How trade’s resilience defies expectations amid coronavirus and global tensions

Contrary to many experts’ dire predictions and countries appearing to turn away from globalisation, trade has held up surprisingly well
Governments might bluster and even enact restrictions in pursuit of their geopolitical goals, but companies and consumers carry on

Stephen Olson

Published: 1:00am, 12 Aug 2021

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In India, Prime Minister Narendra Modi is calling for economic self-reliance and raising trade barriers. China has adopted a dual circulation strategy which puts increased emphasis on domestic demand and relegates trade to a supporting role.

The buzzword within the European Union is strategic autonomy, which recognises the need to strengthen domestic production capabilities and reduce dependence on trade. In the United States, the Biden administration is pursuing a worker-centric trade policy and has maintained many of the trade restrictions put in place by the Trump administration.

Scepticism about trade has been intensified by the Covid-19 pandemic. Countries and companies are now aggressively looking to reduce trade risk through more localised production and less trade.

Given these sobering realities, one might have reasonably expected to see a sharp decline in trade. In defiance of most projections, though, trade has held up surprisingly well.

Given the fallout from the pandemic and rising protectionism, the World Trade Organization estimated in June last year that global trade could fall by as much as 32 per cent in 2020. Yet, the actual decline was roughly 5 per cent. Given the broader macroeconomic environment, in which overall demand was dampened by a 3.8 per cent reduction in global GDP, trade remained buoyant.

Containers are parked at the harbour of Duisburg, western Germany, on May 8, 2020. German exports were down 9.3 per cent last year but they soared past pre-pandemic levels in June for the first time since the coronavirus crisis wreaked havoc on trade. Photo: AFP

Of course, specific circumstances produced eye-catching trade reductions for individual countries. Japanese exports slumped to their lowest level in 11 years in 2020, and German exports were down 9.3 per cent.

While these apparent doomsday scenarios for trade dominated the headlines, they masked the real story. Despite the headwinds, trade took a beating but kept on ticking. What explains the surprising resilience of trade?

Bilateral tariff and non-tariff barriers have proliferated. These restrictions can sometimes be effective in accomplishing their primary objective of diminishing imports from the targeted country. But in many cases, their overall effect is to redirect rather than block trade.

For instance, China has significantly increased trade restrictions on a variety of imports from Australia. Although this initially created painful disruptions, Australian exporters were able to adjust. Today, Australian cotton exports that are no longer welcome in China have found receptive markets throughout Southeast Asia. Barley shipments that previously went to China are now being unloaded in Saudi Arabia.

No evidence the US has Australia’s back in its dispute with China

On the other side of the equation, barley importers in China have not been left in the lurch by the loss of Australian supply. Argentina has stepped in to fill the gap. Argentine barley exports to China have grown so significantly that Argentine farmers plan to expand capacity by 28 per cent to meet the new demand.

Neither has China’s ban on Australian coal stemmed coal imports. US coal exports to China have soared and are straining the capacity of US companies to keep up with demand. Trade restrictions that close one door frequently open another.

Two important caveats are worth making, however. Although trade continues to flow, it will frequently be less efficient. Importers are being compelled to fill their orders from suppliers they might not have selected absent the trade restrictions.

Australian wines are displayed at a wine shop in Beijing on December 23, 2020. Australian wine exporters are still struggling to replace sales to China. Photo: AFP

Exporters do not always find new markets quickly and seamlessly. Australian wine exporters, for instance, are still struggling to replace sales to China.

New trade patterns necessitated by barriers could also produce an increased Balkanisation in trade relationships and a fraying of global trade ties. Restrictions are being put in place not merely for trade-related considerations. Geopolitical calculations, human rights issues and environmental concerns are increasingly factored into trade policy.

This could drive the formation of formal or informal trade blocs among partners who share common perspectives across the ideological, social and geopolitical spectrum, while trade declines with less simpatico partners. At this point, however, it is unclear if such a scenario will materialise to a meaningful extent. There are many examples of trading carrying on despite rising tensions and differences in ideology.

The US-China trade war has not abated under the Biden administration. In some respects, it has grown more complex. US President Joe Biden is casting the bilateral economic relationship within the framework of a broader ideological struggle between democracy and authoritarianism.

Businesses have not, however, taken heed. With the exception of sensitive technology sectors where trade has essentially been prohibited, trade between the US and China has not missed a beat. Even in comparison with 2019 – before the pandemic began – China’s exports to the US are rising significantly.

The US is not the only example of trade flourishing despite tense relations. The EU has imposed sanctions on China and been sharply critical of labour conditions in Xinjiang. It has even sidelined consideration of its Comprehensive Agreement on Investment with China, but despite the sanctions and strong words, the EU’s imports from Xinjiang have soared.

Why Germany’s pragmatic China policy is unlikely to change, post Merkel

China has also shown it can engage in a war of words on one hand while carrying on trade with the other. Australia has faced a barrage of vitriolic denunciations from China over its positions on issues ranging from the South China Sea to the origins of Covid-19.

China’s umbrage appears to be limited by economic reality, though. Australian iron ore exports to China, which cannot easily be sourced from elsewhere, were only down slightly in 2020 from the record-breaking year of 2019.

Despite a recalibration in attitudes towards trade, tempestuous relationships and a rise in protectionism, reports of trade’s demise have been greatly exaggerated. Governments might bluster and even enact restrictions, but companies and consumers carry on.

The greatest efficiencies will rarely be found entirely within the border of any single country. The imperative of cross-border commerce will continue to be formidable.

Importantly, however, trade could end up looking quite different as trade relationships grow increasingly fractious. More trade could be conducted on the basis of “second-best” alternatives and among partners that align rather than diverge on philosophical and geostrategic perspectives.

Stephen Olson is a research fellow at the Hinrich Foundation