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U.S. trade flows face strong headwinds amid economic downturn

March 23, 2020

The economic downturn already underway as the world struggles to fight the coronavirus pandemic will engender a sharp contraction of U.S. and global trade flows that economists say could be mitigated -- somewhat -- by aggressive stimulus measures.

Economic stimulus measures already underway or likely to be implemented -- the Federal Reserve’s lowering of interest rates, for example, or help for most-affected industrial sectors and direct payments to Americans expected to be agreed to by lawmakers this week -- are likely to have a positive, albeit indirect, impact on trade, these economists tell Inside U.S. Trade.

While most agree that a recession is all but inevitable, the length and severity of that recession remain an unknown. During economic downturns, trade typically contracts at much steeper rates than GDP. Efforts to stabilize the economy -- if successful -- could blunt the impact on trade, according to these economists.

“There’s going to be an enormous contraction of trade,” Brad Sester, a senior fellow for international economics at the Council on Foreign Relations, told Inside U.S. Trade. Sester said the partial shuttering of the auto, aircraft and energy sectors in particular will have considerable economic implications.

“All the measures taken to support the economy will help trade,” Sester said.

A recession is “almost guaranteed,” said Rob Scott, a senior economist and the director of trade and manufacturing policy research at the Economic Policy Institute. And a recession could disproportionately impact traded goods, according to Michael Klein, a professor of international economic affairs at Tufts University’s Fletcher School of Law and Diplomacy. Klein also runs the Econofact blog. Scott agreed, noting that recessions generally have much greater impacts on trade than on GDP.

Trade flows will suffer from a “demand shock,” Klein said. Imports of seasonal fruit and other foodstuffs likely will decline beginning this quarter, as many restaurants and bars have been forced to close, he noted. Retail stores also are closing. Many of the products such stores and eateries sell are imports, according to Klein. Consumers also are less likely to buy “big ticket” items like new cars or major appliances during recessions.

“No one is going to go out and buy a washing machine,” Klein said.

A collapse of economies in Europe and other parts of the world would also depress demand for U.S. exports, Scott added.

Sester was a bit more cautious in his predictions, saying how trade in goods will be affected remains to be seen. Goods trade does not rely on physical contact and could continue despite widespread social distancing, he said, but the temporary closing of factories would decrease production and, accordingly, impact U.S. exports.

The biggest unknown is timing -- how long many parts of the U.S. economy will remain shuttered, which will dictate in part how long a recovery might take, the economists said. Scott cited an economic report from Deutsche Bank that said a quick recovery would be possible. The March 18 report, however, notes that “significantly more negative scenarios are also possible.”

“We could remain in lockdown for months,” Scott said. “The longer the lockdown continues, the harder it is for small businesses to remain solvent.”

“Let’s say the virus disappears tomorrow,” Klein said. “What’s unknown is the irreparable economic damage that’s been done. How many small businesses are going to fail? How many people get laid off?”

The last time the U.S. economy was in this much distress was the 2008 financial crisis, the economists said. Governments of major economies then came together very quickly to respond to the 2008 financial crisis, Klein noted, which was a critical component of the global economic recovery. However, he warned, a growing trend toward “nationalism” in the U.S. and other countries puts into doubt whether similar global cooperation was possible this time around.

G20 finance ministers on Monday said they would establish a joint action plan to address the coronavirus pandemic but made no mention of trade policy in their statement.

The World Bank said it would provide $150 billion over the next 15 months to countries that need help to recover from the economic shocks caused by the COVID-19 pandemic. World Bank President David Malpass, a former Trump administration Treasury official, said countries would have to take measures to ensure they can make use of such funds, including reducing “trade protection.”

“Countries will need to implement structural reforms to help shorten the time to recovery and create confidence that the recovery can be strong,” he said during the G20 finance ministers’ meeting, held via video conference. “For those countries that have excessive regulations, subsidies, licensing regimes, trade protection or litigiousness as obstacles, we will work with them to foster markets, choice and faster growth prospects during the recovery.”

Recent interest rate cuts enacted by the Federal Reserve likely will help farmers and allow them to refinance some loans and “save a little bit of money,” according to John Newton, the chief economist at the American Farm Bureau Federation. However, those savings are unlikely to offset losses caused by drops in commodity prices over the last 10 days, he told Inside U.S. Trade. For instance, soybean prices dropped to a six-month low last week at $8.22 per bushel after setting a six-month high of $9.44 per bushel at the start of 2020.

Interest rate cuts, direct payments to workers and injections of money into the financial system are all steps the U.S. government has taken or will take to maintain “a minimal level of economic activity” during the pandemic, Sester said. Direct payments might not boost trade, Scott noted, as many recipients are likely to use the funds to pay rent and to buy basic needs like groceries. However, maintaining even that minimal level of economic activity could ease the economic recovery process later, he said.

Trade financing will be key as economic uncertainty continues, according to Klein, Scott and Sester. Trade financing seized up along with financial markets during the 2008 economic crisis. Klein called trade financing “vital to trade” and said restrictions on it in 2008 contributed to the “collapse of world trade.”

The government can play an integral role in making sure trade financing remains available, Sester said. Government export credit agencies like the U.S. Export-Import Bank can “step up easier than [private lending entities] and they need to,” Sester argued. Supply chain disruptions will create a greater need for export credit financing, he added. The government could also waive certain regulations for private lending, such as capital balance sheet requirements, Sester said.

The Ex-Im Bank can take lending risks that are “necessary in a pandemic that others can’t,” Sester continued. The bank doesn’t need to worry about competing with private-sector financing or taking business away from the commercial sector because such lending has been greatly cut back, he said.

In a statement issued on Monday, the White House said Ex-Im “is offering a number of relief measures for small businesses, including waivers and deadline extensions.” The bank announced it would hold a board meeting on Wednesday to discuss its COVID-19 response efforts. -- Brett Fortnam (

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