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Trade: will COVID-19 drive further protectionism?

29 September 2020: As pandemic measures continue to wreak havoc in economies around the globe, will we see an acceleration in the recent move towards protectionist trade policies? Or will COVID create new avenues for global growth? Mark Blayney Stuart investigates.

Protectionism seems to be undergoing something of a renaissance, most noticeably in President Trump’s bullish approach towards China in trade talks. The WTO recently criticised the US for imposing levies on more than $200bn of Chinese goods since the start of the US-China “trade war”, arguing that the US has breached global trading rules by doing so. In response, US trade representative Robert Lighthizer described the WTO as “completely inadequate.”

Even before the COVID-19 crisis struck, global growth was already noticeably slowing, with global GDP falling to a low of 2.9% in 2019 and the OECD expecting it to “remain stuck at 3%” for 2020 and 2021. COVID-19 now puts something of a flashing red light over future growth prospects. After collapsing in the first half of the year, economies did recover rapidly once businesses were able to re-open. However, as we are seeing, the virus is not going away any time soon. 

Should we be concerned about the apparent push towards more protectionism? The World Economic Forum does not pull its punches, arguing that tariffs (the most common form of protectionism) reduce productivity and output, increase unemployment and raise inequality. “These effects are robustly and statistically significant,” the WEF says, “and are large enough in an economic sense to merit the attention of policymakers.” The pros of protectionism are largely temporary: creating jobs and buying time to develop competitive advantage being perhaps the most significant.

If protectionism is widely discredited as harming the macro-economy, such as here, here, and here, why do it? “In times of economic uncertainty, it’s common for politicians to threaten protectionism to look after industries or sectors of strategic importance,” says Nick Levine ACA, a Chartered Accountant and adviser to SMEs. “It’s currently hard to know how much of this is rhetoric, but the upcoming US election will be key.” Joe Biden “is trying to incentivise American companies to bring offshore jobs back to the States by offering them tax incentives. Similarly, protectionism seems to be a trope favoured by Trump who is trying to encourage the manufacture of more goods in the US.” 

A recent report from ICAEW’s research partner Oxford Economics shows that the average US tariff on Chinese imports is 19.3% – “over seven times the average rate in 2017. Each round of increased levies on Chinese imports has had a direct negative impact on the demand for these goods,” the report argues. “Collectively in annual terms, overall US imports from China have been contracting steadily since the start of 2019.” If the current US political system stays in place for the next four years, “the prospect of further sharp rises in tariffs and other restrictions may have further discouraged bilateral trade.”

Overall, the report says, “the rise in protectionism globally has contributed to countries trading less and focusing on domestic industries, something which is expected to continue accelerating after the pandemic.”

Why protectionism gains traction 

Perhaps the reason protectionism won’t go away is that the benefits of free trade take time and are harder to measure effectively. Not all gains from trade are immediate, the WEF points out, “and not every worker benefits.” So, “governments can feel pressure to implement protectionist policies and measures – including tariffs, quotas and various forms of subsidies – as a way of ‘saving’ domestic jobs and enterprises.” 

What about COVID then – is the global pandemic likely to accelerate the push towards protectionism? “I’m not convinced this will be the case from a policy perspective,” Nick Levine says. “But it is possible that restrictions on movement could create more of a demand for local goods and services.”  

Alternatively, might COVID actually create some new avenues for global growth – and if so, what would they be? “E-commerce is interesting,” Levine says. “Many companies are now innovating due to an acceleration towards e-commerce, and we’ll likely see demands associated with health and wellness grow as people leave their homes less.” Some of these products are well-suited to a global audience, Levine says. “Gymshark’s growth has been impressive, and Huel.com, a meal replacement company, is now the world’s best-selling complete nutrition brand, generating £72m of revenue annually.”

Mark Blayney Stuart is former Head of Research at the Chartered Institute of Marketing. 

ICAEW works with Oxford Economics to provide useful insight and timely intelligence for finance professionals and their clients. Read their UK, regional and global reports by clicking here.