Shocks, international trade and diversification

Ting Lan, Davide Malacrino, Adil Mohommad, Andrea Presbitero, Galen Sher May 11, 2022

The COVID-19 pandemic led to a collapse in international trade (Baldwin 2020), as security concerns prevented individuals from going out and consuming imported goods and workers from producing for export. In the second quarter of 2020, the volume of world trade in goods fell by 12.2% and trade in services fell even more sharply, by 21.4%, compared to the last quarter of 2019. Since then, trade in goods recovered rapidly, returning to pre-pandemic levels by October 2021, but trade in services remains well below pre-pandemic levels. This divergence between goods and services has been well documented (e.g. IMF 2021), but what is less known is that there are different patterns within goods and services. Within goods, trade in goods that are typically produced in GVCs, such as automobiles, electronics and clothing, fell and rebounded the fastest. Within services, trade in travel services remains depressed while trade in telecommunications services is stronger than before the pandemic.

The pandemic has broken old patterns

Prior to the pandemic, trade in goods and services closely followed changes in aggregate demand. Import demand models, which relate a country’s imports to its domestic demand and relative import prices, were effective in explaining imports of goods and services before the pandemic. However, these patterns have collapsed during the pandemic. In 2020, trade in goods declined less than one would expect due to changes in aggregate demand and relative import prices alone. This unexpected gap was larger in countries with more infections, stricter containment measures and lower mobility (Figure 1).

Figure 1 Factors associated with demand model forecast errors in 2020

Sources: Global Health Security Index; Google, Community Mobility Reports; Hale and others (2021); Our world in data; The World Trade Organization; and IMF staff calculations.
To note: The figure reports the standardized regression coefficients of the residuals of the demand model on the listed variables. Solid bars indicate coefficients that are statistically significant at the 5% level; hollow bars indicate those that are not. The health preparedness of trading partners for the pandemic is measured by the Global Health Security Index. The “share of travel services imports” represents the share of travel services in a country’s total services imports. See IMF (2022) for more details.

By contrast, trade in services fell in 2020 less than would have been expected from changes in aggregate demand alone, and this gap is largely explained by the disruption in travel services imports caused by the pandemic. These patterns could reflect a shift in spending from services to goods during pandemic waves, or they could reflect difficulties in producing goods domestically during pandemic waves, in which case they are imported instead.

The Great Lockdown and Unintended International Fallout

Another important reason for the collapse of trade in 2020 is the international fallout from containment policies implemented by trading partners (Bonadio et al. 2020, Espitia et al. 2021, Lafrogne-Joussier et al. 2022). Indeed, we find that up to 60% of the decline in imports of goods between January and May 2020 was the unintended consequence of lockdowns imposed by the countries’ trading partners (Chart 2). This finding is based on a standard gravity model (Santos Silva and Tenreyro 2006) using detailed product-level (“HS six-digit”) data on bilateral merchandise trade that takes into account developments in countries and industries. importers, including changes in demand and factors such as trade agreements that could affect commodity-level trade between country pairs.

Figure 2 The international fallout from lockdowns

Sources: Hale and others (2021); IMF, Directorate of Trade Statistics; and IMF staff calculations.

The fallout from the lockdowns depended on the country that imposed them. The benefits were half as great for countries whose exporting partners could rely more on remote work. The fallout from the lockdowns has also varied over time. They strengthened between February and April as more countries outside Asia began to impose lockdowns, then began to decline from May, suggesting trade adjusted to them.

The resilience of global value chains

Like trade in goods, global value chains have also adapted to waves of infections during the pandemic. After containing its first wave of infections, Asia has increased its market share for GVC-intensive products. Between 2019 and June 2020, Asia increased its market share in Europe by 4.6 percentage points and in North America by 2.3 percentage points (Figure 3). The gains appear temporary as they were reduced to 3.1 percentage points and 0.6 percentage points a year later.

picture 3 Shift in market share

Sources: Trade data monitor; and IMF staff calculations.
To note: Market shares of Factory Asia vis-à-vis Factory Europe are calculated using only GVC-intensive products, as defined in IMF (2022). GVC = global value chain. See IMF (2022) for more details.

Nevertheless, the pandemic has caused widespread supply disruptions (Celasun et al. 2022) by shifting demand from services to goods while preventing workers from producing and distributing them, leading to high shipping costs and congested ports. The war in Ukraine has intensified these disturbances by making energy, metals and agricultural products scarce. Pandemics, wars, climate change and cyberattacks are driving GVCs to become more resilient.

Two resilience techniques: diversification and substitutability

Companies can diversify their supplier relationships to source more components from different countries, which would reduce dependence on a single country (including the country of origin) and provide established relationships that can be exploited in a crisis (Bas and Fernandes 2022). Indeed, our simulations using a global economic model (Bonadio et al. 2021) suggest that a more diversified supply internationally would almost halve the economic impact of a supply disruption in a major supplier country. in the average receiving country (Figure 4). When several countries are repeatedly hit by supply shocks, greater diversification reduces the volatility of economic growth by about 5%.

Figure 4 Gains from diversification

Source: IMF staff calculations.
To note: The figure shows that GDP declines in response to a 25% contraction in labor supply in a country that is a major global supplier of intermediate products. Bars and squares show simple averages of GDP declines in countries in each region. Elasticity of substitution = 0.5. See IMF (2022) for more details.

The greatest possibility for diversification is to reduce the share of national origin. We find that companies around the world tend to source the vast majority of their intermediate inputs from their country of origin (for example, 82% in the Western Hemisphere). Relocation would aggravate this situation by leaving businesses even more exposed to disruption in their home country.

In addition to establishing relationships with a greater number of suppliers, companies could transform their production processes to facilitate the substitution of inputs supplied by different suppliers. For example, in response to the shortage of semiconductors, Tesla rewrote its software to allow it to use less rare semiconductors. Our simulations with the global economic model suggest that greater substitutability can reduce the economic impact of a supply disruption in a large supplier country by about four-fifths in the average recipient country (but not in the source country) .

Implications for economic policy makers

The pandemic has significantly shaped the evolution of trade, and through trade it has spread between economies. Therefore, the preservation of exports and imports is one more argument in favor of ending the pandemic in all regions of the world through widespread vaccination.

Firms will ultimately decide where to produce and source inputs, but politics can also play a role given externalities and information asymmetries (Baldwin and Freeman 2022). For example, other simulations in our analysis suggest that reductions in trade costs, such as non-tariff barriers, can encourage international diversification. In addition, governments can provide information to help companies gain greater visibility into their supply chains and facilitate better risk analyzes of supply chain networks.

Before the war in Ukraine, the global economy was threatened by calls for relocation; the war has increased the risk of global economic fragmentation. At the same time, it has made visible the risks of a high concentration of imports of essential goods. By showing the benefits of international diversification and substitutability, our analysis highlights what can be gained from closer international integration and cooperation.

Editor’s note: The opinions expressed in this column are those of the authors and do not necessarily represent the views of the International Monetary Fund.


Baldwin, R (2020), “The Great Trade Collapse of 2020: Lessons from the Great Trade Collapse of 2008-09”,, 7 April.

Baldwin, R and R Freeman (2022), “Global Supply Chain Risk and Resilience”,, 6 April.

Bas, M and A Fernandes (2022), “The resilience of trade in the face of COVID-19”,, 26 April.

Bonadio, B, Z Huo, AA Levchenko and N Pandalai-Nayar (2020), “The role of global supply chains in the COVID-19 pandemic and beyond”,, 25 May.

Bonadio, B, Z Huo, AA Levchenko and N Pandalai-Nayar (2021), “Global Supply Chains in the Pandemic”, Journal of International Economics 133:103534.

Celasun, O, NJ Hansen, M Spector, A Mineshima and J Zhou (2022), “Supply disruptions added to inflation and undermined recovery in 2021”,, 16 March.

Espitia, A, A Mattoo, N Rocha, M Ruta and D Winkler (2021), “Trade and Covid-19: Lessons from the first wave”,, 18 January.

IMF (2021), External Sector Report, Washington DC.

IMF (2022), “Global trade and value chains during the pandemic”, in War delays global recovery, World Economic Outlook, April 2022.

Lafrogne-Joussier, R, J Martin and I Mejean (2022) “Supply chain disruptions and mitigation strategies”,, 5 February.

Santos Silva, JMC and S Tenreyro (2006), “The Diary of Gravity”Journal of Economics and Statistics 88 (4): 641–658.

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