Simulating the trade effects of the COVID-19 pandemic: Scenario analysis based on quantitative trade modelling

Abstract

The WTO Global Trade Model, a quantitative trade model, is employed to project the impact on the global economy of the COVID-19 pandemic. Because of the profound uncertainty about the duration of the pandemic and the containment measures, three scenarios are constructed, V-shaped, U-shaped and L-shaped recovery, corresponding with a duration of the pandemic of 3 months, 6 months and more than a year. The pandemic and containment measures are assumed to lead to a general reduction of labour supply, a rise in trade costs, and reductions in both demand and supply in sectors most affected by the containment measures. GDP and trade are projected to fall by, respectively, 5% and 11% in the V-shaped and L-shaped scenarios and trade by, respectively, 8% and 20%. The response of trade to the reduction in GDP, measured by the trade-to-GDP elasticity, is projected to rise as the crisis lasts longer. The reason is that a longer duration will lead to a larger drop in spending on durables which are highly tradable.