WTO: World trade primed for strong but uneven recovery

Published April 1, 2021, 11:35 AM

by Bernie Cahiles-Magkilat

Prospects for a quick recovery in world trade have improved as merchandise trade expanded more rapidly than expected in the second half of last year with the Asian region meeting global demand, according to the new estimates of the World Trade Organization. 

A WTO report posted in its website showed the volume of world merchandise trade is expected to increase by 8.0 percent in 2021 after having fallen 5.3 percent in 2020, continuing its rebound from the pandemic-induced collapse that bottomed out in the second quarter of last year.

Photo credit: https://www.wto.org/

WTO also said trade growth will likely slow to 4.0 percent in 2022, with the total volume of global trade remaining below the pre-pandemic trend.

The effects of the pandemic will continue to be felt as this pace of expansion would still leave trade below its pre-pandemic trend. 

The relatively positive short-term outlook for global trade is marred by regional disparities, continued weakness in services trade, and lagging vaccination timetables, particularly in poor countries. COVID-19 continues to pose the greatest threat to the outlook for trade, as new waves of infection could easily undermine any hoped-for recovery.

Major points showed that world GDP at market exchange rates should increase by 5.1 percent in 2021 and 3.8 percent in 2022, after contracting by 3.8 percent in 2020.

Merchandise trade in nominal dollar terms fell in 2020 by 7 percent while commercial services exports declined by 20 percent. Falling oil prices led to a 35 percent contraction in trade in fuels in 2020.

Travel services were down 63 percent in 2020 and are not expected to fully recover until the pandemic wanes.

“The strong rebound in global trade since the middle of last year has helped soften the blow of the pandemic for people, businesses, and economies,” WTO Director-General Ngozi Okonjo‑Iweala said. “Keeping international markets open will be essential for economies to recover from this crisis and a rapid, global and equitable vaccine roll-out is a prerequisite for the strong and sustained recovery we all need.”

“Ramping up production of vaccines will allow businesses and schools to reopen more quickly and help economies get back on their feet. But as long as large numbers of people and countries are excluded from sufficient vaccine access, it will stifle growth, and risk reversing the health and economic recovery worldwide,” she said.

Photo credit: https://www.wto.org/

The Director-General added that trade through value chains has helped countries access food and essential medical supplies during the crisis.

“Manufacturing vaccines requires inputs from many different countries. One leading COVID-19 vaccine includes 280 components sourced from 19 different countries,” she said. “Trade restrictions make it harder to ramp up production.

Short-term risks to the forecast are firmly on the downside and centred on pandemic-related factors. These include insufficient production and distribution of vaccines, or the emergence of new, vaccine-resistant strains of COVID-19. Over the medium-to-long term, public debt and deficits could also weigh on economic growth and trade, particularly in highly indebted developing countries.

In the upside scenario, vaccine production and dissemination would accelerate, allowing containment measures to be relaxed sooner. This would be expected to add about 1 percentage point to world GDP growth and about 2.5 percentage points to world merchandise trade volume growth in 2021. Trade would return to its pre-pandemic trend by the fourth quarter of 2021. In the downside scenario, vaccine production does not keep up with demand and/or new variants of the virus emerge against which vaccines are less effective. Such an outcome could shave 1 percentage point off of global GDP growth in 2021 and lower trade growth by nearly 2 percentage points.

For the whole of 2020, merchandise trade was down 5.3 percent. This drop is smaller than the 9.2% decline foreseen in the WTO’s previous forecast in October 2020. The better than expected performance towards the end of the year can partly be explained by the announcement of new COVID-19 vaccines in November, which contributed to improved business and consumer confidence. Box 1 below discusses reasons for the forecast upgrade in more depth.

The volume of world merchandise trade plunged 15.0 percent year-on-year in the second quarter of 2020 (revised up from -17.3 % in October) as countries around the world imposed lockdowns and travel restrictions to limit the spread of COVID-19. Lockdowns were eased in the second half of the year as infection rates came down, allowing goods shipments to surge back to near 2019 levels by the fourth quarter.

Faster trade and output growth in the second half of 2020 was supported by major government policy interventions, including significant fiscal stimulus measures in the United States. These measures boosted household incomes and supported continued spending on all goods, including imports. In addition, many businesses and households adapted to the changing circumstances, finding innovative ways to sustain economic activity in the face of health-related restrictions on mobility. 

Effective management of the pandemic limited the extent of the economic downturn in China and other Asian economies, allowing them to continue importing. These actions helped prop up global demand and may have prevented an even larger trade decline.

Notably in ASEAN, three countries Thailand, Vietnam and Malaysia were among those listed as leading importers and exporters in world merchandize in 2020.

The impact of the pandemic on merchandise trade volumes differed across regions in 2020, with most regions recording large declines in both exports and imports  Asia was the sole exception, with export volumes up 0.3% and import volumes down a modest 1.3%. Regions rich in natural resources saw the largest declines in imports, including Africa (-8.8%), South America (‑9.3%) and the Middle East (-11.3%), probably due to reduced export revenues as oil prices fell around 35%. In comparison to other regions, the decline in North American imports was relatively small (-6.1%).

Photo credit: https://www.wto.org/

Asian exports saw a much smaller decline of 7.2 percent in the second quarter, but by the fourth quarter they were up 7.7 percent compared to the previous year. Their rapid recovery can be explained by the relatively small impact that COVID-19 had on certain Asian economies, and by the fact that the region has been supplying the world with consumer goods and medical supplies during the pandemic, driving up regional export totals.

In the forecast periods WTO recognized a divergence between regions with faster and slower trade growth. On the import side, Africa, South America and the Middle East will continue to see their merchandise trade stagnate while other regions will pull ahead. On the export side, most regions will only see modest gains while Asia continues to supply large quantities of goods to global markets.

Trade in nominal US dollar terms fell even more sharply than trade in volume terms in 2020. World merchandise export values were down 8 percent compared to the previous year, while commercial services receipts tumbled 20 percent. Services trade was especially weighed down by international travel restrictions, which prevented the delivery of services requiring physical presence or face-to-face interaction.

In 2021, demand for traded goods will be driven by North America (11.4%) on large fiscal injections in the United States, which should also stimulate other economies through the trade channel. Europe and South America will both see import growth of around 8%, while other regions will register smaller increases.

Much of global import demand will be met by Asia, exports from which are expected to grow by 8.4 percent in 2021. 

European exports will increase nearly as much (8.3%), while shipments from North America will see a smaller rise (7.7%). Strong forecasts for export growth in Africa (8.1%) and the Middle East (12.4%) depend on travel expenditures picking up over the course of the year, which would strengthen demand for oil. Meanwhile, South America will see weaker export growth (3.2%), as will the Commonwealth of Independent States (CIS), including certain former and associate Members (4.4%).

In the second quarter of 2020, North America and Europe saw sharp year-on-year declines in export volumes, down 25.8% and 20.4% respectively. By the fourth quarter these regions had recovered much of their lost ground, with respective year-on-year declines of just 3.0% and 2.4%. Middle Eastern exports also fell precipitously in the second quarter as oil consumption slumped worldwide due to restrictions on international and domestic travel.

WTO also noted that the number of daily international flights fell around 80 percent in the first quarter of 2020 as countries closed their borders to reduce the spread of COVID-19. This number gradually picked up as cases declined and people resumed limited travel. The end of 2020 saw an uptick in flights as people travelled to meet friends and family for seasonal holidays, but a resurgence of the virus has reduced flights again in 2021. International flights are closely related to travel services, but also to transport services and goods trade, as passenger aircraft frequently carry air freight shipments.

In contrast to international flights, seaborne transport has been steadier during the pandemic. The number of port calls dipped in February and April of last year as well as in January of this year, reflecting peak periods of infection. The recent dip is worrying since countries have become increasingly reliant on international trade to obtain vital necessities such as food and medicine.

Finally, WTO said that trade policy restraint by members prevented protectionism from strangling world trade. 

The global trade body said that based on its monitoring, many restrictive trade measures imposed at the start of the pandemic were rolled back, and new liberalizing measures were introduced. 

Despite continuing challenges, notably around vaccine trade, the multilateral trading system kept trade flowing and prevented worse outcomes, as members were restrained by commitments and economic self-interest. As during the global financial crisis, the foundation of the system proved sound, WTO concluded.