Uphold trade while fighting COVID-19

Publicerad 23 april 2020

The rampant spread of the Corona virus across Europe and the implementation of draconian measures to contain it have had a disastrous effect on the European economy. Amid industry shutdowns and the looming threat of mass unemployment, European leaders need to optimize the conditions for business to survive while handling the pandemic. Maintaining free moment of goods on the Single Market and securing adequate supply of industrial goods used in our factories should be top priorities.

Mats Kinnwall, chief economist, and Joel Jonsson, senior trade policy advisor, The Association of Swedish Engineering Industries.

In Sweden, almost 70,000 people have been put on paid, temporary interruption in work, primarily in the automotive industry. In case of a total shutdown, the automotive industry in Sweden is losing more than 50 million euros (more than 500 million SEK) in added value each day. Other industrial sectors may soon follow, such as the machinery industry which may be affected in similar ways as the automotive industry. This has sparked a debate in Sweden on the conflicting interests of fighting the spread of the Corona virus and the economic consequences of shutting down the society through social distancing. An over-emphasis on containment may cause mass unemployment leading to severely diminished public health for decades to come. We need to be able to walk and chew gum at the same time.

Swedish universities and high schools have been shut down and social gatherings of more than 50 people have been banned across the country. Citizens are asked to avoid non-essential travel and those that feel ill or are over the age of 70 have been asked to stay at home. Yet, this is much less stringent than most EU countries. Germany and the U.K. have prohibited social gatherings of more than two people. In Italy, Spain and France we see near-total shutdowns, while our Nordic neighbors have closed bars, restaurants and non-essential shops.

Further, we have seen a rise in trade barriers on the European Single Market. Export control, border checks and shipping restrictions have severely limited the free movement of goods among European member states. This needs to be avoided at all costs and calls for better coordination on EU level.

Given the interconnectedness of the European economy, the economic effects of shutting down continental Europe permeates trade dependent countries like Sweden. When factories in France and Belgium closed due to social distancing, Swedish factories in the automotive industry followed almost immediately because of a lack of components for production. Despite having more relaxed policies to fight the Corona virus, the Swedish industry has been hit hard when suppliers are forced to shut down across Europe. 

It is essential to uphold trade, especially in a time of crisis. In addition to ensuring the free movement of goods on the Single Market and maintaining shipping and transports, the EU should suspend its import tariffs on scarce intermediate industrial goods [1]. Cutting tariff lines on strategic industrial goods would allow for European industry to source input for output from new supply chains and value networks in order to keep the manufacturing in the factories still open at home up and running. Industry would also be able to scale up production at facilities in third countries, like in Asia or South America, that are able to maintain manufacturing. Once a more balanced approach prevails across Europe and quarantines are lifted, industry will also have had a chance to ensure adequate supply of goods for manufacturing to start back up more swiftly.

The Corona pandemic has highlighted not only the interdependency among European industry, but also to suppliers outside the EU in a trading system based on global value chains. Some decisionmakers in Europe have drawn the conclusion that we need to be more strategically autonomous and self-reliant, in a shift towards more domestic production. This is not the way to go. As the global growth rate is slowing down, especially in Europe, liberalizing trade with emerging markets is more pertinent than ever. This will allow for European industry to continue to be prosperous through specialization and developing competitive advantages, while sourcing from cost effective and value adding global networks. This, however, highlights the importance of increased global cooperation by reinforcing the multilateral trading system and negotiating ambitious bilateral trade agreements.

The interconnectedness of the European economy necessitates a more coherent response from the member states – one that balances public health and economic interests. The public health consequences of a deep and prolonged recession or even depression need to be taken into consideration. European prosperity is contingent upon a vibrant industry. There are actions that can be taken to help European industry while doing our utmost to contain the Corona virus. These actions must be taken now.

Mats Kinnwall, chief economist

Joel Jonsson, senior trade policy advisor

The Association of Swedish Engineering Industries