The unusual resilience of trade and what lies in store - Capital Economics
Global Economics

The unusual resilience of trade and what lies in store

Global Economics Focus
Written by Gabriella Dickens

The relative resilience of real global merchandise trade during the pandemic has reflected several factors, most importantly robust goods spending in advanced economies. Merchandise trade flows are likely to flatten off next year as the removal of restrictions allows spending to shift back to services. But increased spending on services, including tourism, should see overall trade continue to grow.

  • The relative resilience of real global merchandise trade during the pandemic has reflected several factors, most importantly robust goods spending in advanced economies. Merchandise trade flows are likely to flatten off next year as the removal of restrictions allows spending to shift back to services. But increased spending on services, including tourism, should see overall trade continue to grow.
  • On the face of it, COVID-19 has dealt a heavy blow to world merchandise trade, but the damage has been less severe than one might expect given the collapse in global economic output. We estimate that global GDP fell by 3.8% in 2020, which is bigger than any annual decline since WWII. On past form, this would be consistent with a fall in trade of around 30%. But in reality, figures so far suggest that merchandise trade will by only around 5.4% in 2020.
  • This partly reflects the fact that world trade rebounded strongly in the second half of this year. Real world goods trade was already within a whisker of its December 2019 level at the end of Q3, meaning that around 90% of the lost ground has been made up. And even world real exports of both goods and services rebounded in Q3, despite the services sector remaining very weak.
  • There are several reasons specific to the pandemic that have driven the relative resilience of world trade. First, in contrast to so-called “normal” downturns where the manufacturing sector experiences sharper declines in output than the services sector, it is the services sector that has suffered disproportionately this year. Second, strong demand for COVID-related products such as PPE, medical equipment, and electronic goods to aid in the shift to working from home have boosted trade.
  • Third, there has been a shift in consumption in developed markets away from domestic services towards certain traded manufactured goods, including home improvement products and recreational goods. And fourth, the strong economic recovery in China has meant that demand for commodities – particularly metals and agriculture products – has rebounded strongly.
  • The emergence of effective vaccines suggests that the recent strong growth in goods trade is unlikely to be sustained. After all, the shifts in consumer demand which have benefited goods trade this year are set to reverse as restrictions on services are removed. This could offset the benefits of a broader-based pick-up in aggregate demand. We expect the recovery in goods trade to lose momentum next year, as goods exports from China decline.
  • However, the outlook for services trade – particularly tourism – has unambiguously improved. So, while the positive news on vaccines will not be as transformative for trade as it will be for GDP, we nonetheless expect global real exports of goods and services to return to pre-virus levels by the start of 2022.
  • On a regional basis, countries that benefited from the shift in spending away from services and towards goods – such as China – will see exports weaken, but the faster return of external demand will help exports to recover more quickly in many developed economies, including the US. What’s more, with tourism likely to recover sooner than we had previously anticipated, economies which rely on this sector such as Spain, Thailand, and the Philippines will see a stronger rebound in exports.

The unusual resilience of trade and what lies in store

While the coronavirus dealt a heavy blow to world trade, the damage was less severe than one might have expected given the hit to world GDP. What’s more, trade in goods recovered most of its lost ground over the second half of the year, supported by strong demand for COVID-related products and a recovery in consumer spending in the developed world. However, these tailwinds will most likely reverse next year, so it will be up to services trade to do the heavy lifting in the overall recovery in exports of goods and services.

In this Focus, we will first recap what has happened to world trade in goods and services. We will then discuss why goods trade has been relatively insulated from the economic fallout of the COVID-crisis compared to past downturns and compared to services trade. Finally, we will outline what we expect to happen over the next couple of years.

A look back at world trade this year

Following a weak start to the year, global trade in both goods and services was hit hard during the early stages of the pandemic.

Data from the CPB Netherlands Bureau showed that real goods trade plummeted as lockdown measures were deployed worldwide to stem the spread of the virus. In April, real trade fell by a staggering 12.2% – by far the largest single fall on record. (See Chart 1.) In three-month year-on-year terms, real trade growth fell to a record low of -14.1%. And at its trough in May, real trade worldwide was roughly 18% below its pre-virus level.

Chart 1: Global Real Goods Trade

Source: CPB Netherlands Bureau

According to the CPB Netherlands World Trade Volumes Index, the only other instance where global goods trade volumes have fallen to a similar extent in recent decades was during the financial crisis. (See Chart 2.)

Chart 2: Global Real Goods Trade (2010 = 100)

Source: CPB Netherlands Bureau

On a regional basis, the hit to real exports of goods from advanced economies was larger than the hit to exports from EMs. (See Chart 3.) At their trough, exports from DMs were around 24% below their December 2019 level, while exports from EMs were just 14% below. Admittedly, the rapid recovery in China boosted the aggregate EM trade data. But even discounting China, the damage to exports from the emerging world was less severe.

Chart 3: World Real Goods Exports (Dec. 2019 = 100)

Source: CPB Netherlands Bureau

Chart 4: World Goods Trade (Dec. 2019 = 100)

Source: CPB Netherlands Bureau

In value terms, the collapse in commodity prices during the early stages of the pandemic meant that the decline in nominal trade was slightly larger. World trade values were around 22% below 2019 levels at their trough. (See Chart 4.)

But it was services trade that suffered the largest hit. Admittedly, data on services trade is patchier than for goods, which make up most of world trade. But our aggregate world series for both goods and services showed that when services trade is included, trade was an even greater 20% below its Q4 2019 level at the trough in Q2. (See Chart 5.)

Chart 5: Global Real Exports (Dec. 2019 = 100)

Source: CPB Netherlands Bureau, Capital Economics

Damage to goods trade less severe than expected

So, we can see that the coronavirus dealt a heavy blow to world trade. Even so, the damage to goods trade was less severe than one might have expected given the extent of the collapse in overall GDP.

Chart 6: Global Real Goods Trade & GDP (% y/y)

Sources: CPB Netherlands Bureau, Refinitiv, Capital Economics

Chart 6 shows the past relationship between GDP and world trade volumes. Taken at face value, this relationship would imply that our estimate of a 3.8% decline in world GDP this year is consistent with a plunge in world trade of around 30%. However, data available so far imply that the fall will have been far smaller, at around 5.4%.

Indeed, throughout the second half of the year, world trade rebounded strongly. The latest data from the CPB Netherlands Bureau for September showed that real world trade in goods was just 1.5% below its December 2019 level. For comparison, three months after the trough during the financial crisis, trade volumes had barely risen at all. (See Chart 7.) In fact, it took around three years from the start of the GFC for world trade in real terms to even come close to its pre-crisis levels.

Chart 7: Global Real Goods Trade (100 = t = trough)

Source: CPB Netherlands Bureau

Why has the damage been less severe?

The damage to world goods trade has been less severe than one might have expected for five reasons. First, the downturn has been concentrated in the services sector. Second, the virus has boosted demand for COVID-related products. Third, government restrictions on consumer services have prompted a substitution into demand for traded goods. Fourth, China’s resilience and infrastructure-led recovery have boosted demand for commodities. Finally, the depreciation of the dollar has helped to grease the cogs of world trade.

Looking at the first reason, in a “standard” downturn, the manufacturing sector tends to contract to a greater extent than the services sector. During the past three global downturns, for instance, the slowdown in industrial production was, on average, two times larger than that in total GDP – which includes services output. (See Chart 8.) But with virus restrictions disproportionately affecting the services sector, the latter has suffered larger falls in output than the industrial sector this year.

Chart 8: Global GDP vs. Industrial Production
(% Diff Peak to Trough Over Latest Four Downturns)

Sources: Refinitiv, Capital Economics

The PMI surveys provide further evidence of this – the global services PMI fell by much more than its manufacturing equivalent during the early stages of the pandemic. But during the financial crisis, it was the manufacturing PMI that experienced a far larger drop. (See Chart 9.) What’s more, in the output breakdown of GDP for Q2 this year, hospitality, recreation, and transport were by far the hardest hit sectors. (See Chart 10.)

Chart 9: Global Manufacturing & Services PMI

Source: IHS Markit

Chart 10: Avg. Q/Q % Chg. in Industry GVA (DMs)

Sources: Refinitiv, Capital Economics

Second, during the early stages of the recovery, strong demand for COVID-related products such as PPE, medical equipment, and electronics to aid in the shift to working from home helped to lift external demand. In China – a key manufacturer of such products – exports of these goods accounted for around half of the rebound in export values. (See Chart 11.) Other parts of Asia also benefitted from strong exports of PPE, medical equipment and/or electronics, including Korea, Vietnam, and Taiwan.

Chart 11: Chinese Goods Exports ($, % y/y)

Sources: Refinitiv, CEIC

Third, the more recent shift in consumer spending away from services and towards goods has bolstered the recovery in global trade. Indeed, there has been a sharp increase in demand for goods related to home improvement and recreation – advanced economy retail sales data for September show that, aside from instore sales of items like PPE and other health goods, sales of household goods were way above January levels. (See Chart 12.)

Chart 12: Average Percentage Change in Real Retail Sales from January to September in 12 DMs

Sources: Refinitiv, Capital Economics

Furthermore, in the US, monthly consumption data show that there had been far greater spending on PCs, other IT equipment, furniture, and games. (See Chart 13, which breaks down the percentage-point contributions of each product type to the 5.3% rise in US goods consumption from January to September.)

Chart 13: Breakdown of the Change in US Goods Consumption from January to September (%-points)

Sources: Refinitiv, Capital Economics

Importantly, these goods tend to be traded more heavily. Chart 14 shows the percentage of final manufactured goods consumed in advanced economies that are imported. Electronic goods, electrical equipment, pharmaceuticals, and furniture are among the most heavily imported goods.

Chart 14: Imported Goods Consumption % of Total Goods Consumption in 22 Advanced Economies

Sources: Intracen, Capital Economics

There is also a possibility that the shift towards online shopping has compounded the boost to trade. Non-store sales have surged and are now 20 to 40% above their pre-virus levels in most advanced economies. Admittedly, there are limited data on what exactly makes up these online purchases. But anecdotal evidence suggests that goods sold online tend to be trade intensive. Indeed, 40% of sellers on Amazon are based in China from which exports of furniture, toys, textiles, and plastic goods had not only recovered to pre-virus norms but were between 5 and 50% above those levels by November 2020. (See Chart 15.)

Chart 15: Chinese Goods Exports
($ values, Dec. 19 = 100, seas. adj.)
Sources: CEIC, Refinitiv

Fourth, given that China is a major consumer of some key commodities, its infrastructure-led economic recovery will have boosted commodities trade. (See Chart 16.) Our China Activity Proxy (CAP) (see here) suggests that GDP growth in China was up by a very strong 7.1% y/y in November.

Chart 16: China’s Share of Global Consumption (%)
Sources: Intracen, Capital Economics
Chart 17: Imports from the US & Imports Invoiced in US Dollars as a % of Total Imports (2001-15 averages)
Sources: IIF, Gopinath, Capital Economics

Finally, the weaker dollar will have had a small positive effect on world trade. (See here.) Instead of being priced in the currency of the exporting country, traded goods tend to be priced in a so-called “dominant currency”. Outside Europe, this is principally the US dollar. Indeed, not only are over 40% of the world’s traded goods priced in US dollars, but the share of imports invoiced in dollars is significantly higher than the share of imports that actually originate in the US. (See Chart 17.)

The 10% depreciation of the trade-weighted dollar since March will have caused the price of traded goods to fall – thereby supporting demand – even in cases where neither trade partner is in the US.

The immediate outlook for goods trade

Real world goods trade looks set to return to its pre-virus level this year. (See Chart 18.) Data from the CPB Netherlands Bureau showed that global exports of goods were already back within touching distance of that mark in September. And despite the reimposition of stringent lockdown measures in Europe, we expect that the recovery continued in Q4. After all, the lockdown measures have been focused in the services sector, while the manufacturing sector has remained open, albeit with stricter social distancing in place. And as we have argued, lockdowns have shifted demand towards traded goods which could in fact provide a further boost to trade in Q4.

Chart 18: World Real Goods Trade (2010 = 100)

Sources: CPB Netherlands Bureau, Capital Economics

Indeed, early evidence points to a further recovery. The new export orders component of the Global Manufacturing PMI is consistent with annual growth in world exports pulling off a recovery into positive territory in Q4. And the most recent hard data showed that exports were well above pre-virus levels in all Asian early reporters.

World goods trade to lose momentum next year

On the face of it, the emergence of effective vaccines is good news for the goods trade outlook. Despite the latest news on the new strain of the virus, we still expect the rollout of the COIVD-19 vaccines to allow most DMs to lift restrictions earlier than we previously thought. Accordingly, we have revised up our forecasts for global GDP growth by 0.5%-pt and 0.2%-pt, to 6.5% and 4.3% respectively in 2021 and 2022. (See here.) All else equal, stronger world demand should mean stronger trade in goods.

What’s more, the brighter economic outlook coupled with our expectation that real yields will fall by more in the US than in other DMs, means that we see the US dollar weakening further over the next two years. This will continue to grease the cogs of world trade by weighing on the price of traded goods, even outside the US. And with economic activity rising, demand for oil will pick up, boosting real commodities trade.

However, vaccines will not be as transformative for goods trade as they will be for GDP. Indeed, while we initially assumed that the tailwinds that had supported trade this year would continue over the next year or so as lockdowns were slowly scaled back and demand for COVID-related products remained strong, we now expect these tailwinds to peter out at in the first half of next year.

As the major advanced economies reopen, we expect there to be at least a partial reversal of the shift in spending away from consumer services and towards goods. After all, Google Mobility data showed that visits to restaurants and to high streets in the US, the UK and the euro-zone all rose back towards pre-virus levels fairly quickly as restrictions were lifted in Q3. (See Chart 19.) Importantly, for at least the next 12 months, we expect that the reversal of this substitution effect towards consumer goods will offset most of the boost to trade in goods from a rise in global demand.

Chart 19: Google Mobility: Retail & Recreation Visits (% difference from Jan-6th Feb level)

Sources: Google, Capital Economics

What’s more, even though we think that structural shifts in behaviour that were already underway prior to COVID-19 – such as working from home and online spending – are likely to persist (see here), the related boost to world goods trade has already occurred and is therefore unlikely to offer the same support as it has this year.

As a result, we expect the recovery in world goods trade to slow next year, even though GDP growth is set to rebound strongly.

Vaccines mean stronger recovery in services trade

However, a rebound in services trade next year should mean that total trade continues to grow. Indeed, the approval of effective COVID-19 vaccinations is very good news for services trade. A key reason why services trade has fallen to a greater extent than goods trade is the complete collapse of tourism and business travel. Indeed, data on nominal exports of “travel” across ten major economies showed that in Q2 this year, international travel was 75% below its pre-virus level. (See Chart 20.)

Chart 20: Nominal Travel Exports
(% diff. between Q2 2020 & Q4 2019)

Sources: Intracen, Capital Economics

Effective vaccines mean that we expect tourism to return to its pre-crisis levels more quickly than we had initially anticipated. After all, following the SARS outbreak, it took roughly three months for flights to return to their pre-crisis levels. Admittedly, the SARS pandemic was much shorter and less deadly than COVID-19. Nonetheless, there was no clear long-term impact on economic behaviour, and we expect the same to happen this time, at least when it comes to international leisure travel.

Mixed picture at the country level

Before we conclude with our forecasts for world trade, it is worth considering how the trends described above are affecting different economies. Chart 21 shows the trade balances of 14 major economies. So far, China has been the main beneficiary from the shift in spending towards consumer goods. Relative to global GDP, China’s trade surplus in 2020 is the largest recorded in at least 50 years.

Chart 21: Goods Trade Balance (% of Global GDP)

Sources: Refinitiv, Capital Economics

Of course, it is not just China that has benefitted. The shift in consumer spending has also caused a sharp increase in exports from countries in other parts of Asia and Central and Eastern Europe.

But these countries will not benefit as much from the rollout of COVID-19 vaccines. In fact, they might see their surpluses narrow as spending shifts back towards services and demand for COVID-related products weakens. China’s share of world exports – which rose from 12% in December 2019 to about 13.5% in November – is likely to revert to its previous trend. With the strength in Chinese exports unlikely to be sustained, its trade surplus will narrow.

On the other hand, the economies where exports have struggled to recover as quickly – such as the US – will benefit from the faster return of external demand in key trading partners, particularly in the services sector.

Indeed, given that the approval of COVID-19 vaccines means that we now expect tourism to rebound more strongly than we did previously, economies where tourism accounts for a larger share of overall exports – such as Spain, Italy, Thailand, the Philippines and Turkey – are set to experience a sharper rebound. Indeed, with international flights likely to recover quickly, perhaps even by the summer season in 2021, these economies’ trade balances look set to benefit significantly.

There are two potential headwinds not directly related to COVID-19 that could dampen trade growth over the next couple of years: Brexit and a further escalation of tensions between China and the rest of the world.

Brexit is unlikely to affect the recovery in global trade, even if a deal is not reached. After all, the UK accounts for only 4% of world goods trade.

That said, Brexit could cause problems for the UK. There is likely to be some disruption to trade even if a deal is secured. And in a no deal scenario, the disruption to trade will depend on what type of no deal it is. The UK and EU could cooperate to reduce delays at the borders. In this case, disruptions would not be much more severe than if there is a deal. But in an uncooperative no deal, the EU could slow down trade flows by imposing onerous documentation and physical checks. You can read our views on the impact of Brexit in our UK Focus.

We estimate that in a worst-case scenario, UK exports of goods and services to the EU could fall by 30%. But even then, we think the trade deficit will be narrower than it has been over the past few years. Indeed, given that the UK runs a trade in goods deficit with the EU, any reduction in exports due to disruption would probably be offset by a bigger fall in imports.

But further ahead, decoupling between China and the rest of the world could have far bigger effects on trade at the global level. Tensions between the US and China are unlikely to improve even with a Joe Biden presidency. Reviving trade talks with China does not appear to be a Biden priority, so US trade barriers against China put in place by Trump are likely to remain in place for the time being. Even if talks resume, the tariffs would probably only be reversed in exchange for concessions from China.

And US barriers to trade may rise in some cases. (See here.) It is important to note that we do not expect any major reignition of trade tensions in the next year or two, so the decoupling between China and the rest of the world is unlikely to have a bearing on the trade outlook over the next two years. But ultimately, we think that these tensions will lead to the next period of deglobalisation. (See here.)


While the emergence of effective COVID-19 vaccines has brightened the overall economic outlook next year, it does not bode particularly well for trade in goods. After all, most of the tailwinds that have helped support goods trade in 2020 will reverse as economies open back up. But while we expect the recovery in global real goods trade to slow, we do not expect it to reverse. (See Chart 22.) And from the start of 2022, world goods trade should start its journey back towards trend growth as external demand continues to recover.

Chart 22: Global Real Exports in Goods & Services
(% y/y)

Sources: Refinitiv, Capital Economics

Instead, we expect trade in services to do most of the heavy lifting in the recovery in total trade in 2021. Admittedly, services trade is still suppressed, so it will take longer for exports for goods and services to fully recover. But given that the vaccines have unequivocally improved the outlook for services trade, we expect y/y growth in exports of goods and services to peak at around 20% in Q2 next year. (See Chart 23.) That will push exports of goods and services back to pre-virus levels by the start of 2022. (See Chart 22 again.)

Chart 23: Global Real Exports in Goods & Services
(% y/y)

Sources: Refinitiv, Capital Economics

On a regional basis the picture is more mixed. The countries that benefitted most from the shifts in spending towards goods this year, including China and other parts of Asia, will probably see a worsening of their trade positions as elevated demand for their products eases. But with economic activity set to recover more quicky, in countries where exports were struggling to pick up, including the US, trade looks set to recover more quickly. And the expected rebound in international tourism will help boost trade in countries where tourism makes up a larger part of their exports.

Gabriella Dickens, Global Economist,