Travel restrictions cut global trade by 23% in 2020 Q2
A Bank of England working paper finds that Covid-19 travel restrictions significantly increased trade costs, reducing global trade by approximately 23% in 2020 Q2. The effects were heterogeneous, impacting closer partners and road/air transport more.
Border closures cut trade by 23 percent
Travel restrictions during the Covid-19 pandemic operated as classic border frictions, leading to substantial increases in the cost of cross-border goods trade.
A full border closure reduced bilateral trade by approximately 19% for a typical country pair, resulting in a global trade reduction of around 23% in 2020 Q2. The impact varied significantly by distance and transport mode: geographically proximate trading partners experienced larger trade losses, with road and air trade severely disrupted.
In contrast, seaborne and rail trade remained largely unaffected.
The study found no evidence of long-run scarring effects; instead, trade rebounded strongly with a temporary 'overshooting' once restrictions were eased, making up for lost flows.
Gravity model isolates border friction
The research employs a gravity framework that incorporates internal trade flows, allowing for the explicit exploration of 'border frictions' – the additional cost of selling goods internationally versus domestically.
By using origin-time and destination-time fixed effects, the model isolates the pure effect of border frictions, distinguishing it from broader demand or supply shocks.
The study utilizes the Oxford Covid Tracker to measure the stringency of travel restrictions, ranging from border testing to outright closures.
This approach provides a novel way to quantify time-varying trade costs, offering a more precise understanding than previous literature that often relied on broader containment indices or epidemiological variables.
More than just a health crisis
This paper offers the first cross-country study to quantify the full impact of Covid-19 border restrictions on international trade throughout the pandemic.
Its detailed analysis of distance and transport modes explains why some countries could implement strict closures with lower trade costs than others.
The findings underscore how public health measures can inadvertently create significant, albeit temporary, economic border frictions.