At the end of the first quarter of 2020, when Covid-19 was rapidly impacting all major economies, the WTO had predicted that during the year, global trade could record its slowest growth since the Great Depression in the 1930s. Three quarters later, the WTO has predicted that the world trade volumes will decline by less than 10% over the level in 2019.
Although this is below the organisation’s most optimistic projection in April, which was a 13% decline, it should be pointed out that 2019 had also witnessed a marginal contraction of trade volumes. This implies that trade volumes will be veering off the decadal trend by more than what the numbers for the current year suggest. Importantly, this will be the first time since the early 1980s that global trade volumes will be in the negative territory for two consecutive years.
The moderation in the decline in trade volumes over the projections made earlier was caused by two sets of factors. First, three industries, namely, textiles, computers and electronic components, recorded unexpected upturns during the third quarter. Secondly, Asia, led by the better-than-expected economic performance of the world’s second largest economy, could see a decline in trade volume by just around 4%. These numbers have raised expectations of a sharp rebound during 2021.
Global trade prospects would also have been buoyed by the conclusion of two crucial trade agreements in the closing weeks of the troubled year. The Trade and Cooperation Agreement between the EU and the UK includes several provisions that have helped in reducing the uncertainties in the trade relations between the two partners after Brexit. For instance, the EU and the UK have agreed on a “zero-tariffs” agreement, much to the relief of businesses on the two sides of the Channel that were looking at significant increases in the cost of doing business not too long ago.
Furthermore, the two parties have broadly agreed to maintain the status quo on regulatory coherence related to standards, including those in the key areas of environment and labour; this should ensure minimal disruptions in their bilateral trade flows. Although the future framework of economic relations between the two erstwhile customs union partners is still in the works, the agreement provides a workable basis for addressing the outstanding issues.
November saw the conclusion of the largest free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), that brought countries in the East Asian region closer. RCEP saw the two largest economies going in opposite directions. India decided to stay away from the grouping; lack of preparedness of some of the major industries to compete in what is currently the most dynamic region in the world played a critical part in its decision.
On the other hand, China should play an important role in driving the post-pandemic upturn in trade in the region for two reasons. First, it is the only major economy that would record positive growth in 2020, and two, Beijing has made significant commitments to open its markets to its RCEP partners over the next few years. This possibility of Beijing playing a prominent role in furthering economic integration in East Asia could well see the narrative on “decoupling from China”, largely fuelled by the Trump Administration, taking a back seat on the other side of the Pacific.
China’s position as the largest trading nation could also be bolstered by its impending Comprehensive Agreement on Investment (CAI) with the EU. This agreement is expected to eliminate barriers to EU investment in China, including joint-venture requirements and foreign equity caps in several sectors. The major beneficiaries from the deal could be manufacturing, financial services, environmental services, real estate, and auxiliary services supporting shipping and air transport.
With the EU-China Connectivity Platform seeking to build synergies between the EU’s Trans-European Transport Network and China’s Belt and Road Initiative, CAI could lead to a quantum jump in trade and economic relations between the two partners. These developments notwithstanding, there could be two major challenges for global trade going forward. The first is the spread of economic nationalism promoted by the stimulus packages adopted by most countries, which could result in a degree of their decoupling from the global economy.
In fact, several commentators have been casting serious doubts about the future of globalisation as global trade never recovered fully after being impacted by the economic recession of 2008. Almost all large trading countries have seen a sharp drop in the trade intensities of their economies, with China leading the way with a 22% decline between 2008 and 2019.
The second challenge will be the ability of the Biden administration to reverse the disrupting influence of the US over global trade during the past four years, through unilateral actions against its major partners and also by putting at serious risk the future of the rules-based trading system governed by the WTO. With Trumpism continuing to be a force to reckon with, the new administration will have to pull all the stops to reverse the tide.
Biswajit Dhar (bisjit@gmail.com)
Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU