COVID-19, trade collapse and GVC linkages: European experience

Area of Science:

• Economics
• International Trade
• Pandemic Impact Analysis

Background:

• The COVID-19 pandemic profoundly disrupted global supply chains and international trade flows.
• Understanding the transmission mechanisms of economic shocks is crucial for policy-making during crises.

Purpose of the Study:

• To analyze the role of supply chain linkages in transmitting COVID-19 shocks within the European Union.
• To quantify the impact of the pandemic on intra-EU trade and identify key transmission channels.

Main Methods:

• Utilized the gravity model framework to assess monthly trade data among EU Member States during the first wave of the pandemic.
• Employed infection rates and policy stringency indices as proxies for supply and demand shocks.
• Investigated the role of forward and backward global value chain (GVC) linkages in shock transmission.

Main Results:

• Observed an overall trade decline exceeding 20% among EU countries post-outbreak.
• Identified both supply and demand shocks, influenced by infection rates and policy stringency, as drivers of trade decline.
• Confirmed that forward GVC linkages transmit shocks, with increased COVID-19 cases in destination countries leading to greater export declines for intermediate goods.
• Found that the 'China effect' amplifies shock transmission when trade with China is substantial.
• Did not find robust evidence for shock transmission via backward linkages.

Conclusions:

• Supply chain linkages, particularly forward GVCs, played a significant role in transmitting COVID-19-induced economic shocks across the EU.
• The pandemic's impact on trade was multifaceted, driven by both origin and destination country factors and amplified by global trade patterns.
• Policy interventions and future trade strategies should consider the vulnerability of interconnected supply chains to global shocks.