On 4 August 2020 the IMF released the 2020 External Sector Report on global imbalances and the COVID-19 crisis.

Trade Forecasts

The COVID-19 crisis has led to a decline in global trade, a decrease in commodity prices and more challenging conditions for external financing. Before the pandemic began there were vulnerabilities and policy challenges in public finances, and these challenges have been increased by the crisis.

The latest IMF staff forecasts for 2020 indicate a small narrowing of current account surpluses and deficits by around 0.3% of world GDP, subject to considerable uncertainty. The reason why the net impact is relatively small is due to the large fiscal expansion. There are offsetting increases in private saving and lower investment.

The crisis has had the most impact on economies that depend on oil, tourism and other severely affected industrial sectors, and economies that rely on remittances. In these cases the impact of the crisis on the external current accounts of these countries will exceed 2% of GDP, giving rise to a need for significant economic adjustment.

Policy Implications

In the near-term policy should be directed towards provision of relief and promotion of economic recovery. Tariff and non-tariff barriers should be avoided and the trade restrictions introduced during the crisis should be rolled back.

In the medium term the economic distortions already existing before the crisis could persist or worsen and reforms will be needed. In many cases fiscal consolidation will be necessary in the medium term to promote debt sustainability and reduce the current account gap. Countries having problems with export competitiveness could benefit from reforms to increase productivity.

Supply Chains

Global trade peaked as a share of world GDP in 2008 and has since plateaued. The integration of global supply chains has decreased since 2008 and the crisis could cause further declines in trade integration with more trade barriers and moves to reshoring of production. As at May 2020 a net total of 120 new export restrictions had been introduced, which was significantly more than in previous years. Affected sectors represented around 10% of global trade.

Some policymakers have recommended repatriation of international supply chains as their reliance on foreign producers could make them vulnerable during pandemics. This would not necessarily reduce vulnerability however as increased reliance on domestic suppliers could lead to problems in the case of a domestic lockdown during a pandemic. Also the efficiency gains from global supply chain management could be lost. Reshoring would also result in less foreign direct investment in emerging market and developing economies.

Policy Recommendations

Policies that distort trade should be avoided. The use of tariffs to target bilateral trade balances is costly for trade, investment and growth and is not effective in reducing excess external balances. In addition to reducing tariff barriers countries should resolve trade and investment disputes in a way that promotes a stable and transparent global trading system.

In the medium term a number of countries will need to aim at fiscal consolidation. Structural policies to increase export competitiveness and in some cases diversification can also support rebalancing. Investment in infrastructure and active labour market policies will be required to deal with the consequences of the crisis.