The Impact of COVID-19 on International Trade

Felix L. Friedt, Economics

During the Spring semester 2020, one of my students, Matt Zhang ’21 (Foshan, China), approached me about the possibility of conducting a research project together. He expressed his interest in studying the effects of COVID-19 on Chinese exports, which immediately piqued my curiosity. I thought that researching the impact of Chinese lockdowns and other pandemic policies on international trade would be an interesting and timely (and feasible) summer research project and a good opportunity for Matt to connect his economics and political science skills with his personal experiences.

With the generous support from the CSR/Beltman/Mellon funds, our 10-week summer research project is trying to understand the impact of COVID-19 on international trade. Big events, such as the 2008 financial crisis, can have big effects on international trade, and they are typically larger than they are on the domestic economy—on our own GDP. What is the effect, particularly in the case of Chinese exports?

China was the first country to be hit by the novel coronavirus, and, like the US, it is one of the hubs of a globalized economy particularly when you think about things like manufacturing networks and global supply chains. Studying the impact on Chinese exports may be able to provide us with insights into how other countries’ trade may be affected.

Data dive

To get this project off the ground, Matt sourced data about how China dealt with COVID-19 domestically in terms of their own quarantine policies as well as the intensity of COVID over space—which provinces in China were more or less affected by it. He also collected data on Chinese exports to determine which trade partners and which industries of China were most impacted.

Studying the sparse existing literature on this and related topics helped us frame our analysis around the three primary channels through which COVID-19 may impact Chinese exports, including the 1) local supply shock, 2) international demand shock, and 3) the `infection’ of the underlying global supply chain networks (aka Global Value Chain—GVC–Contagion). That is, the aggregate pandemic effect on Chinese exports to South Africa, for example, may depend on the answers to the following three questions: 1) How severe is the outbreak in Chinese provinces that supply exported products to South Africa? 2) How severe is the outbreak in South Africa affecting consumer demand for Chinese products? 3) How dependent are Chinese producers on foreign suppliers in Italy or Germany, for example, and how severe is the novel coronavirus outbreak for these suppliers? If Germany has more infections than the US and a particular Chinese export industry is more dependent on Germany than the US, then perhaps exports of this particular industry are more affected by the virus through the GVC contagion.

Trade sensitivity

As expected, we found that trade is very sensitive to new infections, both domestic infections in China as well as foreign infections.

We estimate that in the first half of 2020, COVID-19 reduced Chinese exports by about 40 percent, which is a substantial drop. We expect, however, that this impact will taper off throughout 2020 and be less than 40 percent by the end of 2020. While the domestic supply and international demand shocks matter, the GVC contagion—the infection of the supply chain network—accounts for about 75 percent of that reduction.

One explanation is that the international supply shock is relatively persistent over time, while the demand shock is not. Think of a country that’s really badly infected at first. Consumers stop spending money so there is no demand for imports from China. But, after about two months or so, countries start demanding more imports than they would have without the disease because their own production is disrupted, and they need to substitute for it with imports from China.

Shaping the pandemic’s economic impact

Ultimately, the patterns we observe in Chinese exports in response to these three types of shocks set the pandemic effect on trade distinctly apart from previous disruptions of international trade of this magnitude. The Great Trade Collapse of 2008-09, for example, was primarily driven by a collapse in global demand. Consequently, our findings suggest that trade policies have to adapt and should focus on the resilience of and dependence on global supply chains, as these may play an important role in shaping the overall economic impact of the pandemic.

Matt and I co-authored and published a paper about our work. “The Triple Effect of Covid-19 on Chinese Exports: First Evidence of the Export Supply, Import Demand & GVC Contagion Effects,” can be found in the online journal Covid Economics—Vetted and Real-time Paper. Issue No. 53.