Israel on Sunday (17 January) advanced plans for 780 new settler homes in the occupied West Bank, settlement watchdog Peace Now said, adding the move puts Israel “on a collision course” with the incoming US administration.
Right-wing Prime Minister Benjamin Netanyahu had last week directed authorities to approve construction of the units in occupied Palestinian territories.
That came less than two weeks before President Donald Trump’s pro-settler administration was due to leave office.
All Jewish settlements in the West Bank are regarded as illegal by much of the international community.
But Trump’s administration, breaking with decades of US policy, declared in 2019 that Washington no longer considered settlements as being in breach of international law.
US President-elect Joe Biden, who will be sworn on Wednesday, has indicated that his administration will restore Washington’s pre-Trump policy of opposing settlement expansion.
Peace Now, an Israeli civil society group that opposes the occupation, said that Israeli planning authorities had approved “plans to build 780 housing units in settlements, most of them deep in the West Bank.”
“Not only will this settlement activity erode the possibility for a conflict-ending resolution with the Palestinians in the long-term, but in the short-term it needlessly sets Israel on a collision course with the incoming Biden administration,” the group said.
A spokesperson for the European Union said the move was “contrary to international law and further undermines the prospects of a viable two-state solution.”
The EU statement called on Israel to “reverse these decisions on settlements and show leadership to rebuild trust and confidence between the parties, which is necessary for an eventual resumption of meaningful Israeli-Palestinian negotiations.”
Beyond the change in Washington, experts say Netanyahu also has domestic political reasons for pushing settlement expansion.
Electioneering is intensifying ahead of Israel’s 23 March poll, in which Netanyahu is expected to face a fierce right-wing challenge from Gideon Saar, a defector from the premier’s Likud party.
Saar, a prominent pro-settler voice, split with Likud late last year to challenge Netanyahu, Israel’s longest serving premier.
“Prime Minister Netanyahu is once again putting his personal political interests over those of the country,” Peace Now said.
Israel has occupied the West Bank since the 1967 Six Day War.
Following years of settlement expansion, there are currently some 450,000 Jews living in the West Bank amid an estimated 2.8 million Palestinians.
Governments worldwide largely see settlements as an obstacle to a two-state solution to the Israeli-Palestinian conflict.
COVID-19 has disrupted the global economy, and in particular international trade. While the number of Chinese and global coronavirus infections rose rapidly during the first quarter of 2020, new export orders declined by as much as 50% for both goods and services during this time (WTO 2020). Chinese exports suffered the first blow, declining by around 17% in January and February 2020 relative to the previous year and remained depressed throughout the first half of 2020 as global infections soared (Figure 1).
Source: Friedt and Zhang (2020) based on trade data published by the General Administration of Customs of the People’s Republic of China (GACC) and COVID-19 statistics reported by China’s National Health Commission and the European Centre for Disease Prevention and Control (ECDC).
Parallels between the trade effects of the current pandemic and financial crisis of 2008 have been drawn, and some researchers anticipate the pandemic-induced contraction in international trade to overshadow the GTC of 2008-09 (Baldwin, 2020a). Baldwin and Freeman (2020) and Baldwin and Tomiura (2020), for example, argue that, unlike the financial crisis which stifled global demand for traded products, the pandemic triggers a `triple effect’ on trade through the following three channels:
1) Disruption of domestic supply
2) Reduction in global demand
3) Contagion effect spread through disrupted global value chains (GVCs)
Indeed, several recent studies have investigated the role of GVCs in spreading the economic shock originating from the COVID-19 outbreak in China. Sforza and Steiniger (2020), Meier and Pinto (2020) as well as Eppinger et al. (2020) show that the presence of global supply chains magnify the effect of the pandemic-induced production shock and that the resulting disruptions of output, employment, and trade vary with the degree of integration in the global production network.
But there is more to it than the one-directional spillover effects from the disruption of Chinese production onto foreign consumers and producers. The real danger of the pandemic-induced disruption of global production networks lies in the feedback effects that amplify the original shock and spread it through the entire chain of production. In a recent study (Friedt and Zhang 2020), my co-author and I show that GVC contagion has the potential to create a vicious cycle wherein linkages to Chinese production not only cause welfare losses in foreign countries, but also backfire into China through the disruption of foreign suppliers of intermediate inputs essential to Chinese exports. The results are lagged waves of trade disruptions that again ripple through global supply chains.
China, of course, has become the central node for many of these global production networks. Just over the last decade, the global dependence on Chinese intermediate inputs has grown exponentially. In 2006, for example, the network of countries heavily dependent on China – i.e. those who received more than 5% of the value added in their own exports from China – was comprised of a sparse list including Hong Kong, Macao, Singapore, and South Korea (Figure 2a). By 2016, this network of countries expanded substantially and included 27 nations, many of which are major exporters of intermediate inputs themselves. In fact, many of the countries which receive more than 5% of the value added in their own exports from China are also major suppliers of intermediate inputs to Chinese exporters. Among the top 20 foreign suppliers of Chinese exporters, countries such as South Korea, India, the UK, the Netherlands, Canada, Singapore, Thailand, Hong Kong, and Malaysia are also heavily dependent on Chinese intermediate inputs (Figure 2b). These interdependencies are the DNA that make up the complex GVCs we observe today and drive the potential vulnerability of international trade and integrated economies.
Source: Friedt and Zhang (2020) based on UNCTAD-Eora Global Value Chain Database
Source: Friedt and Zhang (2020) based on UNCTAD-Eora Global Value Chain Database
Given the rapid growth of and dependence on GVCs as well as China’s central role within these international production networks, it is not surprising that GVC contagion is one of the key mechanisms through which the COVID-19 pandemic influences trade. What is surprising, however, is the dominance of this effect over other prominent transmission channels. In our paper, we estimate that the pandemic-induced reductions in Chinese exports during the first half of 2020 may be as large as 45%. They demonstrate that the vast majority – around 75% – of these losses are attributable to GVC contagion. In contrast, the domestic supply and international demand shocks explain approximately 10% to 15% of the net reduction in Chinese exports in aggregate (Table 1).
We show that these fascinating aggregate shock patterns can be explained by the persistent, yet lagged, negative influence of GVC contagion on Chinese exports, while the effects of the shocks to domestic supply and international demand reverse after just two months. During the month of a rise in new infections, for example, the international demand shock causes around 50% of the disruption of Chinese exports, while GVC contagion and the domestic Chinese supply shocks explain around 35% and 15%, respectively. Two months thereafter, both the international demand shock and domestic supply shock overturn. Import substitution by adversely affected foreign countries stimulates Chinese exports above the COVID-19-free counterfactual (Table 1). As a result, the international demand and domestic supply shocks offset some of their initially negative impacts and appear as less important contributors to the net changes, or losses, in Chinese exports in aggregate.1
Table 1 Aggregate pandemic effect and individual shock contributions
Notes: Predicted levels of exports are based on regressions reported by Friedt and Zhang 2020. Column (1) reports the predicted relative changes in Chinese exports against a Covid-free counterfactual. Columns (2) through (4) report the relative contributions of the domestic supply shock, foreign demand shock, and GVC contagion to the predicted change in ex- ports.
Source: Friedt and Zhang (2020)
The dominance of the estimated impact of GVC contagion sets the current pandemic effects on trade distinctly apart from those explaining the Great Trade Collapse (GTC) in 2008-09. Many researchers have argued that the 2008-09 GTC is largely attributable to the collapse in global demand due the financial crisis (Levchenko et al. 2010, Benguria and Taylor 2020). In contrast, our estimates suggest that the majority of the pandemic induced GTC of 2020 can be explained by the unparalleled disruption of GVCs and the reversal of the international demand shock just two months after the initial outbreak.
Based on these findings, it is clear that policy recommendations to overcome the adverse trade effects of the pandemic must deviate from the demand-centred instruments proposed in response to the GTC of 2008-2009 (Benguria andTaylor 2019). In addition to stimulating demand, policymakers may consider the resilience of and dependence on GVCs. Already, we observe a tendency away from further integration across countries and a slowdown in globalisation. Although some researchers argue that we have not entered an era of deglobalisation (Antrás 2020), the fallout from COVID-19 and the disruptions of many essential industries may fuel political efforts to further reduce the dependence on international suppliers and limit the vulnerability to international supply shocks.
But is deglobalisation the only solution? It seems not. Instead of severing ties to reduce international dependencies and thereby abandoning the efficiencies gained from GVCs, policymakers may be better served by considering the improvement of the resilience of international production networks. As my co-author and I show, among the 43 export industries included in the analysis, the most exposed industries are, on average, more than twice as vulnerable as the least exposed sectors. While some of this variation in exposure is undoubtedly attributable to the innate complexities of the production processes of certain industries, at least some of this vulnerability arises from the uneven distribution of dependencies across foreign suppliers. As Table 2 shows, some of the least exposed Chinese manufacturing industries rely on the same set of top foreign suppliers as the most exposed sectors but achieve a slightly more even distribution across the network. As a result of these marginal deviations in production networks, the influence of a heavily affected country, such as the US, is downplayed by the relatively smaller dependence on any one specific foreign supplier. Accordingly, the strengthening of GVC resiliency may involve a broadening (rather than severing) of international ties and trade relations and encouraging more diversified global supply chains.
Table 2 GVC contagion by Chinese export industry
Notes: Calculations of GVC contagion depend on the data on foreign-country-to-Chinese-industry Foreign Value Added provided by the UNCTAD-Eora Global Value Chain Database (Casella et al., 2019). We merge the FVA data with Chinese trade statistics based on a two-digit HS classification. Our concordance between the Eora GVC database and the GACC trade data aggregates industries across the two datasets and yields 43 matching export industries. The concordance is available upon request.
Source: Friedt and Zhang (2020)
Baldwin, R (2020), “The greater trade collapse of 2020: Learnings from the 2008-09 great trade collapse”, VoxEU.org, 07 April.
Baldwin, R and R Freeman (2020), “Supply chain contagion waves: Thinking ahead on manufacturing ‘contagion and reinfection’ from the COVID concussion”, VoxEU.org, 01 April.
Baldwin, R and E Tomiura (2020), “Thinking ahead about the trade impact of covid-19”, Chapter 5 in Economics in the Time of COVID-19, a VoxEU.org eBook CEPR Press.
Benguria, F and A M Taylor (2020), “After the panic: Are financial crises demand or supply shocks? Evidence from international trade”, American Economic Review: Insights, 2(4): 509-526.
Eppinger, P, G Felbermayr, O Krebs, and B Kukharskyy (2020), “Covid-19 shocking global value chains”, CESifo Working Paper No. 8572.
Friedt, F and K Zhang (2020), “The Triple Effect of Covid-19 on Chinese Exports: First Evidence of the Export Supply, Import Demand & GVC Contagion Effects”, Covid Economics 53: 72-109.
Meier, M and E Pinto (2020), “Covid-19 supply chain disruptions”, Covid Economics 48: 139–170.
Sforza, A and M Steininger (2020), “Globalization in the time of Covid-19”, Covid Economics 19: 159–210.
World Trade Organization (2020), World Trade Statistical Review 2020.
1 We arrive at the these conclusions by constructing a new dataset that combines Chinese export data with international Coronavirus statistics and information on global production networks and leveraging recent advances in the theory GVCs (e.g. Antás and De Gortardi 2020, Sposi et al. 2020) to develop a novel measure of GVC contagion.
President, World Bank Group; CFR Member
Founder and Chief Executive Officer, RockCreek; Member, Board of Directors, Council on Foreign Relations
World Bank President David Malpass discusses global economic recovery from the COVID-19 pandemic.
Director, Global Strategy and Global Macro, Eurasia Group
General John W. Vessey Senior Fellow for Conflict Prevention and Director of the Center for Preventive Action, Council on Foreign Relations
Adjunct Senior Fellow, Council on Foreign Relations
President-elect Joe Biden’s call to “build back better” after the pandemic is an invitation to renovate America’s outdated neoliberal version of capitalism. The more successful variants of market capitalism found in Europe or, better, in California, point the way forward.