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Trade beyond the pandemic rebound

Good exports led the recovery; now the spotlight is on services.

World trade has recovered from the initial impact of COVID-19, with goods volumes now almost 5% above pre-pandemic levels. But the momentum in goods-trade growth has been slowing since April 2021 and the global trade recovery will now focus on services.

However, a services revival is likely to be more drawn out than the rebound in goods and overall trade growth looks set to moderate in 2022. After growing by an estimated 11.2% in 2021, we expect world exports of goods and services to grow by 5.2% this year and 4.2% in 2023.

And an uneven recovery looks likely. Mainland China, India, Malaysia and Mexico have already reached pre-pandemic export levels but achieving that will take until 2023 for the US, Thailand and the Philippines, and possibly even longer for the UK, Australia and Canada.

Travel was 25% of global services exports before the pandemic, but dropped to just 11% in 2020 and the broader services trade recovery will depend on lifting border restrictions and confidence in overseas travel returning.

Asia-Pacific countries have suffered most from border closures, causing arrivals to key Southeast Asian tourist destinations to plummet. Chinese travellers, the biggest spenders on international tourism, are preferring domestic breaks. Meanwhile, remote working means business travel could take even longer to recover.

But with half of global air-cargo volumes carried in passenger-plane holds, increased air-freight capacity requires an international tourism recovery. Shipping bottlenecks will take time to unwind, so demand for delivery by air seems set to keep air-cargo costs high.

Container-freight rates on Asia-North America routes have eased somewhat but US West Coast ports remain heavily congested with ships queuing at sea and upcoming union negotiations could lead to further disruption. The US, like the UK, is also grappling with truck-driver shortages. Meanwhile, mainland China’s tough COVID-19 policy could disrupt factory and port operations further.

We expect US-China trade tensions – like EU-UK Brexit frictions – to persist, but there is also a risk that EU-China tensions escalate this year.

Progress at reforming the World Trade Organization remains slow with the US still blocking appointments to the appeals court. However, trade liberalisation is continuing: Asia’s Regional Comprehensive Economic Partnership took effect in January and other countries can apply to join the multi-nation bloc that includes Australia, mainland China and Japan.

The UK is aiming to complete negotiations with the 11-member Comprehensive & Progressive Agreement for Trans-Pacific Partnership this year and trade talks with the Gulf Cooperation Council may follow negotiations for an Indian free-trade agreement. However, we expect little progress on a UK-US trade deal in 2022.

Environmental, social and governance issues are increasingly featuring in advanced economies’ trade policies. There could be more progress towards designing carbon border taxes and mandating corporate due diligence in supply chains, which could ultimately change where companies source their products.

As governments and businesses look to build resilience into their supply chains in the wake of the pandemic, some may follow the US, India and Japan in announcing policies to boost domestic manufacturing, despite this being potentially protectionist.

First published 18th January 2022.

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