Globalization and international merchandise trade is down as predicted by relevant watchers—and all signs indicate the trend to remain downward as 2020 comes to an end. The question is whether covid shock and disruption in global supply chain networks would cause countries and in turn companies to start looking inward further causing a prolonged reduced in trade. There is evidence that this has already started to happen.
A preliminary assessment study published by the World Bank in April estimated that global GDP would decline by 2 percent—2.5 percent for developing countries—brought forth by a reduced output on the service industries. The threats to trade have also been evident—according to the WTO, global trade could plummet between 13 and 32 percent by the end of the year. In the second quarter of 2020, trade has shrunk by nearly 19 percent—which is within the range WTO estimates made back in April. This would likely carry on for years, long after large populations have developed immunity against the novel virus.
In the short term, operational complications in maritime and physical traffic, reduced consumption, the impact on production itself due to physical isolation and subsequent lack of confidence of investors have already fuelled the slowdown by way of a contraction in demand while global value chains have also hit pause as components and parts manufacturing plants across the world have been put under lockdowns. The longer-term effect could be slightly more convoluted.
Various studies are now calling for more (not less) economic and trade integration. The fear here is that governments will impose tariff and non-tariff based restrictions to coerce domestic production. Though many countries have responded through fiscal injections; it is likely that the support is toward domestic industrial protection with a focus on indigenization. This would be devastating for exporting countries that rely on valuable dollar inflows.
A special report published by the UN argued: “The pandemic is likely to reinforce two interrelated trends that were already taking shape. The first is a shift towards less interdependence in production, trade and technology among the world’s major economies, particularly between the United States and Europe on the one hand, and China on the other. The second is a trend towards world trade that is less open, more influenced by geopolitical and national security considerations, with more frequent disputes and with a weakened multilateral framework. The net result will not be the reversal of globalization, but a more regionalized world economy, organized around three major productive hubs: North America, Europe, and East and South-East Asia”. This report calls out for more regional integration and proposes that countries must reduced logistic costs and develop value-added services to develop competitiveness.
For countries like Pakistan that are relying on exports to the EU and the US, the pandemic will teach it an important geography lesson—that finding markets close by and forging relationships with regional partners may prove to be more beneficial for both domestic production and subsequently exports than lands far-off. By the looks of it, Pakistan’s main export destinations are experiencing a resurgence of the outbreak, an uncertainty as to how the crisis would evolve and a substantive decline in imports (largest contracted expected in US of 32%). That’s not good news.
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