WTO issues new report on how COVID-19 crisis may push up trade costs

The WTO Secretariat has published a new information note warning of possible increases to trade costs due to COVID-19 disruptions. The note examines the pandemic’s impact 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.

Key points:

  • 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. Transport and travel costs constitute an important part of trade costs, 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.
  • 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. 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. 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.
  • High levels of uncertainty magnify the impact of trade costs on international trade. In the first quarter of 2020, for instance, a widely used measure for the global level of uncertainty was 60 per cent higher than the levels triggered by the Iraq War and the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003. 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.

The report can be found here