Covid-19: WTO warns of possible trade cost increase

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

The note examines the pandemic's impact on key components of trade costs, particularly those related to travel and transport, trade policy and uncertainty.

It identifies areas where higher costs may persist even after the pandemic is contained.

The note estimates that travel and transport costs account for as much as a third of trade costs depending on the sector. Pandemic-related travel restrictions are therefore likely to affect trade costs for as long as they remain in place.

For example, global air cargo capacity shrank by 24.6 percent 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 transports 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.

Trade policy barriers and regulatory differences are estimated to account for at least 10 percent 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 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. A crisis-induced shift towards the digitalisation of customs and regulatory procedures to reduce physical contact could potentially lower the associated trade costs in the long term.

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 to foreign standards.

It notes that in the first quarter of 2020, a widely used measure for the global level of uncertainty registered levels 60 percent 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.

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 key points of the report are as follows:

• 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 percent. 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 sometimes registered 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 percent 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 percent 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.