The current economic slowdown has exposed the potential fragility of global supply chains and exacerbated concerns over trading with China, says new briefing paper.

• The World Trade Organization has predicted that global trade in goods will drop by between 13 and 32 per cent in 2020 as a result of the pandemic;


• The last time trade volumes dropped substantially, during the financial crisis of 2008, they recovered – but not at pre-crisis rates of growth;


• Before the current pandemic, trade tensions had already led to a slight fall in global trade in goods in 2019;


• In addition, there were several other pre-coronavirus trends that looked likely to have a negative impact on the global trade in goods, including concerns over the Chinese government, new technology, and environmental concerns;


• With the exit of the relatively free-trading UK, the EU is in danger of succumbing to more protectionist voices. In the US, Donald Trump was elected on a platform of protectionism and to address what he saw as unfair trade practices;


• The current economic slowdown has potentially exposed the fragility of some global supply chains and exacerbated concerns over trading with China;


• While it can be expected that global trade will bounce back in 2021, the nature of the recovery is not yet clear, but it may not recover to the same level or trajectory as seen prior to lockdown;


• This briefing paper examines the factors that will determine whether the recovery in trade volumes will follow the WTO’s optimistic or pessimistic scenario.

Multiple factors will impact the volume of global trade in the coming months but governments across the globe must reverse temporary restrictions and prohibitions to give the global economy the best chance of returning to previous growth levels, according to a new report from the Institute of Economic Affairs.

Freight Expectations: Post-pandemic Prospects for Global Trade examines the barriers to reaching the World Trade Organisation’s ‘optimistic scenario’ for global trade following the impact of coronavirus.

In April 2020, the WTO published its latest trade forecast for 2020 predicting that global trade in goods is expected to drop by between 13 per cent and 32 per cent in 2020 as a result of the economic impact of the Covid-19 pandemic. It also predicted both a pessimistic and optimistic scenario for the recovery of global trade once restrictions are lifted and economic activity and trade is ramped up again. Freight Expectations looks at factors likely to affect the level of the recovery.

1. Perception – The longer lockdown lasts the less likely businesses and consumers will view the impact of coronavirus as short, sharp and temporary, leading to a weaker recovery.


2. Supply chains – The fragility of the modern supply chain has been tested. Businesses may seek to build shorter supply chains with re-shoring but this would also bring increased costs and concentration of risk.


3. Trade tensions – With Donald Trump in the United States and the European Union becoming more open to protectionist voices, disputes between governments mean trade is increasingly likely to be used as a tool of foreign policy.


4. Concerns over China – China accounted for 12 per cent of global trade in 2018 but concerns over their handling and possible suppression of the coronavirus outbreak have made other international actors more cautious and even reluctant to continue current levels of engagement and trade with the country.


5. Technology – New technology such as 3D printing has the potential to replace significant volumes of trade in goods.


6. ‘Temporary restrictions’ – Eighty countries and customs territories have introduced export prohibitions or restrictions in a bid to protect domestic consumers during the coronavirus outbreak but if these temporary measures are not repealed, international trade will be slow to recover.

Syed Kamall, Academic and Research Director at the Institute of Economic Affairs and author of ‘Freight Expectations: Post-pandemic Prospects for Global Trade’, said: 

“There are a number of factors that will impact global trade over the coming months; trade tensions, protectionist voices, strength of supply chains, and adoption of technology are just some of the reasons the rebound may not be as strong as hoped.

“However, the UK’s departure from the EU may be a catalyst for competition in signing trade agreements and the return to normality for many businesses and consumers will increase demand again.

“We cannot be sure how rapidly global trade emerges from its current dip but governments across the world should seek to lift temporary restrictions and prohibitions brought in as part of their coronavirus response to facilitate the recovery in global trade volumes.” 

Rt Hon Elizabeth Truss MP, Secretary of State for International Trade, said:

“This is a timely paper from the IEA. Rules-based free trade has done more than any single policy prescription in human history to advance human progress and alleviate poverty. The world needs more of it now, not less, and a fully functioning international system underpinned by countries who play by the rules.

The UK government will be a fierce campaigner for those principles. By pursuing ambitious trade deals with like-minded friends and allies, we can put pressure on the WTO to reform rules in areas like digital trade and strengthen the global argument for free trade. We will put Britain at the centre of a network of free trade agreements that will help us maintain market access while also opening up new opportunities for our businesses. It will make us more resilient to future crises by diversifying our trade and supply chains, and make us an international trading hub. These are opportunities we are determined to seize.”

ENDS 

Notes to editors

For media enquiries, please contact Emily Carver, Media Manager, on 07715942731 or [email protected].

Freight Expectations: Post-pandemic Prospects for Global Trade will be published at 00.01 on Monday 6 July 2020. An embargoed copy of the briefing paper can be found here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.