Global trade experienced a sharp drop due to the spread of COVID-19 early last year but managed to recover to pre-pandemic level later in the same year. Japan was no exception to this trend. More than one-third of Japan’s total exports evaporated in the three month stretch between March and May last year, but its total exports rebounded and even exceeded pre-pandemic levels in October 2020.
While it's true that this pattern was widespread, the recovery speed substantially varies across countries. Some segments of world trade remain far from a post-pandemic recovery. For example, Japanese exports to the EU are still below their pre-pandemic March levels. Likewise, exports from the EU to Japan also have yet to show significant signs of recovery. When we discuss international trade, the concentration on trade in goods misleads our discussions. International travel bans during the pandemic affected tourism revenues in the Balance of Payments especially for countries which typically attract many tourists, such as Italy and Japan.
As pointed out by Baldwin and Tomiura (2020), COVID-19 affected our economies not only as a supply shock, which had already been fixed largely by China’s restarted production, but also as a demand shock in COVID-19 infected countries. Fears of income loss and unemployment for low-wage workers with unstable employment contracts in non-tradable service jobs may even ignite anti-globalization protectionism. As COVID-19 has serious regressive distributional impacts, the inclusive growth sustained by stable domestic non-tradable jobs has become more important than before the pandemic.
Changes in the long-run trend
In discussing the recovery to the pre-pandemic level, we also need to note that the global trade had already experienced a change in its long-run trend even before the first wave of COVID-19. International trade and foreign direct investment (FDI) of the world no longer continued to increase over the last several years (Figure 1 for world exports).
For Japan, exports no longer continued to grow after the global trade collapse. The trade balance in goods, once criticized for its enormous surplus since the 1980s, has often turned to deficit in recent years. The offshore production ratio also ceased to increase since 2015.[1] Japanese multinational corporations had already begun to diversify their offshore activities away from China even before the COVID-19 arrival.[2]
Antràs (2020) discusses these changes as the end of the unsustainable “hyperglobalisation” since the middle of the 1980s. Remarkable rise of wage levels in China is among the causes of this historic transformation. In this sense, the COVID-19 pandemic should be regarded as an alarm reminding us of the historic change that was already well underway in the last decade.
Linkages of trade and digital data
Although we tend to be influenced by news of aggregate world trade, it is also critical to note its structure as well. Due to accumulated stocks of FDI, many multinational enterprises actively engage in offshore production by their affiliates and/or in offshore outsourcing to foreign companies. In the Japanese case, Japanese multinationals produce more than one quarter of their global outputs in their offshore affiliates, mainly located in East Asia. This share is even higher reaching nearly half in manufacturers of automobiles.[3] As a result, global production now heavily depends not only on dense networks of trade in parts and components but also on intense communications across national borders for coordinating just-in-time production and delivery. Travel bans implemented during the pandemic forced firms to substitute face-to face contacts, which have facilitated coordination for global supply chains, at least partly by virtual digital meetings. Expanded E-commerce orders by consumers during lockdowns also push our economies toward more dependence on data transfers.[4] Terminating global supply chains and relocating production to domestic plants, however, do not make economic sense.[5] Global firms are under intense pressure to upgrade their digital capability to coordinate more complex operations with customers and suppliers across diverse countries more efficiently while incurring additional cost burdens of redundant sourcing for a risk-hedge purpose.
As we depend more on efficient and reliable data flows across borders to keep our economies afloat, it becomes more critical for us to facilitate cross-border data transfers under transparent rules. We at the same time need to keep protecting the privacy of our citizens as a fundamental social norm.[6] However, some countries restrict cross-border transfers of wide-ranging types of data without clear legal mandates and require multinationals to locate their data centers within host countries. These obstacles become more serious as our economies depend more on digital data flows after the pandemic. Our survey of Japanese firms (Tomiura et al. 2019 and 2020) shows that, although the number of firms transmitting data across borders and affected by cross-border data flow regulations is limited, they are significantly large, productive, innovative, and globalized (Figure 2), suggesting that we should not underestimate the spillover effects that cross-border data transfer regulations have on our economies.[7]
Countries with shared interest in efficient data flows and respect for privacy around the globe are expected to initiate efforts for establishing international rules on digital trade. We have no such international rule, as digital trade in the current full-range form did not exist two decades ago when the World Trade Organization was established. Japan has concluded the Trans-Pacific Partnership Agreement and EU-Japan Economic Partnership Agreement, which include high standards on digital trade. Further collaborations are expected in this direction.
Conclusions
The sharp decline of world trade caused by COVID-19 early last year was already offset mostly by the quick recovery which transpired later in the same year 2020 mainly driven by China. However, it is essential to note that both world trade and FDI had ceased their expansion since the Global Financial Crisis, well before the pandemic. Although (or because) we are still fighting against COVID-19, we should start discussing the future design of international trade regime by realizing that our post-pandemic economies will certainly depend on digital data flows more than ever.
REFERENCES
Antràs, P. (2020) “De-globalisation? Global value chains in the post-COVID-19 age,” Working Paper 28115, NBER.
Baldwin, R., and Tomiura, E. (2020) “Thinking ahead about the trade impact of COVID-19,” In: Richard Baldwin and Beatrice Weder di Mauro eds., Economics in the Time of COVID-19, Chapter 5, pp.59-71, CEPR Press.
Ministry of Economy, Trade, and Industry, Japan (2020) Market Research of E-commerce (Denshi shotorihiki ni kansuru shijo chosa, in Japanese), Japan.
Tomiura, E., Ito, B., and Kang, B. (2019) “Effects of regulations on cross-border data flows: Evidence from a survey of Japanese firms,” Discussion Paper No.19-E-088, RIETI.
Tomiura, E., Ito, B., and Kang, B. (2020) “Characteristics of firms transmitting data across borders: Evidence from Japanese firm-level data,” Discussion Paper No.20-E-048, RIETI.
NOTES
[1] According to Surveys of Overseas Business Activities by the Ministry of Economy, Trade, and Industry (METI), the offshore production ratio (sales of offshore manufacturing subsidiaries divided by the sum of offshore and domestic sales) continued to increase until 2015 but remains stagnant since then. The ratio was 25.3% in the peak year 2015 and 25.1% in the most recent 2018.
[2] The same METI’s survey reports that the number of workers employed in China by Japanese subsidiaries declined from 1.8 to 1.4 million while the world total increased from 5.8 to 6.1 during the most recent five years 2014-2018.
[3] These shares are from the same METI’s survey.
[4] According to METI (2020), cross-border E-commerce trade is increasing sizably. Japan’s imports from China rose by 7.9% from the previous year and reached 1.7 trillion yen in 2019. The corresponding numbers during the COVID-19 pandemic period have not yet been published.
[5] According to the survey of FDI by Japan Bank for International Cooperation in 2020, many firms responded to COVID-19 by increasing operating funds, securing dual sourcing, or investing for automation. Few firms relocated production to domestic sites.
[6] Japan has been declared as “adequate” by the EU, which indicates that the transmission of data to Japan occurs under a comparable treatment with that within the EU.
[7] We distributed a questionnaire in 2019 to almost all Japanese mid- or large-sized firms in manufacturing, wholesale, and information-related service industries, and collected responses from more than twenty percent of them, with the total exceeding four thousand firms. According to Tomiura et al. (2019 and 2020), firms that collect data overseas are on average more productive than firms that do not regularly collect data overseas or in Japan by 14 to 18%.
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