The global recession is expected to coincide with a sharp decline in international trade this year, especially as international trade tends to decline more than GDP in times of crisis. However, the extent of this overreaction is difficult to measure. The World Trade Organization (WTO) forecasts a 13-32% decline in world trade. This estimate indicates that all regions would suffer a double-digit decline in their trade volumes. According to Coface’s forecasting model – which uses oil prices, business confidence in the US manufacturing sector, South Korean exports, and the Baltic Dry Index as explanatory variables for global trade – world trade is expected to decline by 7% in the third quarter of 2020 compared to the previous year. However, the outcome could be significantly worse as the usual correlation measured through linear models does not necessarily work in times of crisis. During periods of negative economic conditions, a sharp increase in uncertainty is one of the reasons for the overreaction of trade to GDP – today, however, this overreaction is at an all-time high.
In this period, importers are facilitating the entry of medical products, while exporters are making it harder to export them. In this context, the case of China is peculiar: although their medical exports decreased by 15% in February 2020, in the midst of a local health crisis, their dominant market share (55.3%) of global mask exports meant that China’s cooperation has been essential in supplying the world. China’s daily production has jumped to 116 million masks, 12 times the amount it produced before the epidemic.
In the longer term, calls for the relocation of production stages in the same country constitute another risk for world trade. At the first stage of the crisis in China, companies around the world realized how exposed their supply chains were to the country and are now looking at increasing supply chain resilience to foreign supply shocks. This could come via two means: full relocation of production to the domestic market, or a strong global strategy of supplier diversification.
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