Abhijith H Nair
M.A. (D.L.B.), Jindal School of International affairs, O.P. Jindal Global University
This paper tries to understand the meaning of the concept of Protectionism through its history and observes the protectionist tendencies in the contemporary world. The latter half of the paper articulates the dire impacts of the Covid-19 pandemic on the world economy and trade through analysis of trade data and tries to identify whether the pandemic has exacerbated protectionist tendencies in international trade.
Keywords: Protectionism, Covid-19, World Economy, International Trade
In the year 2020, the world woke up and found itself caught in a surprising yet appalling situation. Within days, the world got grappled by the ‘CORONA’ virus (Covid-19) that spread like a wildfire. The recent Covid-19 outbreak has flanked the globe and choked existing international systems of trade, hence, becoming the first neoliberal virus in the world. The arrival of the pandemic was so swift that countries and global institutions did not get an avenue to formulate measures that would have guaranteed the continuation of the existing rules of international trade and systems, as predominantly at first, it was seen as a public health problem until it started spreading economic suffering worldwide.
As per the World Bank (2020) projections (Global Economic Prospects, 2020), the disequilibrium created by the pandemic on international trade and the global economy was of a very high frequency, as it affected both the supply and demand side of the global economy and drastically impacted the global trade and GDP due to the lockdown that was implemented to contain the spread of the infection. Previous studies (Lee & McKibbin, 2004) have shown how globalization and world trade gets affected due to a pandemic wherein we can observe the rise of protectionist tendencies because of the pandemic.
The aim of this paper is 1) to understand what Protectionism and its tendencies are 2) to assess the impact of the Covid 19 pandemic on international trade using World Bank Projections (2020) and other previous studies (Baldwin, R. & Weder di Mauro, B., 2020; Gruszczynski, 2020; Vidya & Prabheesh, 2020) and to see whether Covid-19 exacerbated the protectionism in international trade.
- 1 Definition
Protectionism is an economic policy that consists of restricting imports from other countries through policies like Tariffs, Quotas etc. to protect the domestic industries (import-competing sector) from their foreign counterparts. Protectionist policies are seen to prevail through various other ways like restrictions in foreign direct investment, anti-dumping legislation, direct subsidies, protection of technologies, patents etc. (Krugman, P. R., Olney, M. L., & Wells, R., 2008). These trade restrictions are intended to protect the domestic industries so that they can gain comparative advantage and substitute domestic goods for formerly imported goods (import substitution), but (Fairbrother, 2014) emphasizes that this harms both the economic growth and the welfare of a country.
1.2 History & Timeline of Protectionism
Historically, Protectionism has been associated with the economic theory of Mercantilism and Import Substitution (Bhagwati, 1988) and this principle was extensively used during the colonial era, later as (Caliendo, Feenstra, Romalis, & Taylor, 2015) says, due to the recurring wars (predominantly in Europe) the shocks occurred in the economy due to its outcomes, resulted in impacting the trade policies on the long run and gave rise to extensive government trade restrictions and protectionism that became embedded into the economic spheres for the later centuries.
This has made many policymakers believe that lower tariff or free trade will harm domestic manufacturers and help foreign countries grow at the expense of their country. As a result, we can see that even though international trade existed and flourished, the tariff rates remained predominantly high during the years that lead to World Wars. However, in the 20th century after the World Wars, the GATT (General Agreement on Tariffs and Trade) was successful in lowering the trade barriers which resulted in impressive growth in international trade. But, with the oil crisis of 1973, which resulted in the worldwide recession, this trend got reversed
and gave rise to new protectionist tendencies, also known as Neo-protectionism, which is characterized by the imposition of many non-trade barriers like Anti-Dumping Duty, Countervailing Duty, Special Safeguard Duty, Sanitary and Phytosanitary Measures, Technical Barriers to Trade etc. (Salvatore, D., & Brooker, R. F., 1993). This along with sluggish economic growth in advanced economies have led to the reduction of world trade by 8% (Gregori, T., 2020). The Uruguay Rounds of (1984-1994), helped in establishing WTO (World Trade Organization) which reversed this trend as it was the biggest reform in the sphere of international trade, as, unlike GATT, WTO also comprised of intellectual property rights and trade in service and dispute settling mechanisms along with trade in goods.
These policies made international trade and business environment more stable and predictable benefitting both the consumers and producers, wherein consumers got access to a greater variety of goods and services at lower prices (IMF, 2019) while the producers were benefitted from the stability and predictability which made them invest more in trade and create jobs. (Gregori, T., 2020). Hence, as a result, (Figure1) shows how tariffs fell globally from the 1980s until the GFC (Global Financial Crisis) in 2008, which resulted in the sharpest fall of global trade in the recorded history. This has resulted in a concerning trade slowdown phenomenon which (Constantinescu, C., Mattoo, A., & Ruta, M., 2020) have associated with both cyclical and structural factors. The cyclical factors refer, to the weak global demand, changes in composition, shift towards economies with lower trade intensity etc., while the structural factors refer to the diminishing global supply chains, declining diffusion of technologies, government support for domestic industries and protectionism. The analysis of the Global Trade Alert database by (Evenett, 2019) reveals the increase in protectionist tendencies in many countries after GFC, through tariffs, quotas, bailouts, subsidies, localization of requirements, discrimination against foreign commercial interests etc. But (Ghodsi, Grübler, Reiter, & Stehrer, 2017) reveals that the increase in non-tariff measures in developed nations exerts only a modest effect on the developing economies and international trade flow. However, with a fair amount of literature both at the micro and macro levels, one cannot ignore the fact that protectionism and its rise and return do play an important role in shaping decisions and welfare of the nations, like the recent political events like Brexit, America First Policy, Atmanirbhar Bharat etc.
Figure 1. The world average of the Trade Protectionism Index (Gregori, T., 2020)
2 Pre-Covid World Trade
World trade is dominated by the ten largest economies which comprise of the G7 countries plus China, India & Brazil, which accounts for 60% of the world’s supply and demand (GDP), 65% of world manufacturing and 41% of manufacturing exports (Baldwin, R., & Weder di Mauro, B., 2020).
(Figure 2) shows the level of interconnectedness of the supply chain of manufactured goods in the world. Since, the major segment of world trade is characterized by global production networks, wherein we observe that China, the USA, Germany, Japan, South Korea etc. are central to the global supply chains due to their comparative advantage in production and distribution and that the contemporary world trade is dominated by the trade-in intermediary goods than the finished goods (Baldwin, R., & Weder di Mauro, B., 2020). These higher trade-in intermediaries, along with trade diversification and fragmentation promoted the rise in industrialization and higher productivity for developing countries, as countries start specializing in particular goods on which they have a comparative advantage.
Figure 2 shows the global supply chain in world trade.
3 IMPACTS OF COVID-19 ON WORLD TRADE
The Covid-19 pandemic drastically affected the global economy in such a way that it will be the most serious global crisis after the economic depressions of the 1930s. It had wreaked havoc on the economies of all countries and severely impacted world trade and global GDP. As per the World Bank Projections 2020, there has been a drastic reduction in the trade interconnectedness, connectivity, and density among the countries after the pandemic which has resulted in a discernible change in the structure of the trade network. The projection also indicates that the world GDP is expected to decline considerably in 2020, where the developed countries would shrink by 7% of their GDP and developing by 2.5% (Figure 3). Similarly, world trade is set to decline by 13% (Figure 4), which is even more than that of the World War 2 period.
This sudden and unprecedented condition has drastically impacted the manufacturing sector since both the demand and the supply sides of production were affected. Since countries that are central to the global supply chains like China, Japan, Korea etc, were the primary victims of the pandemic, the lockdown implemented to contain the virus in these countries proved fatal for the global trade, as the manufacturing sectors came to a complete standstill in these countries. This severely affected the global supply chain contagion of almost all the countries since these countries are pivotal in global trade networks, which can be seen through the reduction in the volume of container shipping (trade) (Figure 5) (Vidya & Prabheesh, 2020).
Figure 3 denotes the decline in global GDP, here EMDE’s represents the emergingmarketsand developing economies (Global Economic Prospects, 2020; Vidya & Prabheesh, 2020)
Figure 4 shows the reduction in world trade through the rate of GDP growth (GlobalEconomic Prospects, 2020; Vidya & Prabheesh, 2020)
Figure 5 shows the reduction in the volume of container shipping before and after thepandemic (Global Economic Prospects, 2020; Vidya & Prabheesh, 2020)
These direct supply disruptions will not only hinder production in these countries, but rather also- the supply chain contagion will amplify the direct supply shocks, as the manufacturing sectors in the other less affected countries will find it tough and expensive to acquire vital industrial inputs and materials from hard-hit nations (primary producers) as well from each other (Baldwin, R., & Weder di Mauro, B., 2020). This will also cause demand disruptions due to macroeconomic drops in aggregate demand caused due to recession (both globally and domestically) and by the wait and see purchase delays by consumers, as manufactured goods are vulnerable to sudden stop demand shocks, and the delays in investments by firms due to the risk of uncertainty.
Thus, Covid 19 pandemic and its resulting lockdown will impact all the arteries of the global economy like- goods, services, financial capital, investment, and people unlike any other global crisis before. This will result in a fall in imports and exports (movement of goods), and the movement of people among countries as the borders remain closed. Companies, individuals, governments are experiencing disruptions that may lead to sudden deglobalization and exposure to xenophobic reactions and closing borders which may over time promote nationalist and populist tendencies, and thereby, promote deglobalization policy reactions. (Baldwin, R., & Weder di Mauro, B., 2020).
This resurgence of protectionism is unprecedented because of the sizes of the countries involved, the magnitude of tariff increased and the breadth of tariff across sectors and, the rate of protectionism also depends on the length, the rate, death (in this case), and the level up to which the global capabilities are eroded. The aim of the tariffs is not only to generate revenues but also to restrict the imports/ exports to protect job losses and precarity in the domestic industries. Moreover, this demand and supply shock caused during the initial stages of the pandemic prompted the countries to be self-sufficient so that such shocks can be tackled in the future.
4 DID COVID 19 PANDEMIC EXACERBATE PROTECTIONISM
Economist Deborah Elms predicts that the governments around the world will turn increasingly protectionist in the near term as they try to limit the economic damage from the coronavirus pandemic and protect their concerned industries and promote more jobs. This will in turn fuel the existing crisis, however, in the long term, economies will rebound and a renewal of trade organizations and collaborations among nations will occur. (Gruszczynski, 2020) shows that although the pandemic gave rise to some protectionist tendencies, they are short-lived in nature and will recede once the global trade resume.
According to (UNCTAD, 2020), 70 % of global trade occurs through containerships and roll-on/roll-off ships, that carry goods by value internationally by sea, which mostly consist of intermediary goods and raw materials. (Figure 6,7 & 8) shows that during the covid pandemic even though there is a slight dip in connectivity index in terms of trade in 2020, it rebounded back during the Q3 (Quarter 3) of 2020. It also states that even though there was a supply-demand shock, it did not have a direct impact on global shipping as the sea borders were not closed even when land borders were.
Moreover, (UNCTAD, 2020) also implies that the biggest decline in trade will be in the service sector (15%) which is its biggest decline ever (of the sector) and that even though the manufacturing sector has been hit significantly (9%) it is still lower than the global financial crisis of 2008 (15%) (Figure 9 & 10). Hence, we can analyze that even though we could notice some protectionist tendencies during the pandemic, they are more rhetoric in nature than practical as the total shipping cargo which accounts for 70% of global trade has not been hit drastically. Moreover, there has not been a dip in the export from the primary exporting nations like China, Japan, Korea due to any other reasons other than Covid supply shock, and since the global trade has fallen due to production deficiency caused by the pandemic than any other reason it cannot be called as protectionism.
Even though the pandemic affected the service sector drastically, with the overall advances and adaptations in technology it has a very high chance to rebound back quickly wherein we can conduct trade more effectively than before and protect the community at the same time. Thus, we can say that even though Covid 19 affected the global economy drastically it has not exacerbated protectionism and brought in a paradigm shift.
Figure 6 represents the Linear shipping connectivity index. (UNCTAD, 2020)
Figure 7 represents the Linear shipping connectivity index (continuation) (UNCTAD, 2020)
Figure 8 represents the Linear shipping connectivity index in a graph.
Figure 9 represents the Global Merchandise trade from 2006- 2020.
Figure 10 represents the Global trade in Services from 2006- 2020. (UNCTAD, 2020)
Protectionism existed during the early half of the 20th century and reduced drastically with the GATT and WTO agreements (Figure 1), which resulted in the removal of barriers of trade between countries and with the advance of globalization and neoliberalism it resulted in more interconnectedness among nations as one big entity. Contemporary trade is predominantly dominated by a global supply network of intermediary goods (Figure 2). With (Baldwin, R., & Weder di Mauro, B., 2020; Vidya & Prabheesh, 2020) we analyzed how the pandemic has gravely wounded the world economy with serious consequences impacting all communities and individuals by moving rapidly across borders, along the principal arteries of the global economy and has been the prime reason for the decline of global GDP and trade (Figure 3 & 4). We observed (Figure 5) how Covid-19 impacted global trade. However, at the same time through the data of (UNCATD, 2020) in (Figure 6,7,8,9 & 10), we analyzed that how the overall global trade rebounded with time and thatwith the advancements and adaptations in technology the service sector which was the most affected will rebound back quickly. Thus, I conclude that Covid 19 has not created a paradigm shift and did not exacerbate protectionism.
The CATO institute of the US lays down recommendations to be followed to resolve the crisis which includes-Diversification of supplier base rather than relying on a single country, to avoid using tariffs and other trade barriers to encourage the repatriation of supply chains, to discourage patriotic buying to avoid protectionist tendencies. Only cooperation will guide in resolving the crisis through coordination for vaccine research and distribution, removal of barriers to promote trade so both consumers and producers are benefitted.
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The opinions expressed in this article are those of the author (s). They do not purport to reflect the opinions or views of the Jindal Centre for the Global South or its members.