The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods - INTERNATIONAL TRADE WORKING PAPER
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ISSN 2413-3175
2021/08
INTERNATIONAL TRADE WORKING PAPER
The Impact of COVID-19
on the Global and Intra-
Commonwealth Trade in
Goods
Sangeeta Khorana, Inmaculada Martínez-
Zarzoso and Salamat AliInternational Trade Working Paper 2021/08
ISSN 2413-3175
© Commonwealth Secretariat 2021
By Sangeeta Khorana (Bournemouth University); Inmaculada Martínez-Zarzoso (University of
Goettingen and University Jaume) and Salamat Ali (Commonwealth Secretariat).
Please cite this paper as: Khorana, S, I Martínez-Zarzoso and S Ali (2021), ‘The Impact of COVID-19
on the Global and Intra-Commonwealth Trade in Goods’, International Trade Working Paper
2021/08, Commonwealth Secretariat, London.
The International Trade Working Paper series promptly documents and disseminates reviews,
analytical work and think-pieces to facilitate the exchange of ideas and to stimulate debates and
discussions on issues that are of interest to developing countries in general and Commonwealth
members in particular. The issues considered in the papers may be evolving in nature, leading
to further work and refinement at a later stage. The views expressed here are those of the
author(s) and do not necessarily represent those of the Commonwealth Secretariat.
For more information contact the Series Editor: Dr Brendan Vickers, b.vickers@common
wealth.int.
Abstract
This paper employs the gravity model of international trade to examine the effect of the COVID-
19 pandemic on global and intra-Commonwealth trade flows. It uses bilateral monthly exports
data at the HS6 level and the number of COVID-19 cases and deaths, as well as the stringency of
measures taken to contain the virus, to estimate the effect of the pandemic on Commonwealth
countries’ trade. The study finds that the incidence of COVID-19 in both exporting and importing
countries has impacted on Commonwealth trade flows and that the extent of the effect varies with
the development level of trading partners. High numbers of COVID-19 cases, including deaths, in
low-income importing countries led to a reduction in Commonwealth exports, while a high inci-
dence of COVID-19 in high-income importing countries led to with an increase in their exports.
The incidence of COVID-19 in an exporting country was also found to impact on trade among a
global sample of countries. Restrictions aiming to contain COVID-19 in high-income countries
were associated with an increase in Commonwealth countries’ trade. Short-term projections of
trade trends point towards a negative change in both exports and imports of Commonwealth
countries. The study also proposes a set of policy options and recommendations targeting sustain-
able recovery and building resilience in Commonwealth economies.
JEL Classifications: E00, F10, F62
Keywords: COVID-19, goods, international trade, Commonwealth, trade flowsInternational Trade Working Paper 2021/08 3
Contents
1. Introduction 5
2. Correlations between the COVID-19 pandemic and Commonwealth countries’
trade flows 6
3. Literature review 9
4. Methodology 11
5. Conclusions and policy implications 19
Notes 20
References 20
Annex 224 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods
Abbreviations and Acronyms
ACFTA African Continental Free Trade Area
CEPII Centre d’Etudes Prospectives et d’Informations Internationales
CES constant elasticity substitution
CGE computable general equilibrium
DD difference-in-difference
FDI foreign direct investment
FE fixed effects
FTAs free trade agreements
GDP gross domestic product
GVCs global value chains
IMF International Monetary Fund
LDCs least developed countries
MRT multilateral resistance terms
NLS non-linear least squares
OLS ordinary least squares
PPML Poisson pseudo maximum likelihood
WTO World Trade OrganizationInternational Trade Working Paper 2021/08 5
1. Introduction
The COVID-19 pandemic generated a global largely rely on exporting fuels, agricultural
shock of unprecedented magnitude, with a commodities and minerals.
devastating effect on international trade flows Given that around 70 per cent of Common
(WTO, 2020a). This followed from disruption of wealth countries’ exports comprise merchan-
economic activity as a consequence of lockdowns, dise, this study examines how the COVID-19
travel restrictions, international border and port shock has impacted bilateral merchandise trade
closures, and other virus-containment measures in those countries. It employs recent advance-
resulted in a macroeconomic shock. Several ments in empirical modelling to estimate the
accounts indicate that 2020’s global recession aggregate effect of the COVID-19 pandemic on
has been the worst since 1930 (Blake and the global and intra-Commonwealth trade in
Wadhwa, 2020; Hevia and Neumeyer, 2020). member countries’ goods and to explore the het-
The pandemic affected trade flows along both erogeneity (or otherwise) of that impact across
supply and demand channels (Lakatos, 2020). various groups, including the least developed
In 2020, global trade flows collapsed on average countries (LDCs) and small states. It also devel-
by around 8 per cent (WTO, 2020b); that ops a set of policy options and recommendations
impact, however, has varied across countries aiming to revive merchandise trade flows in the
and regions, largely depending upon the level Commonwealth and ensure a sustainable recov-
of development, trade structure, stringency ery from the economic impact of the COVID-19
of containment measures, and governments’ pandemic, as well as to build resilience against
capacity to implement policies supporting future shocks.
business and households. Few studies have examined the relationship
The pandemic had a disproportionately between trade and COVID-19. To our
severe economic and trade effect on 54 knowledge, only Hayakawa and Mukunoki
Commonwealth countries. It induced a deep (2020), Espitia et al. (2021), and Friedt and Zhang
recession in 45 Commonwealth economies, (2021) have used an econometric approach to
the gross domestic product (GDP) of which examine the impact of COVID-19 on trade.
collapsed by US $1.45 trillion in a single None of these, however, focuses on how the
year. This translated to $345 billion forgone pandemic has impacted Commonwealth trade.
in member countries’ global exports and $60 Thus this paper aims to fill a gap in the literature
billion in intra-Commonwealth trade flows. and inform discussions of the potential impact
Among other things, their large populations, of COVID-19 on Commonwealth merchandise
heavy reliance on commodities exports, and trade flows, as well as to offer recommendations
similar deep recessions in major export markets, for policy to revive Commonwealth countries’
made these countries particularly susceptible to economies.
financial contagion (see section 2). Moreover, The paper uses bilateral monthly exports
because of pre-existing structural vulnerabilities, data from January 2019 to November 2020
COVID-19 proved to be a particular problem to examine the short-term effects of the
for low-income countries, including several of COVID-19 pandemic on global and intra-
the Commonwealth’s small states. Commonwealth trade in member countries’
Against this backdrop, there has as yet been goods, including among these countries
no detailed contextualisation of the linkage the LDCs and small states. We examine the
between the incidence of COVID-19 and the exporting Commonwealth countries and their
trade flows within the diverse group of countries trading partners to investigate how shocks
that comprise the Commonwealth. The related to COVID-19 and sector characteristics
International Monetary Fund (IMF) estimated a may have impacted on trade relationships.
fall in commodity prices with an adverse impact The study uses three different measures of
on trade and the macroeconomic situation of the incidence of COVID-19 in a country: the
those countries affected (IMF, 2020). Thus, the number of COVID-19 infections, the number
effect of COVID-19 on trade may be particularly of deaths and the stringency of measures aiming
acute for Commonwealth countries, which to contain the virus.6 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods
The paper is structured as follows. • Section 4 offers insight into the data and the
empirical specification of the gravity model,
• In section 2, we provide descriptive evi- as well as delivers our main findings.
dence of the impact of COVID-19 on • In section 5, we draw some conclusions and
Commonwealth countries’ economies. make recommendations for Commonwealth
• Section 3 presents an overview of the cur- countries seeking to build resilience and
rent literature on the economic impact of protect their economies against future
COVID-19. shocks.
2. Correlations between the COVID-19 pandemic and
Commonwealth countries’ trade flows
The Commonwealth is diverse group of 54 (Roser et al., 2020). This crisis was accompa-
countries stretching from the east coast of New nied by a severe drop in the Commonwealth’s
Zealand to the western parts of the Caribbean global and intra-Commonwealth trade flows
and South America. Six Commonwealth mem- (see Figure 1). Relative to pre-pandemic
ber countries are developed, while 48 are at growth trends, Commonwealth economies
various levels of economic development. This contracted by around 10 per cent in 2020, mak-
is not a formal trade bloc, but myriad drivers ing this group of countries an interesting case
of international trade, such as a common lan- in which to study the implications of the pan-
guage (English being a first or second lang demic. While some of them have been able to
uage in most Commonwealth countries), a contain the pandemic and resume production
shared colonial history, some cultural common and trading activities, at time of writing most
ground and similar legal systems, underpin the Commonwealth countries are still struggling to
trade and economic relationships within this tame the pandemic.
heterogeneous association. Several factors likely contributed to the seis-
The COVID-19 pandemic wreaked havoc on mic trade meltdown in these economies. First,
most of the Commonwealth countries’ econo- the Commonwealth is home to 32 per cent of
mies. As of 20 March 2021, Commonwealth the world’s people and its membership includes
populations had succumbed to 20 million four of the ten most populated countries (India,
infections and witnessed 1 million deaths Pakistan, Bangladesh and Nigeria). Aside from
Figure 1. Commonwealth’s global and intra-Commonwealth exports compared, 2019 and 2020
Global exports Intra-commonwealth exports
3.9 710 701.2
3.9 3.83 700
3.8 690
3.8 3.73 680 672.6
3.7
US$ trilion
US$ billion
670
3.7
660
3.6
3.6 3.54 650
641.0
3.5 640
3.5 630
3.4 620
3.4 610
Pre-COVID In-COVID Pre-COVID In-COVID
forecast estimate forecast estimate
2019 2020 2019 2020
Note: Calculated using the IMF’s pre-pandemic forecasts (October 2019) and in-pandemic estimates (April
2021), and trade-to-GDP ratios taken from the World Development Indicators.
Source: Commonwealth Trade Review (2021).International Trade Working Paper 2021/08 7
these demographic reasons, several underlying by mineral ores (36 per cent) and agri-food
structural factors made these countries particu- products (22 per cent). Around 55 per cent of
larly vulnerable to the trade contagion. these exports are destined for only five mar-
Second, two-thirds of the Commonwealth’s kets: China, the USA, the European Union, the
global and intra-Commonwealth trade is in United Kingdom and Australia. The COVID-
manufactured goods and commodities. For 19 pandemic negatively affected demand for
many member countries, especially developing commodities in these countries, leading to a
countries, the proportion of commodities in collapse in commodity prices, particularly of
gross national exports ranges from 40 per cent fuels. The prices of other key commodities,
to more than 95 per cent, which is extremely such as agricultural products and mineral ores,
high compared with the world average of 29 per were relatively less affected. Nevertheless, a
cent (see Figure 2). These economies were con- reduction in demand, along with challenges
sequently hit particularly hard when commodi- associated with production and exporting, led
ties prices dropped. to an aggregate export loss of around US $125
Commonwealth countries’ main commod- billion for Commonwealth countries in 2020—
ity exports are food products, mineral ores, even though the prices of most commodities
metals and fuels. Among these, fuels are the had surged in the second half of 2020, offset-
most exported, constituting around 42 per cent ting some of the earlier trade losses in com-
of all commodities exports. This is followed modity-dependent economies (see Figure 3).
Figure 2. Excessive reliance of Commonwealth countries on commodities exports
Commonwealth Country Groups Developing Commonwealth Countries
Percent Percent
– 10 20 30 40 50 60 70 80 90 – 10 20 30 40 50 60 70 80 90 100
Commonwealth CDCWCs (35) 84
Pacific (9) 97
Commonwealth developed (6) 51
Africa (9) 79
All commonwealth (54) 45
Caribbean (12) 58
Commonwealth developing (48) 40
World average Asia (8) 29
29
Source: Ali et al. (2020).
Figure 3. Monthly variation in commodity price indices in 2020
180
160
140
120
2015=100
100
80
60
40
Agricultural products Agricultural raw materials Minerals, ores and metals Fuels
20
0
Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
2019 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020
Source: Calculated using data from UNCTADstat.8 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods
Figure 4. Impact of the pandemic on Commonwealth merchandise exports, December 2019 to December 2020
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
.
9
n
b
ar
r
ay
n
l
g
t
v.
0
Ju
ct
Ap
p
01
Ja
Ju
02
Fe
Au
No
M
Se
M
O
.2
.2
ec
ec
D
D
Global Intra-CW
Note: Exports are indexed to 1 in December 2019.
Source: Commonwealth Trade Review (2021).
The adverse effect of the pandemic on containment measures in place are those that
global and intra-Commonwealth merchan- have experienced a large decline in trade flows.
dise exports was first felt in early January Finally, the period of the pandemic
2020, immediately after the outbreak of the saw constrained economic growth in the
novel coronavirus in China in December Commonwealth’s major export markets,
2019. The most marked effect occurred dur- adversely affecting demand for goods and ser-
ing April and May 2020, when the USA and vices (see Figure 5). Other than China, where
many large export markets in Europe imposed GDP expanded by 2.3 per cent, the major des-
national lockdowns. In these two months, tinations for Commonwealth exports recorded
Commonwealth members’ exports dropped to significant contractions in GDP in 2020. In India
almost half their baseline (see Figure 4). The and Singapore, GDP declined by more than 5
impact was higher for intra-Commonwealth per cent. In the USA, which absorbs 31 per cent
exports compared with global exports because of developed Commonwealth members’ goods
many of the large intra-Commonwealth trad- and services exports and 12 per cent of those
ers—including India, Singapore, South Africa from developing members, GDP contracted by
and the United Kingdom—experienced an 3.5 per cent. The European Union, which col-
economic contraction, affecting supply and lectively represents the second-largest market
demand. Exports plateaued in May 2020, but for Commonwealth exports, contracted by 6.6
they rebounded in June 2020 as firms sought per cent. Within the EU-27, growth in the three
to adapt to pandemic containment measures. top destinations for Commonwealth exports—
At time of writing, merchandise exports Germany, France and the Netherlands—fell
are gradually recovering as lockdowns and by 4.9 per cent, 8.2 per cent and 3.7 per cent,
other restrictions on economic activities are respectively. Similarly, the GDP of the United
lifted in many countries. In December 2020, Kingdom, a key destination for intra-Com-
however, the Commonwealth’s exports were monwealth exports, dropped by around 9.9 per
still well below their pre-pandemic levels in cent. These markets collectively absorb around
December 2019. 75 per cent of Commonwealth developed
The drop in Commonwealth countries’ members’ exports and around half those of
exports correlates strongly with incidence of developing countries. At time of writing, most
the virus. Those countries with high num- of these economies are still subject to various
bers of infections (and deaths) and with strict virus-containment measures.International Trade Working Paper 2021/08 9
Figure 5. Commonwealth market share and GDP drop for large export markets (%)
Commonwealth countries pre-COVID-19 export share, by market (%)
All commonwealth
Japan, 4
USA, 22 EU-28, 20 China, 13 ROW, 39
Singapore, 3
0 10 20 30 40 50 60 70 80 90 100
Share (%)
GDP impact for large export markets
USA
UK
Singapore
Japan
India
Hong Kong, China
Euro area
China
–12.0 –10.0 –8.0 –6.0 –4.0 –2.0 0.0 2.0 4.0 6.0 8.0
GDP growth rate (%)
2020 actual 2020 pre-COVID forecast
Source: Commonwealth Trade Review (2021).
3. Literature review
The COVID-19 pandemic resulted in an eco- investment. McKibbin and Fernando (2020)
nomic shock across countries that, in turn, offer a supply-side analysis of the pandemic and
impacted GDP and generated an economic suggest that reduced labour supply increased
downturn, with a negative effect on international the cost of production. Similarly, social distanc-
trade. Studies highlighting pandemic-related ing measures introduced to reduce the spread
shocks to demand and supply attribute transmis- of the disease affected production, consump-
sion of these shocks to the disruption of global tion and trade patterns, both directly and indi-
value chains (GVCs) (Baldwin and Freeman, rectly (Espitia et al., 2021). Those examining
2020; Baldwin and Tomiura, 2020). These studies the impact of measures imposed to prevent
suggest that the pandemic disrupted manufac- the spread of COVID-19 unanimously agree
turing sectors when containment efforts stifled that the restrictions led to a sharp economic
direct supply, with impact on the international downturn.
flow of intermediate inputs, and when global Studies examining the relationship between
demand dropped as consumer spending slowed trade and COVID-19 focus mainly on GVCs
and investment was delayed. and whether these absorbed or transmit-
On the demand side, Correia and colleagues ted COVID-19 shocks. Baldwin and Tomiura
(2020) examine the economic contagion as (2020), Javorcik (2020a, 2020b) and Miroudot
COVID-19 impacted the aggregate demand (2020), for example, report that GVC disrup-
channel and depressed household spending, tions magnified pandemic-induced produc-
leading to business uncertainty about future tion shock and impacted adversely on all of
demand and an adverse effect on business output, employment and trade. Others, such as10 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods Sforza and Steininger (2020), Meier and Pinto machinery products in the importing countries (2020), and Eppinger et al. (2020), have inves- but negatively affected final machinery exports tigated interconnectedness and the channels in supplier countries; as a result, supply-side through which economic shock is transmitted, shocks were more significant in the early stages finding that the economic effect of COVID-19 of the pandemic. A substitution effect was wit- was spread through supply chain linkages, with nessed, results showing that a country’s exports particularly severe consequences for highly are positively associated with the pandemic integrated economies compared to those less burden borne by its neighbours. integrated in GVCs. Espitia et al. (2021) use the gravity model Eppinger and colleagues (2020) and Gerschel to examine how bilateral trade growth may et al. (2020) also examine the global intercon- have been impacted by supply and demand nectedness of international trade and GVCs, shocks during the COVID-19 crisis among showing that slowing productivity in China’s exporting, partner and third countries. This Hubei province impacted on the global econ- study, examining 28 exporting countries and omy. Friedt and Zhang (2021) employ gravity multiple trading partners over a period from modelling to specifically examine the impact the beginning of the pandemic to June 2020, of the pandemic on Chinese exports and to employs DD techniques and relates COVID- explore the heterogeneity of trade effects across 19 shocks to sector characteristics. The shocks Chinese provinces, international trade partners across sectors are assumed to be heterogeneous and commodities. Their results show that GVC and that sector characteristics can address the contagion reduced Chinese exports by 40–45 decline in bilateral export growth induced by per cent during the first half of 2020—that is, the shocks. The regression results, based on a that Chinese exports were highly sensitive to sector-level gravity model, show that negative rising rates of infection both nationally and trade effects induced by the shocks varied widely globally. Fernandes (2020) uses difference-in- across sectors and that sectors within which difference (DD) techniques to focus on trade remote working was possible contracted less resilience measures such as a sector’s depen- than those within which it was not. Espitia et al. dence on China for inputs, the labour intensity (2021) also find that while GVC participation of its production and its technological proxim- increased traders’ vulnerability to shocks, it ity to other sectors. also reduced their exposure to domestic shocks. Bonadio et al. (2020) have examined the Other studies have focused on the impact of GVC disruption on GDP. Their study implications of COVID-19 for trade in services, differentiates between foreign and domestic foreign direct investment (FDI), tourism and shocks, and it calibrates the likely impact of food security. For example, Maliszewska et al. lockdown measures in 64 countries by simu- (2020) employ a standard global computable lating what would happen if countries were to general equilibrium (CGE) model to examine be reliant on domestic inputs. Guan and col- the impact on trade in services by simulating leagues (2020) use the economic disaster model the potential impact of COVID-19 on GDP and to assess the supply chain effects of different trade. Their results show that domestic services COVID-19 control measures and they empha- and traded tourist services suffer the biggest sise the indirect impacts on other countries negative shock. With an open-economy model, through supply chain linkages. Ozge et al. (2020) examine the macroeconomic Hayakawa and Mukunoki (2020) assess the effects of pandemic-induced shocks on capital correlation between the number of COVID-19 flows to emerging market economies. Their cases and deaths and rates of bilateral exports study shows output losses in emerging markets and imports of machinery goods (finished and and attributes these losses to local currency intermediates) between January and June 2020 depreciation, which has a knock-on effect for 26 reporting and 185 partner countries. within the developed world. Their results indicate that registered COVID- International organisations have analysed the 19 cases and deaths in the exporting countries impact of COVID-19 on developing countries, were likely to be a key factor suppressing inter- focusing in particular on how trade in the com- national trade. Their findings also suggest that modity sectors has been affected (OECD, 2020a, COVID-19 did not impact demand for finished 2020b; UNECLAC, 2020; Escaith et al., 2020).
International Trade Working Paper 2021/08 11
Within the context of the Commonwealth commodity exports to the destination markets
countries, Ali and colleagues (2020) estimated would decline by US $98–123 billion in 2020—
the impact of pandemic-induced trade dis- in percentage terms, an export loss of 19–24 per
ruptions on exports of commodities to China, cent compared to pre-pandemic benchmark
the USA, the European Union, the United estimates.
Kingdom and Australia. They predicted that
4. Methodology
We use the gravity model of international Xijt = exp(β1 ln GDPit + β2 ln GDPjt
trade to assess the impact of the COVID- + β3 ln COVIDit + β4 ln COVID jt
19 pandemic on bilateral trade flows. In a (1)
+ β5 Dij + β6 FTAij + β7COLij
basic gravity model, trade between country
i and country j is proportional to the size of + β7 BORDij + β5 LANGij + θi
the economies and inversely relates to the + π j + γt )µijt
distance—a proxy for transportation costs—
between them. Thus it can generally be where
described as: GDPit and GDPjt are the GDPs of countries
YiY j i and j, respectively, in period t
Xij = A COVIDit and COVIDjt are the number of
Dij
COVID-19 cases or deaths (or the strin-
where gency of containment measures) in the
respective countries at time t
Xij is trade flows or exports from country Dij denotes the great circle distance between
i to country j countries i and j
Yi is the GDP of country i FTAij denotes an FTA dummy variable
Yj is the GDP of country j COLij denotes colonial relationship (either past
Dij denotes geographical distance between or present) between the trading countries
the two countries (which could be replaced BORDij denotes a shared border (i.e. neigh-
by trade costs proxies). bouring countries)
LANGij denotes that countries have at least
A commonly used analytical framework, the one (first or second) language in common
gravity model has been applied in many empir- γt indicates time-specific effects (by month)
ical studies to estimate the effects of trade pol- that are common to all trading countries.
icy changes by introducing dummy variables.
Among the policies analysed are the effects of Since GDP variables are available for the
free trade agreements (FTAs). whole of 2019, we use the origin and destina-
The model in this study introduces the tion fixed effects θi and πj, which are a proxy for
following: multilateral resistance factors in equation (1).
• the number of COVID-19 cases by country The second empirical specification, equation
and time; (2), replaces the typical bilateral gravity variables
• the number of deaths resulting from the by time-invariant fixed effects, denoted by Φij:
virus; and Xijt = exp(β1 ln GDPit + β2 ln GDPjt
• an index that is a proxy for the stringency of
+ β3 ln COVIDit + β4 ln COVID jt (2)
virus-containment measures implemented
during the pandemic in each country. + φij + γt )µijt
After adding the dimension of time and Theoretically, the model is based on a con-
other variables, the first empirical specification stant elasticity substitution (CES) system.
of the model is: Anderson and van Wincoop (2003) used a12 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods
non-linear least squares (NLS) model that con- The data on the number of COVID-19 cases,
siders the endogeneity of trade costs to refine number of deaths and the stringency index is
the theoretical foundations of the gravity model retrieved from Roser and colleagues (2020).
and provide evidence of border effects in trade. Data on GDP in nominal values and popula-
They indicated that the costs of bilateral trade tion in number of inhabitants is obtained from
between two countries are affected not only by the World Bank Development Indicators data
bilateral trade costs, such as distance, whether series. The data on geographical and cultural
or not they are landlocked, a shared border and proximity, such as distance, shared border and
a common language, but also by the relative common language, is from the Centre d’Etudes
weight of trade costs in comparison to those of Prospectives et d’Informations Internationales
their trading partners in the rest of the world (CEPII) database.
(the so-called multilateral resistance terms, or Table 1 presents some summary statistics.
MRT).1 Anderson and van Wincoop (2003)
pointed out that these multilateral resistance 4.2 Empirical specification and main results
factors should be taken into account in empiri- To examine how COVID-19 may have
cal research to avoid a biased estimation of impacted international trade, we analysed
the model’s parameters. Baier and Bergstrand monthly trade data for 186 countries over a
(2007) used country-pair fixed effects in addi- period spanning January 2019 to November
tion to time-varying trade costs to obtain unbi- 2020.
ased estimates. According to the most recent Table 2 presents the main results for the
developments, a Poisson pseudo maximum whole sample.
likelihood (PPML) approach can be applied if The gravity model has been estimated using
the model is to retain zero trade flows (Head PPML: first, with exporter and importer fixed
and Mayer, 2014; Yotov et al., 2016). effects (FE) as proxies for the MRT (equation
(1)) and with time FE; and, secondly, with
4.1 Data sources and variables bilateral and time FE (equation (2)). The first
The main source for bilateral trade flows is three columns of Table 2 report the results
monthly data from the UN Comtrade database of equation (1) using PPML and show the
for January 2019 to November 2020. See Table estimated coefficient of COVID-19-related and
A.1 for a list of Commonwealth countries. gravity variables. All of the variables are taken
Health authorities worldwide have collected with one lag—that is, the previous month—to
primary data on COVID-19 on a daily basis. account for lagged effects.
Table 1. Summary statistics
Variable Obs Mean SD Min Max
Trade value (US$) 213380 1.025e+08 7.982e+08 0 4.713e+10
Partner GDP 2019, constant 2010 206439 6.568e+11 2.070e+12 12581 1.830e+13
Reporter GDP 2019, constant 2010 213349 9.698e+11 2.602e+12 18008 1.830e+13
Partner population 2019 207605 55230309 1.784e+08 11646 1.398e+09
Reporter population 2019 206805 59541509 1.838e+08 18008 1.366e+09
Partner new monthly cases 213380 10331.793 93175.493 0 4496410
Partner monthly deaths 213380 291.381 2290.678 0 60750
Partner monthly average stringency 213380 16.473 29.057 0 100
Reporter total monthly cases 213380 19659.207 152796.27 0 2621418
Reporter total monthly deaths 213380 523.002 3368.124 0 60750
Reporter monthly average stringency 213380 15.647 27.556 0 100
Contiguity dummy 213380 .024 .154 0 1
Common language dummy 213380 .134 .341 0 1
Former colony dummy 213380 .022 .148 0 1
Distance between countries 213380 6983.341 4354.057 19.127 19812.043International Trade Working Paper 2021/08 13
Table 2. Main results: gravity model estimations with PPML for the whole sample
Dep. var.: export value (1) (2) (3) (4) (5) (6)
Explanatory var.
Lag-lncovcai −0.033*** −0.028***
(0.005) (0.005)
Lag-lncovcaj −0.002 −0.003
(0.003) (0.003)
Lag-lncovdei −0.028*** −0.023***
(0.005) (0.005)
Lag-lncovdej −0.003 −0.003
(0.004) (0.005)
Lag-lnstrini −0.039*** −0.050***
(0.014) (0.013)
Lag-lnstrinj −0.008 −0.009
(0.009) (0.008)
lndij −0.621*** −0.620*** −0.619***
(0.034) (0.034) (0.034)
Regional trade agreement 0.349*** 0.349*** 0.350***
dummy
(0.072) (0.072) (0.072)
Former colony dummy 0.262*** 0.262*** 0.261***
(0.096) (0.096) (0.097)
Contiguity dummy 0.366*** 0.367*** 0.367***
(0.102) (0.102) (0.102)
Common language dummy 0.111 0.111 0.110
(0.089) (0.089) (0.089)
Observations 178,120 178,120 178,120 177,137 177,137 177,137
Month FE Yes Yes Yes Yes Yes Yes
i j FE j FE j FE
Pseudo-R2 0.923 0.923 0.923 0.991 0.991 0.991
ij FE Yes Yes Yes
Note: Robust standard errors in parentheses; *** p14 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods
Table 3. Gravity model estimations: heterogeneous effects by
income level
Dep. var.: export value (1) (2) (3)
Explanatory var.
laglncovcai −0.026***
(0.004)
laglncovcaj −0.016***
(0.003)
laglncovcaiH −0.003*
(0.002)
laglncovcajH 0.015***
(0.002)
laglncovdei −0.020***
(0.005)
laglncovdej −0.020***
(0.004)
laglncovdeiH −0.005*
(0.003)
laglncovdejH 0.020***
(0.004)
laglnstrini −0.045***
(0.013)
laglnstrinj −0.041***
(0.008)
laglnstriniH −0.017***
(0.006)
laglnstrinjH 0.041***
(0.005)
Observations 177,137 177,137 177,137
Month FE Yes Yes Yes
ij FE Yes Yes Yes
Pseudo-R2 0.991 0.991 0.991
Note: Robust standard errors in parentheses; *** pInternational Trade Working Paper 2021/08 15
In Table 4, the gravity model is estimated for (1)–(3)). The number of COVID-19 cases in
the Commonwealth exporting (columns (1)– the exporting countries plays only a minor role,
(3)) and importing (columns (4)–(6)) countries however. When the focus is on Commonwealth
separately. As in Table 3, we add the interactions imports (columns (4)–(6)), it is important to
for COVID-19 variables with a dummy variable note that the incidence of COVID-19 in both the
for high-income Commonwealth countries to exporting and importing countries plays a role.
acknowledge that the effects can be heteroge- Table 5 presents similar estimates for intra-
neous. The estimates indicate that a high inci- Commonwealth trade. The first part of the table
dence of COVID-19 in the low-income importing present the results of gravity and COVID-19
countries (laglncovcaj) reduces Commonwealth variables, whereas the second part replaces the
exports, whereas a high incidence in the high- gravity variables with time-invariant bilateral FE,
income importing countries (laglncovcajH) as in Table 2, for the whole sample. In general,
increases Commonwealth exports (see columns similar to the results for all countries, the effect
Table 4. Model estimated for Commonwealth exporters and importers
Commonwealth exporters Commonwealth exporters
Dep. var.: trade (1) (2) (3) (4) (5) (6)
value
Explanatory var.:
Laglncovcai −0.010* −0.024***
(0.006) (0.009)
Laglncovcaj −0.021*** −0.014**
(0.006) (0.006)
laglncovcaiH −0.003 −0.013**
(0.004) (0.005)
laglncovcajH 0.017*** 0.029***
(0.004) (0.005)
Laglncovdei −0.013** −0.016*
(0.006) (0.008)
Laglncovdej −0.026*** −0.028***
(0.006) (0.006)
laglncovdeiH −0.007 −0.019**
(0.005) (0.008)
laglncovdejH 0.024*** 0.038***
(0.005) (0.008)
Laglnstrini −0.025* −0.045***
(0.013) (0.014)
Laglnstrinj −0.033*** −0.050***
(0.011) (0.019)
laglnstriniH −0.007 −0.041***
(0.011) (0.012)
laglnstrinjH 0.047*** 0.062***
(0.010) (0.010)
Observations 41,649 41,649 41,649 38,279 38,279 38,279
Month FE Yes Yes Yes Yes Yes Yes
ij FE Yes Yes Yes Yes Yes Yes
Pseudo-R2 0.990 0.990 0.990 0.986 0.986 0.986
Note: Robust standard errors in parentheses; *** p16 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods
Table 5. Results for intra-Commonwealth trade by developed and developing countries
Developed CW countries Developing CW countries
Dep. var.: trade value (1) (2) (3) (4) (5) (6)
Explanatory var.
laglncovcai –0.016 –0.023**
(0.014) (0.010)
laglncovcaj –0.018** –0.016**
(0.008) (0.007)
laglncovcaiH –0.006 0.006
(0.009) (0.007)
laglncovcajH 0.029*** 0.033***
(0.006) (0.006)
laglncovdei –0.008 –0.022*
(0.016) (0.013)
laglncovdej –0.034*** –0.035***
(0.010) (0.010)
laglncovdeiH –0.012 0.006
(0.015) (0.010)
laglncovdejH 0.038*** 0.044***
(0.009) (0.009)
Laglnstrini –0.031 –0.046
(0.030) (0.029)
Laglnstrinj –0.035 –0.028
(0.025) (0.024)
laglnstriniH –0.008 0.017
(0.021) (0.013)
laglnstrinjH 0.069*** 0.073***
(0.014) (0.013)
Lndij –0.624*** –0.624*** –0.621***
(0.106) (0.106) (0.107)
Regional trade 0.699*** 0.699*** 0.699***
agreement dummy
(0.136) (0.136) (0.136)
Former colony dummy 0.612** 0.613** 0.606**
(0.295) (0.295) (0.295)
Contiguity dummy –0.866* –0.866* –0.861
(0.522) (0.523) (0.524)
Common language 1.994*** 1.996*** 1.987***
dummy
(0.385) (0.386) (0.386)
Observations 9,816 9,816 9,816 9,753 9,753 9,753
Month FE Yes Yes Yes Yes Yes Yes
i,j FE Yes Yes Yes
Pseudo-R2 0.886 0.886 0.886 0.977 0.977 0.977
ij FE Yes Yes Yes
Note: Robust standard errors in parentheses; *** pInternational Trade Working Paper 2021/08 17
of COVID-19 on intra-Commonwealth trade is cases or deaths in the neighbouring countries,
higher in magnitude, in particular when consid- calculated using a distance-weighted sum of
ering incidence in terms of the number of deaths COVID-19 burden, is given by:
in the importing countries (cf. 0.02 in Table 3,
column (2), vs 0.044 in Table 5, column (5), for COVID jt (it )
high-income countries). The stringency index
NeighCOVIDit ( jt ) = ∑
j ≠i
Distance
ij
(3)
also presents a different effect for Commonwealth
trade: in high-income Commonwealth countries,
where
a higher level of stringency measures increases
trade (cf. 0.073 in Table 5, column (6), vs 0.041 in COVIDit(jt) represents the number of cases
Table 3, column (3)). and number of deaths in country i(j).
For robustness, we analyse the impact of
COVID-19 on neighbouring exporting and The empirical specification of the model,
importing countries in terms of bilateral given by equation (1), is augmented with the
exports of a given trading pair. The number of corresponding variables:
Table 6. Gravity model for COVID-19 incidence in neighbouring countries
Dep. var: trade value (1) (2) (3)
Explanatory var.
lncovcai –0.025***
(0.003)
lncovcaj –0.008**
(0.003)
lnneigcovcait –0.042*
(0.022)
lnneigcovcajt –0.131***
(0.034)
lncovdei –0.026***
(0.004)
lncovdej –0.010***
(0.003)
lnneigcovdeit –0.041
(0.029)
lnneigcovdejt –0.116***
(0.029)
lnstrini –0.033***
(0.008)
lnstrinj –0.026***
(0.008)
lnneigcovsit –0.101
(0.071)
lnneigcovsjt –0.020
(0.037)
Constant 21.911*** 21.651*** 21.496***
(0.146) (0.097) (0.084)
Observations 212,112 212,112 212,112
Month FE Yes Yes Yes
ij FE Yes Yes Yes
r2_p 0.991 0.991 0.991
Note: Robust standard errors in parentheses; *** p18 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods
Xijt = exp(β1 ln GDPit + β2 ln GDPjt of the model with the number of COVID-19
cases and a counterfactual with zero COVID-
+ β3 ln COVIDit + β4 ln COVID jt
19 cases.
+ β3 ln NeighCOVIDit (4) In Table A.3, the highest decreases in exports
+ β4 ln NeighCOVID jt over the period March–November 2020 are
+ β5 FTAijt + φij + γt )µijt observed for the USA (13 per cent), Canada
(12.4 per cent) and France (12 per cent); in the
where the definition of variables is that same as case of imports, Namibia (19 per cent), Guyana
that provided under equation (2). (16 per cent) and Costa Rica (15 per cent) show
Table 6 presents that an increase in the the highest negative impact. It is worth men-
number of COVID-19 cases in neighbouring tioning that the time frame included a period
importing countries has a negative and signifi- (summer 2020) during which some countries’
cant effect on exports that outweighs the effect trade recovered slightly, which offset some of
on the average importing country (cf. –0.131 the negative impact experienced during the
vs –0.008) and this is also true for the number first months of the pandemic.
of deaths. Lockdowns and other containment In addition, countries report bilateral
measures in neighbouring countries do not, monthly data to the UN Comtrade data-
however, exert different impact on exports in base only slowly, with the implication that, by
comparison to the average importer. January 2021, only 105 countries had reported
The implications of COVID-19 on overall their monthly trade statistics for January 2020;
trade—namely, exports and imports—for by the same date, only 50 countries had reported
specific countries are evaluated with the monthly data for November 2020.
coefficients obtained from estimates presented The main consequence of this incomplete
in Table 2. Using the predictions of the gravity matrix of monthly trade data is that we are not
model, we compared the expected trade with able to present a forecast for 2021 using econo-
and without COVID-19 cases for the whole metric methods that require a balanced panel
period. Table 7 presents a summary of the data set. Nonetheless, we can use the coeffi-
results of those simulations, which shows cients obtained from the gravity models in a
negative changes in exports and imports for partial equilibrium framework to infer what the
selected countries. All country-level results effects of an increase or decrease in the number
can be found in the Appendix (Table A.3). of cases and deaths will be for the exports and
Table A.3 therefore compares the estimates imports of the countries analysed.
Table 7. Decrease in exports due to COVID-19
% decrease Commonwealth countries Share of Share of intra-
in exports affected Commonwealth trade Commonwealth trade
< 10% Canada, India, Pakistan, South 56.91 40.83
Africa, UK
7 – 10% Australia, Bangladesh, Cameroon, 29.87 38.44
Ghana, Jamaica, Kenya, Nigeria,
Singapore, Zambia
5–7% Bahamas, Belize, Botswana, Cyprus, 11.87 18.37
Eswatini, Gambia, Guyana,
Malawi, Malaysia, Malta,
Mozambique, Namibia, Sri Lanka,
Trinidad & Tobago, Uganda
Less than 5% Antigua & Barbuda, Barbados, 1.16 2.12
Brunei Darussalem, Dominica,
Fiji, Lesotho, Mauritius, Nauru,
Papua New Guinea, Samoa,
Seychelles, Tanzania, Tonga,
Tuvalu, Vanuatu
Source: Model simulationsInternational Trade Working Paper 2021/08 19
5. Conclusions and policy implications
This paper uses gravity modelling to exam- Short-term measures to overcome the chal-
ine the link between bilateral trade flows for lenges of COVID-19 can be linked to eco-
Commonwealth exports and the impact of nomic growth by investing in productivity and
COVID-19 on the global and intra-Common- policies aiming to enhance the resilience of
wealth trade in goods. Analysis of data span- Commonwealth countries. Appropriate plan-
ning January 2019 to November 2020 suggests ning is required to minimise the impact on
that COVID-19 had an adverse impact on sectors linked in GVCs. A roadmap will help
trade and that exports decreased as the num- countries to achieve their short-, medium- and
ber of COVID-19 cases rose in an importing long-term goals and to revitalise their econo-
country—that is, that high COVID-19 inci- mies by taking into account the specific con-
dence in low-income importing countries ditions and needs of those sectors adversely
reduces Commonwealth exports, whereas affected. In the short term, governments should
high COVID-19 incidence in high-income focus on the immediate health crisis, on ensur-
importing countries increases Commonwealth ing food and nutritional security, on job cre-
exports. The incidence of COVID-19 in the ation and on supporting the economy to ensure
exporting country, however, does not impact that there is no long-term scarring from the
on trade. For Commonwealth imports, the pandemic.
incidence of COVID-19 in both the exporting In the medium term, Commonwealth coun-
and importing countries has an effect. In high- tries’ focus should be on boosting bounce-back
income Commonwealth countries, more strin- activities that will transform the recovering
gent measures aiming to contain the virus are economy by promoting the long-term sustain-
associated with increased trade. able growth of international trade. For exam-
The pandemic is ongoing at time of writing, ple, regional co-operation might be one way of
and there is uncertainty about its likely dura- achieving an inclusive structural transforma-
tion and severity across countries and regions. tion. An important driver for co-operation in
The pandemic has also revealed the vulner- Africa might be the African Continental Free
ability of Commonwealth countries linked in Trade Area (ACFTA), which can add value and
GVCs, with supply and demand shocks having support diversification, especially by means of
had a ripple effect. In this context, Friedt and participation in regional value chains.
Zhang (2021) suggest that governments’ policy Finally, in light of their growing participa-
response must aim at increasing the resilience tion in world trade, Commonwealth countries
of GVCs—that policy-makers must devise might find in the current situation a unique
measures that protect economies against sup- opportunity to use new technologies to sup-
ply chain shocks and build their resilience. An port policies targeting recovery. The use of new
important point to note is that, to design effec- technologies, such as additive manufactur-
tive and co-operative policies as part of any ing, will prompt a restructuring of GVCs and
recovery initiative within the Commonwealth, may mitigate risks by means of a combination
co-operation is required at the regional and of diversification strategies. It is also possible,
global levels. however, that automation will fuel produc-
To address the vulnerability of coun- tion reshuffling that shifts nations’ incentives
tries linked in GVCs, commodity-dependent and yields a redistribution of manufacturing
Commonwealth countries should consider a set around the globe.
of policies and investments targeting inclusive To conclude, while Commonwealth countries
structural transformation and aiming to diver- will focus in the short term on remedying the
sify the economy. At the same time, commodity- adverse impacts of the pandemic and restoring
dependent countries should consider adopting jobs and employment, their long-term focus may
policy frameworks and measures that support a be on improving productivity and boosting their
sustainable recovery post-COVID-19 and which resilience by investing in a balanced portfolio
build resilience against future shocks. of physical, human, social and natural capitals.20 The Impact of COVID-19 on the Global and Intra-Commonwealth Trade in Goods
For example, countries may choose to invest in providing sustainable returns for future genera-
health, education, skills development, innova- tions. In this way, Commonwealth countries may
tion, technological upgrading, and green infra- build capacity to deal with future challenges and
structure and natural capital, thereby increasing mitigate the impact of future crises, including
the productive capacity of the population and pandemics, and other socio-economic shocks.
Notes
1 Anderson and van Wincoop (2003) derived the grav- yi and yj are the nominal income of countries i and j
ity equation in a cross-sectional model as follows: yW≡∑jyj denotes world nominal income
1−σ tij is the trade cost factor between countries i and j
yi y j t ij
xij = W σ is the elasticity of substitution between all goods
y Pi Pj Pi and Pj measure the trade barriers of countries
i and j in exports and imports, i.e. outward and
where
inward multilateral trade resistance.
xij refers to exports from country i to country j
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Annex
Table A.1 List of Commonwealth countries
included in the analysis
Partner countries Reporter countries
Antigua and Barbuda Antigua and Barbuda
Australia Australia
Bahamas Barbados
Bangladesh Belize
Barbados Botswana
Belize Canada
Botswana Cyprus
Brunei Darussalam Eswatini
Cameroon Ghana
Canada Guyana
Cyprus India
Dominica Kenya
Eswatini Malaysia
Fiji Malta
Ghana Mauritius
Guyana Namibia
India New Zealand
Jamaica Pakistan
Kenya Rwanda
Kiribati Seychelles
Lesotho Singapore
Malawi South Africa
Malaysia Uganda
Malta United Kingdom
Mauritius Zambia
Mozambique
Namibia
Nauru
New Zealand
Nigeria
Pakistan
Papua New Guinea
Rwanda
Samoa
Seychelles
Sierra Leone
Singapore
South Africa
Sri Lanka
Tanzania, United Republic of
Tonga
Trinidad and Tobago
Tuvalu
Uganda
United Kingdom
Vanuatu
Zambia
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