COVID-19 and trade: Challenges ahead for least developed countries and Small Island Developing States

** Originally published by the Overseas Development Institute (ODI) on 1 April 2020 **

The coronavirus pandemic will have major implications for the achievement of the 2030 Agenda and the Sustainable Development Goals (SDGs). Trade-related targets now look even more daunting than before, particularly for least developed countries (LDCs) and Small Island Developing States (SIDS). As the crisis unfolds, there are four key challenges ahead for small and vulnerable economies.

Demand- and supply-side shocks

The adverse trade effects of COVID-19 are likely to be more severe than those of the global financial crisis of 2008–2009 because they comprise both demand- and supply-side shocks. Small and vulnerable economies will be hit hard because of their dependence on trade as a driver of economic growth, their small domestic markets and low levels of diversification, all of which increase their vulnerability to external shocks – as the global financial crisis demonstrated. Trade in goods and services comprises around 60% of gross domestic product (GDP) in SIDS on average, and up to 40% for some LDCs.

Global recession

The outbreak is affecting the three major hubs of the global economy – Asia, Europe and the US – and the top trading partners of developing countries. Countries within these regions account for more than half of all global economic activity. At least US$1–2 trillion is thought to have been knocked off the value of the global economy.

As major economies enter into recession, reducing global growth rates, this will adversely affect growth rates in LDCs. This further jeopardises the likely achievement of SDG targets such as: sustaining economic growth in accordance with national circumstances and, in particular, at least 7% GDP growth per year in the LDCs; and a doubling of LDCs' share of world trade by 2020.

Changes to lead firm strategies

While G7 members have sought to maintain open markets and trade, we know from past experience that vulnerability to exogenous trade shocks and their transmission is mediated by value chain governance: how lead firms react, as well as government responses. Already, large retailers have closed stores, which will significantly affect factories and workers locked into just-in-time supply chains, for example in Bangladesh and Cambodia. Many global value chains began to shorten after the 2008/9 crisis. This shortening could intensify given the effects of the COVID-19 crisis, which will incur permanent losses for some firms and their employees in LDCs.

Increased economic vulnerability

Economic vulnerability remains high in LDCs, including those scheduled to graduate over the next few years. Given the global economic ramifications of the coronavirus, previous economic development trajectories are unlikely to be sustained during 2020, or beyond. Such a dramatic turn of events calls for critical reflection on the future movement out of the LDC category by some forthcoming graduates. This includes Bangladesh and Vanuatu, with the latter relying heavily on the tourism sector (which represents 70% of its total export value) and where demand has collapsed.   

Unless governments act rapidly and in concert there are major risks that corporate layoffs and bankruptcies will rise, feeding a self-reinforcing downward spiral globally. The provision of major financial stimuli, along with social safety nets and incentives to ‘socially supportive firms’ will be pivotal to avoid dire social effects, including unemployment, the availability of goods and services and their price. Additional aid for trade resources could be disbursed now to support the necessary trade-related adjustments.

This year was supposed to see a review of progress, as well as the actual achievement of some SDG targets. Instead, 2020 must be the year that bold, creative and unprecedented measures are taken to ensure that the SDGs are kept on track given current circumstances.

All development partners have pledged to support such endeavours through their commitment to the SDGs, notably Goal 3b on access to affordable essential medicines and vaccines; Goal 8 on decent work for all; and Goal 17 on strengthening means of implementation, including through policy and institutional coherence. The international community must act now to ensure that this last decade of the SDGs is not a lost one.