COVID-19 World Trade Damage To Services

• The response of global goods trade to the Covid-19 crisis has been relatively benign
• Chinese exports have recovered; the country is leading a regional container trade rebound
• By contrast, services exports – buoyant in the 2010s – have been devastated
• This damage seems more likely to persist; protectionism (via bailouts) is likely.

The COVID-19 (C-19) crisis has had severe effects on all global markets, including those for international trade. Typically, trade plays an important role in propagating negative economic shocks across the global economic system. There are some differences this time around. During this downturn, global goods trade has not been as badly hit relative to the rest of the economy as it was in 2008-09 (Chart 1). External deficits on the eve of the crisis were generally much smaller than in the mid-2000s, implying less vulnerability to a sudden stop in capital flows. On the other hand, global services trade has been hit far harder than normal. This difference mirrors the impact that C-19 has had within economies, hitting services sectors far harder than goods sectors.

It is too early to celebrate the relative resilience of global goods trade (and therefore buy assets geared to its strength). We entered the C-19 crisis with global trade (and trade policy) on rocky ground. When thinking about what the world trade picture might look like during the next expansion, quite a lot will turn on the result of the upcoming US election. If President Trump is re-elected, then a further ratcheting up in US protection seems likely, which would further damage trade prospects. If Joe Biden wins, however, the US is likely to remain more inward-looking, as politicians seek to protect lower-wage jobs.

Separately, China has highlighted that the next phase of its development strategy will be heavily geared to channelling domestic demand towards domestic production. Its willingness to allow foreign companies to benefit from the continued growth in its middle class will have been severely dented by events such as the US-led ban on Huawei and the Western reaction to its own policies in Hong Kong. It is plausible that China will promote trade growth concentrated on East Asia, leaving the US and Europe side-lined.

Finally, the longer-term impact of C-19 on global services trade remains to be seen. This had been the most dynamic component of world trade in the last expansion.

Key Stylized Facts On Trade

Unusually weak world trade growth relative to GDP growth characterized the last expansion (Chart 2; note that this chart covers post-war decades, not specific business cycles). This trend was in place before the onset of US protection in 2018, although that policy worsened the trend towards ‘de-globalization’ in the last two years of the decade. In 2018-19, world trade (as measured by export volumes of manufactured goods) rose by 1.7% per year, while real global GDP growth averaged 3.1%.

The bright aspect of the last expansion was the relative vigour of trade in services. Economists have typically viewed goods as ‘tradeable’ and services as ‘non-tradeable’, although that distinction has become increasingly blurred in a digitally connected world. Between 2009 and 2019, global services exports rose by an annual average of 5.5% (in nominal USD terms) and their share in the value of overall world trade rose by 2.5%-points (Chart 3). It was somewhat ironic that the trade policies of the world’s two largest service exporters (the US and UK) became more geared towards de-globalization as the decade proceeded. In 2019, travel and transport accounted for about 41% of globally traded services (Chart 4).

Another important aspect of the last expansion was the more muted level of external imbalances which developed as the expansion matured. Most notably, the US current account deficit in 2019 was 2.2% of GDP in 2019, versus 5.9% of GDP in 2006. Other countries (e.g. many indebted EM economies) similarly restrained the growth of their imbalances (partly by taking advantage of FX flexibility). Cross-border capital flows remained relatively high although were sufficiently balanced not to promote the growth of current imbalances. Additionally, the growth of FX reserves moderated – another reflection of the greater willingness on the part of policymakers to allow FX rates to float, notably in China.

The C-19 Trade Shock

The trade shock from C-19 played out in several waves. The initial impact is best seen as a supply-side shock from China, as the spread of the virus from late January led to the closure of factories and ports. Chinese goods export volumes in January-February were 12.6% below the December level (not annualized), even as DM import volumes slipped only slightly. Chinese export volumes snapped back in March, although have since levelled off, according to CBP data (through June). Chinese trade value data for July and August have been robust, reflecting the broader rebound in world trade into Q3 (Chart 6).

While China’s trade interruption was mainly felt in Q1, weakness elsewhere (including in the rest of Asia) played out through Q2, with the low in global trade volumes in May, one month after that in global IP.

Weakness in aggregate DM export volumes was extreme in Q2, weakness in EM export volumes less so (Chart 7). Chinese export volumes were up 9.9%q/q, saar, in Q2 (China accounts for about 26% of the EM export aggregate). Emerging Asian exports, exc. China, were down 29.7%q/q, saar, in Q2. By contrast, Japanese export volumes (dominated more by autos) were down 55.6%q/q, saar, in Q2. US export volumes were down 68.1%q/q, saar, and Euro area volumes by 57.4%q/q, saar. All of these major DM jurisdictions are on track to experience a similarly sharp bounce in Q3. By way of contrast, Japanese export volumes fell by 73.8%q/q, saar, in 2009Q1, while US volumes were down 39.1%q/q, saar, and Euro area volumes down by 34.5%q/q, saar. OPEC-led oil supply cuts further restrained trade volumes of commodities in Q2.

One interesting aspect of recent alternative trade data is the robustness of container trade, as reflected in the RWI/ISL measure which tracks container activity at 83 major ports around the world. In July, this index had recovered to its highest level since September 2019 (i.e. above the pre-pandemic level). This is a significant contrast to the volume data collected by the Dutch CPB from national trade statistics (currently available through June, Chart 8).

China accounts for this relative strength in container trade. Chinese port container activity (both exports and imports) slumped to a low in February and has since snapped back to a July 2020 level 7.6% above the 2019 average (Chart 9). By contrast, the RWI/ISL index ex-China in July was 3.9% below the 2019 average. It is quite possible that the combination of China’s ‘first-in-first-out’ C-19 cycle and its geopolitical efforts to strengthen its influence across Asia and the Middle East (sponsored by the Belt and Road Initiative) are paying dividends. In contrast, the US decision to withdraw from the Trans-Pacific Partnership has left that alternative trade framework far less robust to withstand the shock from C-19.

A final trade-related metric that is useful to scale the damage done to merchandise trade by C-19 is freight prices, as best summarized by the Baltic Dry index (Chart 10). This slumped to a double-bottom during the C-19 crisis: the first low came as the China trade shock played out in February; the second came when DM trade flows were at their weakest in May. The rebound since has taken the (very volatile) index back to its range in 2017-18. This relative strength is useful confirmation that, although the goods world trade shock from C-19 was serious, it was far less devastating than its overall GDP impact.

 The Collapse in Global Trade in Services

The reason for this, of course, was that it was the service sector that was the epicentre of the C-19 activity damage. It is therefore no surprise that it is service-sector trade indicators that have been weakest in 2020. In the US, for example, goods imports fell through May to be 19.4% below the January level; they have since recovered almost all of that loss. By contrast, US imports of services fell by about 32% between January and May and have since (through July) recovered very little of that loss.

The General Agreement on Trade in Services (GATS) defines trade in services as comprising four modes of supply: (1) cross-border supply, (2) consumption abroad, (3) commercial presence, and (4) movement of natural persons. The C-19 crisis has devastated (2)-(4), although may give a lift to (1), especially in the area of tech-sector trade.

As noted above, travel (business and tourist) accounts for almost one quarter of service exports, and the C-19 activity slump has devastated that sector particularly. The UN World Tourism Organization estimates that global tourist arrivals will fall by an unprecedented volume in 2020 (Chart 11). During the global financial crisis, they were down 4%y/y in 2009. Under a ‘benign’ scenario (opening in July), arrivals would be down 58%y/y in 2020 (blue dot). Under a middle-ground scenario (opening in September, red line), arrivals will be down 70%y/y. Under a worst outcome (no general re-start in 2020), arrivals will be down 78%y/y (grey dot).

Given the implied (similar) revenue losses, widespread insolvencies (both corporate and national) across the travel and tourism sectors seem likely in 2020H2 and 2021. The persistence of virus worries into 2021 could delay any bounce-back. One unfortunate aspect of the changed world of the trade in services is an increase in protectionism. This is unlikely to come from tariffs but instead from increased state support to bail out firms in trouble (e.g. airlines). As a result, the most efficient producers may not survive, whereas those whose governments have the deepest pockets might.