The Covid-19 pandemic has caused the global economy its worst contraction in almost a century. Current forecasts portray a very gloomy picture for 2020 with a 13 to 32 per cent decline in merchandise trade, a 30-40 per cent fall in foreign direct investment (FDI) along with a significant reduction in international airline passenger traffic by 44-80 per cent. The World Bank (WB), Organisation for Economic Cooperation and Development (OECD), International Monetary Fund (IMF) and World Trade Organisation (WTO) have already released forecasts showing significant slowdown in GDP and global trade. World trade already fell sharply in the first half the year as Covid-19 is negatively impacting global economy.
However, the Covid-19 pandemic has accelerated the current economic crisis that has been well underway for quite some time caused by economic austerity measures since 2010, the virus just exacerbated that crisis. However, the current economic crisis exacerbated by a health crisis, is likely to be somewhat different from many past similar occurrences. However, the fear is as GDP is time-dependent, shocks can have permanent effects on output, which in economic literature is referred to as hysteresis. Therefore, factors that impact on long-term growth during a recession such as we face now can leave behind permanent imprint and GDP is unlikely to return to its pre-crisis period.
But at the same time, the pandemic has also added new layers of complexities in the form of vastly expanded state power not only introducing pandemic control measures but also in conducting economic activities. Many of the immediate national responses to the pandemic included restriction on the movements of goods and people. Furthermore, the globally synchronised lockdowns and flow of adverse effects on product and financial markets led to an unprecedented economic slowdown. It is indeed an unique recession combining both the supply side and the demand side shocks.
In this challenging and uncertain times, trade is essential to save lives and livelihood. By the second quarter of 2020, trade contraction due to Covid-19 is deeper than the Global Financial Crisis (GFC) of 2007-08. According to the WTO, the estimated decline in merchandise trade in the second quarter of this year is around 18.5 per cent on a year-on-year basis resulting from the pandemic and associated lockdown measures. It further added the fall in trade now experienced was historically large and the steepest on record. According to the United Nations Conference on Trade and Development (UNCTAD), a decline of around 20 per cent in trade is expected for 2020. According to the European Commission (EC), EU27 will experience a decline in trade volume by 10-16 per cent in 2020.
Such a wide ranging estimate is indicative of the very high degree of uncertainty about any economic recovery in the second half of this year. The latest data and forecasts emphasise the need to plan for a world where to navigate through the expected slow pace of economic recovery in the post pandemic phase and its impact on global trade. In a country like Bangladesh, where trade accounts for 38-40 per cent of GDP, policy choices will have an enduring effect on the country's economic future. In fact, for a country like Bangladesh fiscal, monetary and trade policy choices will play a major role in determining the pace of economic recovery in the post covid-19 phase.
But now continued macroeconomic stimulus is needed using an array of policy instruments as the lack of such aggressive policy instruments could make the current economic crisis even worse than what it is now. However, such stimulus must ensure to serve public interest, not vested interests, to avoid creating market distortion.
With the global economy into its worst dive since the Great Depression of 1929-33, the need for smooth flow of goods and services has become ever more important. But the pandemic has rather given new impetus to impose trade restrictions, creating a major rollback of GATT/WTO successful initiatives to liberalise trade flows achieved through the successive rounds of trade negotiations. In fact, the pandemic has prompted a new wave of trade restrictions. Now the fear is whether that becomes the enduring feature of the global trade environment creating a world of disconnected national markets.
The pandemic has induced another kind of trade restriction as well, especially relating to medical goods under the guise to "protect human health and life". Countries, such as the US and others are now discussing changes to trade policy that will have effects lasting long after the Covid-19 pandemic is over, seeking to bring manufacturing of products back onshore. French President Emmanuel Macron reaffirmed his nation's goal to ensure the nation's "health sovereignty" by onshoring pharmaceutical production. Most developed countries are increasingly imposing export restrictions on essential goods such as medical equipment and food products as well as imposing new tariffs or trade restrictive measures.
In fact, there is a growing political will to restore manufacturing capacity in the national interest to reduce overreliance on foreign countries. To that end, the US is increasingly using national security to restrict imports from China, a pretext which can ultimately amount to any economic activity of scope. In this context the US-China trade dispute further added to trade uncertainties. Also, Such a paradigm shift in the US industrial policy will have shattering effect on countries like Bangladesh that built up their economies through labour cost advantage.
The Covid-19 crisis and necessary public health response are causing the largest and fastest decline in international trade flows since the Great Depression of 1929-33. According to the UNCTAD, there has been a general decline in international trade flows since lockdowns have been put in place. But the trend has been observed more for developing countries than developed countries. The decline in exports from developing countries are likely to be driven by reduced demand in destination markets but the decline in imports is indicative of reduced demand and also exchange rate movements and foreign exchange shortages and debt burden.
The WTO has issued a warning of possible increases to trade costs due to Covid-19 disruptions. The increases are likely to be in areas relating to travel and transport, changed trade policy measures and high levels of uncertainty. These higher costs are likely to persist even after the pandemic is contained.
Now Covid-19 has further accelerated the process international trade protectionism spearheaded by the Trump administration to decrease relative trade exposure to the world in general and China in particular. Now that is happening in most countries under the guise of protecting public health and bio-security to suppress the virus. Also, as regards the future of multilateral organisation responsible for ensuring free and fair trade, the WTO is in grave doubt due to the Trump Administration's attempt to undermine the organisation. The US is now refusing to approve the organisation's budget, even there are hints to withdraw from it. Trade policy in the US is moving in more overtly nationalistic direction. Also, political will to restore manufacturing capacity in the US is gaining momentum and has bipartisan support.
The rationales provided for escape from rule based multilateralism in conducting trade relations are a combination of opportunism and the need of the moment, such as the current pandemic. We can expect a general reshaping of international trade relations and the array of supply chains. Many also predict Covid-19 will cause global economy to fracture along regional lines such as East Asia, North America and Europe which can create a volatile world of partially connected national economies within a wider global trading system. The changes in international trade flows that the Covid-19 crisis has caused might become more permanent than many think and will have more lasting consequential effects.