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free trade research paper

Free Trade and Global Inequality: Why the World Trade Organization and the International Monetary Fund Continue to Advocate for Free and Unfettered Trade?

Dominic Hakim Silvio

Corresponding Author:

Pr Devender Bhalla, HDR (Editor) Email: [email protected]

This paper looks at why free trade is encouraged by the World Trade Organization (WTO) and the International Monetary Fund (IMF) despite causing so much poverty and inequality globally. Using published research, it argues that free trade has increased poverty and inequality globally through job outsourcing, degradation of natural resources, and poor working conditions. These organizations support free trade because they are controlled by economists whose role in trade debates is especially pernicious and less honest.


Every time one opens the television, reads a newspaper, or listens to the radio, one encounters the concept of free trade. The food we eat, the clothes we wear, and even the digital programming we consume all point to this beautiful idea of free trade – a policy that does not restrict imports or exports. Free trade is supposed to lower prices for consumers, raise the economy in developed and developing countries, and eliminate unfair global commerce barriers. Many proponents of free trade argue that it is the fastest way to reduce poverty. Increased international trade has been widely presumed to make households in developing countries better off. 1 Over the past decades, developing countries have implemented large-scale trade liberalizations and become integrated into the global trade system with the false hope that it will alleviate poverty and inequality.

The conception that free trade is good for the poor is so prevalent that many notable financial institutions such as the World Trade Organization (WTO) and the International Monetary Fund (IMF) embrace it with nearly dogmatic ideological passion. 2  These multinational organizations believe that “free trade will ameliorate poverty by increasing growth and reducing inequality.” 3 The World Bank, in particular, cites correlations between free trade and growth and finds evidence that exponential rise in both leads to a decline in poverty and inequality. 4 The International Monetary Fund holds that “economic growth is the most significant single factor contributing to poverty reduction,” although “some poor and vulnerable groups can be adversely affected in the short-run.” 5 Many philosophers, economists, and lawyers are similarly convinced that the case for free trade is strong because it will reduce poverty. 6

We all know that there is a lot of poverty and inequality in the world. One cannot open the television and listen to the news on the radio or social media without encountering social inequality and poverty. According to Chen and Ravallion, about half of the world’s population lives on the equivalent of what two dollars a day purchases in the US. 7 Furthermore, a 2020 Oxfam International study found that the world’s 2,153 billionaires or wealthiest people have more wealth than 4.6 billion people, which signifies that economic inequality is prevalent and out of control. 8

This paper focuses on the consequences of free trade. It argues that free trade has contributed to the prevalence of global poverty and social inequality. Research shows that free trade has contributed significantly to global inequality through deplorable working conditions, job loss, economic damage, and global environmental damage to some countries. The paper is structured into four parts. The first section looks at free trade and poverty. The second section will focus on free trade and income inequality. The third section will explore the relationship between free trade and environmental degradation. The last section will focus on why the WTO and IMF advocate for free trade.

Free Trade and Poverty

The relationship between free trade and poverty has received considerable attention. The number of literature reviews alone is so large by now that it seems that a review of literature reviews would be appropriate. A quick search of “free trade” and “poverty” on google retrieves numerous hits, all of which suggest that free trade is the solution to global poverty, most of which are published by the IMF or the World Bank. As noted above, the academic literature is awash with published articles that support the notion that free trade positively affects global poverty. Nevertheless, widespread and abject poverty’s continuous existence represents the greatest failure of these national policies required for economic growth and well-being. 9 However, one of the issues with this assumption is that to know how the poor are doing, there must be a concrete way of measuring poverty. Without a proven measure, it will not be easy to understand whether things are getting better or worse. Three poverty measures are currently used: the Human Poverty Indexes (HPIs), the World Bank’s poverty lines, and the Human Development Index (HDI).

These measures have been argued to have limitations. There are two versions of the HPI, and both look at literacy and survival rates. The HPI-1 looks at survival to age 40, and the HPI-2 looks at survival to age 60. The HPI-1 also considers access to safe water, health services, and adequate nutrition. The HPI-2 looks at the percentage of a population falling below an income poverty line and unemployment rates. The HPIs have not been around long enough to provide long-term poverty trends, so they are not helpful. The HDI combines the logarithm of Gross Domestic Product (GDP) per capita purchasing power parity (PPP), literacy, primary, secondary, and tertiary school enrollment rates, and life expectancy at birth into a single indicator. Both measures have been argued to have led to understating the extent of global income poverty and the inference without adequate justification that global income poverty has steeply declined in recent years. 10 Furthermore, poverty is multidimensional, and not all its aspects are determined by economic activity.

Apart from questioning the statistical and measurement methods used by the IMF, or the WTO, a considerable amount of empirical research has been done that argues against the notion that trade liberalization is essential to global poverty reduction. One such study was done in India, and the researcher “finds that trade liberalization led to an increase in the poverty rate and poverty gap in the rural districts where industries are more exposed to liberalization.” 11   Moreover, in Pakistan, a study that focuses on the effect of trade liberalization on poverty levels found that free trade does not significantly impact poverty reduction in the short or long run. 12   A similar empirical study on Pakistan also found that free trade does not considerably affect aggregate poverty and income inequality in Pakistan in the short run. 13   Furthermore, another considerable research investigating the effects of free trade on poverty in Asia and Africa found that free trade slightly positively impacts poverty. The analysis focused on the effects of trade liberalization on poverty in seven Asian and African countries: Bangladesh, Benin, India, Nepal, Pakistan, the Philippines, and Senegal. 14 A similar study from Thailand also found that free trade’s impact on poverty is industry and region-specific, with “provinces in which employers are concentrated in industries exposed to a greater tariff reduction experience more rapid poverty reduction and more income growth than less exposed provinces. In urban areas, this impact on poverty and income is also more pronounced.” 15

Similarly, a study in Brazil also found that poverty in urban areas tends to increase with increased trade liberalization. 16   In South Africa, researchers have found that “economic growth has been insufficient to make inroads into the high unemployment levels and that poverty levels have also risen.” 17   Furthermore, studies from many other African countries such as Ghana, Mozambique, Kenya, North Africa, Morocco, Madagascar, and Uganda, to mention a few, have come with the same findings. 18   Nevertheless, studies that find that free trade reduces poverty often cite that these positive impacts are experienced in countries where financial sectors are deep, education levels high, and institutions strong. In short, although this paper has tried to link free trade with increased global poverty, however, it is crucial to understand that these results are not unambiguous.

Free Trade and Income Inequality

The relationship between free trade and income inequality in developed and developing countries has received considerable attention in recent years. Like the studies on the impact of free trade on poverty, many reviews also support the assumption that trade liberalization reduces global income inequality. However, a significant number of other empirical studies have raised concerns about this dogmatic generalization of the impact of free trade on income inequality and have argued that free trade has worsened income inequality in more countries globally. A study from Turkey noted that income inequality was low before Turkey started trade liberalization, but income inequality increased exponentially after adopting trade liberalization policies. 19 Researchers have also found that trade liberalization widens the wage gap between skilled and unskilled labor in Chile. 20

Similarly, researchers noted that wage inequality significantly increased when trade liberalization was implemented in Argentina during the nineties. 21 Furthermore, studies from Mexico indicated that skilled and unskilled workers widened during the 1980s wage gap. The authors assess how this increased wage inequality was associated with Mexico’s sweeping trade reform in 1985 and found that the reduction in tariff protection in 1985 disproportionately affected low-skilled industries. 22   Another study that examines whether the KOF Index of Globalization and the Economic Freedom Index of the Fraser Institute is related to within-country income inequality by using panel data covering around 80 countries from1970 to 2005 concluded that freedom to trade internationally is robustly related to income inequality. 23

Likewise, a study on middle-income Latin American countries argues that there is significant evidence that the process of economic integration to the global market in Latin American countries “produced an increasing inequality through the destruction of formal employment.” 24   Additionally, a study that evaluated the impact of Pakistan’s agricultural trade liberalization on income inequality concluded that “agricultural trade liberalization increases income inequality and is somewhat detrimental to the rural household types, which gauge most of their income from the agricultural business.” 25

In Africa, a study that examined whether the liberalization policies have affected everyone’s income distribution equally found that, in general, trade reforms have increased income inequality. 26 These broad trends in inequality because of free trade is summed up by Harrison, McLaren, and McMillan, who noted:

One of the most robust trends in the last three decades of the twentieth century has been a rise in within-country inequality in a wide range of countries. This rise in inequality whether measured in income, wages, wage premia, or assets, has been observed in both the developed and developing worlds. Within the United States, Latin America, Asia, and Africa the gap between individuals has widened considerably. One plausible explanation for this increasing inequality is the rise in globalization. 27

In short, several studies published between 1990 and 2019 have documented an increase in inequality in developing countries such as Mexico, Colombia, Argentina, Brazil, Chile, India, and China that frequently paralleled major trade reforms. However, while it is evident that trade contributes to wage inequality within a country, the scholarly literature has concluded that it is not its primary driver.

Free Trade and Environmental Degradation

Trade liberalization and its impact on the environment have also received considerable academic focus, with many studies arguing that free trade will harm the environment. Many academics believe that relatively lenient environmental standards resulting from free trade will give developing countries a comparative advantage in pollution-intensive goods. 28 Considerable studies have backed these assumptions. For example, Managi (2004) analyzed the impact of trade liberalization on carbon dioxide level on 63 countries over 1960-1999 and found that “trade has harmful effects to the environment – one percent increase in trade openness increases carbon dioxide at 0.579 percent.” 29 Furthermore, a study in Nigeria has also concluded that trade liberalization’s total effects are detrimental to the environment. 30

Similarly, a study from Indonesia also noted that “if present environmental policies remain unchanged, projected economic growth and structural changes over the next two decades would add to environmental degradation and resource depletion in Indonesia.” 31 Moreover, a study seeking to investigate the empirical association between environmental degradation and trade openness in a panel of ASEAN countries concluded that trade liberalization causes poor ecological conditions. 32

Likewise, a study on trade liberalization and environmental degradation in China also found “that increased trade liberalization has opposite impacts on the environment due to different pollutants. Furthermore, “for air pollutants (SO2 and dust fall), increase in trade leads to more emissions, while for water pollutants (COD, arsenic, and cadmium), trade liberalization decreases emissions.” 33 Furthermore, a study carried out in Ghana also found that “trade liberalization has an adverse effect on emissions of carbon dioxide due to negative scale and composition effects of trade overriding the positive technique effect of trade.” 34 In short, these studies are not exhaustive; nevertheless, trade liberalization causes environmental degradation. Why are the World Trade Organization and the International Monetary Fund continue to advocate for free and unfettered trade? This question will be dealt with in the next section.

Why the WTO and IMF Advocate for Free Trade?

One of the reasons is that economists govern these institutions whose role in trade debates is especially pernicious. After all, as Baker noted, economists are dishonest about their models. They often exaggerate the benefits that their standard trade models predict. 35 For instance, free trade is based on comparative advantage’s economic principle. The comparative advantage argument shows that if a country specializes in producing those commodities with a comparative advantage, it can gain from trade. A country can gain from trade even if it does not have an absolute advantage in producing any good. The comparative advantage argument shows that developing countries can gain from trade even if they are not more efficient than rich countries at making anything. 36 However, the comparative advantage argument has been criticized extensively. First, it assumes zero transaction costs, full employment, and homogenous labor markets within each country. Second,  it also believes that goods produced in each country are identical and that consumers and firms strive to maximize utility and profit, respectively. Furthermore, it assumes that labor cannot move between countries but costs nothing for laborers to switch. 37

As noted earlier, many people, even economists, know that many of these assumptions are false in the real world. We can see that free trade may even hurt the poor without these assumptions. If, for instance, we do not assume that there will be full employment after trade liberalization, the argument does not tell us much about the distribution of benefits to individuals that will result from free trade. Poor people may not benefit from any resulting growth at all. They may even suffer. Poor people may, for instance, lose their jobs as production shifts to commodities made by people who are not poor. If non-economists controlled these institutions, they would not support these unfair trade policies. In short, the main reason why these institutions advocate free trade is because they are managed by economists who are too arrogant to admit that their policies are limited and fallacious. For example, the World Bank is known to be the most prominent and generous employer of economists. 38

Interesting also is that members of developed countries control these institutions. Without reservations, one cannot contemplate the probability of some exploitation element towards members of the developing world. There is the notion of ‘I don’t care’ because we are not the losers here, a sense of selfishness behind the aggressive promotion of free trade. Furthermore, it is ironic that these institutions are also advocating sustainable development. For example, the WTO’s main objective was to foster trade liberalization to benefit all the world’s nations, both developing and developed. Still, a proposal should also be responsible for sustainable development, 39 which is unprecedented considering that sustainable development and trade liberalization are complete opposites. Daly made it clear that there is a limit to growth, which many mainstream economists do not agree with, and likewise, these institutions do not also agree.

This paper has argued that free trade is not in the interest of the poor, albeit the rich. Research shows that free trade has contributed significantly to global inequality through deplorable working conditions, job loss, economic damage, and global environmental damage to some countries. Free trade has caused so much poverty and inequality globally. Yet, the World Trade Organization and the International Monetary Fund still advocate for free and unfettered trade; why? One of the reasons is that these institutions are run by economists whose role in trade debates is especially pernicious and less honest. Economists have considerable power in policy circles and have helped impose specific policies on the larger public. Another equally important reason is that the super-rich in developed countries benefits substantially from free trade.

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Programs: Follow-Up on the 1995 World Summit for Social Development,” (Washington DC: International Monetary Fund,

2000). para. 17–18. Available at: < >.

  • See, for instance, Malgorzata Kurjanska and Mathias Risse, “Fairness in Trade II: Export Subsidies and the Fair Trade Movement,” Philosophy, Politics, and Economics, vol. 7 (2008), pp. 29-56; Fernando Teson, “On Trade and Justice,” Theoria, vol. (2004), p. 1 92; Fernando Teson and Jonathan Klick, “Global Justice and Trade: A Puzzling Omission,” FSU College of Law, Public Law Research Paper No. 285, 2007. Available
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  • Max Lawson et al., “Time to Care: Unpaid and Underpaid Care Work and the Global Inequality Crisis,” Policy papers, Oxfam International 20 January 2020, (Accessed 10 January 2021).
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Measuring Global Poverty, ed. S. Anand, and J. Stiglitz. (Oxford: Oxford University Press, 2006), 25.

  • Petia Topalova, “Trade Liberalization, Poverty and Inequality: Evidence from Indian districts,” in Globalization and Poverty, (University of Chicago Press, 2007), 293.
  • Muhammad Shahbaz Akmal, Qazi Masood Ahmad, Mohsin Hussain

Ahmad and Muhammad Sabihuddin Butt, “An Empirical Investigation of the Relationship between Trade Liberalization and Poverty Reduction: A Case for Pakistan,” The Lahore Journal of Economics 12, no. 1 (2007), 99.

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  • John Cockburn, Bernard Decaluwé and Véronique Robichaud. “Trade

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Trade and Investment 61 (2007), 103.

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  • Ramos Mabugu and Margaret Chitiga-Mabugu, “South Africa Trade

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Working Papers 200718, (the University of Pretoria, Department of

Economics, 2007).

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Inequality in Turkey: An Empirical Analysis ,” Çukurova Üniversitesi

       Sosyal Bilimler Enstitüsü Dergis i 19, no. 2 (2010), 62.

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Liberalization and Wage Inequality,” Journal of Development

       Economics 59, no. 1 (1999), 113.

21 Sebastian Galiami and Pablo Sanguinetti, “The Impact of Trade

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       of development Economic s 72, no. 2 (2003), 497.

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Inequality in Mexico,” ILR Review 52, no. 2 (1999), 281.

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       Political Economy 26, no. 4 (2010), 488.

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Inequality: Evidence from Middle-income Latin American Countries,”

Latin American Research Review (2013), 99.

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Reduce Poverty and Inequality? Empirical Evidence from Pakistan,”

Pakistan Journal of Commerce and Social Sciences (PJCSS ) 7, no. 3

(2013), 569.

  • Esfandiar Maasoumi, Almas Heshmati, Guanghua Wan, Michael

Enowbi Batuo and Simplice A. Asongu, “The Impact of Liberalization

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       Economic Studies Vol. 42 No. 1(2015), 68.

  • Ann Harrison, John McLaren, and Margaret S. McMillan. Recent

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       Economic Research , 2010.

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New Test,” Canadian Journal of Economics/Revue Canadienne

       d’économique 35, no. 4 (2002), 829.

  • Shunsuke Managi, “Trade Liberalization and the Environment: Carbon

Dioxide for 1960-1999,” Economics Bulletin 17, no. 1 (2004), 2.

  • Mete Feridun, Folorunso Sunday Ayadi, and Jean Balouga, Impact of

Trade Liberalization on the Environment in Developing Countries: The

Case of Nigeria,” Journal of Developing Societies 22, no. 1 (2006), 39.

  • Anna Strutt and Kym Anderson, “Will Trade Liberalization Harm the

Environment? The Case of Indonesia to 2020,” Environmental and

       Resource Economics 17, no. 3 (2000), 223.

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Liberalization a Hazard to Sustainable Environment? Fresh Insight

from ASEAN Countries,” Polish Journal of Management Studies 19

(2019), 249.

  • Junyi Shen, “Trade Liberalization and Environmental Degradation in

China,” Applied Economics 40, no. 8 (2008), 997.

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Environment: A Case Study of Ghana.” (Ph.D. diss., University of Ghana, 2013), V.

  • Dean Baker, “Trade and inequality: The Role of Economists,” Real

       World Economic Review 45(2008), 23.

  • Herman Daly, Beyond Growth: The Economics of Sustainable

       Development (Boston: Beacon Press, 1996), 143-145, 152-153,154,

158, 162, 236.

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Publisher information: The Intergovernmental Research and Policy Journal (IRPJ) is a unique interdisciplinary peer-reviewed and open access Journal. It operates under the authority of the only global and treaty-based intergovernmental university in the world (EUCLID), with other intergovernmental organizations in mind. Currently, there are more than 17,000 universities globally, but less than 15 are multilateral institutions, EUCLID, as IRPJ’s sponsor, is the only global and multi-disciplinary UN-registered treaty-based institution.

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Research Article

Effects of COVID-19 on trade flows: Measuring their impact through government policy responses

Contributed equally to this work with: Javier Barbero, Juan José de Lucio, Ernesto Rodríguez-Crespo

Roles Conceptualization, Data curation, Formal analysis, Investigation, Methodology, Project administration, Resources, Software, Supervision, Validation, Visualization, Writing – original draft, Writing – review & editing

Affiliation Joint Research Centre (JRC), European Commission, Seville, Andalucía, Spain

Roles Conceptualization, Data curation, Formal analysis, Funding acquisition, Investigation, Methodology, Project administration, Resources, Software, Supervision, Validation, Visualization, Writing – original draft, Writing – review & editing

* E-mail: [email protected]

Affiliation Department of Economic Structure and Development Economics, Universidad de Alcalá de Henares, Alcalá de Henares, Madrid, Spain

ORCID logo

Affiliation Department of Economic Structure and Development Economics, Universidad Autónoma de Madrid, Madrid, Spain

  • Javier Barbero, 
  • Juan José de Lucio, 
  • Ernesto Rodríguez-Crespo


  • Published: October 13, 2021
  • Peer Review
  • Reader Comments

Table 1

This paper examines the impact of COVID-19 on bilateral trade flows using a state-of-the-art gravity model of trade. Using the monthly trade data of 68 countries exporting across 222 destinations between January 2019 and October 2020, our results are threefold. First, we find a greater negative impact of COVID-19 on bilateral trade for those countries that were members of regional trade agreements before the pandemic. Second, we find that the impact of COVID-19 is negative and significant when we consider indicators related to governmental actions. Finally, this negative effect is more intense when exporter and importer country share identical income levels. In the latter case, the highest negative impact is found for exports between high-income countries.

Citation: Barbero J, de Lucio JJ, Rodríguez-Crespo E (2021) Effects of COVID-19 on trade flows: Measuring their impact through government policy responses. PLoS ONE 16(10): e0258356.

Editor: Stefan Cristian Gherghina, The Bucharest University of Economic Studies, ROMANIA

Received: April 12, 2021; Accepted: September 26, 2021; Published: October 13, 2021

Copyright: © 2021 Barbero et al. This is an open access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Data Availability: The data underlying the results presented in the study are available from UN Comtrade ( ), the Centre d'Études Prospectives et d'Informations Internationales (CEPII) Gravity database ( ) and from Our World in Data COVID-19 Git Hub repository ( ). The three datasets are publicly available for all researchers. Merging the three datasets and following the steps described in the “Model description and estimation strategy” section readers can replicate the results of this manuscript.

Funding: de Lucio and Rodríguez-Crespo thank financial support from Universidad de Alcalá de Henares (UAH) and Banco Santander through research project COVID-19 UAH 2019/00003/016/001/007. De Lucio also thanks financial support from Comunidad de Madrid and UAH (ref: EPU-INV/2020/006 and H2019/HUM5761).

Competing interests: The authors have declared that no competing interests exist.


The world is facing an unexpected recession due to the disruption of the COVID-19 pandemic in the global economy. In parallel with the consequences of the 2008–2009 crisis, international trade has once again collapsed. World trade volumes decreased by 21% between March and April 2020, while during the previous crisis the highest monthly drop was 18%, between September and October 2008. Cumulative export growth rate for the period December 2019– March 2020 was -7%, while for the period July 2008 –February 2009 it was -0,8%. The 2020 downturn was less prolonged than that caused by the latter crisis. Trade volumes in August 2020 only showed a 3% decrease compared to March 2020. The World Trade Organization (WTO) estimated that international merchandise trade volumes fell by 9.2% in 2020, a figure similar in magnitude to the global financial crisis of 2008–2009, although factors such as the economic context, the origins of the crisis and the transmission channels are deemed to be very distinct from the previous crisis [ 1 ].

Due to its rapid propagation, a proper evaluation of the economic impacts of COVID-19 crisis is not only desirable but challenging if the aim is to mitigate uncertainty [ 2 ]. The COVID-19 crisis has its origins in the policy measures adopted to combat the health crisis, while the 2008–2009 crisis had economic roots contingent on financially related issues. At the current time, the collapse of international trade has been driven by the voluntary and mandatory confinement measures imposed on world trade. We aim to analyse the impact of said confinement measures on trade. Estimating COVID-19 impacts on trade would shed light on the cost of confinement measures and the evolution and forecast of bilateral trade.

From an empirical point of view, we resort to [ 3 ], who use quarterly data for the period 2003–2005 in order to analyse the impact of the SARS epidemic on firms. They show that regions with higher transmission of SARS experienced lower import and export growth compared to those in the unaffected regions. The propagation of a virus resembles natural disasters, with both interpreted as external non-economic based shocks, the effects of which have been addressed already in the literature (e.g., [ 4 – 9 ]).

Another strand of the literature directly analyses the effects of the COVID-19 pandemic on global trade in terms of the transmission mechanism of the shock: demand, supply and global supply chains. Some authors argue that demand factors have played an important role in explaining the shock [ 10 , 11 ] conclude that both shocks (demand and supply) are present in the crisis [ 1 ] highlight the role of global value chains in the transmission of shocks [ 12 ] focus on supply chain disruptions and reveal that those sectors with large exposure to intermediate goods imports from China contracted more than other sectors [ 13 ]. Focus on the role of global supply chains on the GDP growth for 64 countries during the COVID-19 pandemic and show that one quarter of the total downturn is due to global supply chains transmission. They also conclude that in general global supply chains, make countries more resilient to pandemic-induced contractions in labour supply. Finally, the collapse in trade can also be considered as a trade-induced effect caused by economic recessions (e.g., [ 14 – 16 ]) and may also be associated with the impact of COVID-19.

During the current wave of globalization, time lags in synchronizing business cycles between countries are reduced significantly in terms of the intensity of trade relationships [ 17 ]. Find that business cycle synchronization increases when countries trade more with each other [ 18 ]. Show that bilateral trade intensity has a sizeable positive, statistically significant, and robust impact on synchronization. These results are in line with [ 19 ], who finds that greater trade intensity increases business cycle synchronization, especially in country pairs with a free trade agreement and among industrial country pairs. Our paper provides prima facie evidence that this relationship also holds during pandemic-related trade shocks.

We contribute to the literature by integrating monthly data for a trade analysis of 68 countries, 31 of which are classified as high-income. We additionally focus on differential effects between high-income and low- and middle-income countries. This paper aims to shed light on the impact of COVID-19 on exports by means of an integrated approach for a significant number of countries, thereby avoiding an individual analysis of a single country or region that could potentially be affected by idiosyncratic shocks. Given the existence of substantial differences in trade performance and containment measures exhibited by countries and trade partners and attributable in part to their income, we also study whether the impact of COVID-19 on trade differs in terms of income levels. To the best of our knowledge, both questions, the integrated impact of confinement measures and the income related effects, remain unexplored in previous studies.

A proper analysis of ex-post trade impacts related to COVID-19 requires a suitable and fruitful methodology. Gravity models can be helpful in achieving this goal, since they have recently started to incorporate monthly trade data into the analyses, albeit with empirical evidence that is still scarce and far from conclusive [ 8 , 20 , 21 ]. At the same time, several methodological issues need to be resolved adequately when using gravity models [ 22 ]. Resorting to monthly data may pose several advantages in terms of accomplishing our research goals and exploiting the explanatory power exhibited by gravity models and monthly country confinement measures. First, the data reflect monthly variations and allow us to better capture any differential effects arising across countries. Second, annual trade data do not capture the short-run impact of shocks that occur very rapidly, something which a monthly time span can achieve. Monthly data can pick up any rapid movements associated with COVID-19 measures and allow for differential shocks in relation to months and countries. This is particularly relevant given the growing importance of nowcasting and short-term analysis techniques required nowadays for an understanding of world economy dynamics. Finally, monthly data can explain the relative importance of demand and supply shocks during the course of the trade crisis.

We collect monthly trade data for 68 countries ( S1 Table ), which exported to 222 destinations between January 2019 and October 2020. Using state-of-the-art estimation techniques for trade-related gravity models, our results are threefold. First, we reveal a negative impact of COVID-19 on trade that holds across specifications. Second, we obtain results that do not vary substantially when considering different governmental measures. Finally, our results show that the greatest negative COVID-19 impact occurs for exports within groups (high-income countries and low-middle-income countries), but not between groups. These findings are robust to different tests resulting from the introduction of lagging explanatory variables, alternative trade flows (exports vs imports as the dependent variable) or COVID-19 impact measures (independent variables such as stringency index or the number of reported deaths per million population).

Literature review on COVID-19 and trade

The specific literature covering the COVID-19 induced effects on trade can be catalogued as flourishing and burgeoning, but also as incipient and inconclusive at the current time. Some studies have addressed the impact of the health-related crisis on trade. The first strand of literature analyses the effects of previous pandemics by emphasizing asymmetric impacts across sectors. Using the quarterly transaction-level trade data of all Chinese firms in 2003 [ 3 ], estimate the effects of the first SARS pandemic on trade in that year. They find that (i) Chinese regions with a local transmission of SARS experienced a lower decline in trade margins, and (ii) the trade of more skilled and capital-intensive products was less affected by the pandemic.

Despite data being scarce, other studies focus on the current COVID-19 trade shock but are usually restricted to specific countries. For the case of Switzerland [ 23 ], combine weekly and monthly trade data, for the lockdown between mid-March and the end of July. They use goods information disaggregated by product and trade partner. They find that: (i) During lockdown Swiss trade fell 11% compared to the same period of 2019, and this trade shock proved more profound than the previous trade shock in 2009, (ii) contraction in Swiss exports seems to be correlated with the number of COVID-19 cases in importing countries, but at the same time, Swiss imports are related to the stringency of government measures in the exporter country (iii) for the case of products, only pharmaceutical and chemical products remained resilient to the trade shock and (iv) the pandemic negatively affected the demand and supply sides of foreign trade [ 24 ]. Use a gravity model and focus on exports from China for the period January 2019 to December 2020. They find a negative effect of COVID-19 on trade, but said effect is largely attenuated for medical goods and products that entail working from home.

For the case of Spain [ 10 ], find that for the period between January and July 2020, stringency in containment measures at the destination countries decreased Spanish exports, while imports did not succumb to such a sharp decline. Finally [ 25 ], extends the discussion of the Spanish case to analyse the impact of COVID-19 on trade in goods and services, corroborating the existence of a negative effect. He finds a more pronounced decline for trade in services, due to the importance of tourism in the Spanish economy.

Other studies have provided additional evidence by considering a larger sample of countries. Using monthly bilateral trade data of EU member states covering the period from June 2015 to May 2020 [ 20 ], use a gravity model framework to highlight the role of chain forward linkages for the transmission of Covid-19 demand shocks. They explain that when the pandemic spread and more prominent measures were taken, not only did demand decrease further, but labour supply shortage and production halted [ 21 ]. Find a negative impact of COVID-19 on trade growth for a sample of 28 countries and their most relevant trade partners. Their findings suggest that COVID-19 has affected sectoral trade growth negatively by decreasing countries’ participations in Global Value Chains from the beginning of the pandemic to June 2020 [ 26 ]. Analyse the impact of COVID-19 on trade for a larger sample of countries, focusing on export flows for 35 reporting countries and 250 partner countries between January and August in both 2019 and 2020. However, they restrict, their study exclusively to trade in medical goods and find that an increase in COVID-19 stringency leads to lower exports of medical products. Finally [ 27 ], use maritime trade shipping data from January to June 2020 for different countries, such as Australia, China, Germany, Malaysia, New Zealand, South Africa, United States, United Kingdom, and Vietnam. By applying the automatic identification system methodology to observational data, they obtain pronounced declines in trade, albeit the effect is different for each country.

Surprisingly, little attention has been paid to the impacts of COVID-19 on trade for different country income levels and we find several reasons to consider this issue as important. First, the role of trade costs is important, as the latter are related to economic policy and direct policy instruments (e.g., tariffs) are less relevant compared to other components [ 28 ]. According to [ 29 ], differences are expected in trade between high-,low- and middle-income countries due to the composition of trade costs: information, transport, and transaction costs seem to be more important for trade between high-income countries, while trade policy and regulatory differences better explain trade between low- and middle-income countries. The second reason is related to the composition of products, given that average skills in making a product are more intensive in high-income countries resulting in increasing complexity of the products traded compared to low- and middle-income countries [ 30 ]. Accordingly, specific product categories incorporate more embedded knowledge and their production may require engaging in a global production network with multiple countries. However, it has been alleged that participation of countries in global value chains depends on their income levels due to the objectives pursued: high-income countries focus on achieving growth and sustainability, while low- and middle-income countries seek to attract foreign direct investment and increase their economic upgrading [ 31 ]. Third, it is found that low-income countries present a lower share of jobs that can be done at home [ 32 ], rendering them more sensitive to lockdowns that affect services. Finally, due to the paucity of health supplies to mitigate COVID-19, as certain healthcare commodities may not be affordable for certain low-income countries [ 33 ]. Consequently, the effect of COVID-19 on the global economy may be more pronounced for those countries with fewer healthcare resources and impacts on trade do not constitute an exception.

Due to the reasons mentioned above, we expect different countries’ responses to trade shocks induced by COVID-19 depending on their income levels, but this issue remains largely unexplored by the academic literature. The only exception is [ 34 ], but they reduce their analysis to COVID-19 impacts on trade concerning Commonwealth countries. Using the period from January 2019 to November 2020, they find ambivalent evidence: an increase in the number of COVID-19 cases in low-income countries reduced Commonwealth exports, but an identical scenario in high-income countries boosted their export flows.

All these findings are summarized as follows. In Table 1 , we present a compilation of studies using monthly data that feature the impact of COVID-19 on trade.


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It is also worth noting that the main shock started in March 2020, when most countries closed their borders and implemented lockdown measures. Accordingly, further analysis of COVID-19 impacts on trade requires periods with high frequency, such as monthly data, in order to deliver satisfactory results. Apart from the aforementioned studies in the context of COVID-19 research, to the best of our knowledge, monthly data are scarcely used in gravity models. They have been used either in the context of trade preferences [ 35 , 36 ] or, more recently, to study the impact of natural disasters on trade [ 8 ].

Additionally, we aim to provide evidence concerning the COVID-19 effects on trade at country level, without restricting our research to either specific countries or territories, or, specific trade flows, such as intermediate goods. Since the COVID-19 crisis is still ongoing, it is also necessary to incorporate the most recent and updated time spans to provide policy recommendations aligned with the business cycle. We intend to analyse whether COVID-19 impacts on trade have affected the world economy from a global perspective. This analysis will allow us to distinguish different impacts in terms of levels of economic development, which to the best of our knowledge, remain largely unexplored by the academic literature.

Empirical analysis

This section is organized into three separate sub-sections. First, we describe the empirical model and the estimation strategy. Second, we report information on data issues. Finally, we cover country policy responses to COVID-19.

Model description and estimation strategy

For the purpose of accomplishing our research objectives, we resort to a bilateral trade gravity model, which has progressively become the reference methodology for analysing the causal impacts of specific variables on trade (e.g., [ 22 , 37 – 40 ]; among other scholars).

free trade research paper

Where subscripts i , j and m refer to exporter and importer country and month, respectively. COVID m is a control variable that takes value 1 for a COVID-19 trade shock, after March 2020, and 0 otherwise. DIST ij is the geographical distance between exporter and importer country. CONTIG ij is a control variable that takes value 1 when exporter and importer country are adjacent and 0 otherwise. COMLANG ij is a control variable that takes value 1 when exporter and importer country share a common language and 0 otherwise. COLONY ij is a control variable that takes value 1 when exporter and importer country share past colonial linkages and 0 otherwise. RTA ij is a control variable that takes value 1 when exporter and importer country have a regional trade agreement in force and 0 otherwise. In addition to these explanatory variables, we also consider other control variables to capture omitted factors. φ im and γ jm are exporter-month and importer-month fixed effects, respectively. Finally, ε ijm stands for the error term.

The logic behind including these variables is found in the literature, and the explanation is provided as follows: COVID-19-related variables are introduced to estimate the impact of the current COVID-19-shock on trade, since it is expected to be detrimental (e.g., [ 3 , 23 ]). Governmental actions are expected to reduce the duration and magnitude of COVID-19 shock by facilitating a smoother transition to a post-pandemic scenario while generating an economic downturn in the short-run due to the limitations of economic activity and the increase in government expenditure. Adjacency and distance relate to the geographical impacts on trade, given the great influence exerted by geography on trade patterns [ 43 ]. Adjacency is included due to the existence of a border effect, where countries tend to concentrate their trade flows with nearby trade partners [ 41 , 44 ], so that higher adjacency leads to increasing trade flows. The reasons to include distance in gravity models stem from the early contributions [ 45 ]. Countries prefer to trade with less distant trade partners, so that a negative coefficient is expected. Colonial linkages and common language respond to the flourishing literature on the impact of institutions on trade, where the latter play a key role in reducing trade costs and facilitating trade (e.g., [ 46 , 47 ]; among others). Finally, regional trade agreements have multiplied exponentially in the context of globalization and trade liberalization, so that they contribute to decreasing trade costs and enhancing trade [ 48 , 49 ].

Exporter-month and importer-month fixed effects are included to comply with multilateral resistance terms (MRTs), which are related to third-country impacts on the bilateral relationship. They are considered as a pivotal element of modern gravity equations [ 41 ]. According to the structural gravity literature, the omission of such aforementioned MRTs is expected to lead to inconsistent and biased outcomes [ 22 ].

Concerning the previous gravity specification, it is important to highlight that our baseline gravity Eq ( 1 ) does not contain GDP, which is considered a fundamental variable in the seminal gravity models because it measures country size [ 45 ]. The omission of GDP is intentional due to several reasons: (i) GDP variables tend to vary quarterly or yearly and (ii) the inclusion of exporter-month and importer-month fixed effects are perfectly collinear with GDP, so that these control variables will capture its effects on trade.

free trade research paper

Eq ( 2 ) introduces some novelties in relation to the previous Eq ( 1 ). First, by interacting the COVID-19 variable with the control variable for regional trade agreements we can compute the impact of COVID-19 on trade by assuming that countries with regional trade agreements affect this empirical relationship. Thus we assess whether COVID-19 impacts on trade are more (less) profound for these countries with (without) previous regional trade agreements. We sum 1 to the variable before taking the logs to avoid losing the observations before the COVID started. This strategy responds to the strands of literature that acknowledge the role of international trade as a driver of business cycle synchronization (e.g., [ 51 , 52 ]) and, more specifically, that regional trade agreements may be behind the transmission of shocks across countries (e.g., [ 19 , 53 , 54 ]). In particular, we follow [ 26 ] approach since the interaction between COVID-19 variables and regional trade agreements allows us to study the heterogeneous impacts of COVID-19 on trade by bringing economic linkages into the discussion.

Another advantage is that interacting an explanatory variable with a control variable may also relieve us from endogeneity issues, as shown by [ 55 ]. In particular, COVID-19 impacts on trade may be driven by omitted variable bias. However, this comes at the cost of not interpreting exporter and importer impacts simultaneously, as both coefficients become symmetric and only one of them can be interpreted, as shown by [ 56 ] and [ 57 ] when studying the impact of institutions on trade using gravity equations at country and regional level, respectively.

Eq ( 2 ) also considers a third set of fixed effects, which are exporter-importer pair effects denoted by η ij . Considering pair effects in the gravity equation as an explanatory variable may pose the advantage of mitigating the estimation from endogenous impacts induced by time-invariant determinants (e.g., [ 58 , 59 ]) and hence may improve the empirical specification. Three-way fixed effects, constituted by pair, exporter-month and importer-month fixed effects, have become the spotlight in gravity specifications assessing the impact of natural disasters on trade, even for those scholars using monthly data, such as [ 8 ].

Finally, we acknowledge that the simultaneous inclusion of such three-way fixed effects, requires large amounts of data in order to carry out the estimation procedure. For this reason, sophisticated PPML estimation commands have recently been developed for gravity equation estimations, so that they can include a high number of dimensional fixed effects and run relatively fast in contrast to previous existing commands [ 60 , 61 ].

Our sample covers a set of 68 countries exporting across 222 destinations, between January 2019 and October 2020 with 31 of these exporters classified as high-income countries. Due to the specific monthly nature of COVID-19 shock, we rely on monthly bilateral trade flows gathered from UN Comtrade. Trade data were extracted on the 15 of February 2021, using the UN Comtrade Bulk Download service. According to the degree of availability of monthly trade flows for countries, our analysis covers aggregate trade flows. For those observations with missing trade flows, we conveniently follow previous studies that suggest that missing trade flows can be completed with zeros, [ 50 , 62 ].

Variables related to the COVID-19 government response have been taken from the systematic dataset of policy measures elaborated by the Blavatnik School of Government at Oxford University [ 63 ]. These indices refer to government response, health measures, stringency, and economic measures. Their composition and implications are described more broadly in the following sections.

The rest of the variables, institutional and geographical, are gathered from the Centre d’Études Prospectives et d’Informations Internationales (CEPII) Gravity database [ 64 ]. S1 and S2 Tables show the list of countries and the main descriptive statistics, respectively.

Policy responses to COVID-19: equal or unequal?

Once COVID-19 spread across a significant number of countries, they were urged to implement policy actions of response. For this reason, several indicators were built to measuring countries´ governmental response to COVID-19. As mentioned previously, the set of policy indicators developed by [ 63 ] constitutes the most noteworthy approach for measuring countries´ policy responses. The four indicators are described as follows:

  • Stringency index (upper left chart, Fig 1 ) contains the degree of lockdown policies to control the pandemic via restricting people´s social outcomes. The index is built using data on the closure in education (schools and universities), public transport and workspaces, the cancellation of public events, limits on gatherings, restrictions in internal movements, and orders to confine at home.
  • Economic Support index (upper right chart, Fig 1 ) includes measures related to public expenditure, such as income support to people who lose their jobs or cannot work, debt relief to households, fiscal measures, and spending to other countries.
  • Containment and Health index (lower left chart, Fig 1 ) combines lockdown measures with health policies, such as the openness of the testing policy to all the population with symptoms or asymptomatic, the extent of the contact tracing, the policy on mandatory use of facial coverings, and monetary investments in healthcare and in vaccines.
  • Overall Government Response index (lower right chart, Fig 1 ) collects all governments’ responses to COVID-19 by assessing whether they have become stronger or weaker. This index combines all the variables of the containment and health index and the economic support index.


Source: own elaboration from [ 63 ]. Note: each point represents a country, and the concentration of countries with similar values produces darker areas. Additionally, the mean and 95% confidence bands are represented.

These indices vary from 0 to 100, with a higher value indicating stronger country measures in response to COVID-19. As these indicators are collected daily, we convert them to monthly averages. The evolution of the four indicators is presented in Fig 1 , where each point represents a country and the concentration of countries with similar values produces darker areas. Additionally, the mean and 95% confidence bands are represented. We pay special attention to differences between high-income and low- and middle-income countries, in line with our research objectives.

Stringency reaches its maximum in April 2020 when the first wave reaches its peak in most countries. Since then, restrictions have been slowly lifted but started to increase again after the summer in high-income countries, coinciding with the beginning of the second wave.

Economic support increased rapidly in March and April and remains stable, with high-income countries granting more economic support to the population than low- and middle-income countries. The economic support variable identifies significant differences between high-income and low- and middle-income countries during the whole period.

The containment and health index and the overall government response index, present a similar pattern regarding income levels. However, we observe that low- and middle-income countries relaxed the measures from April 2021 onwards, whereas high-income countries did so in July 2021. In any case, the countries analysed show significant variability in all the indices, as indicated by the estimates made in the following section.

To sum up, we find that in low- and middle-income countries, pandemic measures have been slightly stricter than in high-income ones, as the values of their COVID-19 policy responses indices are higher for all cases except for the economic support index. The greater availability of resources in high-income countries to control the pandemic explains this difference.

Fig 2 displays the evaluation of total monthly exports in 2020, relative to January 2020, by income level for our sample of exporting countries. We observe the big decline in exports between March and April mentioned previously. In fact, the observed magnitude of trade decline as a consequence of COVID-19 is identical to the previous global recession, but contractions in GDP and trade flows are more profound at the current stage [ 65 ]. However, we observe that high-income countries have gradually been recovering their export flows, revealing a larger degree of resilience and how economic support policies might have helped them in recovering economic activity. In particular, greater firm engagement in trade because of previous global recession may be beneficial, as they have been able to recover in a shorter period of time from this new contraction in GDP due to the openness to foreign markets [ 66 ]. Find that net firm entry in export markets contributed less to export growth during the Great Trade Collapse, between 2008 and 2013, than continuing exporters. Export capacity to foreign markets in order to counteract the negative impact of local demand shocks is illustrated by [ 67 ] for the specific case of Spain.


Source: own elaboration using UN Comtrade trade data.

We acknowledge that policy responses differ by country, as the impacts of COVID-19 have been strongly unequal for countries due to several reasons. First, countries have reported differences in the number of deaths, mainly attributable to the population composition. There is an increasing number of elder populations in a significant number of high-income OECD countries [ 68 ] and this group is the most vulnerable to COVID-19 (e.g., [ 69 ]).

At the same time, countries have also implemented trade policy actions to mitigate the influence of COVID-19 on the global economy. For the sake of brevity and in line with the aim of the article, we only consider the trade policy response. Readers interested in analyzing a complete set of economic policy responses (i.e., budgetary and/or monetary) to COVID-19 are entitled to check the International Monetary Fund (IMF) Policy Tracker at .

We focus on the corresponding period coincident with our sample, but further trade policy actions have been implemented after this period because of the increasing number of cases related to COVID-19 in subsequent waves. They can be checked at the IMF Policy Tracker previously reported, which is updated regularly [ 70 ]. Summarizes the major stylized facts during the first nine months of the pandemic. First, there was a noticeable rise in trade policy activism consisting mainly of export controls and import liberalization measures with strong cross-country variation. Second, this activism was reported to vary by country and products, where medical and food products experimented a substantial overall increase in their demand from February 2020. Third, we observe a further trade liberalization process after May 2020, where the number of liberalization measures exceeded the number of trade restrictions in medical products.

Such cross-country variation in trade policy response aligns with our expectations since, as mentioned previously, trade specialization differs by country. Accordingly, their sensitivity to the growing demand for food and medical products may vary substantially. For this reason, some countries were more resilient to COVID-19 trade shocks than other countries, as shown by the decreases observed in their trade flows. To this end, we compare trade drops for the most affected countries relative to January 2020 and their governmental response, from May 2020 to October 2020. As described by [ 70 ], countries experienced a substantial relaxation in most of their trade measures in May 2020.

For the ten countries with the largest trade drop evidence is ambivalent. For the sake of brevity, we have omitted the data concerning each country and provide a general overview. Data is available from the authors upon request to the corresponding author and can be obtained from the UN Comtrade database. On the one hand, four high-income (Macao, Mauritius, Portugal, and Slovakia) and six middle-income countries (El Salvador, Mexico, Montenegro, Guyana, Egypt, and Romania) were among the most affected countries in May 2020, with El Salvador registering the highest level of governmental response. Trade relative to January 2020 ranges from 51 to 69 percent in this period. On the other hand, we find that the number of high-income countries increased to six in October 2020 but, at the same time, differences in governmental response decreased their observed variance. Israel registered the highest level of governmental response during this month. In this case, relative trade ranges from 76 to 102, corroborating the previous finding that countries recovered rapidly from this trade shock. To sum up, despite differences in governmental response due to the impact of COVID-19 by countries, recovery can be alleged to follow similar patterns for the most affected countries.

This section is organized into three separate sub-sections. First, we present a benchmark analysis, and afterwards we show the main results obtained for the four different COVID-19 government policy response indices. Finally, we review whether COVID-19 impacts differ by levels of economic development.

Benchmark analysis

This section reviews four specifications of the gravity equation: Column (I) in Table 2 includes the COVID-19 binary variable without interactions and only including exporter and importer fixed effects. Column (II) departs from Eq ( 2 ) but introduces exporter-month and importer-month fixed effects and, finally, column (III) adds pair fixed effects to the specification showed in column (II). For this robustness analysis, we use COVID m variable, which takes value 1 from March 2020, when several countries worldwide implemented lockdown measures, and 0 otherwise.


The coefficients shown in column (I) may be biased because the specification does not accurately capture those factors related to MRTs and structural gravity. We hence move on to the alternative specification considered in columns (II) and (III), where we choose column (3) because it corresponds to Eq ( 2 ) and solves limitations in the baseline Eq ( 1 ).

Alternative specifications show an unequivocal detrimental effect of COVID-19 shock on trade. While the magnitude of the COVID-19 coefficient in column (I) is larger, -0.204, the size decreases when we move to our baseline specification in column (III), where we interact with the RTA variable, with an estimated coefficient of -0.050 when we include pair fixed-effects. The rest of the variables show the expected coefficients according to the theoretical insights and projections of gravity models.

Results by COVID-19 government policy responses indices

We now estimate our results introducing the four COVID-19 government response indices using Eq ( 2 ), as governments in countries more affected by the pandemic are expected to response with stringency, health, and economic support measures. Table 3 shows that the effect of COVID-19 on trade is negative and significant for all the variables considered. We agree with the existing literature on the negative impact of COVID-19 on trade (e.g. [ 21 , 23 ]); and also with the negative impact of previous pandemics [ 3 ]. We also find that results do not vary substantially across indices related to COVID-19, as they range between -0.009, for containment and health measures, and -0.012 for economic support. Although estimated parameters are not statistically different from each other, this might indicate that countries demanding more support to boost their economies have been the most affected ones by the COVID-19 trade shock. We also test our results using the traditional variable of COVID-19 reported deaths per million population as impact measure of the pandemic by country. Results, available under request, show no relevant variation to those presented in the article, which might be considered as an additional robustness test of the results presented.


Our results suggest that COVID-19 may be detrimental to trade flows for those countries engaged in previous regional trade agreements compared to the countries that were not members of these agreements, as shown by the result of interacting these variables. However, interaction terms fail to reflect that those countries not participating in regional trade agreements were not affected by COVID-19, given the large set of existing possibilities of trade integration between countries. Furthermore, these countries could have been expanding their trade flows via preferential trade agreements, which are less restrictive than regional trade agreements.

Although the estimated elasticity may mistakenly appear low, it reflects a large elasticity of trade to COVID-19, given the observed change in the four indicators under consideration. For instance, the overall government response indicator increases, on average, from 3.16 to 70.09 from February to April 2020. This change corresponded to a 2,155% increase in the government response indicator that, multiplied by the estimated elasticity of -0.010, results in a sharp decrease in export flows of around 21%. The explanation may be twofold. On the one hand, the COVID-19 trade shock may be expected to be less dampening for the economy in comparison to the trade shock induced by the global financial crisis [ 23 ], as we highlighted previously. On the other hand, the COVID-19 trade shock is still ongoing and it may be necessary to include results for the second wave commencing September 2020.

We include two additional robustness tests. First, in S3 Table we show our results with lagged independent variables, in order to check whether there exist non-contemporary impacts of COVID-19 on trade. Our results show that the estimated coefficients remain significant and with greater values than those presented in Table 3 . Second, in S4 Table we consider the estimations for import trade flows as the dependent variable. The reason for including imports responds to [ 71 ] suggestion of using mirrored datasets, given that import trade flows are more subject to trade barriers than exports. In contrast to import trade regimes, most export trade regimes tend to be free and do not require additional documents or licenses to trade the goods. Results remain invariant in relation to those presented in Table 3 and S3 Table .

Results by levels of economic development

Finally, we complement the results by analysing whether COVID-19 impacts on trade depend on the levels of economic development of exporter and importer countries, distinguishing between high, low and middle-income importers, we follow the last version of the World Bank´s classification. These results are shown in Table 4 , where each cell contains the estimated coefficient and robust standard error for a different estimation of the COVID-19 government response indicators in a PPML regression that includes exporter-month, importer-month, and pair fixed effects. For instance, column (I) presents results for trade between high income countries, where the first row shows the estimated parameter for our reference equation, in line with column (4) in Table 1 . The following four rows correspond to the estimated parameters in Table 2 for COVID-19 related variables. Results with lagged independent variables, presented in S5 Table , show that estimated coefficients remain statistically significant and higher than those presented in Table 3 .


We find that the COVID-19 effect on trade remains negative, but it seems to be inversely related to the income levels of the importer country. While the COVID-2019 dummy variable registers the highest negative impact, -0.103 for exports between high-income countries, (see column (I)), it is -0.055 between low-and middle-income countries, (see column (II)). The greater effect of the pandemic among integrated countries is in line with the results obtained by [ 20 ]. The effect found by [ 34 ] is the opposite, as COVID-19 in high-income countries spurs Commonwealth countries´ trade. However, their analysis focuses on a selected group of countries and distinguishes product categories so that the greater demand for medical products during the pandemic can explain these results. This fact reinforces the importance of including many countries in the sample since we can expect substantial differences in cross-country variation. We also find no significant effect of COVID-19 on the trade from exports of high-income to low-income countries in column (III) and a positive effect of exports from low-income to high-income in column (IV). These results remain similar when using lagged independent variables, presented in S5 Table . As robustness tests we include in S6 Table estimations for import trade flows. Results also remain invariant in relation to those presented in S3 Table .

These differences, within similar income groups and between groups, could be explained by the following. It is expected that countries more integrated into global supply chains and with greater business cycle synchronization are the most affected by trade collapse. We find that the existence of cross-country differences in capabilities is relevant since they determine countries’ comparative advantage [ 72 ]. In this context, high-income countries tend to be associated with exports of high-quality goods since they charge higher prices [ 73 ] and require larger amounts of skills to produce these goods [ 74 ]. Hence, the set of products exported between high-income countries may be related to goods with a higher degree of economic complexity, which exhibit a greater degree of resilience to economic shocks. This difference may also be explained by the higher demand for medical products by high-income countries, since the first COVID-19 wave starting in February 2020 reached this group of countries first.

We find a marginally significant positive effect for exports from low- and middle-income countries to high-income countries. This shows that countries belonging to this income group might have found an opportunity to supply the high-income countries’ markets, with whom they have regional trade agreements, these proving most affected by COVID-19 during the months in our sample. Low and middle-income countries are indeed progressively increasing their gains from trade because of greater exposure to globalization [ 75 ]; and this growth of trade flows from low and middle- income countries to high-income countries corroborates this evidence. Finally, not all kinds of products have been affected in the same magnitude. Evidence for outdoor goods can be found in [ 76 ]. Domestic consumption products, such as food, had a better performance during the pandemic, and low-income countries specializing in exporting these sorts of goods to high-income countries might have increased their exports to high -income countries.


In this study, we shed light on how the current COVID-19 crisis affects trade flows for the world economy during the first wave of the pandemic. We apply a PPML estimator with three sets of fixed effects in consistency with the recent literature on gravity models. Using monthly trade data for a sample of 68 countries, we find a negative impact of COVID-19 on trade flows that it is greater for countries with RTA. In addition, we also find a negative impact for a set of four indicators related to government responses against COVID-19, although a substantial variation in the impact on trade of the different measures is not observable. Furthermore, our results show that the COVID impacts on trade are only negative when income levels for exporter and importer country with regional trade agreements are identical, and in particular for high-income level countries.

These results pose important policy recommendations. The current trade shock induced by COVID-19 is still reshaping the world economy at the moment of writing these lines. However, current effects on trade can be considered as less detrimental than in the first wave from March to May 2020. The reason is contingent on countries’ capacity of adaptation to the different stages of the crisis. Countries may need to mitigate this trade shock by implementing public expenditure programs, as well as encouraging private investment. Such governmental actions may require further institutional initiatives, given the importance of the latter’s sizeable effects on trade flows (e.g., [ 47 ]). Nevertheless, countrywide attention has currently shifted towards vaccines, which may determine the future formulation of policies which concentrate vaccines on a small group of producers [ 77 ]. The transition to a non-COVID-19 context is expected to depend strongly on the vaccination efforts that are being undertaken by most countries. It is fundamental for countries to remain competitive throughout the course of the COVID-19 pandemic, simultaneously rebuilding wherever possible their trade relationships.

Finally, this manuscript presents certain limitations and avenues that must be taken into consideration for future research. First, the current study only offers a preliminary impact of COVID-19 on trade, as the shock is currently ongoing. The final magnitude of the shock may be assessed once it is over. Second, we only consider aggregate trade and the impact of COVID-19 on trade may depend on the sectoral comparative advantage of each country, as shown by the previous literature [ 23 ]. Hence, we may use trade data disaggregated by sectors, although we acknowledge that sectoral trade data availability is less forthcoming than its aggregate counterpart. Third, the existence of a subset of COVID-19 stringency indicators although highly correlated with the stringency index used in this article, may be capturing measures in very specific areas.

The analysis may also be extended to services trade flows in line with [ 25 ] approach. It would also be convenient to replicate these results for the subnational level. Despite recent efforts to estimate inter and intraregional trade flows in specific areas or territories, such as the European Union [ 78 ], this data is elaborated with a considerable time lag much larger than that for country data, and such analysis is not expected to be possible in the near future. Finally, it is necessary to acknowledge the importance of firms as international trade actors since there are substantial productivity differences across exporters. For this reason, it would be convenient to extend these findings to the firm level, as studied by [ 79 ] for Colombian firms.

Supporting information

S1 table. list of exporting countries..

High-income countries in bold.

S2 Table. Main descriptive statistics.

S3 Table. Results with one lag of COVID-19 government response indicators estimated by PPML, January 2019–October 2020.

Dependent variable is trade flows. Robust standard errors in parentheses, such as *** p<0.01, ** p<0.05, * p<0.1. All the specifications include exporter-month, importer-month and pair fixed effects.

S4 Table. Robustness: Imports, M. Results by COVID-19 government response indicator estimated by PPML, January 2019–October 2020.

Robust standard errors in parentheses, such as *** p<0.01, ** p<0.05, * p<0.1. All the specifications include exporter-month, importer-month and pair fixed effects.

S5 Table. One lag of COVID-19 government response indicator.

Results by income levels. Estimated by PPML, January 2019–October 2020. Dependent variable is exports. Robust standard errors in parentheses, such as *** p<0.01, ** p<0.05, * p<0.1. Each COVID-19 indicator is estimated on a different regression but paired in the same column for the sake of brevity. All the specifications include exporter-month, importer-month and pair fixed effects.

S6 Table. Robustness: Imports, M. Results by income levels and COVID-19 indicators estimated by PPML, January 2019-October 2020.

Dependent variable is imports. Robust standard errors in parentheses, such as *** p<0.01, ** p<0.05, * p<0.1. Each COVID-19 indicator is estimated on a different regression but paired in the same column for the sake of brevity. All the specifications include exporter-month, importer-month and pair fixed effects.


We thank two anonymous reviewers for their useful comments, which have contributed to improving the quality of the manuscript. Comments received from attendants of XXII Conference on International Economics and XXIII Applied Economics Meetings are also gratefully acknowledged. The views expressed are purely those of the authors and cannot under any circumstances be regarded as stating an official position on the part of the European Commission.

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Trade War and Peace: U.S.-China Trade and Tariff Risk from 2015–2050

We use the dynamics of U.S. imports across goods in the period around the U.S.-China trade war with a model of exporter dynamics to estimate the dynamic path of the probability of transiting between Normal Trade Relations and a trade war state. We find (i) there was no increase in the likelihood of a trade war before 2018; (ii) the trade war was initially expected to end quickly, but its expected duration grew substantially after 2020; and (iii) the trade war reduced the likelihood that China would face Non-Normal Trade Relations tariffs in the future. Our findings imply that the expected mean future U.S. tariff on China rose more under President Biden than under President Trump. We also show that the trade response to the trade war is similar to the response to the 1980 liberalization that initially granted China access to U.S. markets at NTR terms and was expected to be quickly reversed.

This project was supported by the National Science Foundation, Award# 2214852. We thank Yan Bai, Mark Bils, Carter Mix, and Michael Waugh for valuable discussions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.


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'Free' Trade vs. 'Fair' Trade

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Example Of Research Paper On Free Trade

Type of paper: Research Paper

Topic: Business , Market , Trade , Commerce , Products , Organization , Fair Trade , Company

Words: 1250

Published: 11/28/2020


International Trade Operations Management

Abstract The international markets operate in different dimensions and some of the fundamental principles it employs include free and fair trade. Free trade is defined by allowing organizations to trade freely in their products without restrictions. Fair trade is providing viable conditions for marginalized manufacturers in the market to operate without being overstepped by others. The paper focuses on the tenets of fair and free trade and also puts into perspective the corporate strategies employed by companies in the international market and the inherent challenges.

It is an international market policy that intimates that governments should not restrict exports or imports. The North American Free Trade Agreement and the European Economic Area exemplify free trade. These agreements are established under the policy of open markets. The World Trade Organization is the policy maker that establishes the frameworks that guide international trade. However, it is imperative to note that most nations in the international system still employ the protectionist tendencies where they do not allow goods from external forces to infiltrate their markets (Eun et al., 2011). Essentially, such governments apply stringent rules for their markets protectionist propensities as a consequence of enhancing local employment and boosting domestic trade. In some instances, while subsidies are imposed on exports, heavy tariffs are applied to the imported products. Free trade is built on the premise that goods that are traded on are not taxed in any jurisdiction, and neither are the barriers imposed to hinder their propagation in any economy. Consequently, the services that are offered under the free trade agreement are not supposed to be taxed under any circumstances (Blinder, 2008). Moreover, there should be no manifestations of distorting policies that hinder free trade. Ideally, laws, subsidies, tariffs should not be designed in a fashion that they only support other business entities. Additionally, free trade implies access to markets without any regulations. Consequently, there should be a free flow of information in all economies. The government or multi-national organizations should not employ monopolistic tendencies to further their agenda at the expenses of other business in the market.

This is a social movement whose agenda is to assist producers and manufacturers in developing nations to trade under better conditions. Consequently, the fair trade is aimed at fostering sustainability. Free trade is established on the premise that exporters should be paid high prices. The movement also advocates for high environmental and social studies (Bowes, 2010). Free trade has a special focus on certain goods and products that are consumed domestically or imported from developing nations. Fair trade agitates for equity in the international markets through transparency, respect, and dialog. Sustainable development is a key principle that is propagated by the movement. Essentially, it seeks to secure trading rights, promote workers in developing nations and improving conditions for the marginalized producers. Another area of agitation is the alteration of the conventional trading rules. Some of the rule and regulations employed in the international market further alienate some producers to the extent that they are disenfranchised in terms of sales of their products. The organizations that agitate for fair trade create awareness in the respective economies as a measure of compelling governments and WTO to reconsider certain obligations (Bowes, 2010). Trading of goods and services under this concept is aimed at promoting the marginalized entities to ensure they maximize their products. The absence of the tenets aforementioned is indicative of a system that does not guarantee free trade.

Products that are fairly traded

• Cocoa • Tea • Bananas • Wine • Honey • Sugar • Coffee • Handicrafts • Flowers The firms that are engaged in the fair trade movement market the products. The organization's brand and put logos on the products that are supposed to be traded on before exporting them to various markets. Ideally, the fair trade organizations act as the major marketing firms for the products. For example, if the coffee is to be sold in a nation that has limited manifestations of fair trade, the marketing organizations engage in packaging and branding before marketing the product to the prospective markets. The cooperatives undertake to promote the products though the producers of the products have to pay certain amounts as fees. The money obtained is used by the organizations to market the products to the destination markets with relative ease. Exporting cooperatives operate under specific guidelines to ensure that they achieve the basic minimum in terms of marketing. Milk and milk products are not fairly traded products. In the recent past, milk and its products have experienced relative instability in the market. Pricing has been a major issue to the extent that most of the firms have been pushed to the periphery due to unfair market prices.

Corporate Management Strategy

Think Local Act Local Producers and manufacturers should recognize that the needs of the local consumers are supreme to the other external entities. Case in point is that the domestic market is a major contributor to the well-being of a firm in terms of enhancing profitability index (Kapferer, 2008). Exporting products to global markets in inherent complex and faces some challenges. The sophistications in the external markets in terms of marketing diminish the productivity of the local manufacturers. Focusing on the local market provides leverage for the producers to make products without employing numerous resources in marketing the products. Most of the companies have been forced to rethink their corporate management strategies because of the inherent sophistications.

Challenges faced by organization’s foreign affiliates

The dynamics in the market is not a guarantee that the consumers need the global products. The global markets needed a wider segmentation strategy that targets certain areas of the economy. Such initiatives require heavy financing as a consequence of ensuring that the marketing needs are effectively met. Consequently, international affiliates are faced with a challenge of insensitivity to the markets. Volatility and the inherent instabilities in the market affect the essence organization’s competitive ability.


It is imperative for the firms to recognize that competitive edge can be established in any jurisdiction even at the local level. Organizations should consider the local market as the most viable option towards building a credible market portfolio. The essence of competition in the global markets cannot be overemphasized. Stiff competition in the global markets makes it difficult for companies to realize full productivity. In essence, it is critical for the institutions to confine themselves to the local markets where they can easily gain a competitive edge over other entities. Organizations must realize that the local communities are a credible force in enhancing the profitability index of firms. To this extent, companies should adequately execute their local production and marketing to ensure that they meet the consumers' needs in those jurisdictions.

Bowes, John (2010). The Fair Trade Revolution. London, UK: Pluto Press. Blinder, Alan S. (2008). "Free Trade". In David R. Henderson (Ed.). Concise Encyclopedia of Economics (2nd Ed.). Indianapolis: Library of Economics and Liberty Eun, Cheol S., Resnick, Bruce G. (2011). International Financial Management, 6th Edition. New York, NY: McGraw-Hill/Irwin. Kapferer, J.-N. (2008). The new strategic brand management: Creating and sustaining brand equity long term. London: Kogan Page.


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    This paper analyses the trade creation and trade diversion effect of ASEAN-India Free Trade Agreement (AIFTA) on agricultural trade among the member countries. Data on 50 countries with five major FTAs for the period 2005-2014 were used. Gravity model by ordinary least square and Poisson Pseudo-Maximum Likelihood (PPML) methods was estimated.

  11. Full article: Impact of regional trade agreements on export efficiency

    The present research investigates the role of India's select RTAs (South-Asian Free Trade Agreement (SAFTA), Asia Pacific Trade Area (APTA), MERCOSUR (Mercado Común del Sur) ... Centre for Research in Economic Development and International Trade (CREDIT), Nottingham, Paper No. 17/04. Google Scholar. Aigner, D., Lovell, C. K., & Schmidt, P ...

  12. PDF Gene M. Grossman Alan B. Krueger

    NBER WORKING PAPERS SERIES ENVIRONMENTAL IMPACTS OF A NORTH AMERICAN FREE TRADE AGREEMENT Gene M. Grossman Alan B. Krueger Working Paper No. 3914 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 November 1991 This paper was prepared for the conference on the U.S.- Mexico Free Trade Agreement. sponsored by SECOFI.

  13. PDF 2019 United Nations

    3 UNCTAD Research Paper No. 15 _____ _____ Executive Summary In 2012, the fifty-four member States of the African Union agreed to establish the Continental Free Trade Area (CFTA) by 2017. The CFTA is widely seen as a crucial driver for economic growth, industrialization and sustainable development in Africa.

  14. Environmental Impacts of a North American Free Trade Agreement

    Environmental Impacts of a North American Free Trade Agreement. NBER Working Paper No. w3914. ... S&P Global Market Intelligence Research Paper Series. Subscribe to this free journal for more curated articles on this topic FOLLOWERS. 2,557. PAPERS. 40,474. Sustainability & Economics eJournal ...


    Focusing on frictions between developing countries and industrial economies in the particular area of trade in manufactured goods, the purpose of this paper is to argue that the failure of the...

  16. PDF ADBI Working Paper Series

    ADBI Working Paper Series . The Impact of Free Trade . Agreements (FTAs) on Business in the Republic of Korea . Inkyo Cheong and Jungran Cho . No. 156 . October 2009. Asian Development Bank Institute . Dr. Inkyo Cheong is director of Jungsuk Research Institute, Inha University, Incheon, Republic of Korea, and a professor of economics at Inha ...

  17. The Benefits of Free Trade: Addressing Key Myths

    1. Myth: More exports mean more wealth. Reality: It is the total level of trade—exports and imports—that most accurately reflects American prosperity. Prosperity is defined by the breadth and variety of what Americans are able to consume.

  18. Effects of COVID-19 on trade flows: Measuring their impact ...

    This paper examines the impact of COVID-19 on bilateral trade flows using a state-of-the-art gravity model of trade. Using the monthly trade data of 68 countries exporting across 222 destinations between January 2019 and October 2020, our results are threefold. First, we find a greater negative impact of COVID-19 on bilateral trade for those countries that were members of regional trade ...

  19. Effects of Free Trade Agreements on Trade Activities of Signatory

    Volume 70, Issue 3 Contents Get access More Abstract The study analyses the effects of free trade agreements (FTAs) signed by India on the changes in the trade volumes of member states. The article analyses the benefits of the economic integration of export earnings to meet the import demands.

  20. Environmental Impacts of a North American Free Trade Agreement

    Environmental Impacts of a North American Free Trade Agreement. Gene M. Grossman & Alan B. Krueger. Working Paper 3914. DOI 10.3386/w3914. Issue Date November 1991. A reduction in trade barriers generally will affect the environment by expanding the scale of economic activity, by altering the composition of economic activity, and by bringing ...

  21. Free Trade vs. Protectionism: Exploring the Rationale Behind Trade

    International trade plays a crucial role in the global economy. Today, more than 25% of global output is exported goods. Among them, specialization is the core of international trade because countries could apply their comparative advantage to increase productivity and reach economies of scale. However, governments imposed many trade barriers like tariffs and quotas despite the potential ...

  22. Trade War and Peace: U.S.-China Trade and Tariff Risk from 2015-2050

    Research; Working Papers; Trade War and Peace: U.S.-China Trade… Trade War and Peace: U.S.-China Trade and Tariff Risk from 2015-2050 ... In addition to working papers, the NBER disseminates affiliates' latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, ...

  23. (PDF) 'Free' Trade vs. 'Fair' Trade

    The free market reforms adopted by Mexico in the wake of the debt crisis of the 1980s and in connection with the North American Free Trade Agreement (NAFTA) have jeopardized the physical and cultural survival of Mexico's indigenous peoples, increased migration to the United States, threatened biological diversity in Mexico, and imposed additiona...

  24. Free Trade Research Paper Examples

    Example Of Research Paper On Free Trade Type of paper: Research Paper Topic: Business, Market, Trade, Commerce, Products, Organization, Fair Trade, Company Pages: 5 Words: 1250 Published: 11/28/2020 ORDER PAPER LIKE THIS International Trade Operations Management Abstract

  25. Sustainability

    Climate change presents a significant threat to humanity. It affects agriculture, food supply, and economic development. Urban agriculture (UA) is an alternate climate-smart approach to enhancing food and income security. The climate-smart agriculture (CSA) concept promises to lessen the effects of climate change. Nuanced research is critical to warrant food and income security.