It is often said that trade makes everyone well off, but what happens when this trade is alleged to be the progenitor of a deadly virus? The IMF had predicted that the COVID-19 pandemic would ensue the worst economic recession since 2008–2009 financial crises, with the global trade shrinking to historical low levels. Commercial services all around the world have been devastated due to border closures and consumer sentiment is shifting towards austerity because of apprehensions of similar mishaps in the future. These developments pose an existential threat to the modern economies which are based on complex trading networks. This article analyses how trade, import and export have impacted the US and China—the largest stakeholders of the global economy.

Image source: REUTERS

Katiyayinee Richhariya

In these unprecedented times, trade and open borders have provided the most cogent excuse for all the problems that the world has been facing. The countries having the maximum share in the global trade are the worst affected and the relatively isolated countries seem to have escaped unscathed, exemplifying restrictions and protectionism. This article explores the policies of trade and effect of COVID-19 to analyse the future of complex economic systems.

Before beginning, we need to be aware of the conditions in which the global economy was operating before 2020. The first and foremost was the US-China trade war which stripped the global economy of US$ 585 billion. Second, the consumer demand never boomed to the level prior to the 2008–2009 crisis, therefore the ratio of global merchandise trade to the GDP continuously plummeted since 2012, reducing by 20 per cent in 2019.  

China has the largest share of exports in the global economy—13.2 per cent—which has remained stable since the last three years. Due to the pandemic, 4,60,000 small and household-based cottage industries have been closed and a 29 per cent decline in the number of new registrations was seen. On the other hand, the giant firms like Huawei have increased their R&D expenditure from US$ 15 billion to US$ 20 billion. The SMEs were provided a respite in payments of the principal amount of the loan as they are the backbone of the exporting capacities of China. The customs related data reveals that China had to incur a loss of 0.9 per cent in its imports while its exports fell by 6.6 per cent in March 2020 as compared to 2019. Expectedly, there was an increase in the medical exports by 3.5 per cent during the month of April, while other categories of exports shrank. This was often termed as “mask diplomacy”, as an alternative model to “cheque-book diplomacy”, in the form of shipments of masks and other medical equipment to countries like Spain, Georgia, Italy, etc. 

However, the biggest blow to China will be the disillusionment of the member countries with the Chinese schemes that exemplify its expansionist vision, namely the Belt and Road initiative (BRI). The reasons for it are quite obvious. Italy, the country which experienced the most lethal initial blow of the pandemic became a part of the BRI last year and the two worst affected cities—Lombardy and Tuscany—have the highest amount of Chinese investments. Moreover, Iran which is also a crucial part of this project, was also adversely affected. The terms and conditions of the BRI state that the amendments in the terms of loans provided to the member states can only be made by China. Now these countries, especially African Nations, which provided almost US$ 143 billion during 2000-2017, have applied for debt waivers on their loans for BRI. But the Chinese bank says that these loans are not development grants and thus at least the principal amount has to be recouped. China through Free Trade Agreements (FTAs) had shifted its supply chain base to South East Asia, which has the fastest growing economies of the world, for they provided a surety of returns on its investments. With apprehensions around the BRI at its peak, especially within ASEAN countries, China has pledged maximum cooperation for fighting COVID-19 to retain its market space. 

The United States is the second largest stakeholder in the global economy, with its exports making up 8.7 per cent of the global exports. Due to the trade war, exported medical goods from China, worth US $5 billion (almost 26 per cent of the total medical export) were subjected to extra tariffs. On March 10 and 12, the White House announced lowering of taxes on certain essential medical equipment. During 2017–2019, these critical equipment like masks, thermometers and essential medical headgears faced a sharp decline. At the same time, the imports of these essential medical equipment in the United States fell by 23 per cent. Even after the phase 1 trade deal, few of these essential tariffs had remained. One needs to also keep in mind that America is the largest exporter of pharmaceutical equipment and if it is experiencing a dearth of these, it can be attributed to two major reasons—focus on export-centric policy of medical equipment, higher tariffs as a retribution to the non-tariff barriers in the Chinese pharmaceutical industry. An American company, Gilead, has also got the permission for producing another effective drug called Remdesivir and will be exporting 1.5 million vials of the same.

The Food and Drug Administration (FDA) has consequently eased its “establishment restriction clause” for the import of masks and Personal Protective Equipment (PPE), while on the other hand China tightened its regulations on export of medical devices to the US because of the discrepancies found in its antibody testing kits. Mutual trust is a prerequisite for trade, and with this trust between the US and China eroding to its worst levels since 1989 Tiananmen Square incident, the prospects of US-China cooperation will depend upon the political will of the leadership of both the countries, once the culpability of the crisis is decided.

Katiyayinee Richhariya is Research Intern at CPPR. Views expressed are personal and need not reflect or represent the views of Centre for Public Policy Research.


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