The coronavirus pandemic has the potential to wreak havoc on Latin America and the Caribbean’s (LAC) trade and the integration, making it vital for governments to take appropriate measures to reduce its impact on the economy and life of its citizens.
Over the last 100 years, there have been seven global pandemics (Spanish flu, Asian flu, Hong Kong flu, H1N1, SARS, MERS, and Ebola), which have brought very disruptive supply (e.g., workforce impairment) and demand (e.g., consumer contagion, and restricted mobility and precautionary saving) shocks to the economies affected.
The effects of these pandemics on global and regional trade have been mostly moderate because they mainly impacted countries with less of an influence on the global economy and their spread was contained in most cases.
Coronavirus is different
The impact of the coronavirus crisis, though, may well outstrip that of the Spanish flu of 1918, which, unlike the others, affected the world and LAC’s largest economies, causing estimated drops of 10% in global trade and around 20% in regional trade.
As a result of the post-war´s Great Liberalization, lower transportation and communication costs, and the rise of global value chains, the world economy is today significantly more interconnected than it was in the early 20th century. This change significantly raises the potential of the crisis to spread, as shown by The Great Recession of 2008-2009, which led to a historical annual drop of 20% in world and LAC trade.
As a prelude of what lies ahead, the first trade figures for 2020 are not very reassuring.
China, the epicenter of both the pandemic and global value chains and LAC’s second trade partner, saw exports fall by 17% and imports by 4% in the first two months of 2020, compared to the same period in 2019. LAC exports to and imports from China also fell in the same period by 12% and 6%, respectively.
In the United States, total imports and imports from LAC also fell in January (by 4% and 2% year-on-year, respectively), when the pandemic was only starting. In Brazil, exports in the first two months of 2020 fell by 8.5% year-on-year.
These figures are alarming when you consider that world trade was already in a downturn: in 2019 it grew by just 1%, compared to an average of 5% in the last two decades.
The available historical data suggest that this crisis could affect all LAC countries, regardless of their level of specialization. Although the prices of commodities such as oil and copper face greater volatility, manufactured goods are more vulnerable to sudden stops due to dependence on value chains and because consumers may put off their purchases.
Likewise, service sectors like tourism will be particularly affected by containment measures such as drastic reductions in flights, mandatory hotel closures, and the impact of the disease on their workforce.
The encouraging news is that these past crises suggest that economies can bounce back quickly—known as the “V-shaped recovery.” Whether this happens will depend not only on fiscal, monetary, and health policies but also on the trade and integration policies that governments implement.
Which leads to the question, what should governments do in trade and integration matters to respond to this crisis?
What to do (and what not to do)
- Continue to support trade liberalization, as we suggest in the book Trading Promises for Results: What Global Integration Can Do for Latin America and the Caribbean. It would be a setback if governments in the region succumbed to the nationalist rhetoric that wrongly blames globalization for the current crisis.
- Increase coordination between countries and promote integration. This coordination is needed not only because of the systemic health problems we face — diseases do not respect borders — but also to facilitate a rapid recovery, spearheaded by trade and foreign direct investment.
- Discourage the adoption of restrictions on exports of medical equipment, medicines, and supplies. To date, 24 countries have adopted such restrictions, mostly in Europe and Asia. These measures may increase local supply in the short term, but they create medium- to long-term disincentives for domestic production due to uncertainty over access to external markets. They also create risks of retaliation and jeopardize regional and multilateral cooperation efforts.
- Eliminate tariffs and non-tariff barriers (NTBs) to medical equipment, supplies, and disinfectants. LAC’s tariffs are well above the world average, ranging from 5% to 15%. The NTBs reach 90% of these items. These measures would help to bring down the costs of the products that are essential for managing this type of crisis.
- Promote regional and multilateral trade agreements to facilitate the coordination of pandemic prevention and mitigation measures and keep unilateral measures from producing costly trade and diplomatic conflicts that delay recovery and compromise long-term growth.
- Customs and other government border control entities must implement a simplified and expedited procedure for the dispatch of critical goods.
- Promote and facilitate the liberalization of trade in services, particularly telemedicine. One potential problem during pandemics is that citizens, including those with mild systems, rush to hospitals and overload the system. Some countries in LAC offer telemedicine services within their borders but current trade restrictions prevent them from providing these services in other countries.
- Reduce protection for agriculture, which is usually high in the region. High tariffs are particularly dysfunctional at this time. A supply shock in the domestic food supply chain, without access to affordable imports, can have fatal consequences for the population beyond the direct impacts of the pandemic.
- Work with export promotion agencies to sustain and foster firms’ exports, providing information services that allow them to identify new opportunities for goods and services, as well as establish new commercial ties to replace those affected by the crisis.