Covid-19 Briefing: International Trade and Supply Chains

Rebecca Freeman and Rana Sajedi

The Covid-19 pandemic has led to both a decline in economic activity that has been propagated across borders through global supply networks, and a rise in barriers to trade between countries. This has led to a rapidly emerging literature seeking to understand the effects of the pandemic on trade. This post surveys some of the key contributions of that literature. Key messages from early papers are that: i) The shock is a hit to both demand and supply, and is thus deeper than what was experienced during the 2008/09 Great Trade Collapse; ii) Global value chains have amplified cross-country spillovers; iii) When supply chains are highly integrated, protectionist measures can disrupt production of medical equipment and supplies; and, hence, iv) Keeping international trade open during the crisis can help to limit the economic cost of the pandemic and foster global growth during the recovery.

Demand as well as supply channels

Baldwin and Tomiura (2020) point out that the pandemic is simultaneously a global supply and demand shock. Baldwin (2020) notes that the 2008/09 Great Trade Collapse was a ‘sudden, synchronised and broad’ decline in trade, but was mostly a result of a global demand shock. This time there are additional effects rippling through supply chains, as suppliers have difficulty sourcing inputs. The direct supply-side disruption in the current crisis is thus likely to lead to an even ‘Greater Trade Collapse’ in 2020.

But the story with services trade might be different, since the shock will encourage remote, tele-intermediated interactions – the ‘heart and soul’ of many services. Baldwin and Tomiura (2020) thus speculate that Covid-19 could well end up increasing trade in services, despite the hit to tourism.

Global Value Chains as propagation mechanisms

A key difference of this pandemic with respect to earlier global crises is the increased interconnectedness of the global economy. Baldwin and Freeman (2020a) note that large Global Value Chain (GVC) hubs, which account for the lion’s share of world manufacturing output, have experienced broad-reaching effects of the pandemic on their ability to produce goods and services. Given these countries’ centrality in global trade networks, the resulting shutdown of production to curtail the virus will have disproportionate ripple-through effects to the world economy. Stressing the importance of both direct and indirect (ie via third-country) supply-chain linkages, they calculate that, for their sample of 21 major manufacturing countries, exposure to China is significant: manufacturing inputs from China range from 3.7% of manufacturing output (Netherlands) to 16.4% (Korea). Although countries are less reliant on the US than they are on China, inputs from the US are nonetheless important in as many nations as those from China.

Gerschel et al (2020) consider how the reduction in production in China may affect production in France. They calculate that a 10% drop in Chinese productivity could reduce French GDP by 0.3% through direct and indirect trade links only, mostly transmitted through a few large firms which heavily rely on foreign inputs. Bonadio et al (2020) perform a quantitative assessment of the role of GVCs in the pandemic. They find that one third of pandemic-related GDP contractions are attributed to the propagation of shocks through global supply networks. Nonetheless, they argue that regionalising supply chains is unlikely to insulate economies from similar events in the future given that the shock affects domestic and foreign nations similarly.

Heise (2020) uses transaction-level data to document a sharp decline in US imports from China in February and March, which was somewhat reversed in April. Daily imports from China were roughly 50% lower in March 2020 compared to March 2019, with bigger falls for smaller importers relative to larger importers. Firms with pre-established supply-chain relationships with other countries proved more resilient to the shock, as they were able to shift sourcing to partially offset the reduction in imports from China.

Javorcik (2020) argues that the current crisis has revealed many countries’ over-reliance on China and therefore will force businesses to re-engineer their GVCs by diversifying supplier bases. Kilic and Marin (2020) argue that the pandemic will trigger a wave of re-shoring and greater use of robots to mitigate supply-chain risks, as companies reassess the benefits of sourcing intermediate goods from overseas.

Protectionism on the rise during the crisis

One of the major instruments that many governments have used to tackle the effects of the pandemic has been protectionist trade policy, especially applied to personal protective equipment (PPE) and vital medical supplies, which, according to a WTO report (2020), constituted 5% of total world merchandise trade in 2019. Their production is fairly concentrated: 35% of global medical product exports are from Germany, the US, and Switzerland, while 40% of world PPE exports are from China, Germany and the US.

Bown (2020) summarises the many export restrictions that some major economies have placed not only on PPE, but also on hospital equipment, pharmaceuticals, and food. He notes that these restrictions imperil many countries’ access to much needed products at a global scale, since taking supplies off the market can spark retaliations, lead to higher prices, and harm hospital workers in need in other countries.

Evenett (2020) notes that the rise in protectionism is a continuation of the trend seen since the global financial crisis, but is also common during major global downturns. He stresses the risk that the crisis-era policies become ‘a new dominant form of protectionism’ and cause pervasive trade distortions. He argues for active removal of trade barriers for key supplies to ensure they can reach where they are most needed.

The case for keeping international trade open

Contrary to the idea that GVCs increase the potential for supply disruptions, Miroudot (2020) argues that reliance on a single source for key inputs is far riskier, and complex supply networks are more resilient. He notes that increased trade openness during the crisis could allow countries to exploit economies of scale and boost total production of vital supplies. For example, Korea has already successfully shifted much of its diagnostics industry towards producing Covid test kits, which are now exported to over 100 countries. This, he argues, was made possible by the country’s active participation in international supply networks and skilled supply-chain managers who built on their experience to act quickly.

Stellinger et al (2020) put forward the argument that international trade has been beneficial to public health by allowing increased specialisation: one country on its own simply cannot manufacture all the medical equipment, provide the chemical inputs for medicines, and invent essential medicines. Furthermore, increased profits from access to global markets would encourage R&D spending and fuel innovation.

Bamber et al (2020) show that the fragmentation of production of medical supplies and devices over recent decades has increased – and not diminished – the ability of countries to respond to the sudden spikes in demand during the Covid crisis. In fact they point out that export controls threaten to reduce rather than increase local availability, especially if a country exports parts and components but imports finished medical supplies. They use the example of a ban on the export of ventilator hoses – used for ventilators but of no use on their own – reducing overseas production of ventilators, and hence reducing the supply of finished machines.

Fiorini et al (2020) note the importance of functioning supply chains and distribution networks for the production of these key supplies: while the largest producer of medical masks is China, they require filters from fabric mill companies from a diverse set of countries such as Taiwan, Germany and Canada. They also argue that export controls and requisitioning domestic suppliers made it harder for even domestic healthcare professionals to obtain vital equipment. Furthermore, they make the point that a country banning the export of one good may prompt reciprocal measures which could reduce the overall supply of that good, or other goods the country does not produce domestically.

Baldwin and Freeman (2020b) show the evolution of countries’ reliance on each other over time, and note the increased role of Chines inputs in all other nation’s output since the Great Trade Collapse. They conclude that if the world is to ramp up the production of essential medical equipment to meet the swift rise in pandemic-driven demand, there is no alternative to international trade given the integrated nature of global manufacturing. In particular, documenting high levels of interdependence among nations at the detailed sector level, they posit that a spiral of retaliation could disrupt world productive capacity in virtually all manufacturing sectors.

Final thoughts

Unlike past pandemics, Covid-19 has struck at a time when the world is highly interconnected. The global nature of the shock is likely to lead to a large decline in both exports and imports in a more severe fashion than the 2008/09 Great Trade Collapse, and there is already evidence that its effects are being propagated through GVCs. In response to the simultaneous supply and demand shocks, many governments are using trade policy as part of their toolkit to combat the pandemic, in particular by imposing export restrictions on medical supplies. The consensus view of the literature is that the imposition of such barriers can be particularly harmful during crises, and that keeping trade open, and the strengthening rather than dismantling of supply networks, could help limit the economic and human cost of the pandemic and foster recovery.

Rebecca Freeman works in the Bank’s Global Analysis Division and Rana Sajedi works in the Bank’s Research Hub Division.

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