One-Third Of Global Trade May Be Lost To Coronavirus. In Services, The Damage Could Be Permanent.

On any number of occasions over the past three months, I’ve been keen to reiterate that while there is never a “good” time for a pandemic, the timing of this one is particularly unfortunate.

By that, I simply mean that the world is coming off a year during which global growth and trade was the weakest since the crisis. I’m going to use the same language I’ve employed when making the point previously: Global growth, trade and commerce has been suppressed thanks in part to misguided nostalgia for the mercantilism of a bygone era.

Protectionism, nationalism and policies couched in xenophobic terms all contributed to the first contraction in global trade volumes since the GFC. Meanwhile, growth suffered from some of those same policies, as the bruising Sino-US trade dispute pushed Germany (for example) into the deepest industrial slump in recent memory.

As the economic effects of various containment measures aimed at stopping the spread of the coronavirus become more clear (and more real), we’ve become accustomed to dour estimates.

And yet, even as we’ve largely resigned ourselves to a global recession (at best), the projections are still staggering.

With that in mind, it’s worth noting that the World Trade Organization now sees world merchandise trade plunging by between 13% and 32% this year due to the pandemic. “Nearly all regions will suffer double-digit declines in trade volumes in 2020”, the WTO warns.

And yes, you read that correctly. In the worst-case scenario, the WTO says global trade could contract by nearly a third. That would be almost triple the decline seen during the GFC.

Again, what you want to note in the visual is the decline in 2019, the first in a decade. There was no room for “error” in 2020, and with the tentative thawing of trade relations between the world’s two largest economies in December (i.e., the “phase one” trade deal between Xi Jinping and Donald Trump), there was a glimmer of hope. “Was” – past tense.

“The unavoidable declines in trade and output will have painful consequences for households and businesses, on top of the human suffering caused by the disease itself”, WTO Director-General Roberto Azevêdo remarked. “These numbers are ugly — there is no getting around that”, he added.

Of course, the uglier they are now, the more dramatic will be the assumed rebound in the event the virus can be brought to heel. “If the pandemic is brought under control and trade starts to expand again, most regions could record double-digit rebounds in 2021 of around 21% in the optimistic scenario and 24% in the pessimistic scenario — albeit from a much lower base”, the WTO says.

Perhaps the most disconcerting bit comes when the WTO discusses services.

Obviously, the services sectors of major economies have been devastated by the lockdown protocols. The WTO warns the damage may be permanent. To wit:

Services trade may be the component of world trade most directly affected by COVID-19 through the imposition of transport and travel restrictions and the closure of many retail and hospitality establishments. Services are not included in the WTO’s merchandise trade forecast, but most trade in goods would be impossible without them (e.g. transport). Unlike goods, there are no inventories of services to be drawn down today and restocked at a later stage. As a result, declines in services trade during the pandemic may be lost forever.

Over the course of 2019 (and during the trade war more generally), manufacturing PMIs were watched closely as they reflected the locus of pain from the deglobalization push exemplified in tit-for-tat tariffs.

Now, by contrast, services PMIs are the focal point. In some countries (e.g., Italy) the services sector has simply evaporated. Across Europe, it’s a total debacle.

The WTO goes on to note that because “services also interconnected”, there’s a pernicious domino effect. “Air transport enables an ecosystem of other cultural, sporting and recreational activities”, the organization writes.

2019 was not great for growth in commercial services, just as the year wasn’t inspiring at the aggregate level for merchandise trade.

“Although services are not subject to tariffs in the way that goods are, world commercial services trade still slowed sharply in value terms in 2019 after recording strong increases in the previous two years”, the WTO laments.

Unfortunately, global trade was already on the back foot from a trend perspective. Following the GFC, the trend in world merchandise trade volume shifted lower than the trend from 1990 to 2008 – and markedly so.

Some would argue we were well on our way to “peak globalization” before Trump took office.

When you think about all of this, it’s worth noting that as global trade contracts, it can exacerbate scarcity trends in USD liquidity. The Fed can offset that, but as we’ve seen in recent weeks, it’s an uphill struggle in the current environment.

In the final analysis, the economic tragedy of the coronavirus pandemic will likely be that instead of bringing the world closer together in a shared fight against a common enemy, it will instead serve to “validate” the anti-globalist narrative.

The Peter Navarros of the world will argue that COVID-19 is a poignant example of why supply chains shouldn’t be overly dependent on foreign countries, the Marco Rubios of the world will blame China, accelerating the “de-coupling” trend between the world’s two superpowers and Donald Trump will find in the outbreak an excuse to defund multilateral bodies like the World Health Organization.

Ultimately, no good will come from any of that.