Calculating the Costs of Shutting Borders to Trade

(Bloomberg) --

Across North America and Europe, lockdowns of entire communities and countries are underway. Borders are closing to travel even as governments insist that cargo and trade will still be allowed to pass. That may be a moot point. Economies running into a brick wall tend to see collapses in trade. We learned that in 2009.

The evidence so far this year from Asian economies like China, Japan and South Korea that were hit earlier than western ones is that the coronavirus crisis and the resulting shutting down of industry will have a severe impact on trade no matter what the politicians say.

But what if governments took the next step and decided to halt trade altogether as part of their efforts to slow the spread the Covid-19 virus? What would be the economic impact then?

In a conversation with the Dartmouth College economic historian Douglas Irwin last week, he remembered that work by economists had been done on exactly that. Because there’s an example in U.S. economic history Irwin has spent some time looking at it as well. (Irwin followed our conversation up with a thread on Twitter over the weekend.)

At the request of the U.S. Treasury and the Department of Homeland Security, a group of economists at Australia’s Monash University in 2012 modeled what the economic impact would be of a total shutdown of the U.S. border to cargo and people in the event of a public health threat like a pandemic.

They considered various scenarios, the most extreme of which called for the trade in 95% of goods to be suspended for 12 months. The impact on the U.S. economy? A fall in real gross domestic product of 48%.

There are, of course, fans of greater trade restrictions who would dispute that finding. There is also an example in American history — albeit one long before the days of global supply chains — to draw on that points to a milder though significant impact.

In December 1807 the U.S. Congress at President Thomas Jefferson’s urging imposed an embargo on trade to protest British and French naval harassment that lasted until March 1809.

In a 2005 paper, Irwin calculated that the embargo cost the U.S. 5% of its gross national product at the time. But it also became as close to a natural experiment in autarky as the U.S. has ever experienced in peacetime.

As Irwin lays out, the value of U.S. goods exports fell from from $49 million in 1807 to $9 million in 1808. Meanwhile, the value of imports fell from $85 million in 1807 to $45 million in 1808 — a decline of nearly 50 percent.

We’re not there yet. Except for international travel, the shutdown underway in the U.S. and European economies now is largely domestic. Any effect on trade we are likely to see is a secondary effect of economies closing down temporarily rather than the borders being closed to cargo.

That doesn’t mean, though, that in an age of rising protectionism and populist economic nationalism with a pandemic rattling the world the economic costs couldn’t soar even further.

Charting the Trade Turmoil

Early South Korea trade figures for March showed surprising resilience in exports before the full brunt of the coronavirus hit. Shipment during the first 20 days of the month rose 10% from a year earlier, the Korea Customs Service said Monday. The period had an extra 1.5 working days in the period compared with 2019. Without that, the result would have been just about flat.

Today’s Must Reads

• Surging dollar | If you want to understand how this month’s coronavirus-fueled chaos in financial markets is impacting America’s real economy, look no further than McElroy Manufacturing.
• Online purchases | Amazon’s delivery delays of non-essential goods will extend for at least another month for many customers in the U.S. and Europe, stirring panic among online merchants who rely on the web retailer for business.
• New mission | U.S. automakers are scrambling to see if they can orchestrate makeshift manufacturing of ventilators in as early as two weeks. German companies are also attempting to convert assembly lines.
• Food chain | As shoppers across Europe and the U.S. empty supermarket shelves, wholesalers are struggling to sell food that would normally go to restaurants and hotels.
• Fuel glut | The world is close to running out of space to store all the fuel that jets are no longer burning because of the slowdown in air travel.
• Keep power flowing | As millions of people across Europe stay home to avoid the coronavirus, thousands workers in the energy industry must remain at their posts.
• Medical tariffs | The U.S. signaled a willingness to remove tariffs on medical supplies from China as health authorities backed by U.S. businesses express an urgent need for more masks, ventilators and other equipment.

Bloomberg Analysis

• House view | Bloomberg Economics is forecasting a global recession in the first half of 2020 and the start of a recovery in the second.
• Rough seas | Shipping companies are battening down the hatches as Covid-19 risks increase.
• Use the AHOY function to track global commodities trade flows.
• See BNEF for BloombergNEF’s analysis of clean energy, advanced transport, digital industry, innovative materials, and commodities.
• Click VRUS on the terminal for news and data on the coronavirus and here for maps and charts.

©2020 Bloomberg L.P.