How Might Covid-19 Change the Trajectory of Asian Trade?

Photo by Ian Taylor on Unsplash

The ongoing health and economic crisis has hobbled international trade within Asia, and between the region and trading partners globally. Quarantines, border closures, visa restrictions, curtailment of business activities, and enforced social distancing measures caused a sharp drop in regional imports and exports during the first half of the year. Let’s look at the outlook for Asia’s trade, identify key mega-trends and draw some policy implications for the region.

Asia’s Trade Outlook

In its “optimistic scenario”, the World Trade Organization’s forecasts that Asia’s merchandise exports for 2020 will decline 13.5%, and imports 11.8%. In its pessimistic scenario, the WTO sees a much sharper fall of 36.2% and 31.5% for exports and imports in 2020, respectively.

After a brutal beginning to the year, some Asian economies have begun to move out of first gear, such as China, Thailand, and Vietnam. Yet developing Asia as a whole is projected to see virtually no growth in 2020. A full recovery will take time and will be uneven across countries and sectors going into 2021, but this will depend on the effectiveness of policy interventions, commercial relations among global powers, the extent to which COVID-19 has been contained and national supply responses.

International trade seems likely to rise with the economic recovery. The WTO forecasts that Asia’s exports will soar between 24.9% and 36.1% in 2021. Yet the pandemic has shaken supply chains and the regional trade order, in some cases accelerating underlying trends. Things will look different later in the decade than they did in January 2020. Asian countries need to factor in these developments as they reconsider their strategies for economic recovery. What kinds of changes can we anticipate in the coming year and beyond?

Key Mega-Trends

One major continuing trend will be the shortening and diversification of supply chains. In the first months of the year, North American importers found themselves unable to secure certain products due to reduced flights and cargo shipments, staffing constraints, temporary business closures, and other factors. This scenario was most obvious in the case of critical medical equipment, personal protective equipment, essential medicines, and medical equipment needed in the urgent battle against COVID-19. But the negative impact affected all kinds of traded goods.

As a consequence, Western importers are increasingly weighing the benefits of using cheaper yet more distant suppliers against the risks presented by disruptions like those caused by the pandemic and government responses. Importers who altered their plans during the worst of the pandemic may not simply go back to their previous purchasing habits and suppliers. The rethinking of sourcing strategies that gained momentum during the initial tariff battles between the US and China is now much more serious.

According to the latest edition of Kearney’s Reshoring Index , in 2019, US companies reduced imports of manufactured goods from China while increasing imports from 13 other Asian (mainly low-cost) economies, as well as from Mexico. In addition, US domestic manufacturing commanded a substantially bigger slice of the pie than in the last several years, as reflected in the lowest ratio of total manufactured goods imports for 14 Asian countries as a percentage of domestic manufacturing gross output since 2014.

Successful negotiation of the US-Mexico-Canada Agreement (the successor to the North American Free Trade Agreement) is bringing Mexico into the spotlight as an alternative or complement to export-oriented manufacturing investment in developing Asia. That said, a US manufacturer or sourcing business relocating its operations to Mexico may still find itself reliant on Mexican imports from China, particularly if it is engaged in the production of information and communications technology products or automobiles. This is because Mexico relies heavily on China for key inputs into such products.

An increasing share of Asia’s merchandise trade has been taking place within the region as its integration grows. According to the Asian Development Bank, Asia’s intraregional trade share by value reached 57.5% in 2018, slightly above the 56.3% average between 2012 and 2017. This is much higher than in North America (40.5%), and not far below the European Union (63.8%) . Improving transport connectivity, trade agreements, rising direct investment, and growing numbers of middle-class consumers are contributing to the increased regionalization of imports and exports.

Key unknowns in the international trade environment include the level of commitment by all major trading nations to the WTO and the rules-based global trading system. If countries continue to pursue bilateral and regional agreements, and assertively promote or dissuade direct investment in targeted countries (through export controls, procurement restrictions, and other means), trade patterns will continue to shift.

One development worth watching is the European Union’s imposition of an anti-subsidy duty against China for allegedly subsidizing glass fiber fabrics made by Chinese-owned manufacturers in Egypt. This action highlights that countries will be exploring a variety of policy avenues to protect their own companies and jobs as economies emerge from recession.

Asian Regionalism

Notwithstanding new inter-continental commercial arrangements, such as separate US trade agreements with the Republic of Korea and Japan, and the United Kingdom’s possible negotiated entry into the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), one can anticipate that intra-regional trade will remain strong in Asia and the Pacific for the foreseeable future.

It took more than 30 rounds of negotiations over eight years to get to an approved Regional Comprehensive Economic Partnership (RCEP), but the deal finally got done in mid-November (minus India). The 15-member agreement could contribute to a more stable and predictable trading environment.

Once fully implemented, RCEP will also provide a medium-to-long-term boost in imports and exports across the world’s most populous and economically dynamic region. In addition, it will further tip the scale away from an international trading system that is rooted in global collaboration toward one that is based on deals made among a smaller group of countries with close geographic, economic, cultural, and/or political ties.


Asian economies have been drawing closer together over the past decade. Confronted with comparatively slow growing European and North American markets, Asian firms have targeted the growing middle class in neighboring countries. Regional supply chains have become increasingly intertwined with heavy Asian direct investment in production facilities. Improving infrastructure and reduced tariffs have also boosted trade. Asian economies will rebound from the COVID-19 pandemic and continue to find more opportunities to prosper by doing more business with each other.

An earlier version of this post appeared on the blog site of the Lakshman Kadirgamar Institute.

Author of Learning from Tomorrow: Using Strategic Foresight to Prepare for the Next Big Disruption

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