WTO warns of increasing trade costs due to pandemic
The World Trade Organisation (WTO) has issued an information note outlining where and how trade costs may increase due to the COVID-19 pandemic.
The report highlights transport and travel as having the most significant singular impact on international trade during the pandemic.
Published on 12 August 2020, the report titled, ‘Trade Costs in the Time of Global Pandemic,’ identifies three major sources of increased trade costs in the COVID era: transport and travel; trade policy; and uncertainty. Other determinants of trade costs identified in the report include information and transaction costs, information and communication technology (ICT) connectedness, and governance quality.
Transport and travel, the authors note, accounts for an estimated 15-31% of trade costs by sector – 15% in agriculture, 31% in manufacturing – and has been seriously impacted by actions taken in response to COVID-19. Travel restrictions and border closures, for example, have directly affected trade in goods and services. These types of restrictions, the report emphasizes, will constitute a substantial increase in trade costs as long as they remain in place. Impacts extend to both land and maritime shipping, and include major disruptions to air cargo capacity, which, the WTO notes, decreased by nearly 25% in March 2020.
Trade policy barriers and regulatory differences also represent a significant portion of costs across sectors, accounting for approximately 10% of total trade costs in each. These barriers include tariff and non-tariff measures, temporary actions, and the costs of crossing borders, among other policies that impact trade, such as intellectual property protection. The report notes that, despite several trade facilitating measures aimed at ensuring provision of personal protective equipment and other medical equipment, essential supply shortages due to COVID-19 prompted many governments to impose export-restrictive measures.
General uncertainty and risk aversion have amplified trade costs during the pandemic. The report underscores firms’ reduced appetites to invest in new trade relationships – as seen in recent financial and geopolitical crises – as well as reduced availability of trade finance each of which stand to have a disproportionate impact on developing and emerging economies.
The WTO concludes that changes in trade costs are “expected to revert once the pandemic is under control,” but cautions that policy shifts and market dynamics may cause continued disruption. The report identifies selective government-imposed travel and air restrictions and reduced airline competition as potentially causing higher trade costs, to persist until the virus has been eliminated.