COVID-19 crisis may push up trade costs, WTO report finds

Shocks to transportation capacity, particularly in air freight, have created lingering costs for trade

The WTO Secretariat has published a new information note warning of possible increases to trade costs due to COVID-19 disruptions.

The report finds that travel restrictions and border closures 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%. Travel restrictions are therefore likely to account for a substantial increase in trade costs for as long as they remain in place.

For example, global air cargo capacity shrank by 24.6% in March 2020, as passenger flights account for around half of air cargo volumes. The resulting increase in air freight prices is likely to subside only with a rebound in passenger transport, according to the report.

While sea and land transport have not faced comparable shocks, maritime transport has seen a decrease in numbers of sailings, while international land transport has been affected by border closures, sanitary measures and detours.

Moreover, business travel, which is important for maintaining trading relationships and managing global value chains, in addition to being a significant economic activity in its own right, is being disrupted. The quality of information and communications technology (ICT) infrastructure and digital preparedness will be important in determining how well economies can cope.

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.

Trade barriers

Trade policy barriers and regulatory differences are estimated to account for at least 10% of trade costs in all sectors. They include tariff and non-tariff measures, temporary trade barriers, regulatory differences and the costs of crossing borders, as well as other policies that impact trade, such as a lack of investment facilitation or of intellectual property protection.

The report notes that while COVID-19 has motivated both trade-restricting and import-facilitating changes in tariffs and regulatory practices, these measures have so far affected only a small subset of products.

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.

A possible long-term benefit is the crisis-induced shift towards the digitalization of customs and regulatory procedures to reduce physical contact could potentially lower the associated trade costs in the long-term.

Unease and uncertainty

The report also points to uncertainty as a factor that magnifies the impact of existing trade-related costs, weighing on trade finance flows and dampening the appetite of businesses to invest in researching new markets, acquiring language skills and prospective partners, and conforming with foreign standards.

It notes that in the first quarter of 2020, a widely used measure for the global level of uncertainty registered levels 60% higher than those triggered by the Iraq War and the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003. In mid-March, a separate index of financial market volatility came close to highs last seen in 2008 after the failure of Lehman Brothers.

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.

Post-pandemic prospects

Looking ahead, the report notes that many governments have implemented measures to mitigate pandemic-related disruptions to economic activity, for instance by exempting certain transport crew from travel restrictions, or by enhancing the quality of and the access to ICT.

While many of the changes in trade costs can be expected to revert once the pandemic is brought under control, the report observes that some effects may persist. For example, aviation industry consolidation and shifts in passenger appetite for air travel could lead to higher air transport costs. In addition, government policy choices — which could either reduce or increase trade policy uncertainty — will be important in shaping uncertainty-related trade costs in the future.

The report can be found here.

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