Trade Policy Reflections Beyond The COVID19 Outbreak
Chief Economist NoteTrade policyreflections beyondthe COVID19 outbreakEditor:Lucian CernatIssue 2June 2020Trade
TRADE POLICY REFLECTIONS BEYOND THE COVID19OUTBREAKIssue 2June 2020ABSTRACTThis note provides an analysis on the implications of the COVID19 on anumber of key areas in international trade policy. It reviews the range ofexisting literature and present findings from some in-house analysisconducted by DG TRADE.It provides clear evidence in support of the role of trade in the post COVID19era while highlighting how harmful protectionist measures must be avoidedin order to stimulate a successful economic recovery.Editor:Lucian CernatFor furtherinformation:ISSN 2034-9815Finally, it focuses on bringing together the most recent and persuasive factsand figures to show how embracing new technologies along with an opentrade policy will help solve issues with global value chains and improve theirpreparedness and resilience to any future shocks.This paper is the result of a collective effort by the Chief Economist team in DG TRADE: Lars Nilsson,Brian Kennedy, Alessandra Tucci, Beatriz Velazquez, Stefan Nolte and Zornitsa Kutlina-Dimitrova.The views expressed in this paper are those of the authors and do not necessarily reflect the viewsof the European Commission.
CONTENTSEXECUTIVE SUMMARY . 31.2.3.4.POST-PANDEMIC INTERNATIONAL TRADE. 51.1.The impact of COVID19 has harmed both GDP and trade . 51.2.Digital services trade is likely to be less affected by the pandemic . 61.3.Could developing countries be worse affected? . 8THE IMPORTANCE OF TRADE TO THE POST COVID RECOVERY . 92.1.Trade has been a key driver of economic prosperity in the EU . 102.2.Imports are as important as exports . 112.3.SMEs: The engine behind EU export performance . 12STRONG VALUE CHAINS RELY ON TRADE OPENESS . 133.1.Transparency and coordination boost trade policy effects, not protectionism . 143.2.Global value chains vulnerability and global interdependencies . 153.3.Open trade policies can boost the recovery . 20HOW NEW TECHNOLOGIES CAN FACILITATE TRADE IN A POST-COVID19 ECONOMY . 234.1.Artificial Intelligence (AI) in production and 3D printing: Leading the fightagainst COVID19 . 244.2.5.Blockchain and its potential to facilitate international trade . 25THE WAY FORWARD: BETTER FIRM-LEVEL DATA AND ANALYSIS . 272
EXECUTIVE SUMMARYUsing the latest data and analytical research, this note highlights the potential impact ofthe COVID19 outbreak on EU and international trade policy. The COVID19 pandemicwill have a dramatic impact on global GDP and trade. Latest forecasts from the EuropeanCommission show that the EU economy will contract by -7.4% in 2020 while globalGDP will fall by -3.5%. In addition, research shows that over 140 million people in thedeveloping world could fall into extreme poverty (measured against the 1.90 povertyline) in 2020.In-house analysis performed by DG TRADE’s Chief Economist Unit estimates a decreaseof between 10%-16% in global trade for 2020. For the EU27, the predicted reduction isexpected to be between 9%-15% for extra-EU27 exports and 11%-14% for extra-EU27imports (goods and services combined). DG TRADE also estimates that about 70% ofEU exports and imports of services via mode 1 might still find their markets, but 30%might be at risk.Trade has a vital role to play in the post COVID19 era. Total EU trade has increased byalmost 25% in the last 5 years alone. 36 million European jobs are directly or indirectly,supported by trade. The share of total imports and exports for goods and services in EUGDP is 35.2%, while the share of intermediate goods in extra-EU imports was 60.3 %and 49.3 % for extra-EU exports.The role of imports cannot be understated. Just over a quarter (27.1%) of EU firmsengaged in extra EU trade were two-way traders (both importers and exporters). In valueterms two-way traders accounted for 95% of all goods traded in 2017. Analysis by DGTRADE found that EU import openness has generated a 7.8% or 1.2 trillion real incomegain compared to a situation in which no imports would take place.SMEs account for 87% of total exporting EU companies and support over 13 million jobsin Europe. In normal circumstances, exporting SMEs are individually vulnerable to tradeshocks so it is vital to ensure that SMEs survive and adapt in the post COVID19 era. Butcollectively, given their dispersion across geographical regions, product span anddiversity, having a large share of diversified SMEs is also a source of risk mitigation andresilience.A model of ‘open strategic autonomy’ should be pursued in order to create anenvironment that allows for economic competitiveness and growth along with the internalmeasures that are needed to strengthen the European economy and defend it from unfairand abusive practices. Protectionism is not the answer and DG TRADE research on theimpact of a worldwide increase in tariffs up to legally allowed bound rates coupled withan increase in the cost of traded services predicts that the annual worldwide real incomelosses could be US 211 billion. This would also lead to a fall of US 606 billion in thetotal trade of goods and services.3
The COVID19 outbreak has shown that EU firms in certain sectors are highly dependenton inputs from China. Textiles (46.2%), electrical equipment (46.1%) and electronicproducts (39.7%) are the EU27 products most reliant on inputs from China. These sectorsalso account for the largest share of inputs sourced abroad.Keeping the supply chains of COVID19 related medical products functioning is of vitalimportance. Estimates from the World Bank show that the impact of current exportrestrictions could increase the price of medical masks by 20.5% while other productscould experience smaller increases. The EU imported 380 billion worth of COVID19related medical products from third countries about in 2019 and is the world’s secondlargest importer (and largest exporter) of these products.Global food markets remain relatively stable and well stocked and so far, food priceshave been unaffected. However, the current crisis has led to 17 countries to introduceexport restrictions on food. Protectionist policies from the 2007-2008 food price crisissaw the global prices of rice and wheat increase by 40% and 30%.Firms will be forced to rethink their value chains, as they will need to diversify theirsupplier base to protect against disruptions in production and this rethinking of GVCswill create opportunities for new investment destinations and suppliers. UN Comtradedata shows that buyers around the world have been able to find alternative sources ofsupply from other non-traditional exporters of PPE at very short notice during the currentpandemic.DG TRADE is already actively engaged in the enforcement and implementing anambitious trade policy plan. The latest internal estimates show that the removal of 100barriers over the period 2014-2018 has led to an increase of about 60% of the EU exportsof the products previously affected by barriers towards the partners imposing them. Thiscorrespond to an additional 8 billion of EU exports in 2019.Innovation and new production technologies have led to the emergence of newly tradedgoods and services, which in turn contributes to faster trade growth. In 2017, 65% ofglobal trade was in categories that did not exist in 1992. 3D printing (3DP) has played adirect role in easing the pressure on supply chains and governments during the COVID19outbreak. However 3DP revenues account for less than 0.1% of global manufacturingrevenues. The extent to which the technology will penetrate mainstream industries andmarkets in the future is unclear.While there is a wealth of research and data at an aggregated and sectorial level, moredetailed firm-level data is required in order to fully understand the impact of thecoronavirus outbreak on EU trade, particularly in sectors where production is fragmentedglobally. Firm-level trade statistics may also improve communication, leading to a moremeaningful engagement with stakeholders. This is turn could help reduce publicmisperceptions about trade policy and could help bring current trade policy in line withglobal value chains.4
1. POST-PANDEMIC INTERNATIONAL TRADEThe outbreak and spread of the COVID19 pandemic will have a devastating impact onthe global economy. Governments across the world have introduced measures that shutdown businesses temporarily and have restricted travel and the movement of people.These measures have led to sharp contractions in the level of output, household spending,investment and international trade.1.1. The impact of COVID19 has harmed both GDP and tradeThe latest Economic Forecast from the European Commission 1 predicts that the EUeconomy will contract by -7.4% in 2020 while global GDP will fall by -3.5%. GDP in theUS is expected to fall by -6.5% while GDP in China is expected to grow by 1% (see table1).The pandemic will have a negative impact on all Member States, ranging from -4.3%in Poland to -9.7% in Greece.The disruptions to the global economy are assumed to be concentrated mostly in thesecond quarter of 2020. It is then expected to pick up, assuming that containmentmeasures will be gradually lifted and that after these measures are loosened thepandemic remains under control. It also assumes that the monetary and fiscal measuresimplemented by Member States and the EU are effective limiting permanent damage tothe economy. The forecast anticipates an economic recovery in 2021 with world growthexpected to be 5.2% while EU GDP is expected to increase by 6.1%. Despite thishistorically high EU growth rate, output in 2021 would be almost 2 percentage pointslower than the pre-pandemic level in 2019.Table 1: World GDP growth and projections, selected economies, (real GDP, % 55.21.7-6.45.0Emerging andDevelopingEconomies3.7-1.35.3EU 27USAChina1.5-7.46.12.3-6.54.96.11.07.8Source: European Economic Forecast, spring 2020, P Projected growth.The reduction in economic activity following the COVID19 outbreak will lead to asharp contraction in international trade in 2020. In-house analysis performed by DGTRADE’s Chief Economist Unit estimates a decrease of between 10%-16% in globalEuropean Commission (2020), ‘European Economic Forecast, Institutional paper No. 125, May 2020,ISSN 2443-8014. Available at: -finance/ip125 en.pdf15
trade for 2020.2 For the EU27, the predicted reduction is expected to be between 9%-15%for extra-EU27 exports and 11%-14% for extra-EU27 imports (goods and servicescombined). In absolute terms, using the latest available statistics, this amounts to areduction in extra-EU27 exports between 282-470 billion EUR and a decrease in extraEU27 imports between 313-398 billion EUR (goods and services combined).Exports of primary sectors (other than energy) turn out to be less affected thanmanufacturing sectors, although most of which see export contractions by 15%. Inparticular, transport equipment and electrical machinery exports turn out to be the mostaffected sectors. The WTO secretariat has also recently simulated the potential effects ofthe COVID19 pandemic on international trade, using a different methodologicalapproach. They forecast that world merchandise trade could fall by between 13% and32% in 2020, depending on assumptions about the length and severity of the COVID19crisis.31.2. Digital services trade is likely to be less affected by the pandemicTrade in services by modes of supply as produced by WTO and Eurostat provides anopportunity to predict how the current crisis can change EU services trade. Assuming thatCovid-19 restrictions primarily affect trade in services via mode 2 (consumption abroad)and mode 4 (presence of natural persons), but also mode 1, cross border trade in transportservices linked to passengers, DG TRADE estimates that about 70% of EU exportsand imports of services via mode 1 might still find their markets, but 30% might beat risk, see Figure 1.4Social distancing may become the new normal and firms will need alternative solutions toensure their products can be sold and traded across borders without face-to-faceinteraction. E-commerce and online retail will become increasingly important for thesurvival of many firms. Data collected by Emarsys and GoodData shows that ecommercerevenue increased by 73% in Europe in April 2020 compared to the same period last yearwhile online retail sales grew by 65%.5European Commission (2020), ‘The impact of the Covid-19 pandemic on global and EU trade’ ChiefEconomist Team, DG Trade, European Commission, Brussels, 27 May 2020.23WTO (2020) Trade set to plunge as COVID-19 pandemic upends global economy, Press/855PressRelease, 08 April 2020. Available at: https://www.wto.org/english/news e/pres20 e/pr855 e.htm4Services trade via mode 3 (commercial presence abroad) is expected to be unaffected and to continue asnormal. Therefore, mode 3 services are not included in these calculations.5Emarsys and GoodData, COVID-19 Commerce Insight, 6 May 2020. Available at: https://ccinsight.org/6
Figure 1: EU 28 services exports by sector and by modes of supply, 2017, billion euroSource: Author’s calculations based on the WTO TISMOS database.Latest data shows that almost one-fifth of EU online consumers buy from anotherMember state.6 The European Union has carried out a number of initiatives to boost ecommerce and to create new opportunities for both retailers and consumers. Theseinclude simplified VAT rules making it easier to buy and sell goods online 7, reducing thecosts of cross-border parcel delivery8 and revising consumer protection rules to includeonline purchases9.6European Commission, (2018) ‘Fact sheet-E-commerce in the EU’, 28 November 2018.7https://ec.europa.eu/taxation ecommerce -8-2017-0315 tection-rules7
The continued implementation of the WTO’s Trade Facilitation Agreement (TFA) couldaddress some of the challenges associated the COVID-19 pandemic.10 The TFA hasseveral provisions that promote the adoption of improved export, import and transitprocedures. For example, the TFA includes provisions that provide for a de minimisshipment value or dutiable amount for which customs duties and taxes will not becollected. For certain WTO members this also extends to the VAT and other internaltaxes. The EU has also recently introduced a number of simplifications and digitalimprovements in customs procedures. For instance, since 1 June 2020, the EU has a newelectronic system to manage special trade procedures, such as inward and outwardprocessing trade. This is a welcome development for a non-negligible share of EU trade11and for new EU companies willing to engage in trade, notably as part of global supplychains.1.3. Could developing countries be worse affected?Projections from its latest European Economic Forecast estimate a -1.3% fall in GDP inemerging and developing countries in 2020 compared to a -6.4% drop for advancedeconomies (see Table 1). So far, the vast majority of reported COVID-19 infections hasbeen in developed countries however a major COVID-19 outbreak in developingcountries would most likely have more significant negative effects than in any developedcountry. The housing situation in cities and the absence of social safety nets mean thatmany people cannot afford to stay home from work. Hence, there would be difficulties inenforcing social-distancing rules and lockdown measures and already weak health-caresystems would likely quickly become overwhelmed by an outbreak, especially in denselypopulated areas.Declining demand for oil and commodities and a collapse in tourism will depressrevenues and most governments have no fiscal buffers to stimulate their economies in thewake of confinement measures. Laborde et al (2020)12 estimate that over 140 millionpeople in the developing world could fall into extreme poverty (measured againstthe 1.90 poverty line) in 2020—an increase of 20% from present levels. Withoutadequate support, this global health crisis could thus cause a major poverty and foodcrisis. The IMF acknowledged the gravity of the situation and on Monday 13 April, itapproved immediate debt service relief for an initial six months for 25 countries to helpthem channel more of their scarce financial resources towards vital emergency medicaland other relief efforts.10WTO (2020), ‘E-Commerce, Trade and the Covid-19 Pandemic’ Information note, 4 May 2020.Cernat L, and M Pajot (2012) ‘Assembled in Europe: The role of processing trade in EU exportperformance’, VoxEU, 17 September 2020.11Laborde D, W Martin and R Vos (2020) ‘Poverty and food insecurity could grow dramatically asCOVID-19 spreads’, International Food Policy Research Institute Blog: Research Post, April 16, 2020.128
Box 1: Increasing the participation of LDCs in global supply chainsThere is clear evidence that existing preferential schemes contributed significantly toboosting least developed countries (LDC) exports.13 In fact, exports to the European Unionfrom developing countries using special tariff preferences under the EU’s GeneralisedScheme of Preferences (GSP) reached a new high of 69 billion in 2018. 14 Many seem tobelieve that there is little the multilateral trading system could further offer LDCs as theyhave already obtained fairly generous market access to key markets under the currentpreferential schemes. Given that the LDC exported value-added is used further down theglobal supply chain as part of third country exports still facing tariffs, one could envisage aglobal preferential scheme based on "value-added", i.e. products originating in any WTOmembers should receive an "LDC preferential treatment" proportionate to the value ofLDC’s inputs content embodied in their exports. If the LDC preferential market access werechanged from a simple "LDC direct export" approach to a "GVC approach", LDC exportswould receive a considerable boost and market premium under such a "GVC for LDCs"scheme.15Research from CEPR highlights that most developing countries rely heavily on imports tomeet their needs of medical supplies essential. This makes developing countriesextremely vulnerable to changes in policies by exporters. As a result of export restrictionson key COVID-19 products, access to medical supplies and other critical products couldbe disrupted for developing countries that need them urgently. Taking multiplier effectsinto account they estimate that export restrictions could increase prices of COVID-19relevant goods by 23% on average. 16Nilsson L and E Davies (2020) “A comparative analysis of EU and US trade policies towards leastdeveloped countries and the African Growth and Opportunity Act beneficiaries”, Development PolicyReview, Volume 38 Issue 5, forthcoming, 2020. and Klasen, S., I. Martinez-Sarzoso and F.Novak Lehman,(2016), ‘Trade Preferences for Least Developed Countries. Are they Effective? Preliminary EconometricEvidence’, CDP Policy Review No 4, October 20161
Protectionist policies from the 2007-2008 food price crisis . global trade was in categories that did not exist in 1992. 3D printing (3DP) has played a direct role in easing the pressure on supply chains and governments during the COVID19 outbr
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