How big is the impact of the epidemic on trade, with exports from countries around the world falling by more than one percent!

Global trade fell back by 13 percent between January and June 2020 and has since rebounded sharply as the situation in the Newcastle pneumonia outbreak temporarily improved. Global shortages of masks and medical devices led to export bans in many countries Negative demand shocks associated with heightened uncertainty were partly responsible for the reduction in trade. We provide evidence pointing to two main factors behind the trade disruptions caused by the epidemic shock: (i) global production disruptions leading to product vulnerability requiring country-specific production inputs; and (ii) restrictions on face-to-face production due to the pandemic creating vulnerability for products that are more difficult to produce remotely.

First, production disruptions caused by global pandemic shocks affected the value chain. The sudden decline in the supply of Chinese products sparked a debate about whether the increasing exploitation of global comparative advantage in the decade preceding the pandemic had produced a dangerous dependence on global production networks that had made China a world manufacturing powerhouse.

Second, the shock of the sudden outbreak in early 2020 led to severe disruptions in economic activity as a large portion of the global population was confined to their homes and numerous restrictions were imposed to reduce the limits of virus transmission. While highly skilled workers shifted to remote work and even experienced productivity gains, less sophisticated production, which relies primarily on unskilled workers, was harmed.

What is the economic scale of this impact?

Our estimates, based on detailed product import data for the U.S., Japan, and 28 EU countries in 2020, point to the large economic magnitude of disruptions in input production and face-to-face production disruptions caused by the three mechanisms.

Countries with a higher incidence of the epidemic experience a 1.5 percentage point larger decline in exports of unskilled-intensive products, equivalent to a median export reduction of $1,074 million. A similar increase in the incidence of the epidemic reduces China’s exports of products with higher input dependence as the main supplier by 1.69 percentage points and exports of products with higher dependence on foreign inputs by 0.81 percentage points, corresponding to a median export reduction of $1.199 billion and $574 million, respectively. Finally, a similar increase in the incidence of the epidemic led to a 1.09 percentage point decrease in exports of products with less complexity, equivalent to a median export decrease of $777 million.

Lessons for future crises

With a strong reliance on a small group of suppliers, efforts aimed at smart diversification need to be a key policy and industry priority. This requires global production and supply arrangements that offer a range of options away from concentration, especially in the case of very heavy reliance on a small group of foreign suppliers. This simply does not mean decoupling from global value chains and reliance on imported inputs, as this will not pay off and will be costly. On the contrary, participation in GVCs during a pandemic actually reduces rather than increases vulnerability to domestic shocks, as foreign sourcing is a useful diversification through trade when domestic production is disrupted. Global value chains are critical for countries to obtain the goods needed for vaccination, protection, and testing during a pandemic.

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