Trade and COVID-19

Show Notes

DDG Wolff: Time to start planning for the post-pandemic recovery World Trade Organization, April 9, 2020

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Transcript

Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the audio before quoting in print and write yeutterinstitute@unl.edu to report any errors. Transcripts will be posted within one week of the show.

Jill O'Donnell: Welcome to Trade Matters, the podcast at the Clayton Yeutter Institute of International Trade and Finance at the University of Nebraska Lincoln. I am Jill O'Donnell. Our guest today is David Morfesi, Special Counsel and Director of International Trade at MinterEllison, Australia's largest law firm. David previously served as an International Trade Advisor for the United States government in Washington, DC and Geneva, including serving as a delegate to the World Trade Organization and the World Health Organization.

All right, David, thanks so much for joining us from Adelaide to be on Trade Matters today.

David Morfesi: Thank you, Jill. Wish I was there.

Jill O'Donnell: Well, you were supposed to be here, as you know. You're right now teaching a course for students in the University of Nebraska College of Law that is also open to some graduate students in economics and agricultural economics, on trade with China. So I'm sure you've gotten a lot of questions from those students as you're now teaching that course remotely. So we're glad to have you join us though from down under, even though you can't be here in person.

I'd like to talk with you today a little bit about the course that you're teaching on US trade with China, but also about the COVID-19 pandemic, and how that might be affecting trade, how trade might come into play when this crisis winds down and the economy gets going again, as well as how perceptions of the US China trading relationship might be changing because of this outbreak. So as of today, there are over 1.3 million confirmed cases of COVID-19 around the world, with 347,000 of those in the United States according to Johns Hopkins University. But we've also seen a surge in protectionist trade measures in reaction to this crisis. As I'm sure you've seen, the US and other countries, about 68 others is the number that I've seen, have restricted some medical goods exports since the beginning of this year. And other countries have put in place restrictions on exports of certain food products. So there's a lot to talk about here. I've also seen some dire predictions for the global economy and the US economy. And I'll just mention one I read this morning in the wall street journal by Mark Zandi of the firm Moody's Analytics who said today that there's nothing in the Great Depression, he believes, that's analogous to what we're experiencing now. So a lot to talk about here. But I'd like to start by asking you about a really interesting element of your background as a trade negotiator. You previously served as a delegate to the World Health Organization. So tell us a little bit about what that was like. What's the role of a trade person, so to speak, at the World Health Organization? And what specifically did you do there and what did you learn that impacts the way you're thinking about this Covid-19 pandemic today?

David Morfesi: Well, Jill, this really is the most focused situation on the relationship between public health and trade. That couldn't even contemplate it. It's nothing we've seen before. And it really focuses how trade should be viewed in a situation like a WHO setting. This is a humanitarian crisis. This is a public health crisis. It has immense economic impact. And it's going to continue to have incredible economic impact for years to come. But at this point in the pandemic, that's a bit of the pimple on the pumpkin. Yes, we do need to address that. We do need to make sure that we use all the tools necessary to move goods, to have services as fluid and flexible as they need to be to get the right care to the right people on the right goods to where they need to be, to move food where it needs to go. But remembering that first and foremost, this is a public health crisis. And the WHO, at the time there, was no crisis. Well, there was a potential crisis, which is why I was there. One of the reasons I was at WHO, and one of the negotiations I took part in was pandemic influenza preparedness. And it doesn't seem like we're terribly prepared, but the actual issue was sample sharing of viruses. And my role in that particular negotiation was basically to make sure the economics didn't get into the way. It didn't get in the way of absolutely necessary public health function of immediately sharing influenza strains with places like the CDC and centers in Europe who could work on a flu vaccine in a very short order. And it was interesting being the trade person in many cases in a room with 400 public health officials. And my role there was to keep some level of sanity when discussing trade issues, while the public health officials were absolute top experts in their field when they needed to have access to facilities, to goods, to services, and they assumed them. They said, "Well, first thing you'll need is a million of these devices." "Well, how are you going to get them? And what are you going to do?" "Well, they should all be free, of course." "Okay, let's talk about that." And I would try to help steer the conversation in a way that would actually be something that could be accomplished, something that was based in reality. Because if any part of the response was to fall down, was to not happen, then the response is not effective or could be either diminished or crippled. So the trade conversation there was a rather uncomfortable fit at times, but it was rather necessary to have.

Jill O'Donnell: So I think your phrasing there was interesting, where you talked about how your role, or an important part of your role, was to make sure that economics didn't get in the way of sharing influenza strains so that different organizations could work quickly toward a vaccine. What do you think is happening today on that score? So when a situation like this happens with a novel coronavirus, and countries are scrambling to respond, do you see that there are information sharing and economics issues that are getting in the way of the sharing that needs to happen in terms of that type of medical sampling or medical information in order to develop and deploy a treatment or a vaccine?

David Morfesi: Well, when I say they get in the way, it's not actually economic or business or financial issues that are hindrance in themselves. I'm here in Australia and the government is pouring money onto different measures to fight this pandemic. And from my perspective, we have a very low rate of infection here and very low mortality rate so far. So I can't fault them for their public health response. Money's not the issue and economics aren't necessarily the issue. It's people's reaction and people's perception that trade and public health can be at cross purposes rather than to be symbiotic. And that trade can be a tool, and it is a necessary tool, to get things and get to get solutions from A to B. So the first thing that happens in a situation like this is that people protect themselves. They look out and see what is the threat. You mentioned protection has measures being put into around the world. It's perfectly natural for a country to want to know at this point in time where its medical supplies are, and where they're going. However, it's also important to keep those trade avenues open, to be able to move them where they need to be and where they can do the most good and where they're going to be necessary for, really, for their humanitarian purpose. There's a balance. You have to protect your own population, and at the same time you have to be open to be able to help others.

Jill O'Donnell: Right. So I think this COVID-19 pandemic has really laid bare the sensitivity of the medical supply chain around the world. There's a lot of medical equipment and medicines are made in all different parts of the world, and some have been calling to bring back the supply chain to the United States, for example, for certain medicines or medical equipment. And as you said, it's very natural for countries to want to do that or to look inward during a crisis. But just today I saw it at the World Trade Organization Director General said that imposing export controls on medical supplies and trying to force those supply chains to go domestic, to bring them back, will do more harm than good at the end of the day in fighting the Covid-19 pandemic. So is this natural tendency for countries to want to look inward and to try to refashion manufacturing so that those things can be made in their own countries, is that going to backfire?

David Morfesi: Well, obviously, there will be different schools of thought on this. But it's true, if you think about any supply chain in any circumstance, you can't just build them. You can, but it's never efficient, and it's never as effective as an organically developed system. And if things move the way that demand allows, and that trade that's liberalized will let them, that allows for the efficiencies that can really be effective at a time like this. You think of face masks, it's not technical stuff. It's not that hard, but it's not something that's really done in the United States very much and very often. Most of those come from abroad where they're set up to make them. So why aren't we? There is some domestic production, some production can be switched from developing some goods to other goods, but why would you close the door to that? Or would you encourage others to do the same? Because when you protect your own patch, the reaction is that everybody else will turn around and do the same. So when one door closes, well the number you threw out was 68 more closed behind it. 68 countries so far have put some sort of export control on medical devices, and we know from trade in general that just slows things down. When you liberalize these things, you want to get them, you want to get them to where they need to be. That speeds it up. That takes away the cost and time element, and it gets things to where they need to go.

Jill O'Donnell: So shifting gears just a little bit, there have also been disruptions in the flow of other goods, intermediate and final goods, as a result of this pandemic. And as just one example, I saw that some Chinese buyers reportedly canceled purchases of US pork, over 45,000 metric tons of it, because pork imports were piling up at Chinese ports and so they canceled further purchases. That's just one small example. Do you see that as kind of a short term disruption, or is this pandemic going to more fundamentally reshape where food goes, particularly food exports from the US?

David Morfesi: I'd love to have a very rosy outlook on some of this. And for temporary disruptions, that's quite often the case. It's a blip. It's a bubble. I've heard media outlets and I've read articles that talk about this spreading like the ripples on a pond. And it doesn't spread like ripples on a pond. That's the wrong analogy. It's more like an echo in a canyon. And what happens here is that it starts somewhere, and here it seems to have started in Wuhan in China, and spread out from there. But it didn't just go out. It reverberates and it bounces off of everything it hits. So the reactions are just important to the sound, to the echo that comes back, as the initial splash in the middle that sends out the wave. What happens is that it's now hit Australia. And while China is opening up, Australia is shutting down. And so while the Chinese factories may be restarting at the moment, and Chinese people may be going out again and they may be buying more food and more goods and maybe starting to produce and go back to a normal way of life, Australia is not buying anything. They're not producing anything here. Our factories are closed, our people are at home. And the same in the US, a lot of people are at home. They're not out consuming. They're not going through restaurants. So they're not going to the cinema, they're not buying. So that is the echo that comes back to China. The Chinese are opening up and you're hearing that suddenly other places in China are locking down and taking care. This thing isn't gone, so we can have waves of this go through. And every time there is, that supply chain is impacted. And those disruptions, as you know, carry forward. A supply chain, like I said, isn't a today or tomorrow thing. It's a long-term. And so let's take something that's not going to rock on the dock, like pork. Wool from Australia to China. Walmart is full of clothing made with wool from sheep in Australia that was sent to China. When those factories shut, the wool piles up and there's no place for it to go. Okay, the factories are open. Nobody's sending wool because we're shut. Then some point or another that supply chain gets up, gets going. Do those clothes go back? Or where are they going to go? Is there even a buyer left to buy them? There is a lot going on in the echoes in the Canyon. Haven't stopped reverberating.

Jill O'Donnell: Yeah, certainly. That's true. What do you think about how this pandemic might change views of China when it comes to trade? And so we've seen some criticism that the Chinese government was slow to share information on this outbreak, and I wonder what your view is on whether the situation only bolsters the perspective, which I think was propelled a bit by the trade war with China, that the US should diversify away from China and find other export markets? Or will there'll be relief around the world that China's back up and running ports are working again, supply chains are moving again, as this blows over? Do you think there'll be some kind of long-term shift in the view of the US China trading relationship, or will there just be relief that this huge market, this very important market is back up and running or not?

David Morfesi: I think the reaction to this will be as unprecedented as the event itself. I was in New York on September the 11th, and was a somewhat young trade negotiator in that period. And I was very popular around the world for a good period after that because there was a sentiment that, wow, something short and startling happened and it shows you that we're sort of all in this together. This is longer, this is longer term and there's a lot of uncertainty to it. And there's a lot of time to think about it, which is where you get competing views of we should be open, no, we should be closed. So rather than build the we're all in this together mentality, too much time to think about it could be a problem in terms of rebuilding some of those relationships. Is that a bad thing? Well, diversifying your supply chain, and diversifying your customer base are all good things. If the economic benefit is that you can be more resilient and have better prospects to keep your economy and your business and your supply chains, and particularly supply chains for critical need items, if you can keep those going, I think in the end the world will welcome China back. There is a very big upside to having their productivity and their market there. I think they were adopted as a trading partner for a reason. It's just that they're not the trading partner that anybody expected. They're not a Western trading partner. They are China, and they do things the way China does things. It's an education for the international trading system, and for the world, as to have a deal with China. And it's one that we need to learn quite a few lessons on, and not a small number of those are in economics and trade.

Jill O'Donnell: So you're teaching a class right now on the topic of US trade with China, as I mentioned at the outset, to law students as well as graduate students in economics and agriculture economics. What kinds of questions are you getting from them early on right now in this course about US trade with China in light of the Covid-19 pandemic?

David Morfesi: It's funny, because the questions I'm getting, and they really cut to the heart of some of it. There's really two types of questions. I'm getting questions that are very typical trade questions. How are we supposed to deal with a country that doesn't play by the rules? How are we supposed to deal with such a large trade deficit? And those questions really come into focus in a time like this, because in normal times you just answered the question. In times like this, you ask, is this the right question to be addressing, or is this something more pragmatic we need to be looking at? And that actually goes to the second type of question. Why is China so asymmetrical, so outside the norm in the world trading system? What's different about them? And that really starts to get to a very important point, and one that's often ignored, is that China, 40 years ago, they represented less than 1% of world trade. They didn't have an intellectual property office, they just weren't open. And now they are where they are. China didn't develop as a trader in 40 years. They embraced trade as a country that had developed over thousands of years. They didn't stop being Chinese when they opened up to be involved in a Western designed world trading system. And so understanding China, and understanding their motivation, the way they think, the way they make decisions, is important right from the smallest trader going to do business there to the United States government or the Australian government or any other government going and sitting down and talking to them. China is China. It's not a trading partner that just came along with the latest evolution of a good idea. They brought their own way of doing things from a very closed perspective to a very open system. They are asymmetrical, and they are an anomaly in the system and they're the biggest game in town. That's what we're dealing with, and that's what the students are starting to come to already, which is terrific. That's where I wanted them to arrive. They're starting from that point. So your students are quite switched on. I'm very pleased with that.

Jill O'Donnell: Well that's good to hear. And I think what you just said there at the end, it's a really concise summary in understanding China here is that it's an anomaly in terms of having come into a Western trading system, but still being Chinese as you said, but also the biggest game in town. I think that right there is the heart of the difficulty in working through some of the issues with respect to China. I've had many conversations with you in the past, David, I think I detect that you're an optimist by nature. And you've said before that there's always a phoenix that rises from the ashes of an emergency, so to speak. So in your view, what's the phoenix that we're going to see coming out of this crisis, even if that takes a while?

David Morfesi: It will take a while in this case, it will. But by analogy, I'm not a thin guy. I carry a bit of weight and I've dieted many times in the past. And my advice to people when I'm successful on a diet and they say, "You look so good, how did you get that way?" My advice is always, "Start out as a very fat guy." Because then you drop weight quickly, and you can claim a victory. Whenever there's a collapse in a system, recovery is recovery. It's not a zero sum game. So every game you get is better than where you were. The US economy has a long history of phoenixes rising from the ashes. It is opportunity in entropy. And this is not going to be different, and it's going to depend on trade. It's going to depend on opening up, getting back to business and taking advantage and learning from this experience. Learning how to build resilient supply chains, learning how to work remotely, how to do things like we're doing right now. I'm involved in negotiations right now that are being conducted remotely, and they have to be as efficient as what we would be doing if we were sitting across the table from one another. So we're learning very quickly how to go about that. And it involves international trade and international commerce, because we're using digital platforms across jurisdictions. What is the phoenix that rises from the ashes? I'm hoping that at the end of this, when countries reopen, we can greet each other like old friends, like we missed each other. And believe it or not, we will have missed China. There are aspects of that relationship that a very important. Very important to farmers in Nebraska. They're very important to producers of all kinds of goods that supply chains were disrupted and be efficiencies that can be gained by working together are lost. When those come back, and we have a better idea of what the possibilities are in the world for this kind of disruption, we will have learned from it, and we will hopefully open up and be better prepared to conduct a resilient business and protect ourselves at the same time. Have a bit more of a safety net in place.

Jill O'Donnell: So you mentioned resiliency there a couple of times, and the idea that there needs to be more learning that should occur and that maybe will occur when a recovery begins here about how to build resilient supply chains. But do you think there's a risk at all that for some, there may be a view out there that a resilient supply chain is one that is domestic and not subject to disruptions of other kinds in international relations or foreign policy or other problems in various relationships between nations? Do you think that that view would take hold even more, or will there be enough optimist out there like you who say, "No, there are other ways to make our supply chains more resilient without trying to look inward and bring everything back home."

David Morfesi: In a short term, it is perfectly reasonable to put a lot of money into production of goods and services that are desperately needed, to divert resources to concentrate on particular areas to try to basically react to an immediate crisis. That's not terribly sustainable, and it disrupts the rest of the economy. Again, this is a humanitarian crisis and a public health crisis, so you do what you need to do. It's the recovery economically that's going to be critical, and at that point those are the things we can and should be focusing on once the public health crisis, once the protecting of lives directly is handled, is taken care of, we can trust that we are going to be okay. At that point you need a functioning system that is agile, that is ready to respond and able to grow. And if you have turned inwards, you don't have that agility, you have diverted and changed the flow that has grown rather organically, and you have diminished your capacity. It's the theory behind international trade and the growth of economic wealth for countries in doing so has been around for hundreds of years now, it's 200 years since Ricardo published. And it's this seminal work, and it is as true today as it was then. So really, turning inwards is absolutely critical to be able to do and to have flexibility to do so, to react to the kind of situations where you need to do something in the short term, you need a response, and you need it today. To look to that as a basis for your economy and your supply chains is really looking backwards, and it's looking to diminish rather than to grow.

Jill O'Donnell: Okay. So distinguishing between what makes sense in a crisis moment, or series of moments, or what makes sense in the absence of a crisis.

David Morfesi: I'd love to lighten things and make them sometimes silly because my students listen and they perk up. And it just reminds me of every movie you've ever seen... In the scary scene where the car goes over the bridge into the river and starts to sink. You ever notice that the person that gets out of the car is the person who takes a big deep breath, looks around, assesses the situation, then tries to roll down the window and swims to the surface? The person who struggles and tries to break the glass never gets out. It's how you react in a crisis. I always want to be the guy who takes the big deep breath and then checks his watch and says, "Well, I can probably stay underwater for another minute or so. And so how am I going to get out of here?" Rather than to be the person who is panicking and pounding on the windows. I'm not sure which one of those guys I am, and I hope I'm never actually confronted with that much of a panic, but I hope I rise to the test and remember those movies. But that's sort of the reaction. You don't always have a great amount of time to react, but you have to know what your options are and you have to know them from a perspective that is realistic and that takes an objective view. How has this been done up to this point? Is that still viable? Is there a way to make that work today, or do I need something else? To just shut the door is a natural reaction, and I don't necessarily fault anyone for doing it. But take that deep breath, look around and assess, what is my situation and how am I going to come out of the other end of it?

Jill O'Donnell: Thank you, David for that. We can always count on you for very apt and creative analogies. So thank you for bringing one into this conversation today as well. So last question, as I ask every guest on this show, tell us something that you've read lately about trade, book, article, reports, that's been particularly striking to you?

David Morfesi: These have been some challenging times in trade, starting with trade wars, and then graduating into a pandemic that makes a trade war seem rather insignificant. In all of these things, it is just as easy, and perhaps easier, for people to turn away from liberalized trade as it is for those of us who work in trade to try to use it to address shortcomings, to try to use it for benefit. During this period, I'd say the past- even past couple of years- the Deputy Director General of the WTO from the US, Alan Wolff, has been making speeches, and publishing opinion pieces. And his work has been just... it's a body of work now, and it's so straightforward. It's so clear and it's so pragmatic about how the trading system can address the current situation, the trade imbalances that have been perceived, how the multilateral trading system has benefits that we need to understand in order to take full advantage of them, and to safeguard them. His articles and his opinion pieces have been really sort of a beacon, and I commend them to anybody to hop onto the WTO website and have a look, because they posted there.

Jill O'Donnell: Yes, that's excellent to point out. And he's also been, as you said, making speeches. He has participated in some events through the Washington International Trade Association out of Washington, DC that anyone can tune into on YouTube. So he has been very visible in this. So thank you for pointing out his body of work, we'll certainly point our listeners to some of his recent pieces. David, thank you so much. It's always a pleasure to speak with you. And thank you for sharing your insights with us today on the Trade Matters podcast.

David Morfesi: Well, thank you for this properly socially distant opportunity to talk. And I really look forward to being back in Nebraska, and to seeing everyone again soon.

Jill O'Donnell: Thank you. We look forward to welcoming you back sometime soon as well. That's it for this episode of Trade Matters, thanks for listening. And a big thank you to Alex Boychosky and to Brianne Wolf for helping produce this podcast. Please subscribe to Trade Matters on iTunes, Spotify, Stitcher, or wherever you get your podcasts.

If you have ideas or topics you would like to hear about on Trade Matters, we'd love to hear from you. Send us an email at yeutterinstitute@unl.edu or follow us on Twitter at @YeutterUNL. Opinions expressed on Trade Matters are solely those of the guest or host and not the Yeutter Institute or the University of Nebraska Lincoln.