Is Covid-19 the Last Nail in the Coffin of the Free Trade?

Defining Globalization to Know Free Trade

Globalization refers to the gradual process of intermingling and increasing interdependence among economies of the world. It refers to the integration of world markets with the domestic economies that allows for free movement of goods, capital and services across nations. Globalization is a major reason behind the emergence of free trade era.

Emergence of Free Trade

With the advent of neo-Classical theories of economics in the 1970s and 1980s, free trade became the notion of overall development for the world market. The theories explained the comparative advantages of trade and benefits of specialization in reaching the potential levels of production and higher levels of consumption. Most of the countries carried out market reforms and opened up their economies for foreign competitors. This led to the emergence of an era of globalization and free trade flourished. Even at its Zenith, the mechanism faced several criticisms ranging from how globalization has:

• Rendered uncompetitive domestic Industries, industrialist and workers helpless;
• Has put national security in danger;
• Has increased money laundering and other frauds;
• Has led to excessive exploitation of natural resources; to
• How the mechanism overweighs and destroys government's and citizens' authority over their own country.

Then Came the Financial Crisis (2007-2008)

Contrary to the concept of globalization, the world we live in, is continuously moving towards De-Globalization, laying down the coffin of free trade step by step. The concepts of globalization, free trade and deglobalization necessarily depend on fiscal and monetary policies of a government and therefore can’t be studied in absenteeism of the political ideologies of the country. The concepts are henceforth, components of political economics and underestimating the role of politics may lead us to erroneous conclusions. The collapse of housing bubble (US), due to depreciation of subprime mortgage market resulted in collapse of Lehman Brothers, that provided financial services across globe, which gave this century the first major financial crisis. Supply chains were disrupted and the repercussions of the crisis are felt today in the form of the worldwide recession. This financial shock came at the time when capitalism dominated the world economy. Amidst economic shocks of very high unemployment, low production, high poverty and high vulnerability, right-wing ideologies gained immense popularity. The right took up the cause to protect the economic and political system, blaming globalization for the adversities. Immigration was replaced by nativist and racist sentiments and free trade by protectionism and nationalist sentiments. The goals of these nationalist leaders were protection and development of the domestic industries, employment of their people, attainment of favorable balance of trade and diversifying their production to make the country self-reliant. Rise of nationalism gave way to several refugee crises. Many communities were tortured, slaughtered and forced to leave their homelands. No other country let them in fearing the insecurities of their citizens and over exploitation of their resources. The migrants had no choice but to illegally cross borders and take up jobs to earn their living, for example, the Rohingya Muslim Crisis, South Sudanese, Libyan Crisis etc. Barriers to free movement of goods, services and people became a common phenomenon and price gaps in different countries increased. Consumers had no choice but to buy the limited and expensive goods.

A Hope?

China emerged as a global leader in increasing connectivity in the post-crisis period by its Border and Road Initiative. Physical and digital connectivity have become important and easy because of technical developments and air transport. Tourism as an industry sophisticated and many economies like that of Thailand are entirely dependent on tourism. Even while improving connectivity government have taken greater control of the market, with their policies often acting as bargaining counter to bring benefits to their citizens.

Some Recent Developments

The current US trade policy called ‘Americanism’ by the President Donald Trump, clearly hints this use of fiscal policy as a bargain to extract benefits from other countries. The policy, ‘Bilateralism and No Multilateralism’, claims that a large country like US gains from restrictions and relaxations in trade. The US leaving the UNESCO and UNHRC in 2017 and 2018, can be considered the first steps towards the end of international cooperation. What we are witnessing between the US and China, the trade war, reflects perfectly how the markets have fallen prey to the government policies and their vote bank politics. US continually raised tariffs on Chinese goods and services blaming China of dumping and stealing foreign technologies.

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China opened up its market step wise by introducing reforms in the agriculture sector and then in the industrial sector. It soon became one of the major exporters of world having favorable balance of trade with almost all countries. In 2001 China joined the World Trade Organization and is projected to become the economic superpower by overtaking the American economy by 2030 (‘The Economic Times’).

The United States blame China of violating WTO rules and regulations. China provides better market access, tax breaks and free land to its companies, which disturbs the level playing field in the world. It also gives differential treatment to companies with the aim to sell goods at cheaper price in the world market than in the Chinese market itself. This is called ‘dumping’.

China repeatedly retaliated the US restrictions by levying taxes on US goods. The Chinese tariffs affect the region of US which is the major voter base for the President. The US has put restrictions on Chinese technical industries. This trade war has caused financial losses to the world. Similar trade war was seen between Japan and South Korea.

Brexit

Then turned out another major event of our times, Brexit (the exit of Britain from the EU). Europe has, since long been united under the banner of European Union having common currency, foreign policies and judicial system. Trade restrictions were negligible. The Brexit deal on how trade relations would be continued between the EU countries and Britain in the post-Brexit scenario is yet to come. The US left UNESCO and UNHRC in 2017 and 2018 respectively and has raised proposals to leave the UN itself. This trend of localization of ideas, ideologies and products reflected by superpowers abandoning the international organizations indicates the end of international cooperation and eventually the fall of free trade.

And Here Comes 2020

2020 has been the most dramatic year so far. It came with the possibilities of World War III, protests in Hong Kong, India, US, Mexico etc. and halted the world with the deadly and brand-new coronavirus. The world economy has been literally paralyzed with supply chain disruptions, low aggregate demand and immense fall in exports and imports. As events are turning out, we can surely say that coronavirus is the last nail in the coffin of already deteriorating free trade at least temporarily, with every country worsening its trade relations with China. Coronavirus is a global problem that does not recognize the borders of countries whereas the governments do and are working proactively to protect their nations, citizens and economies. Exports and imports have been banned to stop the transmission of the disease. Entry of foreign tourists, students and labor has been banned for the time being. Governments are trying to protect their Industries under the lockdown period. For instance, Press Note 3 and Press Note 4 have been released in India to amend the FDI policy. The amendment aims to prevent opportunistic takeovers/acquisitions of vulnerable Industries by foreign investors especially China. Now, every foreign investment from the countries that share borders with India would come via the Government route. It also seeks to prevent formation of monopolies that would lead to inefficient allocation as well would make the stability in the country unshielded. With elections due in the US, Trump’s natural instinct would be further protectionism in the form of tariffs, investment restrictions, export ban, import substitution etc. While all these measures are necessary till the disease vanishes or a vaccine is developed, the international organizations must be ready with certain plans, policies, rules and regulations to recover the loss of trade in the post-pandemic times.

Indicators and Conclusion

The KOF Index of Globalization, measures political, economic and social dimensions of globalization. The latest trend of this index shows the flattening growth of globalization since 2015. According to the CPB World Trade Monitor world trade decreased at 1.4% in January 2020, while decreased at 1.5% in February 2020. The World Trade Organization must formulate incentives, rules and regulations that can accommodate the needs of the multipolar world and not only the future superpower. This independency of WTO is important to prevent the countries from exercising individual protectionist policies. If the trade organizations fail, we might see a situation similar to that during the Great Depression of 1930s.