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An emerging threat: the economic impact of COVID-19

Jackson Barton

As COVID-19 began to spread beyond China in February of 2020, interconnected medical supply chains were straining to meet the incredible demands for PPE for the global public health system. Governments are incentivised to place export restrictions on products. Many developing nations will simply be unable to afford the subsequent spiking prices of these inputs, potentially solely reliant on insufficient development aid stocks.

As influential economics columnist Martin Wolf of the Financial Times opined, COVID-19 is waging a ‘dangerous war’ on global supply chains. Due to trade restrictions, forecasts for levels of trade estimate a much steeper drop in overall trade levels than experienced after the GFC. Such a dramatic decrease in cross-border trade flows will be so comprehensively damaging to the already fragile global trade system that countries may also even be tempted to curb imports, in line with US Trade Advisor Peter Navarro’s school of thought. The impacts of such a sudden stop in trade and investment flows is a stunning thought.

What next?

Populists will call for an abandonment of indecomposable, long interconnected global supply chains to preserve economic security. After exogenous shocks, protectionist sentiment rises. Research by the Productivity Commission found that the number of trade-limiting measures implemented by G20 nations ‘more than quadrupled’ following the GFC.

Broader populist and nativist political tendencies have a direct correlation with unfortunate economic circumstances. These same 'hard hit' constituents will once again find nativist, populist economic messages appealing at the ballot box over the coming years. Whilst government competence and effective virus response could beget rising faith in the role of government, markets and international cooperation, such a cataclysmic economic shock will embolden the economic populist message surrounding trade and supply chain risk into the medium-term.

It would not be surprising for many to call for greater supply chain modulation and decomposability at least, a shortening and simplification of supply chain linkages, and the engagement of import substitution. Greater modulation and shorter supply chains mean depressed economic synergies. This reduction in dynamism and an increase in the cost of goods will hamper long-term economic recovery – the extent of this cost and the propensity for the populous to accept it remains to be seen.

Over six months into the COVID-19 crisis, the pandemic’s impact on broader trade and supply chain machinations will be the most lasting economic impression of the entire event, without question. Unemployment will eventually fall, wages will eventually rise, and the pervasion of various technologies and consumer patterns will accelerate, but I fear many of these inescapable trade-related impacts will be far more permanent, and far more damaging to the global economic system. Populism across the western world is being electrified by trade grievances, and I fear many of the rational, liberal actors will lose the rhetorical and geopolitical debates as trade continues to be increasingly maligned, ultimately exacerbated by the pandemic.

'The bridge to the other side':

The supply chain solution is not a simple message of self-reliance and self-sufficiency, but preparation. The issues here are not a problem with trade, but an unprecedented increase in demand, leading to a lack of supply.

Protectionist self-sufficiency strategies will mean businesses could lose scale and scope efficiencies, consumers are subjected to higher prices, global markets become more fragmented, and innovation suppressed. Many smaller economies would not have access to advanced technologies due to expense. These are the costs of protectionism.

Compromisingly, COVID-19 could create the impetus for supply chain strategic buffers to create spare capacity, or to increase the multiplicity of suppliers with additional holding stocks, something of a Marshallian concept. This deepening of linkages, with this additional resilience, could ensure that the global trading system could better respond to exogenous shocks, maintaining stability, whilst minimising end-to-end costs.

Supply chain protectionism concentrates risk domestically, whilst importing and exporting during crises increases the number of suppliers and access to surplus stocks. The positive public health outcomes from this flow of goods are substantial, which we will soon witness firsthand, once we begin to rely on trade links to efficiently distribute a vaccine.

The pressure that COVID-19 is exerting on supply chains is unprecedented. There is an incentive to reach for the short-term, populist toolkit. However, the deepening of trade, strengthening and diversification of supply chains, higher levels of global co-operation and sharing of relevant goods and knowledge is the only way to meet these demand challenges.

Allowing COVID-19 to reverse the hard-won gains of production and trade integration since the 1980s, through implementing short-sighted protectionism, is a cost too great to consider. The G20, WTO and other related global actors to multilaterally work towards the continued smooth operation and long run strengthening of the global trading architecture, allowing the flow of goods to where relative demand resides.

If anything, COVID-19 to remind us that short-sighted economic nationalism is not within the global interest. The pandemic’s economic destruction continues with no end in sight.

Jackson Barton is currently pursuing a Master of International Economics and Finance at the University of Queensland. He has previously worked with the European Australian Business Council in Sydney and the Australian Consulate-General, Shanghai.


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