The coronavirus pandemic has the potential to wreak havoc on trade and the integration process of Latin America and the Caribbean (LAC). In fact, over the past 100 years, the world has seen seven pandemics that have brought supply-side economic effects, such as a sudden reduction in the labor force, and demand, such as consumer contagion, restrictions on their mobility, and the tendency to save money from uncertainty. Randall Castillo, the founder of RACO Investment, discusses how the COVID-19 is changing commerce in Panama and LAC.
The impacts of pandemic crises on world and regional trade have been mostly moderate, mainly affecting lower-economic countries in the global economy and because contagion was limited. But apparently this time it’s different. Explains Castillo, “The impact of this crisis can far exceed those of the Spanish influenza of 1918 which, with the exception of others, affected the main economies of the world and the region, with an estimated 10% reduction in world trade and about 20% of regional trade.”
The coronavirus crisis could outperform Spanish influenza due to the great human and commercial connectivity we are now living in as a result of the post-war period, reduced transportation and communication costs and the development of global value chains. The Great Recession of 2008-2009, which led to a 20% annual historic drop in world and Latin American trade, made clear the implications of these structural changes.
China, the epicenter of the pandemic and global value chains, saw exports fall by 17% and imports by 4% in the first quarter of 2020, compared to the same period the previous year. LAC exports to China and imports from China to the region also decreased over the same period by 12% and 6%, respectively.
In the United States, total and rising imports also fell in January, by 4% and 2% annually, respectively, when the pandemic was just beginning. And in Brazil, exports for the first quarter of the year fell by 8.5%, also in annual terms. These figures are alarming when you consider that world trade was already in full slowdown; in 2019, it grew by just 1%, compared to an average of 5% over the past two decades.
From the historical data available, this is a crisis that could affect all LAC countries, regardless of their level of expertise. Although commodity prices such as oil and copper face increased volatility, manufactured goods are more vulnerable to sudden downtime, dependence on value chains, and the possibility of deferring purchases by consumers. In addition, services such as tourism will be particularly affected by containment measures such as drastic flight reductions, mandatory hotel closures and the impact of the disease on their workforce.
In order to combat the recessions, it will be important to continue to support trade liberalization. Adds Castillo, “It would be a setback if the governments of the region succumb to a nationalist rhetoric that wrongly blames globalization for the current crisis.”
Increasing coordination between countries and boosting integration will also help. This is not only because of the systemic health problems we face—diseases do not respect borders—but also to facilitate a rapid recovery, led by trade and foreign direct investment.
Discourage the adoption of export restrictions on medical equipment, medicines and their supplies. To date, two dozen countries have embraced these restrictions, and these measures are expected to increase local supply in the short term, but they could create medium-long-term disincentives to domestic production due to the uncertainty of being able to access external markets. In addition, they create retaliation risks and jeopardize regional and multilateral cooperation efforts.
It will be imperative to promote regional and multilateral trade agreements to facilitate the coordination of pandemic prevention and mitigation measures; and prevent unilateral measures from producing costly trade and diplomatic conflicts that delayed recovery and compromise long-term growth. Customs and other government border control entities must implement a simplified and expeditious procedure for the clearance of critical goods.
Promoting and facilitating the liberalization of trade in services, particularly in the area of telemedicine, is paramount. Explains Castillo, “A potential problem with pandemics is that citizens, even those with mild symptoms, rush to hospitals, overloading the system. Some countries in the region offer telemedicine services to the domestic public, but current trade restrictions prevent it from spreading to other countries.”
Lastly, working with export promotion agencies to sustain and boost firms’ exports. Asserts Castillo, “Providing information services to identify new opportunities for goods and services, as well as establishing new trade links to replace those affected by the crisis, is going to take on a whole new meaning going forward.”