Annual Report 2020 | Federal Reserve Bank of St. Louis
Countries open to international trade, with production patterns determined by comparative advantage, have gained vast benefits from access to world markets. But the COVID-19 pandemic in early 2020 revealed tensions and some limitations inherent in the design of international trade policy: Countries that relied heavily on imports of critical medical goods—such as personal protective equipment—found themselves at a distinct disadvantage when the pandemic created a sharp worldwide increase in the demand for these goods.
International trade plays a key role in allowing countries to access essential medical products. Their production is heavily concentrated in a few countries, and most countries import them. The increase in the demand for these products along with the slow increase in the supply led to worldwide shortages.
The figure below shows that several countries resorted to trade policy to mitigate these shortages. By March 2020, 58 countries had implemented export curbs and 50 countries had liberalized their imports of these goods. While these policies were largely temporary, several countries still had them in place at the end of 2020, nine months into the pandemic.Data are from Global Trade Alert and include trade policies related to import liberalizations and export restrictions for COVID-19 products, according to World Trade Organization information on COVID-19 and world trade.
SOURCE: “International Trade of Essential Goods During a Pandemic,” a 2020 working paper by Fernando Leibovici and Ana Maria Santacreu.
NOTES: Values for each month report the number of countries with active trade policy changes introduced during COVID-19. At the peaks, 64 countries had implemented export restrictions in April, and 61 had liberalized imports in May.
So, during a pandemic, should countries respond by introducing export curbs and liberalizing their imports? Are there other policies that might be better suited to improve an economy’s welfare once a pandemic has begun?
Our 2020 working paper, “International Trade of Essential Goods During a Pandemic,” investigates the optimal trade policy response during a pandemic, in the context of a dynamic model of international trade with essential and nonessential sectors. We found that, just as observed during COVID-19, the optimal unilateral trade policy is to simultaneously and temporarily raise export barriers while reducing import barriers.
But the pandemic also raised several questions regarding the design of trade policy during normal times, prior to a pandemic taking place:
These considerations extend further than the ongoing pandemic, from access to food to the production of raw material and intermediate inputs that might be critical for important industries. We expect that future discussions on the desirability of openness to international trade will revolve around many of these issues.