How will COVID-19 affect international trade?
The COVID-19 pandemic has affected 185 countries so far.
Several countries have put major production centers in lockdown to contain the outbreak and prevent the further spread of the coronavirus. The lack of parts, components and labor resulting from the lockdown has paused many global manufacturing production chains.
During pandemics, such as the current novel coronavirus outbreak, a supply-led recession is considered normal or even an efficient market response. But as the news arrives from different corners of the world and new data are becoming available, what is clearer is that the health and economic effects of COVID-19 are far greater and complex than first anticipated.
While the disruption in the supply chain is more visual, the pandemic has affected the demand side as well. When the demand for output falters, or output falls because of the negative supply shock, trade naturally slows.
The economics behind this is complicated because the decline in demand (or supply) occurs not only in the high-contact sector, such as tourism, but also in the low-contact sector. For example, people purchase less gasoline even though the gas stations remain open during the lockdown.
Then the question arises: What do people do with the money that is not spent on gasoline? In some cases, the unavailability of goods leads to increased demand for some other products. Take, for instance, people who have stopped going to restaurants for dine-in may be spending more on groceries. Others who are not making a trip to coffee shops maybe are buying more instant coffee for making Dalgona (a whipped coffee beverage) at home.
Switching between goods is not always easy because the option does not exist or simply because people have no desire. Similarly, changing the time of consumption, although possible, may not always be feasible. For example, some work-related travels may have been postponed, but some potential recreational trips, such as to Disneyland, never could happen.
Thinking of demand as the demand for final goods is easy, but demand by companies plays a big role in international trade. For example, idling factories by Ford and General Motors in the U.S. means reduced demand for steel, electronics and other components in other parts of the world as well. In 2019, the U.S. imported iron and steel from roughly two dozen countries. Therefore, in addition to the U.S., these countries likely would be affected.
In the globalized world, woes of one country are a source of sorrow for another country. What we are experiencing now is a synchronized drop in trade volume and trade value across countries.
Some of the declines in trade value can be explained by a drop in commodity prices, especially the drop in oil prices, but most can be attributed to trade volume. In the case of the U.S., a third of the decline in imports is attributed to oil prices. Trade in manufacturing and industrial goods such as autos, steel and chemicals is the hardest hit sector in the U.S., as it is in many other countries.
The narrative is different for trade in services. Post-lockdown recovery in China shows a persistent drop in the output of service sectors, while trade in services seems to be more resilient in the case of the U.S. For example, the trade in private services (business services) fell by 7% for imports and exports, which is far less than the drop in trade of manufacturing goods.
Trade was falling four times as fast as the gross domestic product (GDP) during the great trade collapse of 2008-2009. Even with this evidence, predicting the net effect of the current pandemic on the world output and trade is nontrivial.
Unlike the past trade crisis, this one has hit all major large economies immensely, which are also de facto hubs in manufacturing supply chains in international trade. As a result, those countries that are not hard hit by the novel coronavirus outbreak still are likely to be impacted through these global value chain disruptions.
That is, the potential economic devastation in countries and the regions that lack alternate resources to fill in the supply chain gap could be severe. Financial and credit constraints are likely to add to the fragility of these economies.
The worldwide decline in investment efficiency and demand for durable manufacturing products moved spending during the recession of 2008-2009 to nondurable consumption. This change in demand composition was associated with the great trade collapse.
Two-thirds of the collapse in global trade relative to GDP was attributed to a 23% reduction in efficiency in spending on durable manufacturing products, according to a 2016 study by Eaton, Kortum, Neiman and Romalis. Trade barriers are likely to amplify any such effect.
On a positive note, trade recovery following the 2008-2009 crisis was impressive. The recovery out of the current trade depression will begin with and largely will depend on how fast and effectively the human health aspect of the crisis is addressed. After that, the economic recovery will depend not only on the speed and coordination of policy response across governments but also on what path (protectionism or globalization and equality) these policy measures set countries and institutions across the world for recovery.
Anupa Sharma is an Assistant Professor in the Department of Agribusiness and Applied Economics at North Dakota State University