How Trump is using coronavirus to reshape world trade

“Business wants to be a part of the solution and is already preparing for the realities setting in from the pandemic, including increasing digitalization and diversifying of supply chains,” he added.

While the Trump administration has taken some steps to keep multilateral trade links open, it has not stepped forward with specific proposals to counteract the breathtaking drop in world trade.

For example, it has been silent so far on one widely discussed idea of pursuing international negotiations to eliminate tariffs on medical goods, which would reduce costs for both the current and future emergencies.

Instead, the White House has been considering a new executive order that would require federal agencies to buy pharmaceuticals and medical equipment from U.S. producers to increase self-sufficiency in those areas.

In addition, chief White House economic adviser Larry Kudlow has floated the idea of the government paying moving expenses of companies that want to relocate production back to the United States.

Lighthizer’s office has excluded many medical goods from the 7.5 percent and 25 percent tariffs that Trump has unilaterally imposed on Chinese goods.

But it reacted last week coolly to a congressionally requested report from the U.S. International Trade Commission pointing out additional products where tariffs could be cut to help in the battle to contain or treat Covid-19.

“I’m personally very worried that the protectionism we’ve seen for a while in the U.S. will be now even stronger” and that “we will have more travel restrictions, more trade barriers,” said Harriet Berg, Norway’s consul general in New York.

Shifting China supply chains

Trump has vacillated over whether to stick to a new trade deal with China because of concern that Beijing might not meet its obligation to purchase an additional $200 billion worth of American goods over the next two years. Those comments fuel fears he could impose additional U.S. tariffs on Chinese goods, leading to further trade tensions and more separation between the world’s two largest economies.

China became a leading manufacturer of finished goods following its entry into the WTO in 2001, as well as the source of many intermediate products that U.S. companies used to make their own finished goods. Trade between the two countries soared, leading to a record U.S. goods trade deficit with China of $420 billion in 2019.

In a blunt effort to level the playing field, Trump has imposed tariffs on what grew to be more than $350 billion worth of Chinese goods. However, that prompted Beijing’s own retaliation against most American exports.

The trade war put enormous strains on supply chains built up over the last two decades, prompting many U.S. companies to shift their purchases to other countries, if not bring production back to the United States.

Now, the coronavirus is putting further pressure on both U.S-China trade and the overall relationship, forcing companies to consider the wisdom of remaining dependent on supplies from a country the Trump administration considers “a foreign adversary.”

That’s been underscored by other events of the past two decades that have disrupted trade, including the 2004 Indian Ocean earthquake and tsunami, the 2010 volcanic eruption in Iceland that grounded aircraft traffic and increasingly destructive hurricanes and other severe weather events.

“I think from the mid-2010s onward, companies have really been looking at … moving toward regional supply chain type of structures to mitigate risk,” said Peter Anderson, vice president of global supply chain at Cummins Inc., an engine and power generation manufacturer, during a recent discussion hosted by the Hudson Institute.

Many companies moved production to China in the 2000s to take advantage of lower labor costs, as well as to be better positioned to sell in that huge market and surrounding countries.

Since then, advances in robotics and other technologies have eroded China’s labor wage advantages. But that also means returning production to the United States won’t necessarily lead to a job boom.

Coronavirus could accelerate nationalist trends

The coronavirus revealed how quickly countries can depart from free market norms during times of stress.

As Covid-19 spread and became a global pandemic, countries began clamping down on exports of personal protective equipment like surgical masks and N95 respirators, disposable gloves and medical gowns, as well as highly prized ventilators to treat the most seriously affected victims.

That has led to some calls for the WTO to negotiate tougher rules against when countries can impose export restrictions. However, without other changes, such as both governments and the private sectors building larger stockpiles, any stronger rules could just as well be broken during the next global health emergency.

The solution, some argue, is a “rebalancing” in favor of encouraging more local production, even if that means paying a higher cost for medicines and medical goods.

Cutting tariffs on all medical goods sounds appealing, but it also carries the risk of making the U.S. and other Western countries more dependent on Chinese production since that country’s generous industrial subsidies give local companies a huge cost advantage.

That makes some analysts think there will be a push in both the administration and Congress toward encouraging more domestic production, even if that means the American consumer could end up paying more for some products.

For its part, the U.S. Chamber of Commerce is opposed to “government mandates, but we welcome working closely with our government on incentives and policies that will unleash innovation, spur job growth and support badly needed investments in the United States,” said Brilliant.

“That said, we can’t forget that 95 percent of the customers we want to sell to live outside of the U.S., so we must also remain strong advocates of a multilateral system, even one that we know needs to be reformed and modernized because we need all countries to play by the same basic rules, regulations and standards,” he said.