A Recent report published by the World Trade Organization (WTO) titled “Trade Costs in The Time of Global Pandemic” warns of possible increase in trade costs due to COVID-19 disruptions. The impact of the pandemic was examined on key components of trade costs, particularly those relating to travel and transport, trade policy, uncertainty, and identifies areas where higher costs may persist even after the pandemic is contained.
Travel restrictions and border closures have been an important part of the initial policy response to the COVID-19 pandemic, and these measures have directly affected trade in goods and services. They have disrupted freight transport, business travel and the supply of services that rely on the presence of individuals abroad.
According to the report released by the WTO, transport and travel costs constitute an important part of trade costs as shown in figure 1 and, depending on the sector, are estimated to account for 15 to 31 per cent. Travel restrictions are therefore likely to account for a substantial increase in trade costs for as long as they remain in place.
Figure 1: Determinants of Trade Costs
SOURCE: WTO, 2020
The report further stated that Freight transport service performance is crucial to trade costs in manufacturing. Since the beginning of the COVID-19 crisis, maritime and land transport have remained largely functional, although they have registered sometimes considerable delays, but air freight transport has been severely disrupted, with global air cargo capacity shrinking by 24.6 per cent in March 2020. Many governments are trying to do as much as possible to keep trade flowing, but in some regions, travel restrictions have the potential to disrupt regional trade and livelihoods severely.
Tradable services that rely on physical proximity between suppliers and consumers, such as tourism, passenger transport or maintenance and repair services, have been severely impacted by travel restrictions and social distancing and have seen a prohibitive increase in trade costs.
“The disruption in business travel, which plays important roles in establishing and maintaining trading relationships as well as in managing global value chains, is also likely to affect both business and professional services and manufacturing production, although this will depend on how possible it is to substitute e-interactions for face-to-face communication”-WTO.
The quality of information and communications technology (ICT) infrastructure and digital preparedness will thus be important factors in how well economies cope with the pandemic shock.
“Estimates suggest that trade policy barriers and regulatory differences account for at least 10 per cent of trade costs in all sectors”-WTO
Products essential in the fight against the pandemic have seen the introduction of mostly temporary import-facilitating and export-restrictive measures. The former push down trade costs while the latter raise them. Nevertheless, both types of measures have covered a small share of global trade.
The WTO further indicated that Increased uncertainty may have another malign impact on trade costs, in the form of trade finance contraction. Uncertainty reduces the appetite of firms to invest into new trading relationships, and the increase in uncertainty may also result in trade finance contraction that is likely to take a particularly heavy toll on emerging and developing economies.
Figure 2 Global economic policy uncertainty, January 1997 to July 2020
Source: https://www.policyuncertainty.com/global_monthly.html
Figure 2 pointed to the fact that global uncertainty in 2020 has seen a record highest since 1997. The Global Economic Policy Uncertainty Index comprises three components: newspaper coverage of policy-related economic uncertainty, the number of federal tax code provisions set to expire in future years, and the degree of disagreement among economic forecasters.
The WTO reiterated an argument advanced by the Financial Times on April 28 2020 that,
“emerging and developing economies are already seeing their sources of finance dry out disproportionately due to rising risk aversion among lenders and cash flow challenges for companies arising from the overall collapse in goods demand and supply this is limiting their access to essential goods and may have serious repercussions on health outcomes”
