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The sudden deterioration of prices and real flows were the main explanatory factors behind the decline in the value of LAC goods exports. Services exports also began to contract for the first time since 2015. There have been some signs of improvement since June, but projections for the second half of 2020 suggest that significant risks to recovery remain. 

The COVID-19 pandemic plunged the world and LAC into the most acute trade contraction since the Global Financial Crisis. Goods exports from LAC had already fallen by 2.4% in 2019 after just two years of growth. The year-on-year contraction accelerated from 3.5% in the first quarter to 27.5% in the second. In the first half of 2020, the average year-on-year variation rate was –16.0%. Unlike the trade contractions of the last decade, the main driver of the current crisis was the drop in export volumes. In real terms, the region’s external sales contracted more than global trade (–12.1% and –8.9%, respectively). Commodity markets, particularly those of energy goods, reacted quickly to the pandemic, causing a 5.2% contraction in export prices that also contributed to depressing the value of LAC’s external sales. The variation rate of exports of services from LAC moved onto negative ground for the first time since 2015, going from 1.1% growth in 2019 to a contraction estimated at 29.5% year- on-year in the first half of 2020.

Although the pandemic has not impacted trade flows as much as initially expected and relative improvement has been observed since June, the most recent trend indicators point to a slow recovery of export flows to precrisis levels. Looking ahead, there are growing risks associated with the instability of external demand as a result of new lockdowns and social isolation measures, the volatility of commodity markets, and the indirect effects of global trade tensions, as well as the forecasts of a contraction in intraregional trade, given that the region is continuing to be hard hit by the pandemic.

Although most of the contraction was explained by the drop in extraregional trade flows, the downturn in intraregional trade was more intense. Trade flows within every integration scheme contracted more than trade with the rest of the world. This intensified a trend toward intraregional trade losing relative weight that was also observed in 2019.

In the first half of 2020, the contraction in exports to the US (–19.5%), the EU (–18.6%), and, to a lesser extent, China (–1.0%) played a decisive role in LAC’s trade performance, explaining around two-thirds of the overall downturn. However, intraregional flows fell at even higher rates within all LAC blocs: –30.3% in the Andean Community, –24.6% in MERCOSUR, –24.0% in the Pacific Alliance, and –8.8% in Central America and the Dominican Republic. Similarly, a limited sample of Caribbean countries suggests that intrazone exports from the region contracted by 25.4%, excluding Guyana whose notable increase in oil exports set it apart. In MERCOSUR, the contraction in intrazone sales caused by the collapse of bilateral trade between Argentina and Brazil played a decisive role in the drop in total exports, while Brazil saw an extraordinary increase in soybean shipments to China. On balance, and in keeping with the trend that was observed in 2019, the share of intraregional trade flows in total LAC trade continued to shrink, reaching 12.8% of total trade flows, a drop of 1.2 percentage points in comparison with 2019.

Chapter 1 of this report examines the main features of the downturn in global and regional trade that has been observed since early 2018, tracks the impact of the COVID-19 pandemic on trade in 2020, and assesses the balance of global economic risks. Chapter 2 provides an overview of the region’s recent trade performance, break – ing down the variation in prices and export volumes and assessing the likelihood of a trend reversal in the coming months. Chapter 3 examines the specific features of export and import flows of goods and services in different countries and subregions of LAC. Chapter 4 analyzes the downturn in intraregional trade and examines the export performance of LAC’s main integration blocs. The conclusions discuss the challenges the region must tackle in order to strengthen the participation in the post-COVID-19 global value chains. 1 The Impact of the Pandemic on Global Trade.

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The onset of the COVID-19 pandemic meant governments faced their second systemic economic crisis in under 15 years. This year policymaking went into overdrive as states rightly took steps to protect public health and to stabilize their national economies. The impact of those steps did not stop at national borders. Once more the world trading system faced a major stress test.

When crises happen, overwhelmed officials and policymakers try stifling concerns about trade fallout with the following knee-jerk arguments:

• Collateral damage to trading partners is inevitable at times like this.

• Crisis policy response is temporary and so poses no long-term threat to the world trading system. • No across-the-border tariff hikes (like those witnessed in the 1930s) have occurred and so trade distortions are under control.

• It is unrealistic to expect trade reform during crises.

• Trade rules should not get in the way of national crisis response.

Having documented and analysed information relating to over 2,000 policy interventions taken during the first 10 months of 2020, in this report we marshal evidence to reject every single one of these points. We also compare the policy response this year to that in 2009, during the dark days of the Global Financial Crisis. Doing so reveals there is no single crisis playbook. Governments have a choice in how they respond to crises. Once again states made dissimilar choices with different repercussions for their trading partners. Collateral damage was not inevitable. In fact, we show the fallout across nations this year was very uneven.

This report provides the most comprehensive account to date of the cross-border commercial fallout from government measures taken to tackle the COVID-19 pandemic. Not every element of pandemic response had consequences for trading partners. Of those that did, not all were harmful. Governments may see themselves as responsible solely for the wellbeing of their own citizens but that doesn’t negate the fact that their actions can harm the health as well as the livelihoods of citizens of trading partners. This year has witnessed policy interventions that both sicken-thy-neighbour and beggarthy-neighbour. There has also been a substantial amount of import reform. Key findings relating to global policy dynamics affecting cross-border commerce include:

• Trade distortions implemented this year cover 13.6% of world goods trade. By contrast, trade reforms cover 8.2%.

• By 31 October 2020, a total of 2,031 policy interventions affecting international commerce were imposed by governments around the world. That total is up 74% over the same period in 2019 and 147% higher than the average for 2015-2017, the years before the United States-China trade war really kicked in.

• Only 27% (or 554) of those 2,031 policy interventions benefited trading partners.

• 37 nations saw their commercial interests benefit from 100 or more reforms in trading partners. Whereas 58 nations saw their interests harmed 100 times or more so far this year.

• This year 43 nations saw 10% or more of their goods exports face worse market access conditions. Only seven nations saw 10% or more of their goods exports enjoy better market access.

• During the first 10 months of 2020, 26 nations saw more of their goods exports exposed to better market access abroad than worse conditions. For the rest–over 170 economies—more of their goods exports faced impaired access to foreign markets than improvements.

• Overall, policy intervention during the first 10 months of this year generated a total of 10,546 positive crossborder effects for trading partners. Meanwhile, policy induced 17,252 negative spillovers.

• 110 export curbs on medical goods and medicines remain in force. 68 such curbs have no phase-out date raising the prospect of long-term scarring.

• This year 106 nations implemented a total of 240 reforms to ease the importation of medical goods and medicines.

As is the case before any G20 Leaders’ Summit, we put the track records of this group’s members under the spotlight. Here the main findings are:

• In the first 10 months of this year, together the G20 members undertook 1,371 policy interventions—1,067 of which harmed trading partners. The harmful total is up 24% on 2019 and 117% higher than the years before the trade war, 2015-2017.

• G20 members were responsible for three-quarters of both the harmful and the beneficial knock-on effects for trading partners witnessed this year.

• Three classes of G20 member can be identified—four nations that implemented over 125 trade-related policies in the first 10 months of this year, three nations that implemented 33 or fewer, and the rest (see Figure).

• The policy mix employed by G20 members varied markedly. For example, Brazil undertook 156 policy interventions this year, 47% of which harmed trading partners. For its part, the UK imposed 155 measures and 80% tilted the playing field in favour of domestic firms. Remarkably, the UK’s percentage was bested by Canada, Germany, Japan, Korea, and Saudi Arabia.

• Resort to time-bound crisis intervention varies a lot too. Russia has already phased out 20% of harmful crisis intervention taken earlier this year. China is scheduled to phase out 29% of its harmful measures by the end of this year—the comparable percentages for Italy and Mexico are 32% and 26%, respectively. Overall, 47% of Mexico’s harmful crisisera intervention is time-bound, just ahead of China (46%). In contrast, over 95% of Canada, Saudi Arabia, and South Africa’s policies imposed this year that harm trading partners are not time-bound.

• This year G20 members undertook 770 General Economic Support measures (WTO terminology that captures inside-the-border policy intervention that can affect global commerce). A total of 679 of such measures involved granting different types of trade-distorting subsidies, either to firms competing in home markets or in foreign markets. The G20 is responsible for substantial subsidy-related trade fallout, affecting competitive conditions for 9.4% of world goods trade this year.

Coming at a time when the prospects for a revival of multilateral trade cooperation are improving, our evidence supports three recommendations to policymakers. First and foremost, a major shift in mindset is needed—away from the prevailing view that the world trade rule book must be effectively suspended for the duration of a crisis. This mindset has deep roots—going back to the origins of the post-war trading regime and manifests itself in what are euphemistically referred to as “flexibilities” in multilateral trade accords. In a world with extensive cross-border commercial ties, the current approach to crisis management is a recipe for the long-term scarring of the world trading system.

Keeping goods—including medical kit, medicines, and hopefully soon vaccines—flowing across borders is essential during a pandemic. More generally, open trading regimes facilitate exports, which speed up national economic recovery. A crisis management protocol should be agreed by governments to shape how they respond to crises in a way that limits harm to trading partners and keeps commerce flowing. Temporary policy intervention should be prioritised and a mechanism included to encourage the unwinding of trade distortions introduced during crises. The World Health Organization has protocols that kick in when crises occur, so why can’t the World Trade Organization?

Second, governments and international organizations need to systematically compare the state responses to this year’s pandemic and to the Global Financial Crisis so as to identify those effective policy actions that inflicted little or no harm on trading partners. Third, developing such best practices requires systematic information collection on public policy responses and their crossborder commercial fallout. The new Director-General of the World Trade Organization should strengthen that body’s monitoring and analysis functions. That monitoring needs to pay particular attention to subsidies and other General Economic Support measures. Other international organisations and independent analysts should contribute too.

Simon J. Evenett is Professor of International Trade and Economic Development, University of St. Gallen, Switzerland; Coordinator, Global Trade Alert; and a former nonresident Senior Fellow, Economic Studies, Brookings.

Johannes Fritz is a research assistant University of St. Gallen, Switzerland.

To read the full report, click here.

© CEPR Press, 2020

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While powerful megatrends like global trade tensions, climate change, new technology innovations, and the current COVID-19 crisis impact all parts of the globe, the reality of those impacts – and therefore the necessary responses to them – are inherently driven by unique regional characteristics and the regional enabling environments. The Global Network of Advanced Manufacturing Hubs (AMHUBs) connects regional manufacturing ecosystems to help rapidly transform manufacturing to keep pace with the global megatrends that might otherwise create disruptions for manufacturers around the globe.

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That task is more essential than ever as a step towards reinvigorating the WTO so that it may serve as an effective forum for addressing the trade fallout from the coronavirus crisis. Members need not await the end of that crisis to make progress towards the goal of agreeing on steps to make the Appellate Body operate as intended in 1995. Should there be agreement on that goal, Members can advance solutions now, whether as part of provisional arrangements or through efforts to achieve a permanent solution.

The suggestions in this paper could be implemented either through decisions, agreed interpretations or amendments to the Understanding on Rules and Procedures Governing the Settlement of Disputes (the Dispute Settlement Understanding, or DSU). They include:

1) Providing clear guidance that Appellate Body reports do not constitute binding precedent, but may, as with panel reports, be cited for their persuasive value;

2) Replace the Appellate Body secretariat with clerks seconded from the WTO secretariat;

3) Provide guidance on the role of adjudicators and of the Appellate Body that emphasizes their role of assisting WTO Members in resolving disputes rather than making law.

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The brief calls for a ceasefire between Beijing and Washington on criticism of the two countries’ initial responses to the SARS-CoV-2 virus, accompanied by a commitment to an eventual international investigation of what went wrong in all countries during the early phases of the pandemic. The brief concludes with six areas in which the United States and China should seek cooperation: to share best practices to stem the further spread of the coronavirus; to develop effective vaccines at the earliest possible date; to prepare in advance for mass manufacturing and global distribution of vaccines that are developed; to assist the neediest countries in fighting the disease; to manage debt crises and combat famines in the developing world that might result from the pandemic, and to preserve global trade by privileging diversification of supply chains and national strategic reserves over economic nationalism and less efficient forms of production.

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That matters, because with unrealistic export targets, the deal may be doomed from the start. Other beneficial aspects of Chinese commitments in the agreement could be put in peril. Even worse, hostilities might renew, leading to a re-escalation of trade tensions currently on hold.

Fortunately for the White House, the deal is structured so that the evidence of shortfalls in those Chinese purchase pledges won’t be clear until after the presidential election in November 2020. But anyone who cares about establishing a stable and productive relationship between the world’s two largest economies should be concerned.

The phase one deal has many novel aspects. At the signing ceremony, for example, Trump’s US trade representative (USTR), Robert Lighthizer, respectfully reminded everyone that the United States and China have “two very different economic systems” and that new “trade rules and practices” must “allow us both to prosper.”

But many of these new rules and practices amount to a step backward for the global trading system. Notably, the agreement’s Chapter 6 on Expanding Trade tackles only the one-sided problem of insufficient US exports to China. It does so without mentioning “tariffs.” This was surprising, of course, because Trump’s trade war resulted in Beijing imposing retaliatory tariffs that continued to cover 56.7 percent of US exports to China as of the deal’s signing.

China’s commitment is to increase purchases from the United States valued at $134.2 billion in 2017 to a level of $210.9 billion by 2020 and $257.5 billion in 2021.

If fulfilled, the deal would result in a 92 percent increase—a near doubling—of US exports to China of the covered products between 2017 and 2021. This works out to US export growth of 18 percent on an annualized basis over 2017-21. For perspective, US export growth to China averaged only 21 percent per year when China’s economy was booming at more than 10 percent annually over 2000-07. With China’s economy currently growing much more slowly, for reasons unrelated to the trade war, sustaining 18 percent annual export growth over a four-year period would be a challenge.

But then there are the consequences of Trump’s trade war. The actual starting point to reignite US exports is January 2020. The American companies and farmers tasked with meeting the new targets have suffered through two damaging years of tariffs since those robust export numbers of 2017. US exports to China through 2019 are currently estimated to be $20 billion lower than in 2017.

Thus, China is not being asked to increase imports from the United States by $200 billion over four years (2017-21). It’s even more unrealistic. Beijing must now suddenly increase purchases by $240 billion over two short years (2019-21)—by $96.7 billion in 2020 and by $143.3 billion in 2021.

One potential political benefit of Trump’s deal is its timing. The American public will be unlikely to evaluate whether China has even met the 2020 target until well after the November presidential election. The official US trade statistics for 2020 won’t be available until March 2021.

At the same time, the clock is ticking. Failure to meet the target could result in American retaliation. The phase one agreement also contains a unique and unprecedented dispute settlement chapter with two key elements. The first is a process of bilateral consultations if, say, China has not lived up to the targets. There is no outsourcing of disputes to third party arbitrators, as exists in other agreements, such as the World Trade Organization (WTO) or the US-Mexico-Canada Agreement (USMCA).

Trump’s phase one deal with China was extraordinarily incomplete. US tariffs on hundreds of billions of dollars of trade remain in place. The agreement did not even touch major systemic issues behind the trade war, such as China’s subsidies and state-owned enterprises.

But even the most heralded part of the agreement—China committing to purchase an additional $200 billion of US exports over the next two years—appears precarious. Unrealistic export targets may imperil not only trade peace but also the trade progress required to tackle the legitimate concerns in the US-China trade relationship.

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• Economic policy uncertainty has risen considerably since 2018 owing in large part to the U.S.-China trade war.
• As uncertainty has risen, U.S. firms have been left without a clear understanding of how trade policy might evolve, leading them to delay investment.
• The category of investment most impacted by uncertainty, to date, is equipment, specifically in areas directly caught in the middle of the U.S.-China trade war.
• If uncertainty remains elevated, it could lower the amount of capital available to the economy, thus weakening productivity.  
• A resolution in the U.S.-China trade conflict could boost investment, but the real obstacle is returning more certainty to economic policy. Without this, we will likely see lackluster investment growth for some time to come.

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