Pascal Lamy
Former Director-General, the World Trade Organization
I’m happy to join you for the 2nd Bund Summit, and to see so many friends, either Chinese or from elsewhere, participating in this online platform. I will devote my few remarks to the topic of the impact of Covid-19 on global trade, first in trying to assess what its impact is likely to be, and second in looking at how we should cope with it in terms of policy response.
Starting with the impact of Covid-19 on global trade, and although it’s probably a bit too early to definitely characterize it, I think it is already very clear that this major global crisis will impact all the shaping factors of global trade, namely, the global economy, technology, security, the geography of trade, and also trade domestic politics.
Starting with the global economy, we all know it has been very severely hit, roughly 5% of global GNP wiped out. And although China obviously is doing and will likely have done much better than average, the Chinese economy will still have to rely more on domestic demand than on foreign demand, at least for some time, especially if we have a sort of square-root-shaped recovery which I think is now the consensus among economists.
Second, technology. Covid has triggered what I believe is a massive acceleration of digitalization of our economies, and this works in different ways. Some new technology such as 3D printing may facilitate nearshoring or reshoring of production in manufactures, but on the other side, digital trade and data exchanges obviously facilitate the offshoring of services. All in all, I think the drive to offshoring will remain higher in the future than nearshoring attempts.
Third, security and the geopolitical context of global trade. I think Covid will have increased geopolitical tensions, whether East-West, or North-South - East-West with the US-China rivalry, which I think will have increased with Covid, given the attitude on both sides during the crisis. This will remain there, even if a Biden administration, which many of us hope for, would probably not weaponize trade the way the Trump administration has done it. This context will also be more difficult for north-south relationships because lots of poor countries will have been disproportionately hit by the crisis and they do not have the capacity to borrow zillions of money at negative interest rates on a 30-year maturity. So, this will be one more fragmentation of this world.
As far as the European Union is concerned, my guess is that it will slowly move to what European institutions now call “strategic autonomy” which is a way to reduce European vulnerabilities vis-à-vis both US or China.
The Covid crisis will also impact the geographical distribution of global trade. The multi-localization of production systems usually morphs according to changes in relative prices. In this sense, Covid is a big repricing shock, what they call in academic circles, moving from “just in time” to “just in case”. I call this precautionism, as I expect precaution to play a bigger role in all public policy domains in the future. Safety, security, sustainability, sanitary measures will develop. Add to this a probably more rapid than previously thought increase in carbon pricing and you can figure out a reallocation of production factors.
Finally, I also believe that Covid will impact on domestic trade politics: we can expect some increase in protectionist pressures, as always in times of dire economic and social hardship, which is the case for the majority of people on this planet.
So, overall, we will face a more challenging environment for global trade. Although, in my view, not a change in paradigm. I hear a lot about supply chains reconfiguration, about big movements into renationalization and reshoring of production systems. I do not believe that it is going to be as big as pretended by some. There will be some recalibration of some supply chains, but probably more talk than walk, given the inevitable costs of such changes. As I’ve said and written many times: if, -what I think- globalization is efficient and painful, then deglobalization is inefficient and painful, which is why we should brace for a globalization that could be slower, different, but not for a deglobalization.
What does this mean in terms of policy reactions to address this new situation?
I see four main policy areas:
First, we have to keep trade open and remove barriers and restrictions whether on the import side or on the export side that have appeared at the peak of the crisis. We need a fluid, open trade to oil the recovery, including the earlier and stronger recovery in China which I already mentioned. We have to deal also with the inevitable impact of zillions of Euros and dollars which I mentioned: helicopter money in such massive amounts falling from the sky into the pocket of businesses in order to keep them afloat. This will undoubtedly de-level the competitive playing field for the times to come.
Second point of the global agenda is that we have to reduce strains in the global trade system, which Covid has fostered; in other terms, increasing trust among the major players in the global system, including the US, EU and China. To use an analogy, I think global trade dearly needs a sort of massage to address or relax some of its tightened muscles or nerves. A trust building, or rebuilding, has to come first in our might.
Third, we have to go back to the negotiating table at the WTO to address urgent reforms in some very important areas. Let me just mention a few: dispute settlement, the trade and environment nexus including some sort of code of conduct for border carbon adjustments, strengthening state aid disciplines, avoiding as much as possible digital trade regulation fragmentation - a tough call in my view-, the WTO monitoring capacity, reinforcing the role of the secretariat, and so on. So, there is a full-fledged agenda waiting for the US to rejoin the negotiating table, which I hope will happen.
The fourth point deals with what I already mentioned, which I called precautionism, which is not about protecting producers from foreign competition but about protecting people from risks in a number of areas - security, safety, environment, health, and that’s much more difficult to deal with than playing with protectionism. On the one side, precaution is definitely legitimate, but on the other side, precautionary systems differ, which results in more obstacles to trade, namely what trade economists call non-tariff measures, leading to a patchwork of conformity requirements that increase trade costs. We need, in the future, more global convergence on precaution, which is as much of a global governance problem, which we will address at the next Paris Peace Forum in mid-November, which I have the privilege to chair. This issue goes of course way beyond the trade remit.
Finally, to conclude, what does this mean for China?
I think this landscape leads to two policy prescriptions, as I see it, on issues which were there before the Covid crisis, but which the Covid crisis has probably made more urgent to tackle.
The first one is the acceleration of the opening of the Chinese economy, especially in the area of services. The Chinese economy is reasonably opened in manufacture, reasonably opened in agriculture, but it’s below average in services, which does not benefit enough to Chinese consumers and slows growth.
Number two, I think China will have to accept quite soon to engage in what the Chinese leadership has dubbed as “competitive neutrality”, i.e., accepting more disciplines in state aids, both within the Chinese domestic market and on the international market. I think this is the price to pay now for China to keep trade opening as it has done for the last decades. Opening trade has immensely benefited the Chinese economy. It will not be the case in the future if this issue of re-leveling the playing field for state aids is not addressed. It’s not an issue of whether or not the state should own that part or that part of the economy, which is for the Chinese to decide. But it is about better organizing the competition, the coexistence on the domestic market and on the international market of state-sponsored, state-supported, state-owned enterprises on the one side, and private enterprises on the other side. On this, quite a lot remains to do. I hope we will be back to this question very soon in the global conversation.
