Sudden negative shocks take a strong toll on overall economic activity, disrupting firms’ production and sales. Events such as natural disasters, military conflict or extreme weather events call for policy actions, which may restrict mobility and therefore interfere with firms’ activities. The COVID-19 pandemic is such an event, and the ensuing containment measures had a considerable impact on firms’ activities and on international trade. Going forward, the frequency of such shocks might increase, for example as a result of the effects of climate change. Therefore, assessing the ability of firms to adapt to new circumstances is of particular importance.
The negative impacts of the COVID-19 pandemic on the global economy have been profound and widespread. The initial negative impact on international trade was analogous to that observed during the 2008-2009 financial crisis. The intensification of the health crisis and the containment measures introduced by the authorities to limit the spread of the virus considerably restricted firms’ activities, household consumption and the ability to move goods across borders. In a recent study1, we analyze the overall impact of COVID-19 containment measures, on international trade flows at the firm level in the period January 2020 to June 2021, proxied by a stringency index of the policies implemented.
Our monthly firm-level international trade data for country-product pairs and the monthly stringency indicator2 can be used to address additional questions. One salient feature from the outset of the pandemic until the first half of 2021 was the recovery of international trade flows, raising the hypothesis that firms successfully adapted to the prevailing restrictions in their partner countries. Additionally, the strong heterogeneity of the size of firms operating in foreign markets is likely to have influenced their response in the face of containment measures. The relevance of this relationship is not obvious a priori. On the one hand, larger traders may have a wide ranging portfolio of clients and suppliers, allowing them to sustain their operations despite lockdowns and containment measures in various partner countries. On the other hand, smaller traders that depend on fewer shipments may be more agile in dealing with transport restrictions arising from containment measures (for example by switching to alternative means of transport). A related question concerns the differential impact of lockdowns and containment measures on firms more intensively engaged in global value chains (GVCs), proxied by those with foreign capital participation as well as those firms operating in sectors with a high import content in exports. A similar line of reasoning can be used to examine the differential impact of containment measures in certain trade partners. Some countries may play a more important role in terms of origin of value added integrated in exports; geographic location is likely to influence firms’ options in terms of logistics and means of transport, thus leading to varying degrees of impact of the containment measures on trade flows. The chain reaction within the dense network of GVCs, which continues to condition firms’ activities and price developments, is evidence of this.
The impact of containment measures in trade partners on exports was significant, especially in the first half of 2020
We estimate that the average decline in the growth rate of Portuguese exports was approximately 0.15 percentage points when the destination country’s stringency index increased by 1 percentage point. The impact of containment measures is not consistent across quarters, however. The impact was strongest in the first two quarters of 2020, becoming non-statistically significant in the second half of the year (figure below), suggesting that firms may have successfully adapted their activities to be able to operate under adverse mobility and working conditions. A negative impact partly re-emerges in the first quarter of 2021, when the pandemic’s third wave crested and a stricter enforcement of containment measures was pursued. The impact again became non-statistically significant in the second quarter of 2021.
The detrimental impact of containment measures on exports increases with firm size
Another interesting finding is that the negative impact of the stringency of containment measures adopted in the destination countries increases with firm size (figure below). This result is in line with recent studies on the impact of the pandemic3 and in accordance with the literature, which identifies larger exporters as being more dependent on foreign gross domestic product (GDP)4.
The negative impact of containment measures was higher for foreign capital firms, industries with a high import content and foreign suppliers of crucial value added for exports
We demonstrate that the detrimental impact of containment measures was higher for foreign capital firms, i.e. for those that are more integrated in GVCs. The bottlenecks that arose from limitations to mobility as a result of containment measures primarily affected firms that depend significantly on international supply chains. In the same vein, the figure below plots the coefficients associated with the stringency index for the leading manufacturing industries, ordered according to import content in Portugal from highest to lowest5. The coefficient estimated for “Transport equipment” is by far the most negative. This industry is characterized by a high import content (71.2 per cent) and is widely identified as being highly integrated in GVCs. Conversely, industries such as “Agriculture”, “Food and beverages” and “Chemicals” have coefficients that do not statistically differ from zero. Although the chemicals industry has a high import content (50.4 per cent), it includes pharmaceutical products whose demand was not affected by the containment measures. Industries such as “Footwear” and “Textiles”, which have a lower import content (40.6 per cent and 38.1 per cent, respectively), posted negative and statistically significant coefficients in the stringency index. These industries faced significant impacts due to the closure of retail trade, i.e. customer access to new clothing and footwear collections was limited. In addition, these industries are more labour-intensive and were thus more strongly affected by the absence of workers as a result of containment measures.
The figure below plots the coefficients of the main trade partners, ordered according to their weight as sources of value added in Portuguese exports, from highest to lowest6. The containment measures’ negative impact was higher for Spain, Germany, France and the United Kingdom, Portugal’s four main export partners as well as the key suppliers of intermediate products for Portuguese exporters.
The pandemic crisis will leave a lasting mark on international trade. Pre-existing protectionist tensions may be further reinforced by the push to promote domestic production as a shield against prolonged and severe supply chain disruptions. Supply bottlenecks are still disrupting international trade but our results do not indicate that strong action by governments is necessary. Although the firms that were most strongly affected are typically those engaged in GVCs, international traders demonstrated a very strong degree of adaptation and managed to operate in the face of containment measures. Needless to say, the concentration of production within national borders is risky and goes against the basic principle of specialization along comparative advantages. Nevertheless, following this experience, firms may decide to re-optimize their production and supply chains, a development that will be interesting to assess empirically in the near future. Moreover, the pandemic has reinforced the upward trend in international trade of non-tourism services, notably those associated with communication and data. The quantitative impact of lockdowns and containment measures on the international trade of non-tourism services, with foreseeable impacts on the labour markets, is another topic that must remain on the radar going forward.
The opinions expressed in this paper are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
- Amador, João; Gouveia, Carlos Melo and Pimenta, Ana Catarina. (2021) COVID-19, Lockdowns and International Trade: Evidence from Firm-Level Data, Banco de Portugal Working Paper No. 202114.
- Statistics Portugal collects monthly data on international transactions of goods. The monthly average of the COVID-19 Stringency Index was calculated based on the Oxford COVID-19 Government Response Tracker. The data on COVID-related deaths per thousand inhabitants was collected from the Johns Hopkins Coronavirus Resource Center.
- For example, Bricongne, Jean-Charles; Carluccio, Juan; Fontagné, Lionel; Gaulier, Guillaume and Stumpner, Sebastian. (2021) “The Margins of Adjustment of French Exports to the COVID Crisis”, Working Paper, draft of September 9, 2021.
- For example, di Giovanni, Julian; Levchenko, Andrei A. and Mejean, Isabelle. (2020) “Foreign Shocks as Granular Fluctuations”, NBER Working Paper No. 28123.
- Rua, António and Cardoso, Fátima. (2019). “The import content of final demand in Portugal: Nominal and real evolution”, Banco de Portugal, Economic Studies, Vol. 5, No. 3, 51-73.
- OECD (2005). “OECD Science, Technology and Industry Scoreboard 2005”, Organisation for Economic Co-operation and Development (OECD).