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How world trade will be affected by COVID-19

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COVID-19 will have persistent impacts on nearly all areas of trade, particularly if the areas rely on production or consumption in COVID-19-affected jurisdictions such as China.

This ranges from goods like automobiles and fashion to services such as tourism, transportation, education, banking and energy.

The natural world and related social governance issues are substantially affecting trade, which has not got much attention in the past.

Firstly, the COVID-19 emergency is hastening deglobalisation at least in the short term. It is not easy to reallocate a value chain, which is constrained by labour and other crucial factors.

However, COVID-19, along with a trade war between China and the US, lead to concerns over heavy reliance on supply sources or production in one country.

COVID-19 is reportedly spurring businesses to speed up their movement on value chains.

For example, Google and Microsoft are speeding up their shift of production from China to South-East Asia.

This may lead to further decoupling.

Secondly, more uncertainties exist in world trade, and self-disruption of businesses is more important than before.

COVID-19, a trade war, and Brexit are among the uncertainties faced by businesses in many sectors.

The key hinges on the balance between efficiency and predictability (or risk management).

New opportunities

In this process, more alternatives are likely to be devised, ranging from a broader exit plan and more resilient business models, to specific issues of insurance and contract clauses on force majeure.

Depending on the sectors, some businesses like tech companies are starting to reap the new opportunities such as contactless food delivery services and wider use of robots.

Thirdly, the role of government is likely to further increase.

Besides the central banks cutting interest rates, governments are intervening more in this emergency but are limited by their own systems and constrained by their resources.

Vulnerable economies suffer more given their lack of capacity to provide support to the industry affected by COVID-19.

China has taken various measures, ranging from the deferred repayment of principal and interest, to the reduced basic medical insurance contributions.

Profound implications

The US is considering using the Defence Production Act to expand production of virus gear, among others.

With the enhanced role of government in a trade war (like stipulating the purchase amount in trade) and weaponizing of trade relations (which is often linked to national security), this may further enhance the role of government.

The results and profound implications of government measures in the world economy turbulence remain to be seen.

COVID-19 leads to economic shock, along with pre-existing challenges like the trade war and Brexit. Businesses face a total new trade landscape with more uncertainties, deglobalization and decoupling, and a stronger role of government.

Businesses may need to conduct self-disruption to have quicker responses to more frequent but unpredictable turbulence, a “new normal” of the world economy, and even recessions.

If the efficiency of the global value chain is at risk, consumers may face higher costs of living.

Governance challenges

COVID-19 also brings governance challenges. Governance capacity in different countries and their international cooperation need to be improved against the ironical context of declined multilateralism.

This is seen in the Appellate Body of the World Trade Organization. Essentially, confidence and national governance capacity are crucial for trade.

Down the track, more government intervention is likely to be made if the economy is further affected by the COVID-19 outbreak.

Meanwhile, there is probably a limit regarding the effects of the stimulus measures.

For instance, further stimulus by monetary policy is constraint by the fact that major central banks have already reduced interest rates into negative levels.

The businesses and the broader world community will be affected by the epidemic to various degrees.

However, this unexpected “pressure test” brings an opportunity to seriously review the value chain, business models and trade policy, and such opportunity shall not be missed.

If properly managed, this could make the world trade more resilient: one needs to make sufficient preparations for future uncertainties to stand the turbulence.

Professor Heng Wang is Co-Director of the Herbert Smith Freehills China International Business and Economic Law Centre (CIBEL) in the UNSW Faculty of Law. CIBEL is the largest centre in this field outside China.

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