The effect of lockdown policies on international trade: Evidence from Kenya

The effect of lockdown policies on international trade: Evidence from Kenya

By Addisu Lashitew and Majune K. Socrates

The COVID-19 pandemic has spawned an unprecedented level of social and economic crisis worldwide. The pandemic is projected to reduce global GDP by at least 4.9 percent and international trade by 13 percent. This would make it the most potent health and economic crisis since the Second World War.

In an effort to contain the spread of the virus, governments around the world imposed lockdown policies that restricted the mobility of people and goods, which impeded trade flows at local, regional and international levels. One of the outcomes of these lockdown policies is a supply chain disruption that created a negative supply shock. Measures like border closure and international travel restrictions have hindered global trade flows by increasing trade costs and delaying or entirely prohibiting border clearance.

Lockdown policies further introduced demand–side shocks that varied across product categories. The onset of the pandemic has seen significant stockpiling of essential commodities such as food products and medical items, which further fuelled a surge of demand for these commodities. The pandemic and accompanying lockdowns also led to business closure and shrinking of economic activity, creating massive unemployment that reduced demand for internationally traded goods, particularly for durables. And, in what turned out to be a fulfilment of early predictions, the pandemic led to instabilities in financial services sectors that are important in the smooth running of international trade.

The introduction of lockdown measures by Kenya’s trading partners led to an average increase in export trade by 13 percent, and a drop of imports by 23 percent. The decline in imports was mainly caused by relatively greater disruptions of sea cargo trade with countries that introduced lockdown measures. Import and export of food commodities increased in response to the lockdown measures, by 21 percent and 31 percent respectively, reflecting the income inelasticity of food commodities. The increase in food imports reveals that aggregate imports declined due to a greater fall in demand for non–food commodities.

Lockdowns have also led to a reduction of Kenyan exports to countries with stringent lockdown policies, while imports from these countries responded positively. And while lockdowns did not affect exports to OECD countries, they led to an increase in imports from them. Imports from China, on the other hand, registered marked decline in the first 14 weeks of the lockdown in 2020. These indicators provide nuanced evidence on the effects of COVID–19 on the trade performance of developing country such as Kenya.

The takeaway for policymakers is that demand factors are perhaps more important than supply chain disruptions in explaining the responses of trade to COVID–19 in developing countries. Kenya’s export trade was marginally affected by the lockdowns due, in part to robust demand for income–inelastic food exports, which registered some increase despite the lockdowns and ensuing economic crisis. The significant fall of (non–food) imports, on the other hand, points to a decline of demand for non–essential imports in the face of significant uncertainties caused by a looming health and economic crisis. These results shed light on the asymmetric effects of lockdown policies between export and import trade, on trade via different modes of transport, and across different commodities and trading partners. (This is an abridged version of the full article, available at Brookings.edu here)

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