Covid-19, a tragic event that has upended our lives and caused unprecedented and perhaps irreversible damage to the global economy, continues to shape the narrative for the future of trade and commerce. The World Trade Organization (WTO) estimates that world merchandise trade could decline by between 13% and 32% in 2020, a much steeper drop than the 9% contraction observed at the height of the 2008–2009 global financial crisis. This, in turn, has affected the trade finance sector, with banks having to contend with not only operational continuity challenges but also newer risks relating to letters of credit and invoice-discounting transactions.

The Depth of Disruption

Now that two quarters have passed since the pandemic began, corporates are better positioned to assess its impact on current and future operations. Certain sectors, especially those that rely heavily on global supply chains, have been deeply impacted.

Overall, exports year-to-date have seen a decline, albeit, growth in recent months has improved substantially, with both September and October showing increases. Crisil tracks exports in a number of sectors, including nearly 20 key segments that account for 45–50% of total merchandise exports. Merchandise exports make up nearly 65% of India’s total exports, while services exports that account for 30–35% are dominated by the IT and ITES sector. Indian services industries have clearly been resilient, registering flattish growth in the first half of fiscal 2021. However, merchandise exports have been hit substantially, but recovery trends have been varied.

Specific sectors like pharmaceuticals, specialty chemicals and agro chemicals have been resilient, growing at 14%, 5–7% and 4%, respectively. On the other hand, ready-made garment (RMG) exports have seen a year-to-date decline in H1 of up to 30%, while cotton yarn has seen a sharp uptick in exports from countries like Vietnam and Bangladesh, in anticipation of a pick-up in orders for RMG during the festive season.

A second wave of COVID cases in the U.S. and Europe are fading hopes of an early recovery, however, and the sustainability of cotton yarn exports is a concern. Agriculture-linked sectors like sugar and rice, and non-agricultural commodities like steel and aluminum have also seen a unique pick-up in exports in the second quarter of the year. Diversification from China is supporting non-agri commodity exports, while shortages of food products in many ASEAN countries along with favorable government policies are supporting agri commodities exports. But other value-added segments like autos and engineering products continue to remain a drag for exports.

The ramifications of the pandemic on international trade have been fairly diverse. Inarguably, the pandemic has led to severe supply-chain disruptions due to lockdown measures, industrial shutdowns and the resulting delays in shipping and transport. The vast and diverse world of international trade and finance largely relies on the physical exchange of paper documents to function seamlessly. However, due to the constraints on physical mobility and the consequent logistical issues, the disruption felt in this segment of international finance has been acute.