In early April, when the impact of the Covid-19 pandemic on the global economy was just beginning to be felt, one of the first indications of the crisis that would unfold came from the projections on trade flows. Estimates provided by the World Trade Organization (WTO) spoke of a sharp decline in global trade volumes, anywhere between 13% and 32% in 2020. The Organization’s projections showed that nearly all regions would suffer double-digit declines in trade volumes, and that exports from North America and Asia would be the hardest hit.
Trade was expected to fall more in sectors that functioned via complex production networks, with electronics and automotive products being the most vulnerable. The prognosis for services trade, which had expanded faster than trade in goods since 2005, was more dismal, since it was directly affected by Covid-19 because of the transport and travel restrictions. WTO was cautiously optimistic about the prospects of a recovery in trade in 2021, arguing that this was dependent on the duration of the outbreak and the effectiveness of the policy responses.
These projections of the impact of the pandemic on trade sounded even more bleak for two reasons. The first was that these numbers were far worse than those recorded when the global economy wilted after the “Great Recession” of 2008. Trade volumes collapsed by over 12% in 2009, while global GDP fell by 2%. Thus, trade volumes declined in excess of six times compared to global GDP growth. Trends since the early 1970s show that in normal years, trade had increased, on an average, by a factor of three over GDP growth, but uncertain GDP growth triggered a steep fall in trade volumes. WTO estimated a precipitous fall in trade; therefore, it portended a sharp fall in global GDP.
Further, WTO’s projected worst-case scenario, a decline in trade volumes by 32%, was ominously similar to the experience during the Great Depression of the 1930s. In the three Depression years of 1929-32, trade volumes fell by 30%; the WTO is predicting a 32% decline in less than a year. The indications, therefore, were that the Covid-19 pandemic could culminate in one of the worst economic crises ever. A second source of concern for the global community was that economic downturns have always brought with them apprehensions of rising trade protectionism and the domino effect that the latter could cause on economies around the world.
In times of economic stress, therefore, the dismal imagery of the 1930s always comes alive, when protectionist policies precipitated the adverse impact of the stock market crash of 1929, taking the global economy down to depths that modern civilisation had not witnessed. These fears have been accentuated in recent decades as countries have been more connected with each other than ever before through trade, and production networks—both global and regional—drive output and employment in most economies.
As a result, the relationship between global trade and output has developed a settled pattern since the first signs of globalisation became visible in the early 1980s. During the past four decades, growth of world output has led to more than proportionate increases in world trade volumes, while the converse is true for years in which GDP growth has declined. The interconnected nature of trade through the production networks has meant that any decline in global output has resulted in a far sharper fall in global trade volumes.
After six months of considerable uncertainties, there are indications that the global trade volumes may not decline by as much as the WTO had projected earlier. Estimates for the second quarter of 2020 provided by the Organization show that trade volumes declined by just over 14%, which is closer to the best-case scenario that it provided in April. This number is for the period in which most of the major economies, barring China, had imposed crunching lockdowns that had crippled their economies. But as most economies entered the third quarter of 2020, there were signs of economic revival, however weak, which could imply that the worst is behind them.
For instance, China, which had recorded negative trade growth during the first six months of the year as compared to the previous year, experienced a sharp turnaround in the following two months. A key factor responsible for this less-than-anticipated adverse effect on trade was that protectionism did not raise its ugly head too high. A quick check of the trade measures adopted by WTO members since the outbreak of the pandemic shows that while protectionist measures were adopted by several countries, many others had also liberalised trade to allow free flow of essentials, especially food products, medicines and medical equipment. This indicates that while a number of major economies have been seeking to decouple from the global economy, there was also a counter tendency displayed by many others, which underlines the fact that economic interdependence between nations remains strong.
Biswajit Dhar
Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU
(bisjit@gmail.com)