COVID-19 and global trade

COVID-19 is rewriting China’s trade narrative. Beijing expects it will take a ‘longish time’—code for up to ten years—to digest the international ‘new normal’, no longer a domestic preoccupation. Analysts urge rewarming ties within Asia, where trade interdependence is greater.

supporting the export sector

The plummet in exports, which account for around 60 percent of value-added in manufacturing, will cause major socio-economic problems. The policy response was swift, but fell short of supporting the majority of smaller exporters. Support measures (and their limits) so far include 

• streamlining customs clearance: expiry date unclear
• assisting in redirecting export output to domestic markets: limited by demand, marketing challenges and compliance costs
• more loans and export credit insurance: though not widely accessible
• expanding the international freight network: with doubtful long-term sustainability 
• easing cross-border e-commerce compliance barriers for SMEs: only available in specific zones
• more export tax rebates: benefitting a fraction of sectors  

Despite grim global demand projections, exports performance in March and April was much better than expected. Some now believe that the bottom has passed, but many still anticipate worse to come.

bumpy outlook for China–US trade

In April, three months after the phase 1 deal, heightened trade tensions between China and the US were clear  

• export control was expanded
• a proposal to ban Chinese telecom firms from operating in the US was advanced
• the ‘Luckin Coffee’ scandal added fuel to a looming financial war 

The US call to reshore supply chains puts bargaining chips for more trade talks on the table, argues Dong Xiaoyu 董晓宇 ZGC Group. Manufacturing and energy imports from the US, which saw double-digit decline in Q1, will struggle to reach targets of 85 and 724 percent y-o-y growth respectively, projects Gao Ruidong 高瑞东 Guotai Junan Securities. Trump threatened in early May to restart tariffs if China fails to fulfill its obligations under the phase 1 deal. If phase 2 negotiations proceed, China will likely offer little on structural issues while discussing market access.

The US may decide to work with allies, as the bilaterally-negotiated phase 1 deal failed to address Washington’s major concerns. Li Wei 李巍 Renmin University, a proponent of this theory, advises getting on the front foot, such as by joining forces with emerging economies. Trump has confirmed bilateral negotiation is still on the table (unless he does ‘cut off the whole relationship’); Guan Jian 管健 Globe-law partner believes it will be a major determinant of the WTO reform agenda.

stronger ties within Asia amid supply chain restructuring

Offshore industry relocation is nothing new for China; tariffs and rising production costs have spurred this change in recent years. COVID-19 will speed the decision up for some, as firms are now reconsidering the need for supply chain resilience. This will result in shorter, more distributed (i.e. multisourced) chains located closer to consumers. But large-scale foreign capital exodus is unlikely, MofCOM (Ministry of Commerce) insists, a position supported by surveys of Japanese and American firms. 

Still, concerns about ‘de-sinicisation’ are not unfounded, commentators warn, while optimists eye East Asia as the next centre of the global economy. Beijing’s narrative on 2020’s FDI is far from coherent: generally stable, says NDRC, but prepare for a FDI slump, warns MofCOM’s newspaper. 

ASEAN, China’s current top trade partner, is seen as the major source of trade growth, while warming relations with South Korea and Japan will support industry upgrading, another response strategy aiming to propel China up value chains. New pilot zones in border provinces (Jilin and Guangxi) will bolster this. Going regional is a foundation of global integration, argues Wang Jinbin 王晋斌 Renmin University, so it does not contradict China’s (self-perceived) identity as the defender of globalisation.

declining role of the WTO

Multilateral platforms have so far failed to deliver outcomes in response to COVID-19’s challenges to global trade. WTO reform will likely slow further. While Beijing would like to uphold the WTO as a pillar of multilateralism, analysts are ever more aware of its declining influence. FTAs linking the largest economies are gaining equal importance  as platforms for rule-making, argues Su Qingyi 苏庆义 Chinese Academy of Social Sciences. Protectionism is predictable given flattening global demand; countries will discard differential treatment under multilateral treaties, forecasts Liu Xiaozhong 刘晓忠 Beijing News commentator, relying more on bilateral FTAs.

The MPIA (Multi-party Interim Appeal Arbitration Arrangement), is supported by 19 WTO members and addresses the appellate body’s key controversies. Beijing hopes it temporarily sustains dispute resolution at the WTO until reform can catch up. Scholars doubt the arrangement, noting operational challenges. ‘Temporary’ may be longer than expected, says Shi Jingxia 石静霞 UIBE (University of International Business and Economics); the arrangement is not yet representative of the WTO, argues Huo Jianguo 霍建国 China Institute for WTO Studies vice director; and WTO rules are undermined, adds Henry Gao 高树超 Singapore Management University professor.

Declining multilateral decision-making is bad news for trade norms. Supply chains, flattening demand and geopolitical tensions are, so far, without an end in sight.

what the experts are saying

Shi Jingxia 石静霞 | University of International Business and Economics dean of law

Yale-trained Shi advised Beijing through the China–US bilateral investment treaty talks. Working in universities in Asia, Europe and North America, she was a member of the International Centre for Trade and Sustainable Development and the E15 Initiative. Shi was an early proponent of using an arbitration approach (Article 25 of the Dispute Settlement Understanding) to temporarily replace the WTO appellate body. This has materialised as the MPIA. On the China–US trade deal, Shi believes other countries have some leeway to secure interests. 

Zhang Xiangchen 张向晨 | WTO ambassador and permanent representative

Leading aide to China’s chief representative during WTO accession negotiations, Zhang is well known to all trade negotiators. He rose through MofCOM before taking up his current position. The WTO is significantly less effective during this pandemic compared to the 2008 financial crisis, says Zhang, due to a lack of leadership and trust between members. Calls to reshore some production are understandable, but countries should, through multilateral platforms, collaborate during the crisis and prevent the fragmentation of trade policies.

China Council for the Promotion of International Trade 中国国际贸易促进委员会

Officially accredited by the MofCOM, CCPIT was instrumental in issuing certificates of force majeure when economic activity stalled, but advised commodity importers against using them. China Trade News, the organisation’s newspaper, has in recent months repeatedly called attention to the possibility of supply chain relocation offshore. Another group under the CCPIT umbrella, China International Economic and Trade Arbitration Commission, also provides arbitration on economic and trade disputes involving international firms and enterprises with international investment.