Crisis times can help bolster trade when policymakers commit to new solutions. But, this time around, data shows responses to the Covid-19 pandemic differ from responses to past challenges, especially compared to the financial crisis of 2008. After a decade of increasing protectionism, trade barriers are apparent, and policy is more complex.
In a recent webinar, Flexport Chief Economist Phil Levy and guest Simon Evenett, a University of St. Gallen economics professor, discuss how different nations react under pressure.
Read the transcript below or for the full conversation, watch The State Of Trade: Pandemic-Pressurized Trade Policy.
Excerpted from an auto-generated transcript
Phil Levy: . . . let's jump in and let's first talk about scaling and measuring protectionism
Simon Evenett: . . . you see in terms of the amount of world trade affected, protectionism covers well over 70% now with world trade compared to half that total full trade reforms. So I would argue the build up happened beforehand. This by the way, Phil has one really interesting implication, which is that I think almost all of us who liked the trading system are reluctant to admit that Donald Trump was right about anything. But he was right to point out that before he came to office, there was growing protectionism.
I don't think he ever looked at the numbers. But he asserted this and in this case, he actually wasn't wrong. And what he did was he put many people who supported the trading system in a difficult position. Because when you look at the facts, there was protectionism and Trump's question to everyone is, well what are you doing about it?
His solution, of course, was exactly wrong. I wouldn't support it. But he was right to highlight that there was this buildup beforehand.
Phil Levy: So let's see how we reconcile this with people's preconceptions. Cause it's not hard to tell where the preconceptions are coming from. If you were importing goods from China for example, you saw relatively low tariff levels.
You might've seen anti-dumping duties, countervailing duties on certain products, but relatively low. And then all of a sudden we got this sequence from the US perspective of Section 232 with steel and aluminum, the Section 301.
And so it seemed like that was a pretty clear breakpoint where one saw protection shoot up. Your measures are not straight tariffs into the US.
So let's talk about the differences. What is the difference in terms of these counts versus what one might look at as how much tariffs am I paying to bring something into the US.
Simon Evenett: Great. This is a great question. It comes to one of the key things, key messages here, which is that protectionism differs in its level of salience.
So when a country puts in place high tariffs on imports from other countries and does so very publicly and president Trump didn't do it very publicly. I am not surprised that many of our viewers and our participants, they registered at that and said Hey, something has changed. But I would also urge you to think that there are lots of trade distortions, which go under the radar screen.
And many of them are subsidies related to where governments may give their exporters or help it to essentially steal market share from others in third markets or where governments, but they allow import competing firms at home, or their governments use public procurement devices like Buy America to direct sales tools, domestic firms.
. . . There's a whole range of much less high profile forms of trade distortion, which governments were using before Donald Trump got elected. And often by the way, a lot of those interventions involved a much smaller scale. So the charts that I had shown you before were ones which accumulate thousands and thousands of pieces of protectionism . . .
. . . It's almost like death by a thousand cuts. Whereas what Trump did was to get out a huge bazooka and fire at the foreign trading partner. So the big distinction is salience is definitely salience in this. And now I can fully understand why many people would say that something materially changed under Trump. But what changed was not going from free trade to protectionism, what change was going from murky protectionism to in your face explicit protectionism . . .
Phil Levy: So last question before we move on to some of the other stuff, you talked about bazooka versus smaller marketers. How do we think of relative magnitudes and I know this has been a problem that has plagued trade people for a very long time.
Some of the things that one might think of as really obvious measures have lots of flaws. So you and I know very well if you just looked at say, what's the average tariff rate, you might have high tariffs on goods that aren't traded very much and low tariffs on goods that are, that can be misleading.
Sometimes if you look at tariff revenue, well, if you have tariffs that are so high, that it blocks trade, you get no revenue. And so you'll get a misleading measure. It's a very interesting thing to have this discount thing when you are trying to assess for yourself. What is the magnitude? How do you reconcile all of this?
Simon Evenett: This is a great question. You have to separate out, I think, at least three things.
So first is the sort of frequency of interventions and the left-hand chart I have there is one which counts what's the frequency of new intervention. And you might say, well, look, frequency tells you nothing about the amount of trade involved. That'd be the height of the trade barrier and the like.
And this is a fair comment, but I should add that all the international institutions who track this news, counts too. So I put that there largely for comparability from their work. I prefer what's on the right hand side, which is trade coverage.
So how much trade is covered or potentially affected by different types of policy interventions. So that gives you a better sense of scale, but it tells you nothing about the height of the trade barriers which is the point that you want to make. And you're trying to come up with some aggregate measure that has bedeviled researchers for at least 30 years from what I can remember.
So we have no clean way of aggregating up across all the different types of trade distortions in a way that makes sense. I think the cleanest thing that we have, which we can explain, are shares of exports or imports affected, and that's what's shown on the right hand chart for you there, but that comes with caveats too.
So it could be the case, let's say we have 70% of world trade affected by at least one trade barrier, but 20% is affected by one trade barrier and 40 or 50% is affected by five. So there's a difference in intensity. It doesn't come through in the chart like that as well. So we have a problem summarizing this overall dynamic, but I would argue, I would say for all practical purposes, let's not make the perfect the enemy of the very good . . .
Phil Levy: Yeah.And so the lesson tends to be, we're not going to have a simple summary statistic that takes care of all of it. You take the sort of the totality of the evidence and you take several different cuts at it of which this is a very very useful one.
You had mentioned subsidies, why should we think of subsidies in the same way? Maybe this gets to what you're thinking of as distortion. So where our norm might be to think about the extent to which someone is putting on border measures to block trade. Why are you including subsidies as a measure of distortions the same way?
Simon Evenett: Right. It really goes to this fundamental distinction between trade barriers and trade distortions. And trade barriers typically associated as usually segment import. Import to restrictions, tariffs, quotas and the like and that's the classic textbook way of thinking about protectionism.
And the reason of course is rooted in how so many of us come at this is because that was a large part of the story in the 1930s when we had a massive protectionist breakout. And in fact, if you look at the Oxford English dictionary and the Cambridge English dictionary, the definitions of protectionism, it's all in terms of trade restrictions or import restrictions.
So I understand why that's what many people come at this. But real world experience tells us that there are other policy interventions that matter. So if you're a competitive farmer from Iowa, trying to compete in an overseas market against a subsidized foreign rival, and you're losing market share, you care about the subsidization being offered by the rival's government.
And so for a long time in agricultural trade, it's long been understood. The subsidies were a problem. And so we should therefore try and calculate the share of world trade which is distorted by subsidies. And in this chart, as I show you on the right hand side, we can see the growing shares of world trade which are influenced by subsidies import competing firms or subsidies to exporters.
Now over time, of course, and to bring this discussion up to date, we worry about subsidies, not just in agriculture, but increasingly in sectors like steel, semiconductors, and the like.
There's been a big discussion about whether subsidization, in particular in China, is thought to have created excess capacity markets. And anyone who's interested in that discussion is focusing much more on the subsidy trade distortions than on import restrictions like tariffs. And so that's another reason why we take this seriously.
Phil Levy: Yeah, which is an excellent point. And I liked the way you drew the connection to some of those things where one can lead very much to the other.
Then if you look just this very week at the announcement that was put out by the US and the European Union, which have an ongoing trade war of the traditional sort where they're sticking tariffs on each other, when they start to explain, here's why we needed to have this sort of a tariff war, it exactly gets back to the subsidies.
And in their case, they're talking about excess capacity in steel and frequently alleging that China is at the core of this. But you're right. Whether in its own right or as a precursor to the other barriers that this seems like it's a very useful measure of what's going on.
All right, let's go on and talk a little bit about the crisis.
Phil Levy: And I wanted to sort of refresh people, you know, so now we have these measures in mind where you're claiming and offering evidence that this was a sort of build up that was taking place for over a decade now.
In terms of protection, if you look at the optics, as I said, this is sort of the public pronouncements and you want to compare what happened with the global financial crisis 2008 and 2009, depending on what you're talking about the reaction or the market breakdown which go back to 2007.
That earlier global financial crisis, and compare that to what we've dealt with the pandemic.
Phil Levy: The rhetoric has been dramatically different and what I pulled out here, usually there's no sure way to lose an audience that is to communicate out loud, but I'll risk it. Just to sort of note that the sort of different language at the time there was a section of this London communique, resisting protectionism and promoting global trading and investment.
And it sings the praises of trade. Trade growth has underpinned rising prosperity for half a century and is now falling for the first time in 25 years, you know, protectionist pressure is of concern. We will not repeat the historic mistakes of protectionism in previous eras. We reaffirmed the commitment to not raise barriers.
We stand by the WTO. We'll promptly rectify whatever needs rectifying. That's not really what we've been hearing in the last year or so. We didn't have any great, you know, post pandemic G20 conferences where everyone forwore this sort of thing.
What do you make of this rhetoric? I mean, are the lessons of the 30s, not the same, have they faded over the last decade or so?
And does the rhetoric even matter? Is it people? Was this an example of them saying one thing and doing another?
Simon Evenett: So Phil, ultimately the answer is yes, the governments made these declarations in 2009 and 2010, especially the G20 countries saying they wouldn't do protectionism. And then they went ahead and did it.
And that then created a real tension because there were countries free trading members of the G20 who were very nervous about this. And in fact by 2012, the Mexicans who were hosting the G20 then, they actually got a line in their communique that year, saying we are worried about the rising incidences of protectionism.
Well, that wouldn't have happened if everyone that followed what they said, they weren't going to do 2009- 2010.
Simon Evenett: So it became clear over time that this was an embarrassment that this so-called protectionist pledge was being honored more in the breach as we say in English, right? I was not being taken seriously and we of course, would be monitoring protectionism vibratory, G20 right from the start.
And our reports then became largely the record which showed how much governments were breaking this pledge. Now, for those of us who supported the world trading system, this was a real problem because you know, I think many of us wanted to believe that the system would hold the line against protectionism, but it didn't.
And so there was essentially this tussle over time between the sort of realists versus the idealists on there saying, “Look, when do we admit that the system hasn't worked?” Now in many ways, that tussle came to an end with the election of the Trump administration, because when the Trump administration came in, they went to these G20 meetings and they just made it clear.
They didn't support this no-protectionism pledge. They didn't think other people were supporting him. And the reason you didn't see similar pledges being made quite so prominently in the pandemic, was that the American delegations basically vetoed their statements. And so I think, it's a little bit of an irony for people like me who support the trading system.
Trump injected a degree of truth into this. At least reality check, let's just put it that way. His people injected some reality checking and this time around, countries the G20 decided not to make such a high profile set of statements about this. And I think that probably that was a smart thing to do. Now you have a slide you're showing up the slide
Phil Levy: Data about what they actually did. With or without pledges.
Simon Evenett: Yes. That's exactly right. So the slide that you are showing now for the audience, let me just explain that. So this shows you the frequency with which each G20 member intervened last year, 2020 in markets.
The red part shows you how often they resorted to protectionism. And then the green bar shows you how much they resorted to liberalization. And you could see a huge variation across countries. And the team I have, we worked really hard to try to check every single country. And we think these levels of intensity shown are pretty accurate.
You did have countries like Mexico, who really held back in doing both liberalization and protectionism. And then you had countries like the US and the UK, which had Germany, which actually offered huge numbers of subsidies last year. And that's what's been building up. So you see a big difference across countries and how much they resorted to protectionism. And if we can go to the next slide, Phil, this will just round out . . .
Simon Evenett: . . . what we can see in the left-hand chart is that as we go through 2020, when we get into April, by the time we get to April, we have nearly 200 policy interventions which free up trading and medical goods last year.
And this makes perfect sense right? You do not want to be taxing imports of soap, during a pandemic when we're all supposed to be washing our hands and just so you know last year before the pandemic hit 141 countries tax the importation of soap and 79 of them put import taxes for 15% or more on that imported soap.
And a lot of countries took one, look at this and said, what? This is not. So we've got to get rid of those tariffs. And so they did, they started reducing tariffs on quite a number of medical goods, not just the ones associated with COVID-19. So that's the goodman story.
Phil Levy: We could, something like 1840s Britain. It could have been like the free soap league and it could have been a massive move towards protectionism. I guess we just missed the right Prime Minister to carry it through.
Simon Evenett: Oh, he did. I never, of course again, it goes to savings right? So this was happening, these import tariff cuts and reducing sales taxes on soap and things like this.
This was happening around the world. We were tracking it, but this is not what got the attention. What got the attention is the second highest line in this chart, which is the result by governance to export curbs of things like masks on personal protective equipment or medical equipment like ventilators.
And these export curbs which surge too in the early part of 2020, this got a huge amount of attention because it disrupted industry supply chains, and it caused a huge amount of pushback from internationally active companies whose plans for shipping, all of these different goods around the world were disrupted.
And of course, some governments said, well look, you know, if the goods are in our country we need to keep the masks for our people. What they didn't realize is of course that the moment they do this, they subjected themselves potentially to retaliation from other countries who could hold up shipments as well.
And of course, for people organizing, operating supply chains, this was an absolute nightmare. And I must say to government's credit, by the time we get to the end of this quarter two, a lot of these curbs are starting to be withdrawn. But as you can see from that chart there, even as we project out towards the end of this year, based on known phase updates of these export curbs, we're still going to have a large number of these export curbs in place.
And so I think the trade flows in the medical goods sector will be permanently scarred by this. And by the way, there'll be probably altered also by some of that tariff reductions, some of which are expected to stick as well. And so it's a great example of how a short-term outburst of both protectionism and liberalization can have permanent consequences for trade in assistance for trade in the sector.
And of course, this is going to have implications for where firms invest. So just to make this very tangible, the governments of Canada, Australia, and Japan, all G20 members did not choose to impose export curbs on any medical equipment last year. And the Australians in particular made it very clear that they would not stop shipment from any manufactured goods of this type from Australia.
And so if you were thinking about where do you want to locate production facilities to ship either to a region or around the world, the countries which resisted the temptation to do export curbs last year should be ones who have got a credible story for firms making FDI decisions come to our country because your supply chain won't be screwed up. And it will be interesting to see if companies respond to that track record . . .
Simon Evenett: . . . I'd want to keep barriers low so that we can keep these supply chains going, but that is all presupposes, trusting that those goods will end up being delivered.
And of course that means trusting the other governments are not going to put in place export barriers, so I can see how some people say trust really matters, that is right, for anyone that wants to operate a complex supply chain, implicitly is making assumptions about how trustworthy governments are in terms of export curbs.
And I also, if I'm very pro supply chain, I do want to keep markets open the barriers down as well. So I think trust is an important part of the story, as well as of course keeping the barriers down. And the absence of trust is of course what triggers the barriers increasing and to put it in very tangible terms.
Suppose we want to persuade a country like Ethiopia, not to raise import barriers on all sorts of medical goods and become self-sufficient while the people in Ethiopia, or can I say, look what we will only do that, we can only afford to do that and source for abroad. If we believe that what we need those medical goods, they're going to be delivered and there won't be export curbs. They don't trust that export bans will be issued.
Simon Evenett: Then they are going to say, we need to have our own domestic industry. So I see quite an interesting unity, but the link between the barrier argument and the trust argument and your audience may well have been coming at this problem at the same perspective from two slightly different angles. But I think trust is a prerequisite for supporting lower barriers.
Phil Levy: So that's an interesting point. So let's actually, sort of a baseline for our discussion of this. And this may not be fair to ask you. Do we have a sense for when we talk about these types of goods, whether it's vaccines and the ingredients that go into vaccines, whether it's other sort of health equipment. How integrated is the global trading system? . . .
Simon Evenett: All right. So if we talk to the period before the pandemic hits, let me give you what the status quo was that, we had essentially a score number of countries which were vaccine originators developers.
And then a small number of vaccine manufacturers, countries which manufacturers, and a slightly larger number of countries who are selling ingredients to vaccine producers. And so what you have is of the 200 trading nations around the world, less than 20 are in one could call it vaccine producers club. That is like produce either vaccines or the ingredients and most produced both.
And so what this has done is to produce, is to create a sort of insider and outside the dynamic. If you're inside the production the vaccine club, you're selling or your principal, you could sell vaccines or ship vaccines abroad, which gives you a country leverage. But you're also very contingent on the goodwill of other countries to ship the vaccine ingredients to you.
So the members of the club, tensions could get built between them, but there's a sort of understanding that if I cut you off who access to medicines, you'll cut me off from access to ingredients, and then I'll be screwed too. Now for the countries which are outside the club. They have much less leverage . . .
Simon Evenett: So that's group two, group three is actually a single country, India. India is the country in the developing world, which has a longstanding vaccine production capacity, especially through the Serum Institute of India, and India had agreed the Serum Institute had agreed to essentially be the supply to the developing world and Prime Minister Modi did what the Europeans said, which is the, we will be the suppliers you can count on us. And then when it came to March of last year, so this year when the number of cases in India starts rising then Modi cuts off the exports to the developing world.
And in fact, yesterday the Serum Institute of India announced that they will not be receiving exports to developing countries until the end of the year. So we can put the facts on the table. . .
. . . the weekly exports from India collapsed in beginning of March and I've never resumed. And then what in a piece of analysis I did with Matt Blimely from Airfinity, we then, using the delivery data and contracts that we knew about. We then asked how much would this put back the inoculation efforts of countries in Africa, Latin America, and Asia.
And in the case of Africa, we saw that the Indian move of stopping shipments would put back inoculation by about two to three months. So you can see how once India cuts off exports and stops being the vaccine supplier to the developing world, then there's this huge knock on effects, which is just another way of saying being outside the vaccine production club has a price.
And that's exactly why governments are now debating whether they should have more domestic vaccine production capacity. And that is an implicit in that viewpoint is what some of your participants were highlighting, which is that they think that when push comes to shove vaccines and medical goods are different.
Simon Evenett: So let me just quickly dwell on the digital point, which is where we started tracking this year, policy changes which were affecting digital commerce because we sensed that they were picking up and that has proved to be the case.
We've seen a huge acceleration this year in the number of policy interventions by the big players around different aspects of the digital economy. And there's a real risk here that the digital economy will begin to fragment globally. This has important implications for any business model, which is based on scale and the acquisition of information and data by scale or sort of true scale.
So I think that's a really big area to watch going forward. And then I think the other big area to watch is what you hinted at earlier Phil, what will our political leaders draw as lessons from the pandemic era? Is it that we need to hold our nerve? These shortages happen, the private sector ultimately delivers them.
And so it's a matter of managing that or is the conclusion that we simply cannot trust trading partners anymore, and we must make more stuff at home—in which case expect to see a lot more subsidies and tariffs . . .
To hear the full conversation, watch The State Of Trade: Pandemic-Pressurized Trade Policy. Or to join our experts next time and submit your own questions, check out our upcoming webinars.
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