empower the WTO by allowing a leader to be chosen and the appellate court to be re-established. This would go a long way in providing investors with confidence that the governments of markets in which they invest have some form of recourse in the event rules are broken by other governments. It would also allow investment decisions to be made with greater clarity around the costs of engaging in trade in and out of a particular country. The WTO’s Most Favored Nation system, while not perfect, provides consensus around tariff rates and the rules by which trade is governed unless otherwise overwritten by bilateral or multilateral trade agreements.
Even before the outbreak of the pandemic, protectionism was on the rise with governments around the world putting up barriers to trade designed to restrict imports. These barriers were of significant concern to business leaders who rely on global sourcing to reduce costs, increase efficiency and enhance productivity. Moreover, many governments rely on globalization as a means of helping their developing economies move further up the value chain.
In the early days of COVID-19 governments around the world rushed to impose restrictions on the export of goods critical to containing the virus, such as masks and medical equipment and certain foods. At the time, the fear was that such restrictions would eventually be applied to a broader range of goods.
Yet, by the end of the year those fears proved to be unfounded. A report in November by the WTO showed that of the 133 trade policy measures taken since the outbreak of the pandemic, 63% were trade liberalization measures while the remaining 37% were trade restricting measures. Moreover, one-third of trade-restricting measures imposed in the early days of the pandemic had already been removed by mid-October. Those numbers represent the greatest movement toward trade liberalization in more than 15 years.
Multilateralism on the Rise in Asia
At about the same time the WTO came out with its report, 15 countries in Asia signed the Regional Comprehensive Economic Partnership (RCEP), a free trade arrangement involving one-third of the world’s population and one-third of its GDP. While RCEP wasn’t nearly as comprehensive in its trade liberalization as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), involving 11 Pacific Rim countries, it was a clear sign that governments of developing and developed nations were willing to break down barriers to trade and work cooperatively through a rules-based system.
The signing of the RCEP, the CPTPP before it and the United States-Mexico-Canada Agreement (USMCA) before that, serves as a reaffirmation that despite the emergence of bilateral trade tensions, the broader system of global trade is leaning more toward liberalization than protectionism even as the U.S.-China trade war rages on and the United Kingdom makes its departure from the European Union. Still, without a viable dispute-resolution system in place via the WTO, it is conceivable that the tide could turn at any point.
Cautious Optimism for 2021
Hope that the incoming U.S. administration will re-engage in multilateralism by reinstating the governing role of the WTO and re-establishing friendlier relations with key trading partners has become pervasive. This is not to suggest that Washington will undo all trade restrictions imposed in the past four years. On the contrary, a certain degree of volatility will continue to exist for the foreseeable future. President-elect Joe Biden has already stated he is no rush to do away with the Section 301 tariffs imposed on China-origin goods. He has also been consistent in advocating Buy American policies in relation to government contracts. And with much work to be done in restoring the domestic economy and containing the pandemic, there isn’t likely to be an immediate focus on reforming trade policy.
However, there is good reason to believe the Biden administration will approach trade matters with greater measure, predictability, and heightened discourse with key trading partners. This will reduce the overall sense of uncertainty in the global trade environment, offering some comfort to importing and exporting firms eager to lower investment risk and stabilize their international market share.
The pace at which trade volumes rebounded in the latter part of 2020, and the shift toward trade liberalization, suggest there is good reason to believe confidence in the global trade environment will improve and, in turn, generate greater investment in the year ahead.
Jamie Adams has extensive and diverse experience in compliance with relevant domestic and foreign import and export laws, as well as in creating and executing plans to improve global trade and international supply chain programs and systems.