COVID-19: Global trade value chains, taxation and recovery

06 November 2020
News

Someone disinfects a warehouse during the COVID-19 pandemic / ©dusanpetkovic1

By Mukhisa Kituyi, Secretary-General, UNCTAD

The global outbreak of COVID-19 and the containment measures deployed by governments are having serious consequences for the global economy.

Widespread border closures, travel restrictions and shelter-in-place policies that economies adopted early in the pandemic to slow down the global contagion have disrupted productive activities, with long-term economic consequences.

Cross-border supply value chains have been disrupted, and there has been a significant reduction in the demand for goods and a slump in services. Businesses have responded by cutting wages, furloughing or laying off workers. 

Consequently, unemployment rates have skyrocketed, and the volume of global trade has fallen, with forecasts indicating a plunge of between 7% to 9% in 2020. This would make this pandemic the worst recession since the Great Depression and far worse than the global financial crisis of 2009.

Against this backdrop, global GDP in 2020 is expected to register its sharpest contraction since the Second World War. The World Bank forecasts that global GDP will shrink by 5.2% in 2020, with recessions in both advanced and emerging market economies.

Unsurprisingly, this major global disruption is leading to reduced trade locally, regionally and globally, as supply chains are disrupted, production reduced and other country-specific challenges like snarl-ups at border points due to stringent coronavirus testing procedures, exacerbate the shock.

Unfortunately, the slow pace of international trade activities also reflects those of domestic economies, marking a missed opportunity on government earnings, especially in developing countries.

In other words, although the pandemic is a health crisis, the unavoidable declines in trade and output will have painful consequences for households and businesses, with a shrink in government revenues, a major source of financing sustainable development.

It is imperative, therefore, that we keep trade flowing. This calls for heightened coordination across sectors and countries to restore business confidence, stimulate demand and accelerate economic recovery. And while at it, we need to lay the foundations for a strong, sustained and socially inclusive recovery.

Fiscal and monetary policy are key ingredients

Trade will be an important ingredient here, along with fiscal and monetary policy. At the Annual Tax Summit organized by the Kenya Revenue Authority (KRA) in Nairobi from 4 to 5 November, I joined global experts to explore the impact of COVID-19 on global trade value chains and what this means for taxation, especially in Africa.

At UNCTAD, we believe that spurring global trade offers a compelling opportunity for every country looking to shore up its economy in these turbulent times and achieve long-term sustainable growth.

With the pandemic potentially triggering a global economic slowdown, governments must reimagine how to stimulate the economy and spur international trade and revenue for sustainable development.

First, across Africa, governments need to keep their markets open and predictable. In times of real emergencies such as now, we need to rethink cross-border trade by removing all unnecessary export restrictions and barriers and fostering a favourable business environment.

As we get to the economic recovery phase, we need laws that ensure access to markets, including for essential medical supplies and foodstuff. 

We could use this window of opportunity during the crisis to revisit the provisions of the African Continental Free Trade Area (AfCFTA) agreement and craft additional rules to guarantee the freest possible flow of trade across Africa.

Ideally, removing the non-tariff barriers that remain the biggest hindrance to continental trade can foster regional integration, which must play a key role in the crisis recovery strategies in Africa.

Access to the continent-wide market can play an important role in reinvigorating local manufacturing and agriculture sectors as well as foreign exchange earnings, filling the gap left by the slowdown in international activities. 

Secondly, we need to spur investment in critical sectors that have been greatly impacted by this crisis.  In Kenya, for instance, we would have to shore up efforts through stimulus packages to spur the tourism and hospitality sectors, airlines, education and manufacturing sectors.

Thirdly, we need urgent and concerted efforts to support and facilitate small and medium-sized enterprises (SMEs), which have a pivotal role to play to overcome the crisis with their innovative solutions and agility.

Every government must reimagine SMEs and the broader informal sector and the role they can play in recovery.  This will partly include introducing policy measures to sustain and grow these businesses to more than meet the local demand and produce at a larger scale for export. 

Finally, to steer the economy towards a more sustainable trajectory, we need to spur and direct investments and drive innovation to high-impact sectors that will create jobs and fill the supply gaps left during this crisis.

Both the government and the private sector have a role to play in building a more resilient, more equitable and more sustainable future.

The return to economic growth may be prolonged and uneven, but we are confident that there is an opportunity in the recovery.