The COVID-19 shock and services trade decline: potential for digitalization matters

Abstract

ABSTRACT Global services trade declined by 20% during 2020 with significant heterogeneity across countries, geographical regions and sectors. We present stylized facts and provide hypotheses and empirical analysis seeking to explain this heterogeneity. The decline is found to be correlated with COVID-19 case and mortality rates; stringency of imposed lockdowns; the decline in merchandise trade; and with different ways of transacting services trade. The latter depends on the sectoral composition of services trade across countries, which in turn emanates from more fundamental determinants of comparative advantage in services, generating testable hypotheses to explain the observed heterogeneity in services trade decline. Focusing on attributes of digitalization and the role of value-chains, we find that human-capital-intensive countries with favourable digital-trade policies and greater ability to leverage ICT infrastructure were associated with relatively smaller declines. Moreover, the expected role of GVC-integration in accentuating the services trade decline finds little support in empirical results across sectors providing evidence instead for the GVC-resilience narrative.