Does Protectionism Matter in the Time of Pandemic?
The rise of nationalism in recent years globally as well as related arrival to power of nationalist politicians in many countries are some of the factors that have contributed to resurgence of trade protectionism all over the world. This is particularly the case in the United States, the United Kingdom, and several European countries. Indeed, Washington under the Trump administration has introduced import duties on aluminium and steel originating from many countries (including the EU member states). Besides, Euroscepticism and the Brexit have challenged the principles of free movement and economic integration in Europe in recent years. Indeed, protectionism and nationalism were already on a rise in the pre-COVID-19 period, and the ongoing health crisis has further exacerbated them. In a bid to protect domestic markets and healthcare systems against the adverse effects of the pandemic, many countries have introduced protectionist measures that range from export restrictions to bans on exports of personal protective equipment and other medical and food items. Recently, the EU extended its export authorisation scheme for COVID-19 vaccines until the end of June 2021.
This is not entirely surprising as, in general, periods of crisis like the one we are facing now tend to be conducive to a return of protectionism. While trade protectionism might be justified by arguments such as the need to protect local jobs and industries, ensure national security, and boost domestic consumption, its economic effectiveness and, in particular, its effectiveness in mitigating spill-overs from global crises are often questioned.
Rising Protectionism and its Implications for the Global Economy
In general, trade protectionism includes all actions that aim at impeding or limiting a given country’s exchange with the rest of the world. Common protectionist measures include trade tariffs, subsidies, import and export quotas, Sanitary and Phytosanitary Measures, and other trade restriction measures. Figure 1 displays the number of both protectionist and liberalising measures implemented across the world between 2009–2020. As it can be seen, while both have been on rise, the number of the protectionist measures is higher throughout the entire period.
The number of protectionist policies peaked in 2018 with 3,145 measures introduced across the world. That very year marked the beginning of the process of imposition of import tariffs by the Trump administration on selected products from several countries, including China, Canada, Mexico, and the EU Member States. The trade war was triggered in June 2018 when the US imposed 25% tariffs on steel imports and 10% tariffs on aluminium imports from Canada, Mexico, and the EU Member States, a move that was followed by a series of retaliatory measures. Indeed, the EU countries decided to respond by levying a 25% tariff on a range of US products worth USD 3.2 billion, which went into effect that same month. During the same period, tensions between the US and China have been intensifying. In July 2018, the US administration initiated further trade measures, including 25% ad valorem duties on 1,300 types of products imported from China, which were followed by the introduction of new measures in September 2018 that targeted USD 200 billion worth of Chinese exports. In response, China levied tariffs on US exports worth USD 60 billion. After this escalation, a downward trend in terms of several new protectionist measures could be observed right until the end of 2019, when the pandemic started to unfold the world.
The above-described exchange of protectionist policies has negatively affected global economy. For instance, US tariffs on China cost 300,000 jobs in US as well as an estimated 0.3% drop in the real GDP in 2019 alone. In addition, in 2020 the trade war slowed down pace of growth of US’ investment in China by 1.6 %. Moreover, the US tariffs on EU steel and aluminium are expected to reduce the EU basic metals exports by 1.20%.
Despite these economic costs, with the outbreak of the COVID-19 pandemic, the world has witnessed a resurgence of new protectionist measures, introduced in a bid to limit its impact on the economy. The main policy so far has been introduction of limitations on and increased control of exports of personal protection equipment, pharmaceutical products, foodstuffs, and other essential goods. In fact, since the beginning of the pandemic, 98 countries have enacted export restrictions or export bans and 12 economies have introduced import restriction measures.
Is Trade Protectionism an Effective Response to the Covid-19 Pandemic?
History has shown that periods of crisis are generally conducive to the return of protectionist policies. This was the case with the 1929 great depression or the financial crisis of 2008. Indeed, since the beginning of the health crisis, the world has witnessed an increase in trade restriction measures, including 179 non-tariff and 4 tariff measures. While the these measures aim to ensure the availability of essential medical products on domestic markets and maintain price stability throughout the crisis, many trade experts believe that what they in fact do is leading to an inefficient distribution of essential goods and increase in their prices.
Right before the global pandemic emerged, some economists warned that the rise of trade protectionism throughout the last years could play out as an additional obstacle to policy coordination in the event of a global slowdown. De Bolle, for instance, argued that when countries react to global problems by adopting individual rather than coordinated actions, they make the problem worse, as was the case with protectionist policies adopted during the 1929 great depression. Besides, during the financial crisis of 2008, trade restricting policies proved to be ineffective and negatively affected the economies. According to e.g., Baldwin and Event, in the long term, protectionism protects nothing and erodes competitiveness, growth, employment, and real income.
In this regard, trade restricting measures introduced following the Covid-19 outbreak could be a significant obstacle to an effective and efficient response to the pandemic. For instance, it has been proven that export controls and high tariﬀs in numerous countries had hampered trade in medical supplies, and thus reduced resilience to major shocks such as Covid-19. In Latin America and the Caribbean countries, which produced only 4% of the medical products they need, could not satisfy local demand because of export restriction that obstructed the supply of these products. Besides, the variety and quality of medical supply is bound to suffer as well, since protectionism leads to loss of specialisation benefits that international trade generates. For instance, only seven countries account for 70% of ventilators exports globally, hence a sales ban from even one of them could lead to up to 10% short-term increase in prices and expose billions of lives across importing countries.
Moreover, only a small group of countries — including Argentina, Australia, Brazil, Canada, China, the European Union, India, Japan, Korea, the Russian Federation, Switzerland, the United Kingdom, United States — is engaged in Covid-19 vaccine production. Thus, vaccines export restrictions may have many negative consequences for non-producing states, in particular in the developing world. While export bans may positively affect the domestic supply of medical products in the producer countries, by virtue of exposing populations of other states to the virus and thus prolonging the pandemic in some parts of the world, they negatively affect the global efforts to contain the virus — and so the countries that introduced the bans as well.
Apart from bans on vaccinations, since the beginning of the pandemic 22 countries have announced or imposed export restrictions on food in response to the Covid-19 crisis as well. These export restrictions along with the disruptions of food supply chains caused by health-related restrictions have already led to an increase in global food prices and higher risk of food shortages across poor and remote communities.
Fortunately, until now no country has formally completely banned exports of the Covid-19 vaccines. However, on 30 January 2021, the EU authorised the first-ever three-months-long formal export control on vaccines, which was later revised to six months in total. The reluctance of governments to formally implement export restriction measures for vaccines may be explained by the development of cross-border global value chains (GVCs) that are proved to improve countries’ resilience to shocks. For example, there is evidence that the EU imports most of the vaccine ingredients from countries to which it exports the majority of its ready vaccines. This creates a disincentive to restrict vaccine exports in fear of retaliation from the partners. Moreover, countries which do not produce final vaccine but provide vaccines components may retaliate export restrictions on vaccines by impeding exports of essential vaccine ingredients, which would disrupt supply chains of raw materials and limit the production. Therefore, on one hand, the presence of GVCs may be a deterrent from introduction of protectionist measures. On the other hand, however, GVCs may amplify the effects of trade restrictions since they do have a proven effect of intensifying the negative impact of protectionist policies.
The resurgence of protectionism during the Covid-19 pandemic has translated into limitations and prohibitions of export of medical products and certain food produce. While these measures admittedly helped to ensure availability of essential medical products on domestic markets in the countries that applied them, this has been at the expense of many other states that do not produce these items. It is therefore necessary to rethink a global solution to respond effectively to the pandemic. As the World Health Organization has been advocating from the very beginning of the pandemic, the goal of stopping the pandemic is only achievable “when everyone, everywhere can access the health technologies they need for COVID-19 detection, prevention, treatment and response. Now more than ever, international cooperation and solidarity are vital to restoring global health security, now and for the future”.
Maintaining trade openness amid the pandemic might, it the short term, seem to be harmful to some of internal interests of individual countries, but at the end of the day we do indeed live in a global village whose collective wellbeing hinges upon welfare of each and single one of its inhabitants.