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The COVID-19 pandemic and international trade Contents

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1Introduction

1.The outbreak of the COVID-19 pandemic caused an immediate and severe impact on economic output and international trade which seems likely to exceed that of the 2008–09 financial crisis. The pandemic triggered a “mutually reinforcing triple shock” in demand, supply and trade. There was a reduction in consumer demand, due to lockdown policies from governments and uncertainty over employment. Production was halted or greatly reduced in most sectors, in turn reducing demand for intermediate inputs and impacting supply. Further, the ability to ship goods became inhibited through border controls or restrictions on certain products.1 As a result of the considerable impacts on international trade, we launched this inquiry in March 2020, to consider how this was affecting UK consumers and businesses, as well as the global trading system more generally, and to scrutinise the response by the Department for International Trade (DIT).

2.We heard evidence about the impact of disruption on trade in essential goods (pharmaceuticals, medical supplies and agri-food products—see Chapter 2), trade in manufactured goods and services (see Chapter 3), and international investment (see Chapter 7). In addition, we examined how the UK Government has sought to support businesses to continue to trade internationally in an interrupted trading environment (see Chapter 4). Many of the measures taken in response to the pandemic were applied by governments unilaterally and with little advance discussion at the international level. Further, we received evidence that in the long term COVID-19 could result in a shift towards protectionism.2 We looked at the role played by international institutions in coordinating a unified response to the pandemic (see Chapter 5); and considered what long-term implications the crisis could have on the future of supply chains and trade (see Chapter 6).

3.The remainder of this chapter summarises the impact of COVID-19 on trade and investment, both internationally and in the UK.

Economic impact of COVID-19 on trade and investment

International outlook

4.While the full extent of the economic impact of the pandemic is only beginning to emerge, it has clearly caused significant economic disruption, both in the UK and internationally. In April 2020, the World Trade Organization (WTO) published a trade forecast which predicted a contraction in world merchandise trade of between 13% and 32% in 2020, based on modelling for optimistic and pessimistic scenarios. It said that trade would fall steepest in sectors with complex value chains; and services trade was likely to be most directly impacted by travel restrictions. Trade volumes were expected to decline by double-digits across all regions, but the WTO said exports from Asia and North America were likely to be hardest hit.3 The Organization’s updated forecast, published in June, found that merchandise trade contracted by 3% in quarter one of 2020 and is estimated to fall by 18.5% in quarter two. It said that “these declines are historically large, but could have been much worse” and indicated that its pessimistic scenario was now unlikely, as it implied sharper declines in quarters one and two.4 However, the Organisation for Economic Co-operation and Development (OECD) warned that the outlook for the economic recovery remained “highly uncertain and vulnerable to a second wave of infections.”5 Further, the WTO said “a slower-than-expected pace of economic recovery would weigh on trade growth,” resulting in trade growth well below the pre-pandemic trajectory.6

5.The United Nations Conference on Trade and Development (UNCTAD) described the pandemic as a “supply, demand and policy shock” for Foreign Direct Investment (FDI)7 and predicted a “dramatic fall” in FDI due to the crisis.8 It forecast that global FDI flows would decrease by 40% in 2020, and it expected a further fall of between 5% and 10% in 2021, followed by a recovery in 2022.9 The crisis had caused a slowing down of existing investment projects, a re-assessment of new projects due to the economic uncertainty, and the implementation of new investment restrictions by governments in response to the crisis. While the impact was expected to be severe everywhere, UNCTAD said that developing countries would see the biggest falls in FDI due to their reliance on global value chain-intensive and extractive industries. Europe was expected to see the largest falls amongst developed countries.10

UK outlook

6.According to the OECD, as a service-based economy, the UK is heavily impacted by the pandemic.11 UK GDP fell by 2% in quarter one of 2020 compared with the previous quarter and is expected to further decline sharply. The OECD’s UK-specific assessment said “investment growth is projected to remain subdued and the outlook for trade remains weak.”12 In the three months to May 2020, both UK exports and imports fell by £47.7 billion and £42.6 billion respectively. The services sector and manufacture of machinery and transport equipment, particularly road vehicles, were most impacted.13 Responses to the Office for National Statistics’ Business Impact of Coronavirus (COVID-19) Survey found that 73.5% of exporting businesses were exporting less than normal and 60.4% of importing businesses reported that they were importing less than normal.14

7.The Purchasing Managers’ Index (PMI) and sector-specific indices have tracked the impact of the pandemic on different sectors of the economy.15 The PMIs for both services and manufacturing experienced sharp declines between March and April 2020.16 Manufacturing output declined by 24.3% while the Index of Services recorded its largest monthly fall on record, a drop of 19%.17 The PMIs for both sectors recovered somewhat in May and June. For manufacturing, this was linked to the partial reopening of plants. In the service sector, new business activity continued to decline but at a less sharp rate than in previous months, with financial, transport and communication services the best performing.18 The exception was export sales, which continued to decrease at a shaper rate, due to ongoing international travel restrictions, logistical difficulties and heightened global economic uncertainty.19 The data for June 2020 concluded that manufacturers were much more optimistic about the outlook for their businesses than service providers.20

Our evidence

8.Over the course of six evidence sessions, we heard from 26 witnesses, including the Secretary of State for International Trade, Rt Hon Elizabeth Truss. Our other witnesses included Ambassador Alan Wolff, Deputy Director-General of the WTO, academic experts, business representative bodies, journalists and civil society organisations. In addition, we received 52 pieces of written evidence. We would like to thank all those who took the time to provide us with evidence, particularly in light of the fast-evolving nature of the pandemic and related policy responses, and the short notice of our inquiry.

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