Trade Policy Can Lead Covid-19 Economic Recovery

This piece is part of the Strategic Trade series supported by the Atlas Network.

According to the International Monetary Fund, the global response to Covid-19 has already eclipsed $9 trillion. This is sure to rise. A first glimpse of the inevitable fiscal crises that mitigation response is creating comes from Zambia, which is struggling to navigate debt relief. Even more distressing, the World Bank predicts that at least 70 million people will be pushed back into extreme poverty as a result of this pandemic. Any crisis can serve as an inflection point for major shifts in public policy, but Covid-19 may be the most important humanitarian crisis of the twenty-first century. Every tool at the United States’ disposal should be considered in this light. U.S. trade policy may prove to be one of the most powerful such tools for heading off disaster.

The United States should seize this opportunity by prioritizing any swift changes it can make to liberalize trade. Encouragingly, new research from World Bank economists suggests that steps toward increased openness and liberalization can be expected in the wake of fiscal crises. In this way, our current circumstances favor change. Several factors can help the United States frame a new approach.

First, there has always been a tension between U.S. foreign aid development efforts and trade policy, which often work at cross purposes. The latter, if restrictive, has the effect of limiting economic opportunity for developing countries. The former is an ill-fitting band-aid that may soften the indirect impacts of those trade restrictions but also creates disincentives for needed market reforms. U.S. trade policy should be better aligned with foreign policy objectives, remembering that a strong presumption of opening trade is a win-win.

Secondly, foreign aid is likely to shrink in the wake of Covid-19, exacerbating the urgency for increased trade liberalization. One of the most significant indicators of this trend comes from the United Kingdom, where the Department for International Development was recently subsumed by the Foreign Office with accompanying budget cuts. This mirrors the larger forces at play globally as donor nations consider scaling back both the scope of their mandates and the spending dedicated to foreign aid efforts. Organizations such as Oxfam, for example, have already cut 1,450 staff since Covid-19 began, and many other organizations are likewise feeling the crunch. All of this puts more urgency on a renewed effort to liberalize trade to prevent a potential global poverty nightmare.

Third, there are streamlined opportunities on the United States’ doorstep to increase trade. The United States should inventory them and consider them seriously, even if they fall short of the ideal. For example, Eugenio Mari Thomsen, an economist at the Fundacion Libertad y Progreso in Argentina, argues that if the United States were to join the recent MERCOSUR-EU agreement, it could quickly expand that economic bloc to 600 million people. He cites the 2017 reinstatement of Argentina as a beneficiary of the United States Generalized System of Preferences as having had a major psychological impact on the region, encouraging more openness to trade and international cooperation. Any readymade opportunities to facilitate trade in the short term can help to insulate struggling communities from some of Covid-19’s worst economic effects.

At the same time, the United States should also be working to build support for unilateral U.S. leadership for the long term. Dr. Sarath Rajapatirana of the Advocata Institute in Sri Lanka makes such a case for U.S. leadership, warning that preferential agreements may achieve trade diversion rather than the trade creation the United States truly seeks.

Lastly, local efforts to increase trade opportunities help to highlight the perverse impacts recent trends in trade policy have had on low-income populations. In Indonesia, the nongovernmental and nonpartisan Center for Indonesian Policy Studies (CIPS) has been working to reduce and eliminate non-tariff restrictions on rice imports, pointing to disproportionate burdens on household food budgets in low-income communities. CIPS Head of Research Felippa Amanta has said that, in the Asia-Pacific region, applied tariffs have halved in the past two decades but that non-tariff measures have increased fourfold. She also said the uncertainty of U.S. trade policy, particularly with China, has colored domestic trade policy in Indonesia, pushing it in a more cautious and protectionist direction.

Of course, there are hundreds of other examples that point to the outsized impact the United States can have on ending global poverty through liberal trade. Foreign aid alone cannot answer humanitarian challenges. Free and open trade is a much more powerful and sustainable solution. By prioritizing fast-tracked opportunities to increase free trade while building support for a more unilateral strategy in the long term, the United States can prevent one of the worst humanitarian disasters of the last 100 years and save its own economy in the process.

Matt Warner is the president of Atlas Network, a grantmaking organization committed to supporting local vision for change.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Matt Warner

President, Atlas Network