Photo: World Bank
“Trade policy can make an important contribution to ensuring an effective exit from the crisis. That’s why we should work together … and avoid tensions and obstacles to world trade.”
- German Federal Minister for Economic Affairs and Energy Peter Altmaier, March 31, 2020
“Common sense measures like deferring tariff payments and fully funding loan programs for retailers — now largely closed — are just two of the tools all governments should be implementing.”
- American Apparel and Footwear Association President and Chief Executive Officer Stephen Lamar, April 22, 2020
As of May 11, COVID-19 has infected more than 4 million people and caused almost 300,000 deaths. To slow down the pandemic, many countries implemented lockdowns and border closures with significant disruptions to production, trade flows and other economic activities. Global demand and supply are suffering unprecedented negative shocks. Many governments launched drastic policy responses, ranging from massive stimulus packages to monetary interventions. Yet, it is not clear when the global economy will start to recover.
While many countries are implementing trade restrictions, especially on exports of critical medical equipment, food and basic supplies, several trade liberalization responses could in fact mitigate negative shocks from COVID-19. Governments should consider incorporating tariff reductions and non-tariff trade measure (NTM) simplification in their policy interventions, at least until economies recover, for three reasons.
First, COVID-19 induced chaos and disruptions have significantly increased trade costs and impeded firms to reach their customers and suppliers in a timely manner. Second, social distancing requirements and lockdowns have reduced governments’ abilities to enforce trade restrictions and process the necessary paperwork. Goods are piling up at ports and customs awaiting inspection and clearance. Finally, in a world dominated by global value chains (GVCs), which are more sensitive to trade costs and delays, tariff reductions and NTM simplification could provide the flexibility and speed for a GVC-led trade recovery. Tariff reductions and NTM simplification are not likely to impose high costs on high and upper-middle income countries, which account for over 90 percent of world trade. Lost revenues would be small relative to the budgets and stimulus packages of these countries. The time to act is now.
Tariff Reductions
Many countries are experiencing shortages of goods as governments are ordering factories to close and workers to stay home. Increasing imports of such products would relieve the markets; this could be facilitated by lowering tariffs. A valuable channel is the expansion of country and product coverages of the existing World Trade Organization (WTO) Agreement on Trade in Pharmaceutical Products (or the zero-for-zero initiative on pharmaceuticals) so medicines or medical products could be imported with zero tariffs.
In 2018, total tariff revenues were $277 billion (Table 1), corresponding to 0.69 percent of the value of world trade and 0.37 percent of world GDP. Across-the-board removal of tariffs might not be feasible since tariff revenues are important contributors to government budgets in many low-income countries (Figure 1). An alternative would be for countries with a tariff-revenue-to-GDP ratio below the world median (0.78 percent) to eliminate their tariffs, while allowing the remaining countries – mostly least developed countries – to maintain them at the current levels. These reductions would cover 90 percent of world trade and GDP, while protecting the fiscal balances of the most dependent countries. A third option would be to have only high-income and upper-middle income countries remove their tariffs. The reduction would amount to $209 billion, covering 94 percent of world trade and 93 percent of world GDP.
These tariff reductions for upper-middle-income and higher-income countries, however large they might seem, are relatively small compared to their stimulus packages. For many G20 countries, the preliminary packages account over 5 percent of their GDP and are increasing by the day (Figure 2). Even for many non-Organisation of Economic Co-operation and Development (OECD) countries, the announced packages are large; for example accounting for 9% of GDP for Thailand, 2.5% of GDP for Bangladesh, 1.2% of GDP for Argentina. (Just the decline in economic activity due to the Global Financial Crisis of 2008-2009 resulted in a decline of tax revenues corresponding to 1.3 percent of GDP.)
Table 1. Costs of eliminating tariffs
Lost tariff revenue
Lost tariff revenue as share of world trade
Lost tariff revenue as share of world GDP
