International Trade during COVID-19
Humankind is at a standstill right now due to the ongoing COVID-19 pandemic which has gone beyond human understanding.
The numbers are rising every day, and it is distressing. To contain the spread of the virus and control the outbreak, lockdowns have been imposed by governments to flatten the curve. As little to no level of economic activity is taking place right now, economies all over the world are facing losses. With the implementation of strict social distancing measures, most organizations are closed or are carrying out production with much less effectiveness.
This affects the trade of goods and services directly in various ways.
In an exporting country, supply would decrease due to lockdown, inability to switch to remote working, especially in labor-intensive industries, and the decrease in imports of intermediates from neighboring countries. All of these result in an upward shifting of the supply curve. Italy’s exports went down by 40 percent in March 2020 as compared to March 2019.
However, if the domestic demand for goods decreases, the net export supply would go up as the unconsumed quantity can be exported. If the neighboring countries do not export due to COVID-19 restrictions, it creates an opportunity for the country to export, thus increasing supply, which is called the ‘substitution effect’.
Several countries have set up export controls on medical products like certain drugs, PPE, ventilators and other sanitation products. France, for instance, prohibited the export of medical products containing hydroxychloroquine from March to May 2020. Others had established controls over the food supplies as soon as restrictions were imposed fearing a food shortage soon.
For an importing country, the main problem during a pandemic arises when demand for goods goes down because of low earnings and lesser mobility. However, we see an exception to this is people hoarding goods fearing stricter restrictions in the future. The imported demand for medical products has increased, as a result of which tariffs for medical products have been relaxed to ensure the availability of these supplies. The Eurasian Economic Union temporarily eliminated import tariffs on food and medical products from March to June 2020.
COVID-19 has severely disrupted the air, maritime and land transport services. Due to port closures (especially from China where the virus is said to have originated from), shipping volume decreased by 20 to 40 percent in February 2020 as compared to the same month last year. Perishable goods cannot be transported due to the 14 days’ quarantine imposed by many countries. This decline in container shipping in 2020 is less than the decline faced during the 2008 recession, indicating some recovery in May.
Many countries have reduced cross border transport services, and quarantine rules have been imposed on drivers, reducing the flow of goods. The International Civil Aviation Organization (ICAO) estimates an overall loss of about USD 393 billion in gross passenger operating revenue in 2020. According to ICAO, the worst-hit regions in terms of revenue are Europe (-60 billion USD as of September 2020 compared to the previous year), Asia-Pacific (-48 billion USD) and North America (-18 billion USD). International Air Transport Association (IATA) reported that international air cargo volume shrank by 43.7 percent in March 2020 compared to March of the previous year. Export order indices for manufacturing and services picked up in May 2020 (32.2 and 29.8 respectively) but remained below the usual trend.
Export revenue lost for services, unlike goods, cannot be recovered. These include hotel and flight bookings, meals, and flights for business, personal, and recreational purposes. These services, which account for 40 percent of the world services exports, are hard-hit by the pandemic which restricts people from supplying and consuming these services.
Ukraine and Ireland saw an increase in service exports which is largely due to the dominance of IT firms. Growth in these countries was possible due to efficient remote working. The COVID-19 crisis could lead to digitalization and improvement in technological infrastructure which has already been in progress. Trade and business can recover and go back to normal once the pandemic is over or at least under control. It can also lead to a change in globalization over a long time. What changes the pandemic will bring in trade and trade relations depends largely on its severity and period over which the condition persists.
Jayati Sharma
SY BSc Eco (19-22)