SERIES: COVID-19’s Long-Term Policy Implications - Trade After the Pandemic
The COVID-19 pandemic has rightly become the sole focus of the public health policy world, but it is also having far reaching effects into policy landscapes way beyond healthcare. This blog post is the sixth in a series that will explore how COVID-19 is changing American life, and as a result, impacting various policy areas. This series will explore changing American attitudes, examine new policy ideas, and project on legislative and regulatory activity we may see as a result of the virus in the months ahead.
The COVID-19 pandemic has upended the daily interactions from the individual to the international scale. As companies and countries scramble to acquire the materials needed to fight the virus, some lawmakers are calling for a reorganization of trade lines and re-shoring of manufacturing in an effort to prepare for future emergencies.
China
China and the United States have long had a contentious relationship, and the COVID-19 pandemic has only exacerbated these tensions. Since 2010, China has led the world in manufacturing, supplanting the U.S., and recent statistics estimate that China accounts for approximately 28% of global goods output, compared to just under 17% for the United States. Even as Chinese workers and foreign investors demand higher wages and better working conditions, the country has maintained its production dominance.
The economic and public health devastation brought about by the COVID-19 pandemic may threaten China’s status as “the world’s factory.” Agencies within the U.S. federal government – including the Departments of State and Commerce, among others – are already looking for ways to shift manufacturing away from China through tax incentives or other re-shoring subsidies. These sentiments have been echoed by lawmakers on both sides of the aisle. Senator Tom Cotton (R-AR) has been one of the more vocal anti-China voices on the Hill in recent weeks, as he has argued that American citizens should be allowed to sue Chinese officials for their response to the pandemic and its ensuing global effects. He has also pressed for the return of domestic medical supplies production, while Senators Marco Rubio (R-FL) and Elizabeth Warren (D-MA) have raised their own concerns about medical supply chains that rely primarily on China.
Though there is some general agreement within Congress about bringing back industry, at least in principle, the Administration has also vacillated in its approach to trade with China. President Trump has not balked at the idea of expanding tariffs on Chinese imports, and has gone as far as charging that he would be willing to terminate the recently signed trade deal if Beijing did not purchase more American products. The President also recently signed an executive order prohibiting U.S. electric utilities from using foreign-made grid devices that could threaten national security. This order came on the heels of a Department of Commerce announcement tightening restrictions on the purchase of dual-use items by sanctioned states, including China. However, Chief White House economic advisor Larry Kudlow has struck a more conciliatory tone, noting he does not see a rush to impose more tariffs on imported Chinese goods.
As China looks to extend its influence on the global stage, expect U.S. lawmakers to continue to search for ways to check their power, particularly through trade and economic means. During the recent trade war with China, one of the mechanisms by which the Administration has sought to affect trade relations is through the implementation of Section 301 and Section 232 orders. Although the negotiated deal with China earlier this year and the onset of the pandemic have led to the exclusion of certain goods – particularly medical supplies – from tariffs, such restrictions may resume as lawmakers seek to build and protect domestic capacity. The severity of these restrictions will likely depend on the volume of goods that China purchases, as President Trump has indicated that he will not renegotiate Phase One of the trade deal.
Deglobalization
The widely publicized condemnations of China and calls to bring back manufacturing of certain goods to domestic factories is emblematic of a larger trend towards deglobalization. Following World War II, a series of trade liberalization policies and creation of multilateral institutions (e.g., the World Trade Organization) led to a massive increase in global interdependence. A widely used metric to judge this is ratio of exports to global GDP, and the end of the last World War saw 60 years of export growth consistently outpacing GDP expansion. The 2008-2009 economic recession reversed that trend. Over the past decade, globalization has been gradually receding, and the pandemic my end up further expediting the process.
An area of congressional bipartisanship throughout the response to the COVID-19 pandemic has been the emphasis on reshoring or regionalizing essential manufacturing capabilities. These proposals have ranged from efforts to boost PPE production and stockpiling medical equipment, to extricating supply chains from their reliance on China. Such calls were already being heard on a more muted level prior to the spread of the virus, and the trend has only picked up momentum as lawmakers pursue ways to become more self-sufficient.
Regionalization: USMCA and the U.S.-UK Trade Deal
The United States-Mexico-Canada Agreement (USMCA) could serve as a framework for the sort of regional commerce and cooperation that may emerge more prominently following this crisis. The agreement, which goes into effect on July 1, updates the North American Free Trade Agreement (NAFTA) and seeks to remove trade barriers between the countries. However, even with the close relationship and consistent dialogue among the signatories, trade between the nations during the pandemic has not been without challenges.
A particular area of concern is automobile manufacturing. Factories in Mexico produce a large number of components for U.S. car makers, and the different classifications of what sectors are considered ‘essential’ between the two countries presents challenges for plants looking to resume operations. The lack of alignment between Mexico and the U.S. has not been limited to automobiles; aviation and defense are experiencing issues, with both industries relying on parts manufacturers that are located in virus hotspots. Lack of clarity related to Mexican shelter-in-place orders has also caused problems, as some American firms with facilities in Mexico have been forced to shut down segments of their manufacturing operations where public health guidance is unclear. Although the U.S. government may be able to exert more direct influence over Mexican industry than it can China, simply changing trade partners does not serve as a panacea for every potential supply issue, and reshoring such production could ultimately raise prices for consumers.
While the United Kingdom does not share the same geographic proximity to the United States as do Mexico and Canada, it has indisputably been a reliable ally and strong trading partner. Since the UK formally withdrew from the European Union earlier this year, pro-Brexit officials have viewed a new trade deal with the United States as an important way to deepen ties with non-EU allies. Unsurprisingly, the inability for diplomats to meet in-person because of public health concerns has complicated the recently started discussions. Nevertheless, officials have begun their negotiations through videoconference.
The UK government’s enthusiasm for striking a deal with U.S. comes as internal estimates cast doubt on the magnitude of benefit such an agreement could have. Many working in the trade space believe that a completed FTA would be largely symbolic; Britain’s own assessment suggests that long-term benefits to the economy would amount to less than 0.1% of GDP. Even with these relatively small expected gains, the push for a completed deal reflects the growing consensus that supply chains should be reorganized through friendly partners rather than rival countries.
The Durability of Globalization
It is worth noting that most trade experts and economists do not believe that shortened supply chains and economic nationalism will result in the complete abandonment of the principle of comparative advantage. Companies are still going to seek out cheap suppliers in order to keep input costs low. However, many working in and analyzing industry expect a push for material sourcing diversification. This could take the form of supply chain redundancies of key components to reduce risk, or refocus trade on friendly partners or those more geographically proximate. While such decisions could result in higher costs, they could also serve to prevent the sort of acquisition troubles that have plagued many manufacturers during the pandemic.
An indicator that points toward the strength of globalization is foreign direct investment among countries. Despite escalating trade tensions with China last year, U.S. firms invested a record $14 billion in factories and other long-term projects in the country. Industry analysts say that much of the capacity being built on Chinese soil is in response to burgeoning consumption among a rapidly growing middle class, and not necessarily to fulfill American demand. It is one thing for governments to pass legislation – whether that be tariffs, tax incentives, etc. – that encourages re-shoring, but it is entirely another for them to fundamentally alter supply chains. Those decisions still primarily reside with private companies.
If there is one U.S. policy shift that could come about from the virus, it will likely be the expansion of what “national security” encompasses. Previously, national security was focused largely on physical threats (i.e., how to protect individuals from bodily harm); this understanding could be broadened to include elements of economic and public health security. Advocates of economic nationalism – such as those who have argued for “America First” policies – may view this crisis and the resultant supply chain troubles as evidence of the need to reduce U.S. reliance on China. Public sentiments support this position, with a recent Pew Research poll finding that two-thirds of Americans hold an unfavorable view of China. This was summarized succinctly by Jörg Wuttke, the chairman of the European Union Chamber of Commerce in China: “The globalization of putting everything where production is the most efficient - that is over.”
Campaigns on Trade
Perhaps more so than any other issue during the 2016 election, then-candidate Trump ran on a platform of “deal-making” and being strong on trade. Having negotiated deals with both Japan and China, coming to an agreement on USMCA, and being in the midst of ongoing discussions with the United Kingdom, expect the President to lean heavily on these accomplishments as evidence of his promises to protect American workers. It is also likely that the campaign will seek to highlight Joe Biden’s support for the Trans-Pacific Partnership (TPP). The Trump Administration withdrew from the agreement almost immediately after entering office.
Unlike President Trump, the Biden campaign has taken a much more positive view of liberal trade regimes. As noted, the former Vice President supported the TPP, though he has since indicated that he’d like to renegotiate aspects of it to make it more advantageous to U.S. interests. Both the president and Joe Biden have signaled a distrust of China. The current Administration has largely relied on tariffs and other measures to restrict trade; Biden is more likely to follow in the footsteps of former-President Obama and try to strengthen relations with EU allies to present a united front against the East Asian power. Additionally, in a Foreign Affairs article, the Democratic nominee stated that he would not enter any trade agreements without first consulting with environmental and labor leaders.
Conclusion
The COVID-19 pandemic has exposed a number of cracks in the existing global trade order. A gradual trend towards more restrictive trade has transformed into a full-throated chorus to buy domestic products and protect national industry. China in particular has come under sharp scrutiny for their dominance in manufacturing of medical supplies and other goods. As lawmakers respond to the pandemic, many are actively searching for ways to curb China’s influence and re-shore essential sectors.
Even as Congress considers ways to bring back industry and lessen supply chain dependence on China, free trade and globalization should not be written off as remnants of a post-WWII order. Although tariffs and other restrictive measures can make commerce more expensive, cheap labor costs and growing international markets will continue to push U.S. firms to invest abroad. The pandemic may result in a reorganization of supply chains, but it is unlikely to fundamentally threaten trade among countries.