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COVID-19 pandemic breaks international trade ties and in its model, resembles the Great Depression, according to NSYSU Professor Shih-Jye Wu

(Report by student journalist) The scope of the COVID-19 pandemic is steadily growing. Governments around the world impose lockdowns to prevent further spread of the virus, and this significantly lowers the global production and demand rates. World Trade Organization pointed out that under the pessimistic scenario, this year’s international trade volume could drop by as much as 32%. Professor Shih-Jye Wu, who teaches a course in international trade theory at the Institute of Economics at NSYSU and specializes in regional economics and international trade, said, that the economic recession caused by the pandemic will be comparable to the Great Depression of 1929, with a dramatic decline in production and demand. The economic crisis of the Great Depression was also a factor that indirectly led to the outbreak of the Second World War. This historical precedent might raise concerns about the future international situation.

However, “economic recession caused by a pandemic and a common financial crisis are not similar”, says Professor Wu. He gave an example of the financial tsunami of 2008 and the Asian financial crisis of 1997 when consumer sentiment and the demand were low but the supply was left unaffected. Conversely, during a pandemic, not only do the consumers avoid going shopping but also the chain of demand and supply shrinks as a result of lockdowns and layoffs, which only deepens the crisis.

The model of the present economic recession is very similar to the Great Depression of 1929. Professor Wu explained, that to prevent the spread of the pandemic, many countries implement restrictions on shipping, which causes a dramatic decline in international trade volume. The Great Depression led to imposing tariff walls around the world, which was also a cause of stagnation in international trade. A standstill in international trade caused countries not rich in resources, such as Japan or Germany, to look for resources abroad, which indirectly led to the outbreak of the Second World War. With this historical example in mind, we might not expect a bright future of the international situation. Professor Wu said that he hopes that although the present economic situation is similar to the times of the Great Depression of 1929, the global situation will not be driven to such an extreme.

Shrinking and fragmentation of the international trade chain replaced the past state of affairs. Professor Wu pointed out that it used to be only necessary to consider costs when deciding on the demand-supply chain of a product, thus, the production chain could be spread across a few countries. However, to prevent the spread of the pandemic, governments have already started to examine the length of production chains. Professor Wu thinks, that as a result of the above, the production chains will shorten and split into three major areas: China, as the center of the Asia-Pacific region, Europe and Africa, and the USA as the center of the Americas. There will be fewer and fewer products with production chains spreading across several areas. “International trade is Taiwan’s economic lifeline. Before the pandemic, Taiwanese firms would mostly get orders from abroad and outsource the production to overseas producers. This model will very probably have to face a change in the near future”, he said.

(Edited by Public Affairs Division)
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