Trade flows and the pandemic: evidence from Europe

The impact of the Covid-19 pandemic on trade flows and patterns: evidence from Europe

The rapid spread of Coronavirus has forced governments throughout the globe to adopt lockdown measures that have led to significant contractions in both output and trade. The decline in trade caused by the current health crisis and the resulting economic uncertainty is likely to exceed that induced by the global financial crisis (GFC) of 2007-08. 

This project aims to provide evidence on the impact of the Covid-19 pandemic on international trade in the case of various European countries and to assess how long the recovery will take. For this purpose, it will use state-of-the-art econometric methods to estimate dynamic panel data models. More specifically, it will make a threefold contribution. 

First, it will analyse the impact of the Covid-19 pandemic on trade flows (imports and exports) in the UK and the EU countries both in the short and in the long run. The current pandemic is both a supply and a demand shock and both types of shocks can be expected to affect international trade. Therefore, our analysis will aim to establish the relative importance of Covid-19 as a supply shock leading to a fall in exports or instead a demand shock resulting in a decline in imports.

Second, it will investigate the impact of the Covid-19 crisis not only on trade flows but also on trade patterns. For this purpose, the analysis will be carried out both at the aggregate and at the sectoral level. The current pandemic has caused a value chain disruption, and therefore trade is likely to fall more in sectors (such as electronics and automotive products) characterised by complex value chain linkages than in others. The epidemic originated in China and the value chain disruption was already at that stage an important factor affecting trade; it has remained so now that the disease has spread worldwide. China is an essential supplier of inputs used in industries around the world. In particular, industrial parts and components made in China are important for manufacturing processes in most economies, whose manufacturing sectors are at the heart of numerous international supply chains. Thus, a supply shock is likely to lead to ‘supply chain contagion” through trade in intermediate goods.

Third, it will compare the effects on trade of the Covid-19 pandemic and of the GFC of 2007-8 respectively. As a first step, various indicators will be constructed measuring the extent of the current slowdown in comparison to the earlier one following the GFC. During the GFC banks experienced liquidity and solvency problems and governments had to adopt urgent monetary and fiscal policy measures to counter the downturn and provide temporary income support to businesses and households. By contrast, in the case of the current health crisis, the impact on the economy is due to the restrictions on movement and social distancing that have affected labour supply, transport and travel as never before, and clearly different policy measures are required. The findings of this project will be of interest not only to academics but also to outside users (and therefore will also be disseminated in the form of briefing notes). For instance, they will provide guidance to policy-makers on trade policies at a crisis time, and on how to reduce pandemic-related trade risks and facilitate trade (international policy coordination might lead to a much faster recovery). 

Our findings will also be informative for market participants having to choose appropriate trade strategies. This engagement with end-users in policy-making and the trade sector will create collaboration opportunities between them and Brunel University London.