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The trade of merchandise goods hit a record US$5.6tn in the third quarter of 2021, according to the UN, but concerns are growing that the Omicron variant of coronavirus could disrupt supply chains and threaten further recovery.

World trade is continuing its strong recovery from the pandemic, states the United Nations Conference on Trade and Development (UNCTAD) in fresh analysis on goods trade. Global trade is forecast to reach about US$28tn in 2021, an increase of 23% compared with last year.

But the body warns of an uneven recovery across countries. In the UK, goods trade is set for a 23% decline this year relative to 2019, while markets in East Asia such as China and Taiwan are poised for growth of 16% and 23% respectively. Japan and Singapore are bucking the high-growth trend for Asia as they are set for declines of 9% and 5%. The recovery has also been more muted for services trade, which remains below 2019 levels.

“The positive trend for international trade in 2021 is largely the result of the strong recovery in demand due to subsiding pandemic restrictions, economic stimulus packages, and increases in commodity prices,” says UNCTAD. “However, the forecast for 2022 remains very uncertain due to several factors.”

These factors include a slowing economic recovery; disruption to logistics networks; the global semiconductor shortage; geopolitical tensions; governmental policies impacting international trade; and debt burdens after governments borrowed more to prop up economies in the face of the pandemic.

Additionally, a new threat in the shape of a heavily mutated Covid-19 strain has emerged. Omicron was named a “variant of concern” by the World Health Organization in late November and, similarly to its predecessor Delta that caused widespread restrictions and lockdowns, is rattling nations’ confidence of economic recovery.

Analysts at IHS Markit say that Omicron could be an “adverse game changer” for trade. “The financial markets reacted heavily to its emergence and the number of states reintroducing stricter contingency measures is increasing fast and that will impact global economic activity in Q4 2021/Q1 2022,” reads a briefing published on December 1.

 

Rolling out restrictions

How deep an impact Omicron will have on trade and already stressed supply chains is unclear. Ben May, director of global macro research at Oxford Economics, tells GTR: “It’s very difficult to know at the moment because we simply don’t quite understand what the health implications and by extension, the potential economic repercussions, of Omicron could be. We’ve taken the view that in the shorter term, it’s probably sensible to assume some disruption.”

Some countries have moved to impose fresh travel restrictions to curb the variant’s spread, notably for South Africa – where the variant was first reported – as well as surrounding nations. The EU, US and countries across Asia Pacific are establishing strict rules for travellers that may have been exposed to Omicron.

“It’s probably going to be a few weeks before we know whether those restrictions are likely to be upped and, if they are, the extent to which that derails the return to normality,” adds May. “A lot will depend on countries like China and other Asia Pacific countries that have taken a zero-tolerance approach to Covid. Clearly, there’s scope for greater disruption in those economies as they continue with those policies. That may well have spill-over, say, if for example ports in China are closed, which we have seen happen.”

In August, China shut down a terminal at its Ningbo-Zhoushan port, the third-busiest port in the world, after one worker tested positive for the virus. Closing key trade terminals and imposing stricter measures may put already squeezed supply chains under more pressure.

Such measures are also fuelling inflationary fears. Disruption to supply chains may lead to “a bit more” cost-push inflation – when prices rise due to higher costs of production and raw materials. “It’s more likely, if anything, that Omicron pushes up on inflation in the shorter term, but you can’t discount it being disinflationary either,” May says, adding that the latter situation would occur if substantial measures and lockdowns are imposed around the world and demand plunges.

Last month, the UN said that rising freight costs are threatening to increase global import prices by 11% by 2023. Despite price freezes by shipping lines and regulatory action, ocean freight costs on certain routes have risen by as much as 500% this year. High rates may only be pushed up further by Omicron as the variant is set to take a toll on trade.