COVID-19 - what is the new normal for international trade?

By Johanna Jacobsson, Professor at IE Law School.

The global pandemic has very quickly resulted in the closing of borders and the isolation of our societies, global commerce has drastically decreased, and the role of individual states is becoming more prominent than that of international organizations. Globalization has already been in decline for some years, but its future is now even more unclear than ever. International travel will take a long while to recover and COVID-19 is causing companies to consider the re-organization of their supply chains. At the same time, states are doing all they can to support their national economies while paying less attention to international rules.

These are some of the key takeaways of what is to be expected from the new normal in global affairs and international trade. While the effects may remain moderate in case a vaccine becomes available in the near future, the pandemic is in any case contributing to developments that were already on their way before the virus broke out. It is accelerating several trends that undermine globalization, such as the ongoing detachment between the Chinese and U.S. economies. The competing superpowers are both aiming to reduce their economic interdependency and the competition is only going to get tougher in current conditions.

Exceptional times, exceptional actions

During the first months of the pandemic, countries around the world adopted measures that would, under normal circumstances, be illegal or highly questionable from the point of view of international rules. Considering international trade disciplines alone, the closing of borders from the transport of goods and passengers, export restrictions and massive subsidies to domestic businesses would not be possible in normal times.

Even the most integrated trade area of the world, the European Union, has not managed to coordinate its actions in these exceptional times.  Rather, EU member states have adopted their own individual responses. Among them, the closing of borders between the Schengen states and the export bans of masks and drugs put forward by certain EU states. At its most difficult time, Italy had to turn to China to access protective gear instead of its European partners. Since then, the European Commission has done its best to bring the member states in line, but it must operate largely by persuasion because EU member states retain sovereignty in matters of public emergencies.

The EU and international trade rules provide space for such unusual measures, as long as they are taken in the name of public health or public security and are strictly necessary to attain those goals. At the same time, multilateral and regional trade rules prohibit practices that have protectionist goals. The next couple of years are likely to bring about several uncertainties and disputes arising from the demarcation of state acts that are aimed to protect the public health from those that are aimed to insulate domestic industries from foreign competition. The worsening economic situation will undoubtedly make it tempting to continue some of the exceptional measures even once the public health crisis is over. For the moment, countries and businesses appear somewhat willing to close their eyes from growing subsidies and other deviations from international trade rules – but there are surely limits to their patience.

Reverse gear on globalization (or not)

The multilateral trading system responded well during the financial crisis in 2008, holding the line against protectionist measures. It is not clear that the same will happen this time around. The COVID-19 pandemic represents an unprecedented disruption to the global economy and world trade, as production and consumption are scaled back across the globe. Certain smaller countries have joined forces, pledging to keep supply chains open and remove any trade restrictive measures on essential goods, especially on medical supplies. On 30 March, the G-20 trade ministers came out with a commitment to keep any emergency measures targeted, proportionate, transparent and temporary and to avoid creating unnecessary barriers to trade or disruption to global supply chains.

However, there is a growing discussion about the possible need to re-organize global supply chains. Countries are thinking of incentives to bring certain essential production back home and companies are developing alternative arrangements to keep their supply chains functioning throughout the emergency. While companies are likely to make some changes to their supply chains, for example by having a better reserve of alternative suppliers in different parts of the world, the global supply chains are not likely to go through any radical changes. Products and components will still be bought from the most efficient sources. The situation may, however, change if the pandemic will last longer or if states start adopting increasingly protectionist measures, putting in place tariffs and other market access barriers and thus forcing companies to buy from domestic sources. And in any case, the predictability of the international trading environment as well the legal certainty regarding the rules of the game is going to suffer. This has also to do with the demise of the principal guarantor of these global public goods - the World Trade Organization.

Will the WTO survive?

The G-20 states' pledge included also a commitment to keep any emergency measures consistent of the rules of the World Trade Organization (WTO). The enforcement of this promise may, however, prove difficult as the WTO faces the most challenging situation of its 25 years of existence. The downfall of the WTO started well before the pandemic, but the current crisis could make it still worse. This multilateral trading organization of more than 160 states is becoming less relevant as compromises become harder and harder to reach thanks to diverse membership and countries that are increasingly turning to bilateral and regional trade agreements. The biggest challenge is, however, the United States, which is threatening to withdraw from the organization altogether and has blocked the functioning of the WTO's appeal court. In a time in which such a court is most needed to enforce the existing rules, it is unavailable. The solutions to the hurdles facing international trade during this unprecedented time are therefore, to a large extent, left in the hands of individual governments. As in any global crisis, they must decide whether restrictions and discrimination against foreign businesses is part of the solution, or whether global cooperation and adherence to the rules would finally play out to everybody's mutual advantage.