Uncertainty magnified global trade costs; WTO Report

The WTO Secretariat has released a new information note warning about potential trade cost increases due to COVID-19 disruptions.

The note discusses the effect of the pandemic on key components of trade costs, especially those relating to travel and transport, trade policy and uncertainty. It identifies areas where, even after the pandemic is contained, higher costs are likely to persist.

The note reports that travel restrictions and border closures constitute an important part of the initial policy response to the COVID-19 pandemic and these measures affected trade in goods and services directly. They have disrupted freight, business travel and the provision of services that rely on the presence of people abroad.

The performance of the freight transport services is crucial to the manufacturing cost of a trade. Maritime and land transport have remained largely functional since the beginning of the COVID-19 crisis, although they have sometimes recorded considerable delays, air freight transport has been severely disrupted, with global air freight capacity shrinking by 24.6% in March 2020.

Most governments continue to do as much as possible to keep traffic flowing, but travel restrictions in some areas have the potential to severely disrupt regional trade and livelihoods.

Transport and travel costs are an important part of the cost of trade and are estimated to account for 15 to 31 percent depending on the sector. Hence, travel restrictions are likely to account for a significant increase in trade costs for as long as they remain in place.

Trade-able services that rely on physical proximity between suppliers and consumers, such as tourism, passenger transport, or maintenance and repair services, have been severely affected by travel restrictions and social distance protocols and have caused an increase in trading costs.

The effect of trade costs on foreign trade is magnified by high levels of uncertainty. For example, a commonly used metric for measuring the global degree of uncertainty in 2020 found it to be 60% higher than the rates caused by the Iraq War and the 2003 outbreak of the Severe Acute Respiratory Syndrome (SARS).

Uncertainty decreases a firm’s appetite for investment in new trading partnerships, and the rise in uncertainty can also lead to a downturn in trade finance, which is likely to take a particularly heavy toll on developing and emerging economies.

Looking ahead, the report notes that many governments have implemented measures to mitigate pandemic-related economic activity disruptions which includes exemption of certain transport crew from travel restrictions, or by improving the quality and access to Information and Communications Technology.

The quality of the infrastructure for information and communication technology (ICT) and digital preparedness will be integral factors in deciding how well economies cope with the pandemic shock that highlights the report.

Furthermore, government policy choices — which could either minimize or raise trade policy uncertainty — will be critical in influencing trade costs associated with uncertainty in the future.

Although many of the fluctuations in trade prices can be expected to reverse once the pandemic is brought under control, certain consequences can remain, the study states. For example, restructuring of the aviation industry and changes in customer demand for air travel may result in higher costs for air transport.