Thoughts Impact of Covid 19 On International Trade

Marine ALLAIRE
Reflexion paper
As the covid 19 crisis spread and sanitary measures were taken around the world, it
was not only health that was impacted, but international trade in a whole. Having discussed
capital flows and the trade deficit in class, I wondered about the effects of covid 19 on them.
The year 2020 was marked by some of the largest reductions in trade and capital
flows since World War II. Indeed, measures aimed at slowing down the pandemic, such as
lockdown measures, gradually led to the closure of borders, massively slowing down trade
flows. Many countries have been severely affected by an important fall in imports and
exports. This is particularly true of European Union countries, but also of China and the
United States. According to the OECD, in the first two quarters of 2020, global trade
contracted by 16%, exceedingly even the shock observed during the 2008 global financial
crisis.
The covid 19 pandemic has also had a significant impact on supply, demand and supply
chains. In some countries, people were no longer able to work, which automatically
impacted purchasing power and demand. In a situation of uncertain future, and with
incomes for the most part diminished, demand turned mainly to basic necessities leading to
a decrease in non-essential goods and services, affecting directly exports.
In addition, as international trade is difficult, the production of manufactured products has
fallen sharply because of lacks in supply chains, especially since many of them require raw
materials from importing countries, which are also assembled on different production sites.
Thus, if production declines, supply also falls. In fact, we can see that covid 19 pandemic
affected global trade flows through a significant reduction of both demand and supply.
What also seems exceptional about capital flows during the COVID-19 crisis is the scale and
speed of the outflows, in just a few months. According to OECD this unprecedented capital
outflows is driven by sales of portfolio assets by foreign investors especially from emerging
countries. Thus, we can see note a desire of secure investment by the investors in these
uncertain times.
Furthermore, the drastic reduction of inflows and outflows of goods, services and capitals
has led to sharp currency depreciation for emerging markets. Exchange rates of some
emerging countries dropped substantially, as Russian rouble or Brazilian real (BRL). The
currencies of advanced economies, them, have generally not being that much impacted.
Even if the international market situation and flows have almost returned to their pre-
pandemic state, there are still after-effects.
Since 2020, the French economy is going through a crisis with the most important
trade deficit among the European Union. This situation makes me wonder about the causes
of this deficit and its impact on the country. As lockdown orders were imposed in France, in
April 2020, the value of France’s total exports declined by 78% and imports declined by 70%
comparing to the previous year. As a result, the trade deficit in goods and services widened
from 23 billion euros to nearly 44 billion euros. Faced with uncertainty and reduced activity,
the French economy increased its debt via securities issued on financial markets. In addition
to short-time working measures, which enabled companies to adjust their payrolls during the
crisis while preserving jobs, they also benefited from a series of cash-flow measures provided
by the government to preserve their production facilities and avoid the rise in bankruptcies
thus leading to an increase of the public debt. In addition, the massive drop in tourism has
also had a strong impact, as being one of the most visited countries in the world, many
French business sectors depend on it.
Even after the covid 19 crisis, the trade deficit remains. In 2022, the country continued to
import more products than it exported, posting a record trade deficit of nearly 164 billion
euros. This is almost double the trade deficit in 2021 (85 billion euros). This lack of exports
and increase of imports can be explained by the geopolitical tensions with the Ukraine-
Russia war. The conflict disrupted trade routes and supply chains, affecting French businesses
that have trade relations with Ukraine. Also, France, like many European countries, is
dependent on energy imports. Due this conflict, France had to find new trading partners for
its gas and electricity supplies as well as France's need to import due to the shutdown of
several power plants. These massive importations led to an increase of prices.
In addition, France has seen a deterioration of its industrial goods deficit during the last 10
years then lowering exports flows.
Because of this overall context of trade deficit, France experiences unprecedented inflation
which therefore influences supply, demand and consumer behavior.
We can also see the weakness of the euro currency, which has been depreciating in recent
years, attacking the value of the US dollar which strengthen the inflation effect.
This overall landscape will not be easily reversible, as deindustrialization is the result of
choices made several years ago, increasing exports will certainly be difficult. Moreover, the
energy trade deficit should increase further as average energy prices remain high. In 2023,
trade deficit improved slightly and France narrowly escapes the threat of recession hanging
over its economy.
As a result, we can see that the trade deficit has an impact on the country's entire
economy and its economic situation. It remains to be seen whether the situation will
improve over the next few years.

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Marine ALLAIRE

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