Will Clayton Fellow in Trade and International Economics
Director of Knowledge
H.H. Dubai Ruler Court, Government of Dubai Legal Affairs Department
- In a period of economic Darwinism, the pandemic will finish off weak businesses, leaving dominant firms, such as Amazon and Huawei, even stronger.
- More protectionist trade will favor the rich countries able to subsidize their industries, keeping poorer nations in recession longer.
The pandemic is posing many challenges to governments, with millions affected and more than 160,000 dead. The world economy cannot significantly recover unless and until testing is widely available – so businesses can rehire those with immunity – and an effective vaccine is widely available, though this is probably a year off at least.
In the short-term, with locked-down businesses and social distancing, economies are suffering major downturns. The impact will be severe, possibly into the medium-term. Isolation measures are causing an enormous reduction in domestic demand in many countries, and a huge dip in savings.
Consumption of everything but the bare essentials will slow for at least several years. Many will have to borrow the maximum on their credit cards just to pay for food, clothing and shelter. Once economies begin to recover, governments are expected to encourage domestic consumption. Manufacturing has fallen in many countries, with factories closed and workers furloughed. No economy is immune.
U.S. macroeconomic data is showing negative growth. Italy, Spain, and even Germany and France are sinking into recession. Optimistically, Germany’s economy is expected to shrink by 1.9% in the first quarter, and 4.2% for the full year.
Almost all regions will suffer double-digit declines in exports and imports this year; the World Trade Organization predicts a best-case reduction in world trade of 13%, and a worst case of 32%. Africa, the Middle East and the Commonwealth of Independent States could see exports decline this year and beyond. Demand for petroleum products has fallen precipitously because of the worldwide recession caused by Covid-19 and Russian-Saudi Arabian tensions over production.
While outbreaks – such as the pneumonic plague in India (1994), severe acute respiratory syndrome (2003) and swine flu (2009) – have seemed to inflict a strong but short-term economic downturn, China’s economic downturn this year (for example) will be the most severe since the Great Depression, and recovery may take years.
Fortunately, there are better safety nets in the U.S. and European Union now than in the past, and the world banking system, in most cases, is in far better shape. Still, Covid-19 has caused mass shutdowns of businesses and manufacturers throughout the U.S. and Europe.
Faced with the coronavirus public health emergency, some governments, such as in Singapore, Taiwan and South Korea, have responded promptly and effectively. Others are beginning to provide substantial funds to counter and control the spread of the disease, with financial and economic measures designed to stabilize their economies and employment. These include tax reductions, subsidies for certain sectors, lower interest rates and shoring up investment in infrastructure.
In the short-term, these measures can help absorb the shock and may stabilize the economy. But even with trillions of dollars being poured into the U.S. economy, it is difficult to offset a situation where most factories, shops and restaurants are closed, 15 million or more are out of work and many businesses are likely to fail if the shutdown lasts beyond the end of the month.
Tourism is dead, along with air transport and car traffic. There is no evidence in Europe or the U.S. that financial stimulus is overheating the economy.
In the long-term, virtually all economies will be affected, with the path to recovery long and complicated. Spending habits could switch toward saving, threatening domestic consumption in the medium-, and perhaps long-term.
Major purchases such as cars and expensive travel may take several years to fully recover, as will a return to 2019 output levels. Businesses will find essential loans hard to obtain, particularly in developing countries, and many will go bankrupt.
Longer term, many countries, particularly the U.S., will diversify their supply lines to diminish dependence on a handful of countries, whether for pharmaceuticals, services or petroleum. Governments may well force enterprises to do so too. Policies may be adapted to reform health care systems and educational sectors, or not.
Many countries will accelerate the adoption of industrial and import substitution policies despite possibly prolonging the worldwide reduction in trade, keeping poor countries in recession longer.
Industrial policies could include localization targets, such as setting advisory or mandatory domestic and international market shares to be held by local technology and production, or state funding for industry development – subsidies, tax breaks, government procurement favoring domestic suppliers, and governmental direction of foreign investment and technological imports.
In the longer term, such government interference does not bode well for the world trading system. It will favor large, rich countries able to extensively subsidize their industries, such as China, the U.S. and even the EU, and where enterprises can obtain the funds to accelerate the replacement of human workers with robots.
Additional trade conflicts between countries seem likely, particularly among the U.S., China and India, and within regional groupings such as the EU and the United States-Mexico-Canada Agreement signatories.
Weak businesses such as traditional department stores and smaller restaurants in the U.S. will disappear, and those that dominate, such as Amazon, Apple, Walmart and Huawei, will emerge from the pandemic stronger than ever. Many services, including educational services, will move even more rapidly toward delivering online. Inefficient manufacturers operating behind high tariff walls such as in India, Brazil and South Africa will find it even harder to compete.
A period of “economic Darwinism” may well follow. Of course, the accuracy of these depressing estimates is anyone’s guess, but it is virtually certain that most world economies will never be the same.
This article originally appeared in the South China Morning Post on April 21, 2020.
David A. Gantz is the Will Clayton Fellow for Trade and International Economics at the Baker Institute’s Center for the United States and Mexico. He is also the Samuel M. Fegtly Professor Emeritus at the University of Arizona College of Law,
Bashar H. Malkawi is the director of knowledge at H.H. Dubai’s Ruler Court, Government of Dubai Legal Affairs Department, and was previously dean of the College of Law at University of Sharjah, UAE.