DEPUTY DIRECTOR-GENERAL ALAN WM. WOLFF
Thank you Mr. Roelof Hemmen.
I am pleased to join you today to look at how the Covid-19 pandemic is affecting the future of trade.
It is fitting that the Dutch trade community has organized this debate. Dutch sailors and merchants have been at the forefront of global trade for centuries. My father imported goods from the Netherlands into the United States over 50 years ago. As long as there is someone looking for goods to move from one part of the world for the benefit of both the producer and the consumer, you will do well.
Over the millennia, the ways goods, services, ideas and people have crossed borders has changed almost beyond recognition. One recent example: I am currently speaking to you from Switzerland via an internet platform that few of us were familiar with when this year began.
But the Netherlands has kept up with the times. Rotterdam’s port is an example of that adaptability. Having first emerged as a major transhipment hub in the 17th century, it ranked as Europe's largest freight port in 2018(1), and is among the top 12 globally(2).
The forces transforming the global economy have also transformed the port of Rotterdam. It was an early adopter of containerization and automation — with benefits for this entire continent and those that lie beyond the oceans.. In the face of climate change, the port has set for itself the target of carbon neutrality — while putting into place state-of-the-art storm surge barriers against the threat of rising sea levels.
Like the rest of the global economy, the port has also been affected by Covid-19. Rotterdam’s throughput in the first six months of 2020 was 9.1% less than in the first half of 2019(3). This is in line with new WTO data suggesting that global merchandise trade volumes in the second quarter of 2020 were 14.3% lower than a year before.
COVID-19 AND THE GLOBAL ECONOMY
As you are well aware, the outlook for the global economy over the next two years remains uncertain. Much will depend upon how the pandemic evolves, what measures governments and businesses will need to take, and how quickly countries can rebound from the economic damage.
The International Monetary Fund in April estimated that global economic output would shrink by 3%. By June, it downgraded this expectation to a 4.9% decline. This month, the OECD projected that the contraction would be around 4.5%. Estimates may vary, but one thing is clear: the world economy is in the steepest downturn of our lifetimes, on a scale unseen since the 1930s.(4) The ongoing contraction in global merchandise trade is substantially worse than during the global financial crisis in 2008-2009. Services trade has also declined, though less sharply.
While trade volumes have also been affected, it could have been much worse. In April, WTO economists projected that depending on the pandemic’s impact and the policy response, global merchandise trade volumes could fall by 13% to 32%.
We are on track to be at the better end of that spectrum. Fiscal and monetary measures have cushioned the shock to demand. Many supply chains have overcome the initial disruptions to travel, transport, and border clearance. Container shipping has held up relatively well — in no small part thanks to the thousands of seafarers who have been unable to return home on schedule. Policy-induced trade restrictions have thus far been confined to a relatively limited number of goods and trading relationships.
Our task today is to think about the economy and trade after COVID-19. Trade policy choices do have a direct role in the medical response to the pandemic, since they affect countries’ ability to import key medical supplies — as well as eventual treatments and vaccines.
Trade will also matter for the wider post-COVID economy. A robust and inclusive economic recovery would be best served by open and predictable international markets. Open trade, underpinned by the rules-based system, enables the productivity gains that come with increased specialisation and scale, and a freer exchange of goods, services, and ideas.
For over seventy years since it was founded in the wake of the Great Depression and the Second World War, the multilateral trading system has fostered greater economic integration and prosperity.
In recent years, improved information and communications technologies combined with predictable market conditions to give rise to the global value chains that now dominate manufacturing production and trade.
It became feasible for companies to locate investment across multiple locations at home and abroad, sourcing inputs and services from the most cost-effective locations. This boosted profitability for firms while lowering prices for consumers — as attested to by the incredibly powerful yet affordable digitally enabled devices most of us are currently carrying around with us. COVID-19, however, reinforced the call by many for onshoring.
Under the surface, the factors affecting value chain choices were shifting even before this year. Increased automation was reducing the importance of labour-cost arbitrage. More frequent natural disasters linked to climate change were repeatedly disrupting production and shipping, forcing companies to think again about how best to build more resilient supply networks. COVID-19 accelerated ongoing trends such as the shift to e-commerce. And it caused a new kind of supply shock.
COVID-19 AND GLOBAL SUPPLY CHAINS
When the pandemic first hit, medical equipment, from simple hand sanitizer and masks to more sophisticated protective garments and ventilators were suddenly in short supply. Domestic manufacturing could not immediately respond. In many places, the immediate response from governments, which were taken by surprise, was to unilaterally restrict exports to shore up the availability of supplies at home.
The WTO’s monitoring exercise documented an increase in trade-restricting measures in March and April, primarily for exports of medical supplies and agricultural products.
WTO rules permit measures to relieve domestic shortages of essential products. But the fact is that export restrictions can cut off import-dependent countries — especially poorer ones — from urgently needed supplies. And by blunting incentives to ramp up production, they can even lead to higher prices at home than might otherwise have been the case.
We should note that many of the COVID-19 specific trade restrictions have already been reversed, though the momentum of the removal of emergency measures is beginning to slow. Shortages of certain medical supplies persist, even in countries with substantial manufacturing capacity.
The news on this front is not entirely grim. Countries’ trade-facilitating measures in fact outnumbered restrictions. Global trade in products such as personal protective equipment, hand sanitizer and ventilators grew by close to 30% in the first half of the year compared to 2019, pointing to how increased production and trade are helping meet demand for essential supplies.
It will now be important for governments to identify and unwind continuing trade restrictions once they are no longer necessary.
The experience of shortages in a relatively few, but essential, product lines, and of being unable to rely on international markets, has injected new urgency into the debate over on-shoring and near-shoring supply chains.
While it is understandable that governments would be keen to avoid a repeat of these circumstances, moving value chains closer to home is not straightforward, is sometimes impractical and in many cases would carry major opportunity costs.
First, it is not simple to replicate all the links in a value chain domestically, especially when a sector is capital- or knowledge-intensive, or tied to natural resources. According to some estimates, a single multinational can have more than 10,000 independent suppliers. It is one thing to convert clothing factories to making masks and aprons, or to switch from manufacturing perfume to hand sanitizer — both of which are alcohol-based. It is quite another to replicate at home the 600 globally sourced parts needed to make a ventilator.
Second, some businesses have strong economies of scale, taking advantage of ecosystems that have developed in specific locations, with unique suppliers and specialized talent. You cannot reproduce that overnight, if at all.
Third, this strategy may offer a false sense of security. Concentrating production in a single territory exposes the country to locally concentrated shocks: natural disasters or domestic economic or political crises. Deep international markets are more resilient in the face of such shocks.
And finally, when it comes to global supply chains, the economics of running businesses often provides effective limits to government policies favouring self-sufficiency. Using policy to maintain uncompetitive or obsolete productive structures is a recipe for higher costs and lower productivity. For a finite handful of products, this price may be worth paying to ensure domestic supplies — but even here there will be limits, especially where governments will emerge from the pandemic without excess funds for expenditure on projects of limited benefit. As a general policy, however, onshoring across too broad a swath of the economy would leave citizens significantly poorer than they otherwise would have been.
The pandemic has exposed some of the fragilities inherent to value chains and economic interdependence. But it has also shown that trade plays a central role in maintaining the availability of goods and services.
Global value chains evolved because of economic forces. They are driven mainly by the need of businesses of any size: whether a single entrepreneur selling products through the web, or a major multinational, businesses require a return on investment.
I do not believe that global value chains are a relic of the recent past. I do think, however, think we can expect what I call Global Value Change.
I think we will see more flexibility in these networks, moving towards more diversity in sourcing and increases in inventory. Trade will still be a most important source for most of what industries and individuals consume. A shift from “just-in-time” to “just-in-case” manufacturing does not mean that all components can or should be made next door.
McKinsey Global Institute(5) recently estimated that 16 to 26 percent of exports, worth $2.9 trillion to $4.6 trillion in 2018, has the potential to shift to new locations — whether that involves reverting to domestic production, nearshoring, or new rounds of offshoring to new locations. This estimate was due to all causes. For example, the primary cause of shifts in supply chains in agriculture is due to climate events, but also to local outbreaks of animal infections. In agriculture, on-shoring and near-shoring is not the most likely or even possible answer. The answer lies is diversifying or temporarily shifting sources of supply.
These shifts need to be backed by a functioning trade system that provides transparency and predictability to cross-border trade.
There are other implications here for companies and for governments.
New technological tools can help build supply chain resilience. For example, early in the pandemic, a well-known footwear maker(6) used predictive analytics software to reroute products from physical stores to e-commerce sales, cushioning the impact on sales.
Companies will have to deploy resources more creatively and nimbly. The FT(7) recently described how shipping companies have reduced losses and even in some cases even increased profits — by cutting capacity and shifting towards shorter routes, smaller vessels, and new lines of business such as substituting for air freight.
For governments concerned about access to essential products currently and in future crises of whatever nature, there are three principal routes to assuring supply: stockpiling, investment in domestic manufacturing capacity and trade. In practice, countries with the financial and technological wherewithal to do so will likely opt for a mix of all three within limits.
Each option has its shortcomings. Public stockpiling is expensive, and recent experience provides clear evidence that the commitment to maintaining stockpiles erodes over time. Moreover, a serious enough crisis might overwhelm stockpiles, or demand products that were not foreseen.
Attempting to build up a reserve of spare or easily diverted manufacturing capacity would be expensive, and demand resources that could have been deployed elsewhere.
Relying on international trade is the most efficient and economical choice of the three — provided that there is reasonable security of supply.
Governments can act at the WTO to help make trade a more reliable mechanism for assuring access to essential supplies. In fact, several different WTO members have called for supply lines to be kept open, particularly for food and medical products. The European Union has informally broached the idea of new rules to ensure the free flow of trade in essential goods, with tariff cuts and disciplines on export controls.
CHALLENGES IN THE TRADING SYSTEM
The WTO continues to provide enormous value to the global economy. The lion’s share of world trade continues to occur under WTO rules and principles. Bilateral and regional trade agreements rest on the multilateral architecture. The world weathered the financial crisis a decade ago far better than we otherwise might have done because the WTO exists. This is also true now for the pandemic.
But the WTO’s contribution to post-COVID recovery would be substantially enhanced if members take forward the ongoing process of systemic reform. This would mean restoring the WTO to its intended role as a venue:
- where agreements are successfully negotiated to address pressing problems;
- where disputes are settled within a binding and universally accepted structure;
- and where members are actively served by a strong, dedicated, professional Secretariat.
Last week under the leadership of Saudi Arabia, G20 trade ministers reiterated their commitment to supporting reforms to improve the functioning of the WTO.
For the WTO to remain fit for purpose, its rulebook must be responsive to a changing global economy.
On the current agenda, concluding ongoing multilateral negotiations on fisheries subsidies would be a valuable step in demonstrating in practical terms the shared commitment indicated by declarations in support of the multilateral trading system and sustainable development. Of broader importance to the world economy would be the successful conclusion of an agreement on digital trade among a group of WTO Members accounting for over 90% of global trade including the European Union, China, and the United States.
Geopolitical rivalry does not rule out making progress on sustainable development, while doing more to protect the environment.
In conclusion, it is safe to say that trade will continue to be transformed — as it always has — by a multitude of factors: demographic and technological change, political choices, environmental stresses, and, from time to time, by the spread of disease that has always gone hand-in-hand with human mobility.
The of Port of Rotterdam has witnessed many such changes: from the pioneering 16th century Dutch cargo vessels (fluyts) to the rise of refrigerated steamships and containerization, from being cut off from British trade by the Napoleonic blockade to the utter devastation of the Second World War and subsequent rebirth of a global economy. We can expect the Port to see many more changes in the years ahead — including, hopefully, a greater share in world trade with Africa spurred by the new African Continental Free Trade Area.
The foundation for world trade is the WTO — its rules, its processes, its services to Members. The flow of trade around the world, like the movement of cargo vessels and tankers, relies on protocols, on lane markings, on radar and sonar (which in the case of trade consists of the transparency that comes from monitoring and notifications), on the stability offered by the trading system, the equivalent of GPS.
The job of the WTO Secretariat and of the delegations of the WTO's 164 Members is to provide the framework, to allow the world to continue to prosper from world trade.
WTO Members will have an opportunity to work with the new Director-General to place the multilateral trading system, and global trade, on an even better foundation for the future. I believe that our 164 Members and the 23 countries seeking to join the WTO have strong common interests in a robust, effective and improved global trading system. They presently need to find the will to work constructively with each other. I believe that in the long term they will certainly do so.
We are not by any means at the end of the journey across millennia to enjoy the benefits of world trade. Land traffic will expand, new modes of manufacture will be put into place, but oceans and ports will remain of immense continuing importance. Of that Rotterdam can be sure.
- https://ec.europa.eu/eurostat/web/products-eurostat-news/-/DDN-20200402-2 back to text
- https://www.weforum.org/agenda/2019/02/visualizing-the-world-s-busiest-ports back to text
- https://www.portofrotterdam.com/en/news-and-press-releases/port-of-rotterdam-fully-operational-in-first-half-of-2020 back to text
- https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/ back to text
- https://www.mckinsey.com/business-functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains August 2020 back to text
- Nike, as cited in the McKinsey report. back to text
- https://www.ft.com/content/65fe4650-5d90-41bc-8025-4ac81df8a5e4 back to text