Introduction
Richard Baldwin and Beatrice Weder di MauroTrade volumes collapsed at the same time in all nations and almost all products at a
pace never seen before. It is impossible to know if history will repeat this pattern in
reaction to the COVID-19 shock, but it is a possibility.
Each of these first-round demand shocks are likely to be subject to Keynesian multiplier-
like amplification. For many people and companies around the world, not working
means not getting paid – and that puts an additional damper on their demand.
Duration of the shocks
On the duration of the crisis, we could seek some clues again from past shock
experiences. The negative impacts of COVID-19 on domestic demand for non-tradable
services will become substantial if it takes a long time to contain the infection. Previous
epidemic shocks were short and sharp. Today, the duration is less clear. China exports
an enormous amount of industrial goods, so the duration of interruption may depend as
much on whether firms can find substitutes for Chinese goods as it does on the speed
of the health recovery in China.
In the worst case of demand shrinkage aggravated side-by-side by supply disruption,
one might even imagine a situation somewhat analogous to the oil shock in the 1970s,
when almost all the industrialised countries fell into persistent stagflation.
- Governmental reactions create more and longer-lasting disruptions than the virus.
As a lesson from history, much of the economic problems from the 1970s oil shock
came from the inflation sparked by inappropriate macroeconomics policy responses,
not just the actual oil shortage. In a more recent episode, the tariff hike by the Trump
administration resulted in reduced imports from China, but US imports from other
sources, such as Mexico and Vietnam, largely offset the effects.
The channels of COVID-19’s economic contagion
Globally, economies are connected by cross-border flows of:
- goods,
- services,
- knowhow,
- people,
- financial capital,
- foreign direct investment,