GLOBAL TRADE: COVID-19 LOSSES EQUIVALENT TO A RETURN TO 1994 TARIFFS
Global trade may remain below 90% of its pre-crisis level even after lockdowns are lifted and will only gradually recover in the second half of 2020.
How much could global trade lose due to Covid-19?
Euler Hermes estimates that lockdowns and uncoordinated lifting of restrictions could cost goods trade $2.4 trillion, the same as if all countries raised their tariffs to 17%, i.e., close to levels last seen in 1994.
The computer and electronics, metals and mining, transport, electrical equipment and textile sectors are most at risk of prolonged supply chain disruptions during the lifting of restrictions. In terms of countries, businesses operating in China, the US, Germany, France, Ireland, Belgium, Luxembourg and the Netherlands are most at risk.
Watch out for old-fashioned protectionism, which could: (1) recreate the uncertainty of 2019 and harm investment recovery, while US-China tensions intensify; (2) eliminate $30 billion in trade in Covid-19-related equipment and act as a crisis amplifier for emerging and developing countries.
All countries should lift widespread lockdowns by June this year. However, after a 22.5% shock in value terms, trade may remain below 90% of its pre-crisis level even after lockdowns are lifted. Nevertheless, Euler Hermes experts still expect goods trade to rebound in the second half of the year, following a recovery in the manufacturing sector. They apply R0, the projected end of lockdowns in all countries and each country's share in goods trade to understand how quickly international goods trade restrictions will be lifted. Figure 1 shows the share of global trade (as % of pre-crisis trade) restored over the coming months. We see that the end of lockdowns (which should be announced by the end of June in most countries) does not mean an immediate return to normal. Indeed, some countries will continue regional lockdowns and only gradually open all sectors of their economies, with bars and restaurants operating at low capacity for several additional months. Goods trade is expected to recover in the second half of 2020 and in 2021, boosting overall growth next year by +10% in volume terms and +15% in value terms.
Figure 1: Global goods trade in 2020 as a share of 2019 level: impact of lockdowns and gradual uncoordinated lifting of restrictions
Sources: Various, Euler Hermes, Allianz Research
Euler Hermes analysts estimate that lockdowns and uncoordinated lifting of restrictions could cost goods trade $2.4 trillion, the same as if all countries raised their tariffs to 17%, i.e., close to levels last seen in 1994. Even after lockdowns are lifted, differentiated rules for removing restrictions on the flow of goods, services and people could create uncertainty, information asymmetry and regulatory burdens for businesses, preventing global trade from returning to normal. From a goods perspective, such uncoordinated lifting of restrictions will subtract a total of $1.5 trillion from global cross-border goods flows by the end of 2020. This is equivalent to a worldwide tariff increase of +7 percentage points (to about 13% average tariff) on global goods trade. Considering the combined impact of lockdowns and gradual uncoordinated reopening, we see that the Covid-19 crisis and its aftermath eliminate $2.4 trillion in goods trade (and $1.1 trillion in services trade). Overall, the added losses from lockdowns and exits will be equivalent to a sudden increase of +11 percentage points in the global average tariff to about 17%, a level last seen in 1994.
Despite a U-shaped recovery, some specific sectors are at risk of inflationary pressure because they are more vulnerable than others to supply chain disruptions (high foreign value added in exports) and their inventories are below or close to the long-term average. Several PMI 'output prices' components have risen in recent months due to longer delivery times and various logistical difficulties from widespread lockdowns affecting more than half of global GDP. Looking at sectors, computer and electronics, then metals and mining, transport, electrical equipment and textiles are most at risk of prolonged disruptions during the lifting of restrictions, given their dependence on foreign production and inventory levels. In terms of countries, businesses operating in China, the US, Germany, France, Ireland and the Benelux countries may be most at risk of inflationary pressure and supply chain disruptions, as their export dependence on foreign production processes is higher compared to similar businesses in other countries, and their inventory levels are below or close to the long-term average.
Figure 2: Global supply chain integration and inventory levels by sector
Sources: Bloomberg, OECD TiVA, Euler Hermes, Allianz Research
(Listed companies for specific sectors where data is available, last point is the average of H2 2019 and H1 2020.)
Figure 3: Global supply chain integration and inventory levels by country
Sources: Bloomberg, OECD TiVA, Euler Hermes, Allianz Research
(Listed companies for specific sectors where data is available, last point is the average of H2 2019 and H1 2020.))
Finally, Euler Hermes analysts note that we should watch for the return of pre-Covid risks: old-fashioned protectionism, which could (1) recreate the uncertainty of 2019 and harm investment recovery, while US-China tensions intensify; (2) eliminate $30 billion in trade in Covid-19-related equipment, thereby acting as a crisis amplifier for emerging and developing countries. The US has officially leveled accusations against China through Secretary of State Mike Pompeo, who repeated earlier allegations linking the Covid-19 epidemic to a laboratory in Wuhan, China. This could lead the US to challenge the so-called phase one trade agreement, whose terms are even more demanding now that energy prices have plummeted. Euler Hermes estimates that this year China may buy an additional +20% of energy products to comply with the agreement, and an additional +3.6% of agri-food products. And while this means a +1.8% increase this year, it is three times less than forecast when the agreement was signed. Moreover, the WTO is expected to pave the way for Europe to raise tariffs in the Airbus/Boeing case by the end of June.
Lockdowns and the lifting of restrictions are also associated with increased protectionist measures on Covid-19-related products. Data show a record high level of new export restrictions on medical, pharmaceutical and protective equipment (Covid-19-related products). In total, in 2020, over 80 new protectionist measures were introduced worldwide on these products, a record high and 2.5 times more than in all of 2019. Euler Hermes estimates that export bans could reduce trade in Covid-19-related products by $30 billion in 2020.
This targeted protectionism could be an amplifier of the health crisis for emerging and developing countries. Indeed, as shown in Figure 4, Brazil, Argentina and Algeria, followed by South Africa, Morocco, Indonesia, Colombia, Malaysia, Mexico and Chile are countries whose imports of Covid-19-related products are highly concentrated on three main partners, and where import tariffs on such products are higher relative to the rest of the world.
Figure 4: Average import tariffs on Covid-19-related products and import concentration (% of imports from top three trading partners)
Sources: World Bank, Euler Hermes, Allianz Research
Authors:
GEORGES DIB
Economist
ANA BOATA
Head of Macroeconomic Research
ELLA CARMI
Economic Research Assistant
BASTIEN PATRAS
Economic Research Assistant
Summary
Euler Hermes estimates that lockdowns and uncoordinated lifting of restrictions could cost goods trade $2.4 trillion. This is equivalent to raising global tariffs to 17%, the level of 1994. Analysts warn of old-fashioned protectionism that could harm investment recovery during a difficult period of US-China tensions.
The computer, electronics and metals sectors are most at risk of supply chain disruptions. In 2020, over 80 new protectionist measures were introduced worldwide for Covid-19-related products – 2.5 times more than in all of 2019. Goods trade should rebound in the second half of the year.
