The Effects of COVID-19 on International Trade in Latin America and the Caribbean
Updated: Jan 18
By Omari Joseph
Early in August, the Economic Commission for Latin America and the Caribbean (ECLAC) released a special report entitled 'The effects of the coronavirus disease (COVID-19) pandemic on international trade and logistics'. The report forecasted a 23% decline in foreign trade for the region due to the economic effects of the coronavirus pandemic. This decline is greater than the 21% decline experienced during the 2009 financial crisis. The commission also forecasted that the value of regional exports will contract by 23% and that imports will decrease by 25%. At a glance, it is clear that the coronavirus pandemic has dealt a heavy blow to trade in Latin America and the Caribbean (LAC).
This contraction was also observed globally, with the volume of international trade dropping by 17% between January and May 2020. This has affected LAC worse than other developing regions because of the heavy reliance on exports and foreign investment. This weakness is highlighted at industry level. Some of the most affected industries globally were oil, manufacturing, and minerals. These happen to be the biggest industries in LAC after agriculture, which was one of the few major industries that was hardly affected by the pandemic.
Another major reason for the sharp decline in foreign trade for LAC is the reduced output of the service sector. Tourism, one of the region’s biggest service industries, saw a 50% decline according to the ECLAC report. S&P Global forecasted that tourism in the Caribbean will likely decline 60% to 70% from April to December, compared to the same period last year. This has particularly affected the economies of the Caribbean islands, although larger countries, like Mexico, are also suffering. In May, 76,000 (95%) of the 80,000 rooms in the Cancun Hotel Zone were unoccupied. In March, Barbados had an occupancy rate of 1.6%. These low occupancy rates mean that tourism revenues are at rock bottom. Territories like Barbados, Saint Lucia and Dominica are heavily dependent on tourism for direct and indirect contributions to their gross domestic product (GDP).
These tourism-dependent countries rely on big markets such as the United States, the United Kingdom and Canada for much of their business. Demand from these markets has tanked, resulting in massive job losses and revenue losses in adjacent industries. The revenue loss is most concerning because the affected countries lose a source of foreign exchange. The lack of foreign currency also hampers their ability to participate in international trade. They now have no US dollars to pay for imports or to make debt payments. These governments can only hope that the tourism industry experts, who predict a massive surge in arrivals post-lockdown, are correct in their assertions.
Guyana is hoping for the same outcome, because the pandemic has come at a bad time for its tourism industry growth. After being named the number one tourism destination in the world, the South American nation was beginning to see an increase in arrivals from the United States, which was interrupted by the coronavirus pandemic. The International Monetary Fund (IMF) still projects the Guyanese economy to see positive real GDP growth of 26.2% in spite of the pandemic. This is primarily due to the growth of the oil and gas sector, and to a lesser degree to the resilience of the agricultural sector. Nevertheless, like the rest of the LAC region, the nascent oil-producing nation is hoping for the normalisation of trade with its major source markets.
While the majority of the decline can be attributed to reduced trade with key export markets like North America and the European Union (EU), intraregional trade has also contracted by 23.9%. The contraction of intraregional trade has affected the production of manufactured goods in particular. Increases in the cost of transporting inputs for the manufacturing process as well as delays in the delivery of finished goods have been the hallmark of intraregional trade during the pandemic.
Unsurprisingly, logistics are at the centre of the region’s struggles. The region’s already limited land transport capacity has been significantly affected by stricter health measures and increased administrative obstacles. Regional air traffic collapsed, with passenger traffic being almost entirely wiped out, and cargo being cut in almost half. While regions with stronger linkages were affected similarly, relatively low logistical efficiency limits productivity, during a time where productivity is already greatly affected. This effect is analogous to a car with a bad engine getting a flat tyre. Time and resources are lost fixing the flat, but even after it is fixed, the car is still inefficient. Interestingly, the pandemic has done LAC a favour by exposing major weaknesses in regional economies, and highlighting areas of strength. Logistics, despite being a weakness for the region, is fundamental to a nation’s economic productivity.
This means that logistics are also the key to the region’s recovery. While presenting the COVID-19 special report, ECLAC’s Executive Secretary Alicia Bárcena stated that “Deepening regional integration is crucial to emerge from this crisis. With pragmatism, we must rekindle the vision of an integrated Latin American market. In addition, the region must reduce costs through efficient, smooth and secure logistics.”
In light of this information, we can see that the LAC region has been placed in an extremely difficult position. Governments and policy makers must find a way to address the short-term effects of the economic recession and strengthen the economies in preparation for similar or even greater shocks in the future. Since LAC governments lack the resources to provide unemployment and housing relief schemes like developed nations, the main focus is surviving the pandemic and stimulating job growth after trade conditions normalise.
Deepening regional integration and improving logistical linkages within the region will be crucial to the economic recovery after the pandemic. This will serve to improve the economic resilience of the region during future crises. If these regional integration matters are left unresolved, economic recovery will be slower, and regional productivity will remain low.
Omari Joseph is an intern at M74 from Georgetown, Guyana. He is an undergraduate student of International Tourism Management at the University of the West Indies in Trinidad. Omari has written for the CAF Development Bank of Latin America, the Eric Williams Memorial Collection, and the Explore Guyana Magazine.
The views expressed above are those of the author and do not reflect the official position of the M74 Group, which remains neutral on all matters. Publishers assume no liability for content.