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    Ripple Effects of COVID–19’s Impact on Global Trade

    Ripple Effects of COVID–19’s Impact on Global Trade

    The Coronavirus disease (COVID-19) outbreak in China that occurred nearly two years ago soon catapulted into a global health crisis that led to severe economic shocks almost all over the world. According to estimates published by UNCTAD, in March 2020, the slowdown of manufacturing in China due to the Coronavirus is disrupting world trade and could result in a $50 billion decrease in exports across global value chains. The report also suggested that the most affected economies at the time were the European Union ($15.6 billion), the United States ($5.8 billion), Japan ($5.2 billion), The Republic of Korea ($3.8 billion), Taiwan Province of China ($2.6 billion) and Vietnam ($2.3 billion), with India too ranking amongst the Top 15 nations.

    Just like it did in many parts of the world, the virus wreaked havoc in India. The situation in 2020 had reached such an abysmal state that the International Monetary Fund (IMF) projected the Indian economy is expected to contract by 10.3% in the fiscal year.

    In an attempt to mitigate the situation, India implemented a nationwide lockdown in March 2020. As a result of the stringent restrictions, markets struggled for finances and millions became jobless, leading to an economic slump that has severely hampered international trade. Being that India is the sixth biggest economy in the world by GDP, the global trade ecosystem is still reeling from the impacts of these measures today, and the ramifications may not be properly assessed until well into the future.

    Overview of COVID-19 impact on India’s exports

    The Federation of Indian Export Organisations (FIEO) claimed that Indian exports had been badly impacted in the first wave of the pandemic. This was because India obtains raw materials, components and hardware from China to make finished products for its domestic/global consumption. With manufacturing facilities having slowed down in China, the production of leather, electronics, etc. also died down in India, thus affecting U.S. imports from the country.

    The United States was one of India's key trade partners that felt the brunt of the pandemic’s impact. According to data from India's Commerce Ministry, exports to the United States, India's largest outbound destination for goods, plummeted 11.3% in 2020 compared to 2019. And, it could have been worse if it hadn’t been for the robust trade growth between the two countries for certain product groups that showed resilience during the pandemic.

    There are a number of factors that contributed to the economic disruptions and current rise in demand for Indian goods in the United States.

    Lockdown restrictions

    India was among the first few nations of the world to undergo a complete lockdown to contain the spread of the virus. The United States, among several other countries, imposed stringent measures a little soon thereafter. By then, orders from the United States had already begun piling in India, which India was unable to fulfill, having been knee-deep in the pandemic crisis. The situation more or less continued throughout the year, with eventually the United States relaxing its norms and India dealing with the aftermath of the lockdown.

    FIEO claimed that the order books had begun improving by August 2020, especially with many orders coming from Europe and the United States. However, labor shortage due to migration, factories running only at 60% of their total capacity, quarantine measures taken for the crew at docks, to name a few, led to delays in trade and impacted India’s imports from the United States.

    Supply chain constraints

    The container shortage crisis is one of the main factors to examine when assessing the pandemic’s impact on global trade.

    The significant decrease in container availability in Asia affected the entire supply chain and severely impacted exports to the United States in particular. Due to the shortage, the shipping industry was faced with a reduced workforce, fewer shipping vessels operating, erratic movements in demand for various commodities and empty containers stranded at North American ports, all compounding the crisis further. Unlike China, India was slow to recuperate from the losses and may have failed to jump on opportunities to export to the United States, which is the largest importer in the world.

    Data from The Trade Map of India reveals that the exports to the United States from India have grown more than 20% in the first quarter of 2021 (April-June) than it did in the same period in 2019. However, going ahead, The Trade Promotion Council of India said that exporters might opt for proximate markets instead of long-haul destinations like the United States. Experts believe this change in strategy is due to skyrocketing freight costs and longer turnaround time for containers, which will hit exports to the United States.

    With many countries looking for alternate geographies to China to set up their manufacturing hubs, India will scale up production to meet the demand in the United States and continue to make progress toward becoming a key player in the global trade ecosystem once more.

    There are some things working in the country’s favor. India could stand to benefit from the fallout in the ongoing U.S.-China trade war and tap into new opportunities. And, the Indian government has proven that it is willing to take robust measures that modernize infrastructure and ensure the smooth flow of goods, with extra health and security measures for its laborers, which will be critical for the nation's growth in addition to boosting its trade relations with the United States.

    Rising prices of raw materials

    According to the World Bank's Commodity Markets Outlook, the prices of raw materials are expected to be 10% higher this year on average, compared to 2020, before stabilizing in 2022. Experts attribute the price hike to the increased production cost for most manufacturers because of higher input costs.

    Over the last few months, in India, the rising global demand for specific raw materials like steel, cotton yarn, dyes, etc., has led to spiraling prices and the fears of closure of units due to an acute shortage of feedstock. If the situation continues to worsen, exporters feel it will hamper production and the export of raw materials to major western markets.

    For Indian exporters, the price rise couldn't have come at the worst time. With the export oriented economies gearing up for the biggest shipping season of the year, the U.S. holiday season, the ongoing inflation is bound to shake things for sure, perhaps even leaving slim chances or crushing altogether the export opportunities for small-sized Indian businesses.

    Conclusion

    Data from the Directorate General of Foreign Trade reveals that the United States comprised a 23.34% share of India’s total exports worth $5,421.82 million during April 2021-22. To be sure, trade has shown some signs of improvement. But, the road to full recovery will likely be a long one.

    Even though the bilateral trade situation between these two countries may be reaching the pre-pandemic levels, constant changes in the supply chain and other circumstances can drastically modify the scenario. The United States is the world's largest trading nation, so India must ensure it does whatever it can to build a strategic relationship with the superpower to carve its name in the global trade space.

    The article was first published on sdcexec.com

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    Pushkar Mukewar
    Pushkar Mukewar
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