Countries across the world need to rethink their trade and foreign policies to reflect the new reality. They need to continue to lend support to the WTO but also to accelerate work on regional and bilateral deals, while entering plurilateral agreements on specific issues – within the WTO if possible, or outside it if not. Beyond these general prescriptions, the priorities of different economies vary greatly. The trade hegemons of China, the European Union and the US face vastly different challenges. Middle powers on the periphery of the regional blocs, or outside them, such as Brazil, India and the United Kingdom, face an especially arduous struggle to adjust to a less predictable system. Small nations will be forced into asymmetrical deals with the hegemons or will play them off against each other, adding to the politicisation of trade relations.

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Global value chains (GVCs) divide production processes into discrete stages located around the globe. Using GVCs, companies can organize different parts of their value chain strategically, such as locating in a target customer’s home market or a competitor’s base. When deciding where to locate particular stages of production, firms typically consider key inputs such as raw materials and labor—along with associated accessibility, costs, and quality—and domestic policies that may encourage or discourage different types of investment. Congress, in particular, has an interest in understanding the economic and broader policy implications of the ongoing evolution of global value chains on U.S. businesses and consumers.

Since the 1990s, GVCs have shaped the global economy. More than two-thirds of world trade occurs via GVCs each year, representing a shift in how trade and commerce are conducted as trade in intermediate goods and services exceeds that of commodities and finished goods.

Unilateral trade liberalization and lower trade barriers made possible by free trade agreements (FTAs) and the creation of the World Trade Organization (WTO) have spurred GVC growth. Technology advancements and new internet-enabled services that lower costs and provide seamless connections around the world have also been a major factor. Consequently, companies and countries can focus on comparative advantages and specialize in different products and services within value chains, opening economic opportunities and new markets for small businesses and developing countries.

Despite the growing presence of GVCs in the global economy, recent events have highlighted the potential risks and vulnerabilities of GVCs, particularly those that are concentrated in a particular region or reliant on a single supplier. Worldwide natural disasters, emergencies, and other policy-driven circumstances, such as the Coronavirus Disease 2019 (COVID-19) pandemic, have shown that GVC links integrate and create interdependence between economies, which can leave companies vulnerable to external shocks, including interruptions in other countries. At the same time, interdependence can create broader economic growth and strengthened relationships among nations. After a period of rapid globalization through the 1990s and early 2000s, the growth of GVCs has slowed in recent years.

Concerns about U.S. value chains and the ongoing COVID-19 pandemic have raised questions about potential risks that GVCs may pose for particular economic sectors, the economy more generally, and, depending on the product and degree of external dependencies, national security. For example, recent events have shown that certain sectors, such as medical supplies and information technology and communications equipment, are susceptible to risks if the production of key components is concentrated in one country or controlled by one company. Some companies are seeking to diversify their supplier base across countries and regions, in part to increase their resilience and to lower their risk exposure. Some analysts foresee greater shifts in the future. To mitigate risks and vulnerabilities, companies may (1) rethink their business models and seek to build in redundancies for resilience, (2) focus more on shorter local or regional value chains, and/or (3) utilize emerging technologies to lower and diversify risks and costs. These shifts will likely vary across industry sectors, depending in part on the location and availability of suppliers and customers, as well as U.S. and foreign trade and investment policies.

In response to the risks described above, many policymakers, companies, and other stakeholders are reevaluating the role of GVCs in the economy. Several factors influence the formation and configuration of GVCs, including new and updated FTAs (e.g., the U.S.-Mexico-Canada Agreement), along with changes in import policies, rules of origin, export controls, investment regimes, and labor and manufacturing costs. These factors provide Congress with multiple levers to influence corporate decisions. Some U.S. and foreign policymakers have introduced legislation and other measures to incentivize, or in some cases force, companies or certain industries to shorten their value chains and increase domestic production. Such measures could affect the accessibility, quality, and price of goods sought by U.S. buyers.

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The atmosphere of uncertainty that characterized the 2020 US election was consistent with the rampant uncertainty that has plagued 2020 as a whole. The global COVID-19 pandemic, which has taken the world by storm, has disrupted lives, upended economies, and destabilized supply chains. 

This disruption was profoundly felt in the Western Hemisphere, where suppliers in the Americas were forced to adapt sourcing and inventory strategies as suppliers in Asia and other regions shut down operations, where companies faced shortages and interruptions, and where costs soared as necessary raw materials became harder to source. Even as grocery-store shelves quickly emptied, food and basic necessities became scarce for many, and personal protective equipment (PPE) went on back order, the world stepped up to diversify sourcing and manufacturing locations, setting the stage for the modernization and increased resilience of supply chains in the coming years. 

Supply remains crucial as governments, businesses, and individuals brace for a second wave of shutdowns and prepare to bounce back post-pandemic. A key priority for the next US administration will be working alongside partners and allies in the Western Hemisphere to assure supply-chain resilience is achieved and prioritized. 

President-Elect Joe Biden has pledged to build broad-based supply-chain resilience and to work collaboratively with the private sector to improve productivity and avoid unnecessary costs and bureaucracy.¹ Snap polls of businesses show they are counting on the next US administration to deliver on this promise.² As the inauguration of the forty-sixth president of the United States approaches, the question becomes: how can cooperation across the Americas, under a Biden administration, impact the future of supply chains in the Americas?

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The onset of the COVID-19 pandemic meant governments faced their second systemic economic crisis in under 15 years. This year policymaking went into overdrive as states rightly took steps to protect public health and to stabilize their national economies. The impact of those steps did not stop at national borders. Once more the world trading system faced a major stress test.

When crises happen, overwhelmed officials and policymakers try stifling concerns about trade fallout with the following knee-jerk arguments:

• Collateral damage to trading partners is inevitable at times like this.

• Crisis policy response is temporary and so poses no long-term threat to the world trading system. • No across-the-border tariff hikes (like those witnessed in the 1930s) have occurred and so trade distortions are under control.

• It is unrealistic to expect trade reform during crises.

• Trade rules should not get in the way of national crisis response.

Having documented and analysed information relating to over 2,000 policy interventions taken during the first 10 months of 2020, in this report we marshal evidence to reject every single one of these points. We also compare the policy response this year to that in 2009, during the dark days of the Global Financial Crisis. Doing so reveals there is no single crisis playbook. Governments have a choice in how they respond to crises. Once again states made dissimilar choices with different repercussions for their trading partners. Collateral damage was not inevitable. In fact, we show the fallout across nations this year was very uneven.

This report provides the most comprehensive account to date of the cross-border commercial fallout from government measures taken to tackle the COVID-19 pandemic. Not every element of pandemic response had consequences for trading partners. Of those that did, not all were harmful. Governments may see themselves as responsible solely for the wellbeing of their own citizens but that doesn’t negate the fact that their actions can harm the health as well as the livelihoods of citizens of trading partners. This year has witnessed policy interventions that both sicken-thy-neighbour and beggarthy-neighbour. There has also been a substantial amount of import reform. Key findings relating to global policy dynamics affecting cross-border commerce include:

• Trade distortions implemented this year cover 13.6% of world goods trade. By contrast, trade reforms cover 8.2%.

• By 31 October 2020, a total of 2,031 policy interventions affecting international commerce were imposed by governments around the world. That total is up 74% over the same period in 2019 and 147% higher than the average for 2015-2017, the years before the United States-China trade war really kicked in.

• Only 27% (or 554) of those 2,031 policy interventions benefited trading partners.

• 37 nations saw their commercial interests benefit from 100 or more reforms in trading partners. Whereas 58 nations saw their interests harmed 100 times or more so far this year.

• This year 43 nations saw 10% or more of their goods exports face worse market access conditions. Only seven nations saw 10% or more of their goods exports enjoy better market access.

• During the first 10 months of 2020, 26 nations saw more of their goods exports exposed to better market access abroad than worse conditions. For the rest–over 170 economies—more of their goods exports faced impaired access to foreign markets than improvements.

• Overall, policy intervention during the first 10 months of this year generated a total of 10,546 positive crossborder effects for trading partners. Meanwhile, policy induced 17,252 negative spillovers.

• 110 export curbs on medical goods and medicines remain in force. 68 such curbs have no phase-out date raising the prospect of long-term scarring.

• This year 106 nations implemented a total of 240 reforms to ease the importation of medical goods and medicines.

As is the case before any G20 Leaders’ Summit, we put the track records of this group’s members under the spotlight. Here the main findings are:

• In the first 10 months of this year, together the G20 members undertook 1,371 policy interventions—1,067 of which harmed trading partners. The harmful total is up 24% on 2019 and 117% higher than the years before the trade war, 2015-2017.

• G20 members were responsible for three-quarters of both the harmful and the beneficial knock-on effects for trading partners witnessed this year.

• Three classes of G20 member can be identified—four nations that implemented over 125 trade-related policies in the first 10 months of this year, three nations that implemented 33 or fewer, and the rest (see Figure).

• The policy mix employed by G20 members varied markedly. For example, Brazil undertook 156 policy interventions this year, 47% of which harmed trading partners. For its part, the UK imposed 155 measures and 80% tilted the playing field in favour of domestic firms. Remarkably, the UK’s percentage was bested by Canada, Germany, Japan, Korea, and Saudi Arabia.

• Resort to time-bound crisis intervention varies a lot too. Russia has already phased out 20% of harmful crisis intervention taken earlier this year. China is scheduled to phase out 29% of its harmful measures by the end of this year—the comparable percentages for Italy and Mexico are 32% and 26%, respectively. Overall, 47% of Mexico’s harmful crisisera intervention is time-bound, just ahead of China (46%). In contrast, over 95% of Canada, Saudi Arabia, and South Africa’s policies imposed this year that harm trading partners are not time-bound.

• This year G20 members undertook 770 General Economic Support measures (WTO terminology that captures inside-the-border policy intervention that can affect global commerce). A total of 679 of such measures involved granting different types of trade-distorting subsidies, either to firms competing in home markets or in foreign markets. The G20 is responsible for substantial subsidy-related trade fallout, affecting competitive conditions for 9.4% of world goods trade this year.

Coming at a time when the prospects for a revival of multilateral trade cooperation are improving, our evidence supports three recommendations to policymakers. First and foremost, a major shift in mindset is needed—away from the prevailing view that the world trade rule book must be effectively suspended for the duration of a crisis. This mindset has deep roots—going back to the origins of the post-war trading regime and manifests itself in what are euphemistically referred to as “flexibilities” in multilateral trade accords. In a world with extensive cross-border commercial ties, the current approach to crisis management is a recipe for the long-term scarring of the world trading system.

Keeping goods—including medical kit, medicines, and hopefully soon vaccines—flowing across borders is essential during a pandemic. More generally, open trading regimes facilitate exports, which speed up national economic recovery. A crisis management protocol should be agreed by governments to shape how they respond to crises in a way that limits harm to trading partners and keeps commerce flowing. Temporary policy intervention should be prioritised and a mechanism included to encourage the unwinding of trade distortions introduced during crises. The World Health Organization has protocols that kick in when crises occur, so why can’t the World Trade Organization?

Second, governments and international organizations need to systematically compare the state responses to this year’s pandemic and to the Global Financial Crisis so as to identify those effective policy actions that inflicted little or no harm on trading partners. Third, developing such best practices requires systematic information collection on public policy responses and their crossborder commercial fallout. The new Director-General of the World Trade Organization should strengthen that body’s monitoring and analysis functions. That monitoring needs to pay particular attention to subsidies and other General Economic Support measures. Other international organisations and independent analysts should contribute too.

Simon J. Evenett is Professor of International Trade and Economic Development, University of St. Gallen, Switzerland; Coordinator, Global Trade Alert; and a former nonresident Senior Fellow, Economic Studies, Brookings.

Johannes Fritz is a research assistant University of St. Gallen, Switzerland.

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© CEPR Press, 2020

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Resilience

Theoretical considerations and empirical evidence support the view that an integration approach to resilience is better than a reshoring approach. A trade policy that allows cost-effective sourcing from different parts of the world provides EU firms with greater flexibility during disruptions. When aggregated to the entire EU economy, firm-level flexibility with respect to sourcing thus supports the open strategic autonomy objective. By contrast, a reshoring approach provides fewer opportunities for firms to adjust. A reshoring approach would also reduce employment and increase poverty in developing countries, undermining sustainability development goals. It would also hurt EU efforts to reform the World Trade Organisation (WTO).

Robustness

Whether a reshoring or an integration approach is more robust depends on the geographic origin of the disruption. At the same time, the overall risk that supplies will be interrupted altogether is reduced under an integration approach, since it allows more diversified supply lines. For the COVID-19 pandemic, moreover, there is no evidence of correlation between the level of fragmentation of production in a sector – a traditional measure of value chain integration – and negative economic impacts in that sector. On balance therefore, an integration approach is preferable also from a robustness perspective.

Sectoral evidence  

A spike in demand for medical supplies and personal protective equipment led to severe shortages during the initial phase of the COVID19 crisis. During spring, however, global supply expanded quickly and by summer, initial shortages had been removed through the help of imports from countries that had already passed through the acute phase of the crisis. For pharmaceuticals and vaccines more than 80 percent of EU imports already originate in other European countries, making a reshoring strategy superfluous. In Europe, agricultural food chains have so far remained robust during the COVID-19 crisis.

Policy recommendations

The EU should avoid reintroducing barriers that were temporarily removed during the COVID-19 crisis.

Multilateral or plurilateral agreements improve supply-chain flexibility for EU firms. Multilateral solutions also mean that we don’t put all our eggs in the same geographic basket. This, in turn, contributes to the open strategic autonomy objective. Consequently, multilateral or plurilateral solutions are our preferred policy option.

If multilateral or plurilateral efforts fail, one option is to liberalize imports of intermediate goods unilaterally. That would increase flexibility with respect to sourcing for EU firms. Canada has done this and studies have shown that import liberalisation of intermediate goods improves firm productivity. During a time when the US and China are reluctant to embrace open trade policies such an initiative would strengthen Europe’s position as the hub of global trade.

Another option if multilateralism fails is to diversify our network of regional trade agreements (RTAs) and to make them more interregional. The long-term objective would be to multilateralize commitments in EU RTAs. The EU-MERCOSUR agreement, for instance, connects Europe with a region that is not part of the two other supply chain hubs – AsiaPacific and North America. Efforts to link up the EU with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) could serve a similar strategic purpose. When the US, China and India all struggle to embrace multilateral liberalisation, an attractive option for the EU is to build multilateral building blocks from RTAs. Just like the GATT started out with just 23 countries, a multilateralism for the 21st century could be built ‘inside out’ from a solid base of like-minded countries. Because of its economic size and commitment to multilateralism, the EU has a particular responsibility to lead such a development.

For goods that EU member states cannot accept even a short interruption of supplies, the only way to guarantee full robustness is through stockpiling. Assuming a common understanding by member states, the EU could agree on a division of labour with respect to stockpiling of essential goods. Such an agreement would require EU legislation that restricts member states from confiscating essential goods during a crisis. It would also have to consider the individual needs of member states and national stockpile preparations during times of crises, conflict or war.

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Europe’s permissive stance thus far was contingent on Chinese convergence with such liberal economic norms; and adjustment was the general trend in China after 1978. But in recent years, the trend has become less clear. Unless major reform steps are taken soon, the view that China under Xi Jinping is diverging with advanced economy norms will be entrenched. Given China’s size and weight in global product and service markets, its reversion to statist economic strategies (or even sluggish progress toward more liberal approaches) will have direct and increasing impacts on the sustainability of Europe’s system.

Europe’s policy instruments will need to be adapted to this new reality. Trade competition implications can be grappled with trade policy tools (though with limited efficiency), and the national security consequences of direct investment have been tagged for stepped-up screening at the border. But this leaves much unaddressed. As the EU Commission reviews “gaps” in EU policymaking and tools for dealing with China-related distortions, this report takes stock of defensive measures in competition, anti-subsidy, public procurement and related policy fields that could help Europe deal with market distortions spilling over through growing Chinese investment and other commercial linkages with Europe. 

The “China challenge” is just one issue in an emerging debate about the need for a revision of Europe’s competition and industrial policies. Given the stakes, the discussion has the potential to become politicized and counter-productive. In order to identify impactful and cost effective solutions to promote and defend Europe’s ability to compete, current issues will need to be assessed objectively. This report contributes to framing the current debate by distinguishing between three critical yet sometimes entangled or competing policy objectives: (1) An effort to preserve free and healthy market competition in the EU in the interest of EU consumers; (2) A producer-oriented drive to promote a level global playing field for European firms; (3) A desire to maximize the longterm competitiveness of European companies, including through new forms of industrial policy.

As EU member states and the Commission think about new policy instruments, we argue that Europe should be cautious to avoid the nonmarket practices it objects to abroad. Europe’s response needs to be first and foremost a positive agenda for member states and EU institutions to enable a thriving market environment that fosters innovation and growth. Policy responses should advance a robust liberalism that avoids damaging competition policies and market principles that have been the regulatory workhorses of most OECD market economies for decades.

This report is structured as follows: Part 2 describes China-specific competition and competitiveness challenges faced by the EU, including concerns related to China’s economic model and specific channels, and how these create harm for European consumers and producers. Part 3 presents the result of a comprehensive stocktaking of possible policy responses. It includes a review of existing instruments that could either be reformed or used more forcefully to respond to China-related challenges, as well as novel options. It also assesses these instruments in terms of potential effect in dealing with Chinese distortions, ease or difficulty of reform in the European context, and implications for EU-China and transatlantic relations. Part 4 finally offers a series of recommendations for European stakeholders in the short- and medium term. 

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