Trade shocks and trade diversion due to epidemic diseases: Evidence from 110 countries

Abstract

COVID-19 has been a massive trade shock that has disrupted global trade, making the last few years a special phase. Even during normal times, epidemic diseases have acted as trade shocks in specific countries, albeit not to the same extent as COVID-19. For some trade shocks, the situation normalizes after the disease transmission is over; for some, it does not. Thus, specific countries can sometimes lose their original trade ratio due to trade diversion; that is, an epidemic disease could lead to unexpected industry restructuring. To examine this, based on data on 110 WHO members from 1996 to 2018, we use a fixed-effect panel model supported by the Hausman Test to empirically identify whether epidemic diseases can cause trade shocks and trade diversion. We find: First, epidemic disease can lead to negative shocks to a country’s trade growth and its ratio of worldwide trade. Second, with a longer epidemic, the probability of the trade diversion effect increases. Our results hold even after considering country heterogeneity. This presents a considerable concern about the shock of COVID-19 lasting further. Many countries are not just facing the problem of temporary trade shocks, but also the challenge of trade diversions. In particular, the probability of trade diversions is increasing rapidly, especially for late-developed countries due to their lack of epidemic containment and vaccine-producing capabilities. Even middle and high income countries cannot ignore global industry chain restructuring. Forward-looking policies should be implemented in advance; it may be too late when long-term trade damage is shown.