We are naturally focused these days on economic vulnerabilities close to home. As discussion turns to how business resumes, however, we also need to watch the global economy that we’re part of. Developments there point to another level of vulnerability that could prolong the new recession.
Consider that California is the fifth largest economy in the world, and its major ports — Los Angeles, Long Beach and Oakland — are among the nation’s largest. Most U.S. imports from and exports to Asia pass through them. Also, the Bay Area is also one of the most global economies in the nation, and a leading exporter of technology, medical devices, biopharmaceuticals and other products, and of services such as education, consulting, accounting and engineering services. It is also a leading portal for agricultural exports from the Central Valley. What happens in other economies therefore matters deeply. And there, the news isn’t good.
Shipping through the Port of Oakland, which supports 84,000 jobs in the region, dropped 11% in March compared to one year earlier. Long Beach and Los Angeles, the state’s two largest ports, also experienced large drops. The composite IHS Markit Purchasing Managers Index (PMI) shows plummeting activity around the world: 13.3 for the Eurozone, 12.9 for the UK and 27.8 for Japan (a level below 50 denotes shrinkage). Export orders will follow those numbers down.
National economic numbers support this. The International Monetary Fund predicts a drop in Eurozone GDP of 7.5%, and contractions of the United Kingdom 6.5%, Japan 5.2%, and China 4.9%. Mexico and Canada will also see major declines. These are California’s largest trading partners. Emerging economies, will be also be hit hard as commodity prices collapse and remittances fall. More than 100 countries are currently exploring emergency funding. Overall, the IMF predicts a 3% contraction in the world economy in 2020, compared to just a .1% drop in 2009 at the height of the Great Recession.
All this will directly impact trade. The World Trade Organization expects global trade to fall between 13% and 32%. Services such as travel and transport will be most affected. Trade will also fall in sectors such as electronics and automotive products that have complex supply chains. That will impact countries such as the United States, China, Korea, Singapore, Mexico and Canada. Besides shrinking markets, US exporters face another challenge: as the U.S. dollar strengthens the cost of what we export will increase.
The breadth of that projected range, 13%-32%, suggests the high level of uncertainty. There are two scenarios: one with a sharp drop now followed by an early recovery later this year, and another where the decline is steeper, the recession prolonged, and the recovery less complete — pushing a rebound into 2021 or 2022. The speed at which economies re-open is the major variable.
Another variable is trade policy. The last several years have seen the undermining of international institutions such as the World Trade Organization, and a broad-based U.S. withdrawal from multilateral engagement and leadership. Bilateral trade conflicts have grown, with tariffs imposed by the United States on a spectrum of countries, which have often retaliated. This pushed world trade growth into negative territory in 2019, even before the crisis, and increased costs for consumers. As just one example, Section 301 tariffs imposed in 2018 on imported medical supplies from China have increased costs and reduced U.S. access to urgently needed supplies. In a world on the brink of deep recession or worse, we can ill-afford unilateral restrictions that threaten to repress the world economy even more.
This is the time for a reset. We benefit from a global economy and cannot isolate ourselves from it. It is critical at this moment that the United States and its trading partners come together to reduce tariff and other economic barriers and strengthen global cooperation to keep trade flowing. Bilateral and regional trade negotiations should be approached from a new perspective, and focused efforts should be made to reform and strengthen — not undermine — the WTO.
All countries and their economies are impacted by the pandemic, and in this moment of peril we need national and global policies that help to lift all boats.