With several countries and regions locked down, will there be a redrawing of geographical boundaries?
- Much of what we saw in terms of global integration of trade and finance would suffer in the short run.
- When the world was hit by economic recession in 2008, trade dipped by almost 10% in 2009 when there was a 3% decline in global GDP.
- That’s roughly the relation between trade and growth. When there’s a boom, trade grows much faster than GDP.
- The World Trade Organization (WTO) has now estimated that in a worst-case scenario, global trade could dip as much as 32%, indicating the kind of dislocation they expect in large economies.
- It’s going to be a very different ball game — the first thing that will happen is countries will try to build themselves up.
How has it hit India and what can we expect as impact?
- In India we can see the disruption that is taking place — almost 50% of our trade is directly linked with the micro, small and medium enterprises (MSMEs) sector as even large players have sub-contracted to the smaller producers.
- So it is anyone’s guess what the impact is going to be on trade because of the disruption in production.
- Going forward, most economies, with the exception of China, are going to see a very different kind of dynamic as they will try to build up from where they would be in a few months’ time and then think in terms of how to integrate themselves again with other countries.
How could this impact Asia Pacific as a region and India in particular?
- UNESCAP has released its annual Economic and Social Survey on 8th April 2020 — what we are finding of course, is that the COVID-19 crisis is a challenge never seen before and it is going to be a bigger shock for the world economy than the global financial crisis which was only driven by a demand shock.
- This entails a demand and supply shock and it is still unfolding.
- It is now clear that many economies are going to shrink — developed countries as well as many in the Asia Pacific region that are highly dependent on tourism and commodities trading will also shrink.
- Commodity prices are at their lowest in the last 10 years.
Specifically, With respect to India
- There is a slight silver lining because of low oil and commodity prices as we are net importers and, also, since the government is not allowing a full pass-through of the lower global prices, it means that there is some fiscal space through commodity price reduction.
- Still, the disruption in work, especially in MSMEs that are the backbone of manufacturing, trading and services, is very serious.
Is COVID-19 set to reverse the trend of globalisation as we know it?
- The process of globalisation was already in retreat and last year, the term ‘slowbalisation’ was being used.
- World trade had never really recovered since the global financial crisis — from a 10% growth, it had been hovering around 1%-2%. Add to that the trade wars and the WTO talks process coming to a grinding halt.
- Now, with this pandemic, there is another recognition of the vulnerability that global economic interdependence creates.
- So some countries are facing difficulties in getting medical supplies, some find their manufacturing can’t run as value chains are linked with China.
- Countries will reconfigure their economies to look at import substitution with a greater clarity now, as the perils and pitfalls of overdependence on foreign supplies become clear.
- Import substitution, that had become a bad word, may be back in currency.
How different is China’s position?
- News has been filtering through that China’s manufacturing sector is back.
- Other countries will remain in a lockdown phase for at least another two months.
- So, if the Chinese get a lead in getting their act together, they are going to consolidate their position in the global economy further.
- However, China doesn’t really figure in the top of countries that have announced stimulus packages.
- Countries are going to be extremely wary of the superpower that China will become and would like to disengage.
Could this dampen movement of labour across countries?
- Once you talk of import substitution, you focus more on your domestic skills.
- The movement of personnel will follow the formula of economic needs.
- The first priority of every government would be to create jobs for its own people.
- In a high unemployment scenario, hiring expats won’t be in favour.
Could the role of WTO evolve in such a situation?
- Trade rules have worked best when the global economy is booming and isn’t facing a crisis.
- On the issue of subsidies for small industries, no country will like the WTO to be telling them what to do or what not to do.
- The agricultural subsidies issue is going to be junked.
- If the WTO rules are junked, then it’s a free-for-all situation.
Shall there be a rethink on existing multilateral and bilateral pacts?
- Countries cede a part of their sovereignty while getting into these trade agreements. In the last quarter of the twentieth century, we saw one driver of governance — market forces-oriented.
- But now, in major economies, governments have taken centre stage and depending on how long the pandemic drags on, the government will remain in the driver’s seat and markets will take a backseat.
- If governments have to do the heavy-lifting, then they want full force of their sovereign powers.
- The project of globalisation could settle at a new normal and it will be a very different WTO and trade governance framework, with different kinds of regional and bilateral engagements.
- India, of course, has already become a reluctant player and had, in a way, started disengaging.
- Other countries were more tightly knit together through pacts like the ASEAN.
- The European Union is already in tatters and it will be important to see the role of the European Commission and the European Central Bank in getting a decent stimulus in addition to what individual governments have done. NAFTA is already being rewritten.
- So going forward, much of the churning is going to get bigger in regional formations.