International trade had been facing hard times well before the Covid-19 pandemic broke out and shocked the global economy. Feeble GDP growth across several regions of the world, trade tensions between key economic players that contributed to revive protectionist instincts, alongside with the prolonged standstill of multilateral negotiations had collectively contributed to slow down international exchange. A preliminary forecast by the World Trade Organisation (WTO) had estimated a +3% growth for international trade in 2020.
The pandemic came as a complete game-changer: it was an external – and unforeseeable - shock that heavily crippled an already fragile international framework. In the short term, national lockdowns during the first wave led to a “paralysis” of a number of key supply chains. This contributed to temporary disruption in the provision of critical goods, particularly across the agri-food and pharmaceutical sectors. However, in spite of a very gloomy situation (exemplified by the WTO’s substantial revision of its forecast in June 2020, with an expected world trade contraction between 13% and 32%), it appears things might have actually turned out better than expected. Now, the Geneva-based organisation is confident that the latest estimates for 2020 (a -9.2% decline in international trade), released in October, could actually turn into a better performance, thanks to a considerable pick-up in the exchange of goods that took place in the last quarter of 2020.
What next? 2021 between hope and concerns
A positive rebound of +7.2% for global trade flows is expected in 2021However, a degree of uncertainty will persist until movement restrictions are not eased. This is going to particularly affect trade in services, as many of the economic sectors providing them (including tourism and all of the categories falling under “mode 4”) crucially depend on physical presence. Moreover, the latest WTO Trade Barometer for services signalled several downside risks that might undermine the ongoing recovery. For instance, what has so far been an uneven distribution of Covid-19 vaccines is a key stumbling block preventing a durable global recovery for trade in services.
This means that pre-pandemic levels of trade flows are still out of sight in the immediate future, raising concerns over their medium-to-long term consequences. In fact, the external shock generated by the coronavirus on the global economy on both the demand and supply sides might become structural (including, for instance, the effects of unemployment on households’ purchasing power), ultimately pushing global trade below its growth trend. Moreover, there are currently some logistical bottlenecks that prevent goods from being traded more smoothly. Reduced capacity because of shortage of containers – particularly in Asia – has led to a sharp increase in freight and shipping costs (in some cases up to 6 times higher than in 2020). This should not be considered as a long-term barrier, but it could hamper short-term trade recovery by disrupting global supply chains.
Nevertheless, key changes in the global political framework provide hope and renewed expectations for a revival of a multilateral trade policy agreement. The new Biden Administration in the United States, as well as the entry in office of Ngozi Okonjo-Iweala as the WTO’s new Director General, are key factors with real potential to reactivate dialogue and collaboration mechanisms in order to make decisive progress on trade policy dossiers. Crucially, will this prove to be enough to call for a “reset” of multilateral trade governance?
WTO reform: is it finally the right moment?
International trade governance has been at a de facto standstill for years, not only because of the limited progress on ongoing negotiating rounds but also because of the paralysis of its dispute settlement mechanism, the Trade Appellate Body. The US’ decision to support the appointment of Ms. Okonjo-Iweala has profound political meaning, both because of her profile and top-class expertise (notably, she is the first woman – and the first African woman – to lead the organisation, an economist with previous experience at the World Bank and as chair of the Global Alliance on Vaccinations) and because of her intention to reform the WTO. Naturally, Ms. Okonjo-Iweala’s success will depend on her political steer and determination, but it will also be up to the Member States’ willingness to cooperate. So far, what we have seen is a mixed picture.
To illustrate, the ongoing negotiations aimed at regulating e-commerce, an area where convergence will be crucial in the future given the increasing economic importance of this sector, have proved promising. During the latest round of negotiations, which were held in February, some progress was achieved, raising expectations that a positive conclusion could be reached before the 12th Trade Ministerial Conference -due to take place later this year. Unfortunately, the same cannot be said about intellectual property and vaccines distribution. The recent refusal by the EU and the US to allow waivers for patents to Covid-19 vaccines and treatments (as requested by India and South Africa with the support of many developing countries) is yet another example of the implicit division between “rich” and “poor” countries. It follows that a reform of the TRIPS agreement might also be necessary: striking an appropriate balance between the legitimate safeguard of intellectual property (and economic incentives for R&D activities) and the importance of making vaccines available to all is going to be the most important challenge for the WTO in the next couple of years.
Key players: a new relationship between US, EU and China?
From the beginning of his presidential campaign, Joe Biden was clear about his intention to start a new phase with the EU, after years of disputes that had produced economic damage on both sides. The recent agreement with the European Commission to suspend the retaliatory tariffs imposed as a consequence of the Airbus/Boeing case marked a first important step towards the possible restart of a “transatlantic dialogue”, alongside with new US Treasure Secretary, Janet Yellen,’s openness toa digital services tax, which might further reduce trade frictions and pave the way for a productive dialogue at the OECD level. However, China remains the big “elephant in the room” between Washington and Brussels: in fact, the Comprehensive Agreement on Investment (CAI) signed at the end of 2020 points to the EU’s ambition to develop a trade and investment policy aimed at reaching “strategic autonomy” in the international sphere. However, this approach could also generate divergences with the US, since the Biden administration has so far asserted a “tough stance” against China, exemplified by the dialogue established with Asian and Pacific countries in view of a “containment” strategy against Beijing.
As such, managing expectations will be key to ensure this year’s optimism for progress will be matched with an equally realistic and pragmatic approach.
Is protectionism behind us? Probably not
The outbreak of the pandemic one year ago induced several countries to adopt trade restrictions measures aimed at protecting the supply of key items, particularly Personal Protective Equipment. According to the Global Trade Alert, 1863 new trade barriers were raised globally in 2020, representing the highest value since they were first monitored in 2009. Despite a more favourable political environment, this trend should not be underestimated: as previously discussed, the “race for vaccines” could undermine free trade. Moreover, there is an ongoing debate around initiatives to facilitate “reshoring” processes of global value chains. The EU had already started focusing on this before the pandemic when it launched its “new industrialisation” initiative, a stark difference with the US, which have prioritised “Buy American” policies since the Obama administration. It remains to be seen whether measures to facilitate assets repatriation can be beneficial to the economy, as they could lead to new forms of “disguised” protectionism and reduce the diversification of supply sources.
The year of Italy’s G20 between opportunities and challenges
Within the agenda set by the Italian Presidency, based on the “3Ps” (“People, Planet and Prosperity”), strengthening multilateral trade governance has been confirmed as a key priority. The G20 can be an ideal forum to create political momentum and launch initiatives to defuse protectionism and remove unnecessary trade barriers, particularly at a moment where cooperation mechanisms should be key to find a way out of the current health and economic crises generated by the pandemic. Moreover, Italy is primarily interested in facilitating a free trade environment, since the country’s feeble economic growth over the last decade has been mainly driven by exports: Italy runs a €30bn trade surplus with the US and is seeking to improve its performance with Asian markets, particularly in China where the demand for “made in Italy” products is on the rise.
Therefore, despite a troubled and uncertain situation, 2021 could be a turning point for trade governance. Progress might be possible within the WTO thanks to a new leadership and renewed cooperation among its members. However, geopolitical rivalries among key economic players will require a realistic approach. Italy, for its part, should make the best out of the G20 by matching its national interest with progress on the multilateral agenda.