Unlike SARS, where the virus dissipated quickly, Covid-19 brought most economic activity and social interactions to a halt. According to estimates, as of end November 2022, the virus had afflicted over 640 million people and caused 6.4 million deaths. The months-long lockdowns and quarantines devastated the global economy and trade. According to a report by the UNCTAD, global trade in 2020 declined by $2.5 trillion (approximately 9 per cent). Severe though this contraction was, it was mercifully lower than the initial estimates of a double-digit hit. When economic conditions improved in 2021, as government and health authorities got more adept at handling the contagion, the value of global trade rebounded strongly, reaching a record high of about $28.5 trillion, equivalent to an increase of about 13 per cent compared with pre-pandemic levels.
This aggregate-level data, however, hides the wide disparities among the least developed countries, developing countries, and developed countries. While the 2020 contraction was similar among all nations, the recovery in 2021 wasn’t uniform. The developed nations saw a 10 per cent fall in imports and exports in 2020, and a recovery by a similar margin the next year. For developing nations, the fall in trade was between 10-12 per cent in 2020. This grouping recorded a recovery of 15 per cent (for exports) and 12 per cent for imports in 2021. The least developed countries, which showed an 11-14 per cent fall had the slowest recovery of 6 per cent (exports) and 11 per cent (imports).
The pandemic, therefore, accentuated the economic disparities among nations. This is especially true if we look at a region like Africa, where exports fell almost by a quarter in 2020 and hardly recovered at all in 2021. One of the reasons for this was a sharp decline in commodity prices. Data from UNCTAD shows that the export competitiveness of the poorest countries declined sharply during the pandemic.
Another adverse impact of the pandemic on developing nations was on food prices and food security. While in the first six months of the pandemic, from January to September 2020, food prices declined marginally from the last quarter of 2020 through to February 2022, UNCTAD’s monthly food index trended upwards. Food imports absorb a large amount of export revenue in developing countries; a rise in basic food prices thus increases import bills, potentially limiting access to nutritious food. Rising food prices in 2021 contributed to vulnerability and food insecurity in many low-income developing countries.
According to UNCTAD, in 2020, small island developing states and the least developed countries spent approximately 42 and 23 per cent respectively of the total value of merchandise exports on food imports. In 2021, according to estimates, food import bills in developing regions increased by 20 per cent compared to 2020. This was largely attributed to higher food commodity prices and a threefold increase in freight, which led to a deepening of food insecurity. According to the Food and Agriculture Organisation (FAO), between 720 million and 811 million people worldwide were undernourished in 2020, an increase of at least 118 million compared to 2019. The war in Ukraine and the resultant drop in food grain supply from that nation is likely to further exacerbate this.
If we look at the impact of the pandemic on various industries, trade in automobiles, energy, and manufacturing was worst hit in 2020, while, unsurprisingly, trade in pharmaceuticals, medical equipment and personal protection gear surged. The prolonged lockdowns and the need to work from home also saw a surge in trade in office equipment, while agricultural exports were fairly resilient.
The surge in demand for office equipment was reflected in an increase in information technology-related trade, while the travel and tourism sector was devastated, falling between 50 and 70 per cent. The UNCTAD data also highlights a fascinating factoid. Trade, where subject to deep trade agreements between partners (beyond just tariff concessions), was substantially more resilient during the trade downturn in 2020. A possible reason according to the report is that such trade agreements often reduce the uncertainty of cross-border transactions by providing for more stringent policy commitments, a more developed legal framework, and improved regulatory convergence.
As with trade in goods and services, cross-border investments also declined sharply in 2020, by 35 per cent to less than US$1 trillion before surging to $1.58 trillion in 2021. Again, reflecting the disparities among nations, the recovery was largely accounted for by steep increases in developed countries. The war in Ukraine has again dampened the enthusiasm for cross-border investments, with greenfield project announcements declining by 21 per cent and the number of cross-border mergers and acquisitions dropping by 13 per cent.
When it came to policy measures adopted by governments, there was an interesting contrast between developing and developed countries, the UNCTAD report notes. Their economies hit by declining trade and falling demand, most of the investment measures implemented in developing countries were aimed at liberalising, promoting, or facilitating investment. In contrast, the developed countries, faced with depressed asset prices caused by falling markets, took a more protectionist stance. The majority of the measures introduced in developed countries included new regulations or reinforced existing ones.
All of these measures were related directly or indirectly to national security concerns about foreign ownership of critical infrastructure, core technologies or other sensitive domestic assets. Often, the measures were aimed at protecting sensitive domestic businesses against foreign acquisition during the pandemic. “About 25 countries, nearly all developed countries, as well as the EU, adopted or reinforced screening regimes for foreign investment, bringing the total number of countries conducting foreign direct investment screening for national security reasons to 34,” the report said.
Excerpted with permission from The Global Trade Paradigm: Rethinking International Business in the Post-Pandemic World, Arun Kumar, HarperCollins India.
