United States

U.S. approach to trade – USTR Lighthizer’s Foreign Affairs article and Congressional testimony on June 17

Every year, the U.S. House of Representative’s Committee on Ways and Means and the U.S. Senate Finance Committee hold hearings to understand the Administration’s trade agenda for the year. This year both Committees held hearings on June 17 where the sole Administration witness was U.S. Trade Representative Robert Lighthizer.

Ambassador Lighthizer had separately prepared an article for Foreign Affairs entitled “How to Make Trade Work for Workers, Charting a Path Between Protectionism and Globalism” which had been reviewed by many of the Committee members prior to the hearings. The article is available here and presents the Trump Administration’s approach to trade policy. https://www.foreignaffairs.com/articles/united-states/2020-06-09/how-make-trade-work-workers.

The Foreign Affairs article

Ambassador Lighthizer uses the challenges of the COVID-19 pandemic to state that it is time for discussions to reach a new consensus on “the future of U.S. trade policy.” Amb. Lighthizer’s summary of the approach of the current Administration are repeated below:

“That debate should start with a fundamental question: What should the objective of trade policy be? Some view trade through the lens of foreign policy, arguing that tariffs should be lowered or raised in order to achieve geopolitical goals. Others view trade strictly through the lens of economic efficiency, contending that the sole objective of trade policy should be to maximize overall output. But what most Americans want is something else: a trade policy that supports the kind of society they want to live in. To that end, the right policy is one that makes it possible for most citizens, including those without college educations, to access the middle class through stable, wellpaying jobs.

“That is precisely the approach the Trump administration is taking. It has broken with the orthodoxies of free-trade religion at times, but contrary to what critics have charged, it has not embraced protectionism and autarky. Instead, it has sought to balance the benefits of trade liberalization
with policies that prioritize the dignity of work.”

The paper reviews the history of trade liberalization, what the Administration views as its limits, their perception that many trade advocates have extolled the benefits of liberalization while discounting or ignoring the economic costs of liberalization. Unlike other areas of government policy, trade liberalization was viewed as an absolute good and not weighed against the costs of the policy in fact.

The section of the article entitled “The dark side of free trade” reviews the steep economic and human costs for the United States over the period 2000-2016 noting the loss of manufacturing jobs, stagnation of median household incomes, and the devastation to the populations left behind in manufacturing locations. While outsourcing reduces costs, it increases vulnerabilities and reduces the nation’s ability to respond to certain situations, such as the pandemic.

Amb. Lighthizer opines that “A sensible trade policy strikes a balance among economic security, economic efficiency, and the needs of working people.” He reviews how he believes the United States-Mexico-Canada Agreement (“USMCA”) achieves that balance looking at specific improvements from NAFTA.

The article then goes on to look at “two of the most significant trade challenges [the U.S.] will face in the coming years: market-distorting state capitalism in China and a dysfunctional WTO.”

The Trump Administration changed the approach of trying to deal with China’s trade policy issues pursued by prior Administration (e.g., through bilateral talks and through the WTO dispute settlement system) by going after some of the larger issues through the section 301 investigation with resulting tariffs on imports from China which led to the creation of the Phase 1 Agreement and, depending on success of Phase 1, a potential Phase 2.

On the WTO, the article focuses on the WTO’s Appellate Body and its deviation from its original purpose.

“The challenges in the WTO are also vexing. Like many international organizations, the WTO has strayed from its original mission. Designed as a forum for negotiating trade rules, it has become chiefly a litigation society. Until recently, the organization’s dispute-resolution process was led by its seven-member Appellate Body, which had come to see itself as the promulgator of a new common law of free trade, one that was largely untethered from the actual rules agreed to by the WTO’s members. The Appellate Body routinely issued rulings that made it harder for states to combat unfair trade practices and safeguard jobs. This was one of the reasons why the Trump administration refused to consent to new appointments to it, and on December 11, 2019, the Appellate Body ceased functioning when its membership dipped below the number needed to hear a case.

“The United States should not agree to any mechanism that would revive or replace the Appellate Body until it is clear that the WTO’s dispute-resolution process can ensure members’ flexibility to pursue a balanced, worker-focused trade policy. Until then, the United States is better off resolving disputes with trading partners through negotiations—as it did from 1947, when the General Agreement on Tarifs and Trade was signed, until 1994, when the WTO was created—rather than under a made-up jurisprudence that undermines U.S. sovereignty and threatens American jobs.”

Congressional Hearings

The Congressional hearings provide the opportunity for the Administration to present its record of accomplishments as well as identifying pressing issues being pursued and for members of Congress to inquire about specific issues of importance to their constituents, to challenge the narrative of the Administration (typically by the opposition party), to press for commitments on actions deemed of importance and otherwise to gain clarification of matters of interest to Congressional members.

Yesterday’s hearings had all of the above. Amb. Lighthizer’s opening statement to both Committees stressed what the Administration viewed itself as having achieved and the benefits to working Americans with a focus on China (and the US-China Phase 1 Agreement), USMCA, the US-Japan Phase 1, disputes at the WTO and WTO reform proposals as well as the Administration’s game plan for the WTO, for pending negotiations with the U.K. and Kenya and for WTO reform, and enforcement of existing agreements. His opening statement to the U.S. Senate Finance Committee is embedded below but mirrors his prepared statement to the U.S. House Ways and Means Committee.

17JUN2020LIGHTHIZERSTMNT1

Senate Finance Committee Ranking Member Wyden (D-OR) in his opening statement painted a different picture of the first three years of the Trump Administration’s trade agenda and whether successes had been achieved. His statement is embedded below.

061720-Wyden-Trade-Agenda-Hearing-Opener1

There were many questions in both chambers on the USMCA agreement, with particular focus on enforcement of labor, environment and other issues. With the final revised USMCA receiving strong bipartisan support in both houses of Congress and with the agreement taking effect on July 1st, many of the questions flagged areas where one of the countries was viewed as not in compliance with obligations in the Agreement (e.g., energy practices in Mexico) and commitments by Amb. Lighthizer to pursue matters where compliance wasn’t in place.

On the issue of Section 232 tariffs on steel and aluminum products from Canada and Mexico, some members inquired whether examining imposition of such tariffs would be consistent with U.S. agreement with the two countries which had excluded them from the additional tariffs. Amb. Lighthizer reviewed that the agreement excluded Canada and Mexico where volumes remained at historic levels. If the U.S. found surges and decided to impose the tariffs, any retaliation by Canada or Mexico would be limited to the same sectors (i.e., could not retaliate against agricultural products). Amb. Lighthizer indicated that the U.S. was considering whether tariffs should be imposed in light of surges that had been occurring.

There were also many questions about the U.S.-China Agreement with a focus on whether China was likely to meet its obligations on the purchase of goods (with most questions focused on agricultural purchases). Ranking Member Wyden (D-OR) cited a Peterson Institute paper claiming poor compliance with purchase commitments. See https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods Amb. Lighthizer on a number of occasions reviewed what were described as inadequacies in the Peterson data and reviewed strong growth in orders from China on agricultural goods to the present time (vs. exports through April shown in the Peterson graphs which look at January-April, even though the agreement didn’t take effect until February 14, 2020).

There were many questions about reshoring manufacturing of medical goods, particularly personal protective equipment (“PPE”), challenges to such reshoring because of the failure of the Administration to enter into long-term contracts to permit manufacturing to start up, whether broader tariff exclusions should be provided to imports of such products while there were inadequate supplies, concerns about existing supplies of PPEs amidst the ongoing pandemic. The issue featured prominently in Senate Finance Committee Chairman Grassley’s (R-IA) opening statement and in the questions of a number of Senators and House Representatives in the two sessions. Amb. Lighthizer discussed use of tariffs as a longer term issue to support reshoring and contested arguments that the Administration had not done enough to secure supplies during the pandemic. Chairman Grassley’s opening statement is embedded below.

Grassley-at-Hearing-on-the-President

There was also interest in both Houses of the ongoing or soon to be initiated FTA negotiations with the United Kingdom (ongoing, two rounds completed) and with Kenya (to start after July 4). There were questions or statements of support for the U.S.-Japan Phase 1 Agreement particularly by members with agricultural export interests to Japan.

On U.S.-EU trade relations, there were a few questions raised dealing either with the perceived abuse of geographical indications on food products by the EU and its push to get other countries to accept EU indications or with changing EU SPS provisions that appear to members of Congress and USTR as not science based. Amb. Lighthizer characterized both as protectionist trends from our friends in the EU. He also indicated that USTR is considering whether the U.S. should initiate a 301 investigation on the non-science based SPS measures.

On digital services taxes, questions arose about yesterday’s announced U.S. withdrawal from the OECD negotiations. Amb. Lighthizer reviewed USTR’s role in conducting 301 investigations first on France and now on a host of other countries where taxes are being imposed or considered on digital services on a discriminatory basis and on companies with no physical presence in countries imposing the taxes. The OECD effort was started to achieve a global agreement that could be accepted by all. The U.S. withdrew from the talks based on its view that the talks were building in discrimination against U.S. companies. If there is not a solution in the OECD, Amb. Lighthizer made it clear that results from the 301 investigations would permit the U.S. to take appropriate action against countries who proceed without a global agreement.

While Amb. Lighthizer’s opening statement had reviewed various WTO issues relevant to reform efforts — addressing Appellate Body; putting teeth into WTO notification requirements; clarifying which Members are eligible for special and differential treatment, and the concern about bound tariffs which have proven not to reflect current economic realities between countries, there were few questions about WTO reform during the two hearings. Amb. Lighthizer did go through the challenge of a WTO system where tariffs are bound, where the U.S. over 70 years has removed the vast majority of its tariffs and many other countries have maintained very high bound and even applied tariffs with little likelihood that those tariffs would be reduced regardless of the economic advances made by countries with high bindings. India and Indonesia were two of the countries used as examples of where bound tariffs today of such countries were not reflective of their economic advances and hence were unfair to the U.S.

There were also questions that arose from press reports about statements President Trump allegedly made to President Xi in Japan seeking China’s help in his reelection effort and to reports about two USTR professional staff members who had set up a webpage and been contacting automotive companies about helping them with USMCA compliance at a time when they were still USTR employees. Amb. Lighthizer was in a meeting with the U.S. and Chinese Presidents in Osaka, Japan in 2019 and denied that any request for assistance was made by President Trump at that meeting. On the latter issue, Amb. Lighthizer indicated that political appointees clearly could not do what was done by professional staff and that the professional staff had reportedly sought and obtained clearance from the USTR ethics office.

Conclusion

It has long been obvious that the Trump Administration was adopting a significantly different approach to trade policy than had been pursued by prior Administrations over recent decades. Ambassador Lighthizer’s Foreign Affairs article provides an articulation of the underlying concerns that have driven the Administration to the current policy approach. While there are many who remain skeptical about the benefits vs. costs flowing from the modified approach being pursued by the Trump Administration, there is little question that the change in approach has gotten attention of trading partners and at least some important modifications in agreements.

The USMCA has many novel elements, many of which are interconnected in terms of achieving stated objectives. Changes in rules of origin coupled with a high level of labor needing to make a minimum level of hourly wages and labor enforcement provisions are intended to address longstanding concerns of labor and is consistent with Amb. Lighthizer’s articulated objective of making trade work for workers. The willingness to work with the Democrats to achieve the labor and environment provisions contained in the revised agreement objectives permitted broad bipartisan support when implementing legislation was considered in the United States. Similarly, the USMCA provision of a sixteen year sunset of the agreement, extendable every six years should permit Canada, Mexico and the United States to update the agreement on a regular basis preventing the loss of relevance or coverage that normal FTAs have experienced with the passage of time.

On the importance of the U.S. relationship with China, the current Administration has come to the conclusion that China is not interested in converting to a market economy in fact. Reciprocity is unlikely under WTO Agreements since the WTO is premised on market economy Members, and the WTO agreements do not address many of the distortions flowing from the Chinese-style economy. Thus, the Administration has pursued a different approach to achieve a different outcome and greater reciprocity. The importance of the U.S.-China Phase 1 is best understood in that context. While the jury is out on how successful the Phase 1 Agreement will be, Amb. Lighthizer’s review of USTR information on growing orders from China in agriculture and China’s implementation of many of the specific commitments in the SPS area and other areas is encouraging.

On the WTO, the U.S. is looking for fundamental reform to achieve an organization that has rules for all and that reflects the changing capabilities of Members. With the differences in views of the purpose of the Appellate Body between the U.S. and the EU (and others), there is no likelihood of rapid restoration of the Appellate Body. With the EU moving towards taking unilateral action against Members who don’t engage in a second stage review of disputes with them, we are likely facing a period of heightened trade tensions between the U.S. and the EU.

Other U.S. proposals that have already been made at the WTO (notification requirements; eligibility for special and differential treatment; WTO being an organization for market economies ) or are working on jointly with others (e.g., EU and Japan on industrial subsidies and state-owned enterprises), have different challenges in terms of reaching consensus to adopt. The issue not yet formally raised on revisiting tariff bindings and/or how the system addresses changes in economic might over time with existing bindings would seem to require a further major shock to the operation of the WTO to have any chance of being considered.

As trading partners struggle to find new sources of revenue, particularly following the economic challenges flowing from the COVID-19 pandemic, many have looked to tax foreign companies in the digital services space. As the U.S. has many of the major players, there are looming major confrontations over EU and other country efforts to impose discriminatory taxes. The U.S. will defend its interests if an OECD agreed approach cannot be found. Based on yesterday’s withdrawal of the U.S. from the OECD process, major disputes are likely by the end of 2020.

The Trump Administration will continue to utilize all legal tools available to it under U.S. law and pursuant to various Agreements to achieve a rebalancing of the U.S. trade relationship with our major trading partners and with all nations. The Foreign Affairs article provides the Administration’s logic for the approach being pursued.

U.S.-China Phase I Deal is Failing Expanded U.S. Exports Even Before Recent Efforts by China to Limit Certain U.S. Agriculture Exports as Retaliation for U.S. Position on Hong Kong

The U.S.-China Phase I trade agreement went into effect in mid-February just as the COVID-19 pandemic was rapidly spreading globally.  In the United States, the U.S. Trade Representative and U.S. Secretary of Agriculture have released a series of statements indicating that China has been making a number of the substantive changes that were contained in the agreement, with the U.S. being pleased with the progress.  See, e.g. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement

The COVID-19 pandemic has seriously reduced economic activity in the United States and in many other countries.  Despite such reduced economic activity in recent months, the U.S. Administration has remained optimistic about China’s meeting the agreement’s terms and the agreement being “a success,” including the significant increase in exports to China from the United States over two years (2020-2021).  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/may/usda-and-ustr-announce-continued-progress-implementation-us-china-phase-one-agreement.  An important measure of the success will be the extent to which there are significant increases in U.S. exports.

As reviewed in a recent post, the United States has announced it will be terminating special status of Hong Kong in light of Chinese security actions taken vis-a-vis Hong Kong.  U.S. Withdrawal from the World Health Organization and Decision to Revoke Preferential Treatment for Hong Kong – Reduced Cooperation as COVID-19 Pandemic Rages On, https://currentthoughtsontrade.com/2020/05/30/u-s-withdrawal-from-the-world-health-organization-and-decision-to-revoke-preferential-treatment-for-hong-kong-reduced-cooperation-as-covid-19-pandemic-rages-on/.  U.S. action did not call for the termination of the US-China Phase I Agreement.  In recent days, the press have reported that China has ordered state-owned entities to stop purchasing from the United States various agriculture products, including soybeans, pork, corn and cotton.  https://thehill.com/policy/finance/trade/500464-china-halts-state-purchases-of-us-soybeans-pork-report.  There have been some statements in the U.S. press suggesting that China continues to buy U.S. agricultural products including soybeans despite the earlier reports to the contrary.  See, e.g.,   https://insidetrade.com/trade/grassley-confident-china-will-meet-phase-one-commitments.

With April 2020 U.S. export data now available, what is clear is that China is far behind in meeting the levels of purchases from the United States in a wide range of goods categories to meet the first year growth over 2017 on goods of $63.9 billion.  Total U.S. domestic exports to China in 2017 were $119.910 billion.  The $63.9 billion increase of U.S. exports of goods were on a subset of total U.S. goods exports, just $66.381 billion.  Thus, the rate of increase in the first twelve months under the agreement is expected to be 96.26% on the categories contained in Annex 6.1 to the Agreement.  There are specific commitments with regard to certain manufactured goods (increase of $32.9 billion over 2017 levels), agriculture (increase of $12.5 billion over 2017 levels) and energy (increase of $18.5 billion over 2017 levels).  While there are no specific commitments on other products the U.S. exports to China, the rate of increase as measured against all U.S. domestic exports to China in 2017 would be 53.29% if all other products were at the same level as in 2017.

Unfortunately, looking just at March and April 2020 (the first two full months after the agreement took effect for which U.S. export data are available), U.S. domestic exports of the products contained in Annex 6.1 to the agreement declined by 4.04% from the March-April 2017 period.  All other U.S. domestic exports of goods to China declined 39.35% in March-April 2020 compared to the same period in 2017.  In total U.S. domestic exports to China of all products declined by 20.24% in March-April 2020 compared to the same months in 2017.  Thus, the early months of the first year of the Phase I Agreement are moving in the wrong direction in terms of U.S. exports.  While challenges in China and in the United States from the pandemic have undoubtedly dampened both demand in China and ability to ship from the U.S. for some products, that situation has changed in May and will presumably improve moving forward.

The above figures do not account for increased U.S. services exports to China contained in Annex 6.1 to the agreement (increase of $18.5 billion over 2017 levels).  Data for U.S. services exports for 2020 are not available by country at this point for January-April.  But overall U.S. services exports have been hard hit in the first four months of 2020 and this will include U.S. exports to China.  U.S. exports of services to the world were $169.482 billion in the January-April 2020 time frame, down from $193.010 billion in 2019, with March and April 2020 being more sharply contracted, $72.117 billion vs. $97.103 billion in 2019.  See https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf (page 16).

The table below shows the 18 categories of goods for which there are growth commitments in Annex 6.1 of the Agreement.  All figures are in U.S.$ billions.

Product CategoryMarch-April 2017March-April 2020Change
Manufactured goods
1. Industrial machinery$1.845$2.091+$0.246
2. Electrical Equipment
and machinery
$0.694$0.867+$0.173
3. Pharmaceutical
products
$0.323$0.501+$0.178
4. Aircraft (orders and
deliveries
$0$0 $0
5. Vehicles$1.747$0.716-$1.031
6. Optical and medical
instruments
$0.522$0.566+$0.044
7. Iron and steel$0.232$0.081-$0.151
8. Other manufactured
goods
$1.737$2.224+$0.487
Subtotal — MFG goods$7.099$7.046-$0.053
Agriculture
9. Oilseeds$0.747$0.230-$0.517
10. Meat$0.106$0.582+$0.476
11. Cereals$0.224$0.194-$0.030
12. Cotton$0.229$0.200-$0.029
13. Other agricultural
commodities
$0.000$0.354+$0.354
14. Seafood$0.231$0.152-$0.079
Subtotal – Agriculture$1.536$1.712+$0.175
Energy
15. Liquefied natural
gas
$0.014$0.162+$0.148
16. Crude oil$0.658$0.210-$0.448
17. Refined products$0.334$0.193-$0.241
18. Coal$0.090$0.016-$0.074
Subtotal – Energy$1.096$0.581-$0.515
Total of 1.-18.$9.731$9.339-$0.392

Conclusion

The Trump Administration has had an aggressive program over the last several years to address perceived serious problems in our bilateral relationship with China. The Phase I Agreement was viewed as a down payment with the more challenging issues still on the table to be negotiated in a phase 2 agreement. There is no sign that Phase 2 negotiations have started. The history of U.S.-China consultations has been a great many promises of change by China and relatively little action by China to address U.S. concerns.

It is a positive that a number of the specific changes China has agreed to in the Phase I Agreement have been implemented to date. The U.S. has also made modifications it agreed to make in the Phase I Agreement. But the core issue for the Trump Administration is to see if its different approach to China can achieve meaningfully greater reciprocity in our trade relationship with China. That has been the justification for the large tariff increases on large parts of Chinese exports — getting long overdue changes to Chinese actions that harm American businesses and workers and obtain greater market access to the Chinese market.

Through April, U.S. trade data don’t show meaningful expansion of exports to China despite the commitments contained in Annex 6.1 to the Agreement. Indeed, U.S. exports are down sharply to China (U.S. imports from China are down sharply as well).

Despite the ongoing bilateral differences and actions causing a continuation of tensions between the two largest economies in the world, improving bilateral trade to a more reciprocal level would be in both countries’ interest. With China having recovered from COVID-19 constraints and with the U.S.having started its reopening process, the coming months will reveal whether the Agreement represents a further lost opportunity or a sea change in trade flows.

COVID-19 Trade and Economic Fallout — Are current projections too optimistic?

The COVID-19 pandemic is not simply a global health crisis but also a global economic crisis of unprecedented proportions.

The WTO has projected that global trade will decline between 13 and 32 percent in 2020 before rebounding in 2021.  https://www.wto.org/english/news_e/pres20_e/pr855_e.htm.

The IMF in its April 2020 update of the global economy modified its projection to show global GDP contraction of 3.0% for 2020 with a 6.1% contraction by advanced economies (U.S., -5.9%; Euro Area, -7.9%; Japan, -5.2) and a 1.0% contraction for emerging markets and developing economies.  https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020.

Developments in global trade and the national economy for the United States and the rising severity of the pandemic in some of the emerging and developing countries will likely cause future downward revisions to the global trade and economic fallout occurring in 2020 and reemphasize the importance of global cooperation both in responding to the pandemic but also in posturing the world for an economic recovery in the second half of 2020 and beyond.

United States data through April as an example

Gross domestic product in the United States declined 5.0% in the first quarter of 2020 based on a May 28, 2020 second estimate provided U.S. Department of Commerce’s Bureau of Economic Analysis.  https://www.bea.gov/sites/default/files/2020-05/gdp1q20_2nd_0.pdf.

With more than 40 million people filing for unemployment benefits between mid-March and the end of May, the projection for second quarter GDP from at least one source on June 1, 2020 is an extraordinary contraction of 52.8%.  See https://www.frbatlanta.org/cqer/research/gdpnow.  This compares to the Congressional Budget Office’s projection of a 39.6% decline in the second quarter.  https://www.cbo.gov/publication/56335.  The CBO estimate uses a 3.5% decline in GDP for the first quarter and an annual projected decline of 5.6% for 2020.

With the current first quarter data GDP contraction in the U.S. at 5.0% and the most recent data from a model similar to that used by the Bureau of Economic Analysis projecting a 52.8% contraction in the second quarter, it is highly likely that the U.S. contraction in 2020 will exceed the 5.9% projected in the April IMF data.

Indeed, with the number of bankruptcies being reported in the U.S. and the large number of small and medium sized companies that may not be able to return to operation as reopening occurs, the economic rebound may not be as strong as current projections estimate either.  The continued large number of new cases in the United States may be a contributing cause as some states either delay the speed of reopening or face larger resurgence of cases once reopening occurs because of the continued high level of COVID-19 in the population.

While the number of cases in the United States has at least stabilized and has been  trending down, the rate of decline is far lower than that experienced in western Europe.  For example, the United States continues to have the largest number of new confirmed cases of any country in the world, many weeks after the U.S. peak.  Indeed in today’s European Centre for Disease Prevention and Control report on the COVID-19 situation update worldwide, as of 2 June 2020, the U.S. has 302,679 cases reported in the last fourteen days of the continuing to grow global total of 1,477,362 new cases in the last fourteen days.  European countries have relatively few (7,973 for Spain; 7,311 for Italy, 9,188 for France and 6,818 for Germany).  https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases.  In a prior post, data were shown for various countries over the period December 31, 2019 – May 24, 2020.  Most European countries show reductions from their peak two week period of 80-90% while the United States has shown declines of only 23.5% through May 24 (slightly more through June 2, 26.0%).  See COVID-19 – new hot spots amidst continued growing number of confirmed cases,  https://currentthoughtsontrade.com/2020/05/25/covid-19-new-hotspots-amidst-continued-growing-number-of-confirmed-cases/.  To the extent that IMF projections are based on infection rates that decline more rapidly than the actual U.S. experience with COVID-19, that would be another reason to believe the IMF projected contractions for the U.S. are too low. 

On the trade front, the United States was doing well until mid-March.  But the COVID-19 challenges that resulted in government actions led to 1st quarter 2020 exports from the U.S. of goods being down 1.2%, services exports down 21.5% for a total contraction of U.S. exports of 6.7%.  U.S. imports of goods were down 11.5%, led by contraction of imports from China due to various additional duties imposed on Chinese goods.  U.S. imports of services were down 29.9% for total imports being down 15.5%.  See Bureau of Economic Analysis, News Release BEA 20-23, May 28, 2020 at 7, https://www.bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-second-estimate-corporate-profits-1st-quarter.

The U.S. Department of Commerce, U.S. Census Bureau puts out a “Monthly Advance Economic Indicators Report”.  The April 2020 report was released on May 29th and showed estimated data for imports and exports of goods (seasonally adjusted).  April exports for the U.S. were down 29.9% with individual sectors being down 5.3% (food, feeds and beverages) to 70.8% (automotive vehicles).  Similarly, U.S. imports were down 20.6% for April with sectors varying from being down 5.6% (foods, feeds and beverages) to 57.0% (automotive vehicles).  https://www.census.gov/econ/indicators/advance_report.pdf.

Thus, U.S. trade contractions in April suggest that the range put forward by the WTO (13-32% for the year) is probably the correct range. 

Rising Number of COVID-19 cases in South America and in India

The IMF revised 2020 projections from April likely understate the negative effects that emerging and developing countries are experiencing.  Specifically, Latin America and the Caribbean are seeing major outbreaks of COVID-19 cases with the peak not yet reached in a number of important countries like Brazil, Peru, Chile and Colombia and also in Mexico.  Depending on developments in these major countries and the spread in others, the likely economic contraction in the region could be significantly higher than the 5.2% contained in the April 2020 projections by the IMF.  Brazil was estimated to experience a GDP contraction of 5.3% by the IMF, but recent estimates show a steadily growing projected contraction, latest figures showing 6.25%.  See https://www.statista.com/statistics/1105065/impact-coronavirus-gdp-brazil/.  With the COVID-19 cases still growing in Brazil, the contraction in GDP for 2020 will likely continue to worsen.

Similarly, India was projected to have GDP growth of 1.9% in 2020.  The country’s challenges with COVID-19 cases are just starting with the current total number of confirmed cases at just under 200,000 but with nearly half of the cases reported in the last fourteen days (97,567 of 198,706).   Indeed, some recent projections by Oxford Economics now have India’s GDP contracting in 2020.  See https://www.icis.com/explore/resources/news/2020/06/01/10513907/india-gdp-growth-slows-to-4-2-lockdown-stays-at-manufacturing-hubs.

Other countries are also seeing increasing case numbers and the global totals of new cases have not peaked as yet which likely mean greater numbers of cases than most models have anticipated.  If so global contraction could be significantly worse than the April estimates of the IMF.

High national debt levels are growing higher   

The collapse of economic activity even for a few months is reducing tax revenues, increasing government spending in many jurisdictions and worsening national debt levels.  For example, in the United States the Congressional Budget Office blog from April 24 estimated that the U.S. budget deficit in 2020 and 2021 will be $2.7 billion and $1.1 billion higher than earlier estimates and that federal debt held by the public is likely to grow from 79% of GDP in 2019 to 101% of GDP in 2020 and 108% of GDP in 2021.  https://www.cbo.gov/publication/56335.  The actual deficits and federal debt are likely to be significantly higher as the CBO estimates are based on forecasts for GDP contraction that already understates the severity experienced through the first quarter and assumes no further federal assistance will be required to pull the economy out of the steep contraction being experienced in the second quarter.  As governors across the country have made clear, the serious budget shortfalls being experienced by the states because of closed businesses, reduced revenues and increased expenditures are not sustainable.  If these 2020 shortfalls are not addressed through federal legislation, the outcome will be large reductions in state and local services and massive layoffs of state and municipal employees including police, fire, health care and teachers.  So either the budget shortfall of the federal government is understated because of additional stimulus funding needs or the expected recovery of the economy (and hence government revenues) is overstated because of the challenges for many states.

Virtually every country is facing budget challenges as they attempt to address the COVID-19 pandemic and its economic fallout.  See, e.g., articles on growing budget deficits for France, Italy, Brazil and India; https://www.reuters.com/article/us-health-coronavirus-France-budget/france-more-than-doubles-crisis-package-cost-to-100-billion-euros-idUSKCN21R2J2; https://www.nytimes.com/reuters/2020/05/22/world/americas/22reuters-brazil-economy.html; https://www.reuters.com/article/us-health-coronavirus-italy-budget-exclu/exclusive-italy-sees-2020-budget-deficit-near-10-of-gdp-source-idUSKBN21Y2U9; https://economictimes.indiatimes.com/news/economy/indicators/indias-fiscal-deficit-may-shoot-to-6-2-of-gdp-in-fy21-fitch-olutions/articleshow/74928660.cms?from=mdr#:~:text=NEW%20DELHI%3A%20India’s%20fiscal%20deficit,Fitch%20Solutions%20said%20on%20Wednesday.  

Budget shortfalls, the need to borrow more money and the pressure to reduce national, regional and local services all affect the ability of nations to contribute to international institutions, to provide financial assistance to the poorest countries and to facilitate short-, medium- and longer-term growth.

Conclusion

The global COVID-19 pandemic is creating economic havoc in addition to the heavy health toll on countries around the world.  A global challenge of this magnitude hasn’t been faced since World War II.  The projections that have been made by multilateral and national organizations have been for huge contractions in world trade and in global economic growth.  Unfortunately, the estimates at least on global GDP contraction are likely too optimistic both in terms of the severity of the second quarter 2020 contraction and the anticipated level of  second half 2020 recovery.  Moreover, there is likely to be significantly more national stimulus programs needed to help economies recover increasing already huge national debts for many countries and the likely greater need for trade financing and debt support for many developing and least developed countries because of the severity of the global trade and GDP contraction. 

The challenges being faced affect the health and livelihood of billions of people but are occurring at a time of reduced trust in multilateral institutions, increased trade frictions between major nations and groups of nations and a lack of strong leadership within and among nations.  

How severe the damage to the world turns out to be from the pandemic will depend on –

(1) whether countries come together to ensure open markets;

(2) whether countries both coordinate information about and promote expanded production of essential medical goods to ensure adequate and equitable availability to all at affordable prices,

(3) whether countries support efforts of both public and private players on the development of effective vaccines and therapeutics and facilitate the sharing of information while ensuring equitable availability to all at affordable prices where breakthroughs occur,

(4) whether countries support multilateral organizations’ efforts and individually support the bolstering of health care infrastructure of least developed countries and some developing countries where COVID-19 cases could easily overwhelm internal capabilities;

(5) whether countries cooperate for a strong global recovery by pursuing stimulus programs that don’t distort markets and create other challenges to global participation, and by providing multilateral organizations with the resources to address debt and trade financing needs of the poorest among us.

There are some efforts to address each of the five items above although the U.S. announced withdrawal from the World Health Organization handicaps efforts reviewed in (3). 

More needs to be done and could be done with greater cooperation among the top 50 countries in the world.  However, we may be at the maximum of what is the art of the possible at the moment.  For the 7.8 billion people living on earth in 2020, let us hope that more is possible quickly.