How the COVID-19 is impacting the international trade, an overview of the short-term effects for the global economy

di Mario Ghioldi - 30 Aprile 2020

 from Warsaw, Poland

 

The future global scenarios

Declaring the COVID-19 a pandemic on March 11 2020, the World Health Organization (WHO) affirms how the SARS-CoV-2 will inevitably spread to all areas of the world (WHO, 2020), influencing and re-shaping the activities of governments, private companies and individuals. In a situation evolving day by day, the pandemic still shows an exponential growth, following the WHO data, more than 210 countries have reported cases of COVID-19, forcing governments to launch unprecedented public-health and economic responses (WHO, 2020). Beyond the current health emergency, private and public analysts are assuming future economic global scenarios (Mckinsey & Company, 2020). In general, they could be gathered in three groups: a rapid recovery, a general slowdown or a global recession.

In all scenarios considered, a key role is covered by the European Union and the US and their abilities to achieve a rapid control on the situation as China did. Excluding the first unrealistic case, where Western countries quickly subdue the COVID-19 spread, other scenarios assume a potential slowdown or recession which can affect all global areas, having a particular impact on the small and mid-size companies. Considering the uncertainty over the gravity of the economic impact/implications, it seems important to analyze the first international trade data published by different international agencies in order to understand how SARS-CoV-2 is affecting businesses among countries.

The Chinese Manufacturing Purchasing Manager’s Index (PMI) slowness, an important concern for the US and the EU firms

Although it is too early to calculate the full economic and trade consequences of COVID-19, it is possible to understand some short-effects of the outbreak, such as a general decrease in exports and consequently the impact on the global chain, the strong reduction of Foreign Direct Investment (FDI) and the economic slowness of the developing countries (UNCTAD, 2020). The first relevant data which can be analyzed come from China. This is not only the first country strongly affected by the outbreak, but it is also one the most important actors in international trade., Thus the decreasing of Chinese output, as indicated by the United Nations Trade and Development (UNCTAD), could have consequences in regional and global value chains (UNCTAD, 2020).

Chinese manufacturers also fell sharply, with the rate of decline the steepest in the survey history (Source IHS Markit)

A first important indicator of the current Chinese output is the Manufacturing Purchasing Manager’s Index (PMI) which shows the economic trends in the manufacturing sector (Trading Economics, 2020). The PMI consists of a diffusion index which summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. In February, the Chinese PMI fell by about 22 points to 37.5, the lowest reading since 2004. According to UN data, this drop in output should indicate an annual reduction of 2% in Chinese exports (UNCTAD, 2020). This slowdown affects all those countries whose industries rely on Chinese suppliers. Beyond the closest countries to China as the Republic of Korea, Japan and Vietnam, following the first analysis the most affected economies are the United States (for a loss of $5.8 billion) and European Union countries (for a loss of $15.6 billion) (CSIS, 2020).

 The Global FDI drop and the negative trends for automotive and airlines industries

Another important concern for international analysts is related to Global Foreign Direct Investments. In January, some international agencies such as UNCTAD and WTO projected a 5% of FDI  potential increase in 2020-2021 (UNCTAD, 2020). Nevertheless, the SARS-CoV-2 phenomena may strongly hit the FDI flows, scaling them down to the lowest level since the 2008-2009 financial crisis. This considerable drop is generated by the lower profits of the firms, which are converted into lower reinvested earnings, the most relevant element of the Foreign Direct Investments.

Following a study of the aforementioned UN trade agency on the investment trends of 100 multinational enterprises, the profits of more than two third of samples selected has been strongly impacted by the virus (UNCTAD, 2020). In particular, according to the study, the coronavirus should impact in a considerable way the automotive, airlines and energy sectors. The earnings forecasts of companies coming from those sectors seem to confirm this trend, in particular the automotive industry (-44%) and airlines (-42%) should be considerably hit by the outbreak. Considering how those companies are relevant capital investors, the investment prospects will be affected, impacting also the recipient country economies.

The international trade slowness in developing countries, a threat for the global food security

Moreover, the impact of COVID-19 on trade routes in developing areas is becoming another important topic debated by analysts. Differently than the industrialized countries which launched large public investment programs, developing countries are not able to enact similar policies to overcome the crises. Consequently, the economies of these states could slow down reducing the export opportunities and increasing the borders closeness. Despite the International Monetary Fund (IMF) and the World Bank (WB) emergency programs (IMF, 2020; WB, 2020), some institutes such as the International Food Policy Research Institute (IFPRI), assumed COVID-19 will increase the number of poors by 2%, affecting 14 million people worldwide (IFPRI, 2020).

Taking in consideration the data at the beginning of April, the most relevant trade routes in emerging areas are still open (Universität Bonn, 2020) . Nevertheless, the possible lockdowns of some regions, like South-East Asia or Latin America, could affect supply in exporting countries, reducing considerably global trade. A clear example of that is the rice market which in the last days of March risked a slowdown due to Vietnam’s decision to halt rice exports for a few days to assure domestic food supply (Bloomberg, 2020). Hanoi is the third largest rice exporter in the world, thus this decision risked to jeopardize all the sectors. Thus in the first weeks of April, trade analysts warned how the possible launch of similar policies by the other rice top exporters (India, Thailand, and Pakistan) could have a strong impact on food security, global trade and the economy (The Guardian, 2020). Even though this possibility seems currently prevented, the risk remains high due to the unpredictable situation provoked by the outbreak.

The need of coordinated and efficient political responses, the G20 efforts in the Oil and Pharmaceutical sectors 

Considering the importance of international trade in a globalised world, the policy should be fast, efficient and coordinated at different levels. Considerable steps forward were done in the last week of March and in the first days of April. First of all, G20 trade ministers agreed to ensure uninterrupted flow of vital medical supplies (WTO, 2020). This agreement was reached in response to India’s export restrictions on different drugs such as  B1, B6 and B12, tinidazole, metronidazole, acyclovir, progesterone and chloramphenicol. Thanks to the G20 declaration, the Asiatic area shouldn’t suffer any shortage of these goods. Moreover, the most important oil producers (such as: Saudi Arabia, Mexico, the US or Russia) are working closely with the Organization of the Petroleum Exporting Countries (OPEC)  and the G20 in order to reach a relevant agreement to cut the petrol production (Financial Times, 2020). The coordination among different oil suppliers is becoming fundamental, considering the world’s crude oil storage capacity may fill up next month because of coronavirus-related weak demand (The New York Times, 2020).

Conclusions

As shown previously, the COVID-19 pandemic represents an unprecedented challenge to the global economy and world trade, as production and consumption are scaled back across the globe. Beyond affecting the operativity of trade infrastructures and routes, the current outbreak is strongly jeopardizing the manufacturing production and the Foreign Direct Investments to developed and developing countries. Considering the current situation, policy makers are called to launch coordinated policies on global, regional and local levels. In particular, countries should strengthen and eliven the previous global and regional trade agreements (RTAs), which are the most efficient tool for the international trade growth.

 

Bibliography A-L

Bloomberg  (2020). Vietnam’s Rice Trade Thrown Into Turmoil on Export Halt Muddle. [online] Available at: https://www.bloomberg.com/news/articles/2020-03-25/vietnam-s-rice-trade-thrown-into-turmoil-on-export-halt-muddle

Center for Strategic and International Studies. (2020). The Global Economic Impacts of COVID-19. [online] Available at: https://www.csis.org/analysis/global-economic-impacts-covid-19

Financial Times. (2020). G20 backs largest oil supply agreement in history. [online] Available at: https://www.ft.com/content/16ac91d8-42bf-4190-88de-f3d89b2b36f4

International Monetary Fund. (2020). Confronting the crisis: Priorities for the Global Economy. [online] Available at: https://www.imf.org/en/News/Articles/2020/04/07/sp040920-SMs2020-Curtain-Raiser

International Food Policy Research Institute. (2020). How much will global poverty increase because of COVID-19 [online] Available at: https://www.ifpri.org/blog/how-much-will-global-poverty-increase-because-covid-19

Bibliography M-Z

Mckinsey & Company. (2020). COVID-19 Implications for business. [online] Available at: https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business

The Guardian. (2020). Coronavirus measures could cause global food shortage, UN warns [online]. Available at: https://www.theguardian.com/global-development/2020/mar/26/coronavirus-measures-could-cause-global-food-shortage-un-warns

The New York Times. (2020).OPEC and Russia Agree to Cut Oil Production [online]. Available at: https://www.nytimes.com/2020/04/09/business/energy-environment/opec-saudiarabia-russia-oil-coronavirus.html

Trading Economics. (2020). China NBS Manufacturing PMI. [online]. Available at: https://tradingeconomics.com/china/business-confidence

United Nations Conference on Trade and Development. (2020). Analysis and resources on COVID-19. [online] Available at: https://unctad.org/en/Pages/Coronavirus/Analysis-and-Resources-on-COVID-19.aspx

United Nations Conference on Trade and Development. (2020). Coronavirus could shrink global FDI by 5% to 15%. [online] Available at: https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2299

United Nations Conference on Trade and Development. (2020). Global trade impact of the Coronavirus (COVID-19) Epidemic [PDF]. Available at: https://unctad.org/en/Pages/Coronavirus/Analysis-and-Resources-on-COVID-19.aspx

United Nations Conference on Trade and Development. (2020). Impact of Coronavirus outbreak on Global FDI [PDF]. Available at: https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2299

United Nations Conference on Trade and Development. (2020). Short-terms effects of the coronavirus outbreak: what does the shipping data say? [onlne] . Available at: https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2296

Universität Bonn. (2020). Covid-19: Impact on food trade – Is global food security at risk? [onlne] . Available at: https://www.uni-bonn.de/news/covid-19-impacts-on-food-trade-2013-is-global-food-security-at-risk

World Bank. (2020). World Bank Group Launches First Operations for COVID-19  Emergency Health Support, Strengthening Developing Country Responses [onlne] . Available at: https://www.worldbank.org/en/news/press-release/2020/04/02/world-bank-group-launches-first-operations-for-covid-19-coronavirus-emergency-health-support-strengthening-developing-country-responses

Word Health Organization. (2020). Coronavirus disease (COVID-2019) situation reports [onlne] Available at https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports

World Health Organization. (2020). WHO Director-General’s opening remarks at the media briefing on COVID-19. [onlne] Available at https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020

World Trade Organization (2020).DG Azevêdo welcomes G20 ministers’ commitment to notify WTO of COVID-19 related trade measures. [onlne] Available at: https://www.wto.org/english/news_e/news20_e/dgra_30mar20_e.htm

***

Autore dell’articolo*: Mario Ghioldi, Dr. in International Studies and Diplomacy presso L’Università degli Studi di Siena; Master in Diritti Umani presso SIOI.

***

Nota della redazione del Think Tank Trinità dei Monti

Come sempre pubblichiamo i nostri lavori per stimolare altre riflessioni, che possano portare ad integrazioni e approfondimenti. 

* I contenuti e le valutazioni dell’intervento sono di esclusiva responsabilità dell’autore.

Editor’s Note – Think Tank Trinità dei Monti

As always, we publish our articles to encourage debates, and to spread knowledge and original and alternative points of view.

* The contents and the opinions of this article belong to the author(s) of this article only.

Autore