International Trade Makes Economies Resilient

The global trading system is increasingly under pressure as it weathers disruptions stemming from the ongoing pandemic, trade disputes, and Russia's invasion of Ukraine. The U.S. approach to trade is also being questioned by some politicians and interest groups who deem international trade harmful to American workers.

In the wake of the World Trade Organization's (WTO) 12th Ministerial Conference, it is important to recognize that while these shocks and frustrations illustrate real challenges facing global commerce, trade liberalization has delivered huge benefits to workers, industry, and consumers that should not be overlooked.

The resilience provided by international trade networks has proven especially important in recent years, as WTO leaders have suggested.

Consider how "offshoring" was blamed for shortages of personal protective equipment (PPE) early in the pandemic. In fact, U.S. production had always been sufficient for the top manufacturers of N-95 masks to meet U.S. demand. But COVID-19 caused U.S. demand for N-95 masks to surge by an astonishing 40-fold, soaring from about 25 million in 2019 to about 500 million in 2020.

Public health experts had long warned about such a potential crisis, as in the 2005 "National Strategy for Pandemic Influenza," which called for new investments in PPE stockpiling (and which federal budgets never funded adequately). The focus on stockpiles is a recognition that current production - whether domestic or foreign - cannot keep pace with pandemic demands.

Even so, international trade proved a lifeline in the medium term. While world trade decreased by 7.6% in 2020, trade in medical goods increased by 16%. International trade allowed much-needed medical supplies to be delivered worldwide even as countries worked to boost domestic production as well.

The IMF's most recent World Economic Outlook deems global supply chains adaptable and resilient, suggesting that "policies such as reshoring are likely misguided." The authors point to the pandemic and note that international trade played a large role in accelerating the global economic recovery. They warn that localizing production may leave countries poorly prepared for the next disruption.

A World Bank study had similar findings: "Policies that are supportive of, not hostile to, trade could prove critical to strengthening recovery from the pandemic, supporting greater diversification, and reducing extreme poverty." The report estimates that policies that reject protectionist approaches will lead to 25% trade growth between 2019 and 2030; reshoring policies would cause a decline by 22% and thrust 52 million people into extreme poverty.

In an example of how protectionist policies reduce resilience, consider the global food crisis. Russia's invasion of Ukraine and its blockade of Ukraine's Black Sea ports have disrupted global agricultural trade. Making matters worse, 31 have countries imposed export bans or licenses at some point during the past four months, covering about 13% of all food traded worldwide ("global calorie markets"), according to the International Food Policy Research Institute. Happily, a number of these restrictions have been dropped, and those in force affect about 5% of global food trade today. Even so, these measures have prevented wheat, corn, and other foodstuffs, of which Ukraine is a significant global producer, from leaving the country.

Protectionist moves are thus wreaking havoc on an already delicate agricultural supply chain and harming all parties involved. Export restrictions and retaliatory measures exacerbate shortages by reducing global supply and driving up prices.Import-dependent nations are at further risk of extreme food insecurity, and producing nations subject to restrictions are unable to take advantage of the opportunity to fill those gaps.

International investment also makes companies and economies more resilient. Even as the sharpest recession in a generation caused the U.S. economy to shed eight million jobs between 2007 and 2009, U.S. multinational corporations added a net 289,000 American jobs, according to the U.S. Bureau of Economic Analysis. They added 2 million more U.S. jobs between 2009 and 2013. The impact of the "Great Recession" was far more severe for companies with a purely domestic footprint.

Geographic diversity of suppliers can bolster resilience against future shocks, but eliminating trade and investment - and depending on a limited number of domestic suppliers - may end up doing more harm than good.

Trade officials returned home from the WTO's ministerial conference with a mixed bag of deliverables, but the lesson is the same: The world should invest in the multilateral trading system rather than turn away from it. Countries are more resilient when they trade than when they try going it alone.

Public link

Please use the above public link if you want to share this noodl on another website.