The pandemic is predicted to have a significant negative impact on international trade. According to WTO projections, Latin America and the Caribbean’s exports and imports are expected to experience a pronounced decrease this year, reaching at least 13% and 22% respectively –in line with the estimates for the world. Available aggregate data confirm that the region’s trade actually registered an important contraction in the first months of 2020.
From a policy point of view, the question arises of what margins of trade are driving and will drive these aggregate developments. Are we witnessing a plunge of the number of trading firms, the number of traded products, and the number of associated trade transactions or shipments (what trade economist call the extensive margin), a collapse of trade values for given trading firms, products, and transactions (what trade economist call the intensive margin), or both?
To answer this question, we analyzed high frequency and highly detailed firm-level micro trade data to disentangle the channels through which the crisis initially affected macro trade outcomes in six Latin American countries, Colombia, the Dominican Republic, Ecuador, Paraguay, Peru, and Uruguay. When comparing the first five months of 2020 and 2019 for these countries, these data reveal (see detailed figures for each country below):
- While similar on average, total exports showed substantially more heterogeneous responses across the sample countries than total imports. On average, exports and imports contracted similarly —15% and 17%, respectively. However, in the case of exports, these contractions ranged from 0.1% in Ecuador to 30.1% in Peru, whereas in the case of imports decreases ranged from 7.6% in Uruguay to 21.7% in Ecuador.
- The transaction extensive margin —as measured by the number of shipments— plummeted for both exports and imports in all six countries. On average, the number of export and import transactions fell 23.1% and 21.2%, respectively. The export transaction count dropped 16.6% in Ecuador and 31.2% in Peru, while import transactions did so 15.8% in Colombia and almost 27.1% in the Dominican Republic. Importantly, these drops are generally larger than those observed in values, which implicitly suggests that average transaction sizes increased.
- The firm’s extensive margin also registered substantial reductions in both exports and imports in most sample countries. The reductions in the number of exporting and imported firms averaged approximately 11% and ranged between 4.3% in Ecuador and 18.7% in Peru, and between 6.5% in Colombia and 18.9% in the Dominican Republic, respectively. Hence, the sharp decrease in the number of transactions can be at least partially traced back to the fact that a large number of firms cease to trade altogether.
- The product extensive margin consistently shrank more in exports than in imports. On average, the number of exported products declined by 7.9%, with the range of the negative variations going from 4% in Colombia to 13.6% in Ecuador. In contrast, the number of imported products dropped less one-fourth of the export counterparts, with the range extending from 1.3% in Ecuador to 3% in the Dominican Republic.
- While both the firm extensive margin and the product extensive margin decreased significantly in all sample countries in the case of exports, the contraction of the former was substantially larger than that in the latter in the case of imports. On average, the number of exporting firms and exported products fell 11% and 8%, respectively. In contrast, the reduction in the number of importing firms averages almost 12%, but that in the number of imported products was only 1.9%. The average gap between these two margins was 5.9% in the case of exports but roughly 10% in the case of imports.
COVID-19, a massive negative shock to relationships
In short, COVID-19 has generated a massive negative shock that has considerably affected the levels of international trade in the world and particularly in the region. Unlike the global financial crisis that took place a decade ago, the pandemic has had a significantly larger negative impact on the trade extensive margin. This impact is specifically true for both the number of firms and the number of products for exports and the number of firms for imports.
In this regard, even though the shock can be temporary, observed negative consequences can be persistent. The reason is that trade relations are like personal relationships. They are hard to establish and develop, and trust can only be built over time based on experience. This is especially challenging when several preexisting ties suddenly weaken or disappear as is happening with the pandemic.
What countries and firms can do going forward
Firm figures clearly show that both exports and imports started to recover in May 2020, but how will aggregate trade and their margins evolve in the upcoming months?
Public policies can play an important role in this story. This is particularly the case for trade (and investment) facilitation and promotion. For example, it has been shown that trade promotion programs —including information and matchmaking services— can help firms weather international crisis periods. Similarly, trade facilitation initiatives that reduce border times, such as improved risk management systems and adoption of electronic trade single windows can have significant positive export effects when firms face demand uncertainty.
For these policies to be properly designed and accordingly effective, a crucial input is required: robust insights on how different types of firms were and will be affected in the medium and long run. Not only countries but also firms within given countries can respond asymmetrically to the crisis. Different firms can adjust their prices, adapt their product baskets and their sets of destination/origin countries, change their groups of customers and suppliers and reoptimize and decide to stop selling or buying abroad altogether to different extents. To be continued…