The World Trade Organisation (WTO) in its recent press release announced an expected trade plunge of between 13pc and 32pc in 2020. — Reuters/File

Pakistan's top export destinations have been devastated by Covid-19. What does it mean for our trade?

With a majority of Pakistan's exports destined for most-affected countries, traders must diversify to other items.
Published May 16, 2020

Coronavirus has proven deadly, causing more than 300,000 deaths within a short span of five months since the first fatality was reported in Wuhan, China, in early January. It has wreaked havoc on major world economies. Apart from China, affected western countries reporting the highest death rates include the United States, United Kingdom, Italy, Spain, France and Germany.

At the start of this month, these countries accounted for almost two-thirds of the global virus death toll. These economies contribute a large proportion to global output and trade with around 40 per cent of global trade and around 60pc of manufacturing value addition coming from them.

Data from World Bank’s World Development Indicators shows the percentage of coronavirus fatalities in each of these economies and their relative contribution to global output and manufacturing activities.

This statistics make it clear that world trade and output is likely to face massive disruptions.

The World Trade Organisation (WTO) in its recent press release announced an expected trade plunge of between 13pc and 32pc in 2020. The recovery in 2021 will depend upon the effectiveness of policy responses undertaken by various economies in the world. Their recoveries, in turn, will matter for exports from Pakistan.

One of the major threats from the virus is the rate at which an average person can contract the disease from an infected person.

Many of the countries reporting high death rates do not typically report deaths from communicable or infectious diseases including hepatitis, HIV, measles, malaria and dengue.

High fatalities to have long-term consequences for world economies

According to statistics provided by the World Bank, 88pc (90pc for Europe) of the deaths in high-income countries are from non-communicable diseases such as cardiovascular diseases, cancer, diabetes and chronic respiratory illnesses. In contrast, 38pc of the deaths reported in low-income countries are from non-communicable diseases.

This shows that countries that have taken the biggest hit from the virus are those that normally report the lowest percentage of deaths from communicable diseases. Therefore, it is likely that their modern-day health systems have rarely faced pressure due to an infectious disease. In response to this, all the mentioned European countries have enforced nationwide lockdowns, while the United States has adopted a more localised strategy.

Irrespective of their different strategies, high infection rates, surge in deaths and the burden on their health systems will likely have long-term consequences on all economies across the world and global trading patterns.

Almost 50pc of Pakistani exports are to most-affected countries

Even though Pakistan's export to gross domestic product (GDP) ratio is less than 10pc, most exporters in Pakistan tend to be large businesses that employ a significant amount of workers. Thus their contribution to the overall economic activity is likely to be larger than suggested by exports as a percentage of GDP.

Exporters also add value through their extensive supply chains. Certain export-oriented sectors have a multiplier effect on jobs in the economy. A drop in exporting activities will exacerbate the employment crisis in Pakistan. All the destinations specified rank within the top 12 export destinations for Pakistan, with the United States, China, United Kingdom and Germany ranking as the top four, respectively.

Almost half of Pakistan's exports are directed to the countries most affected by the coronavirus — China, UK, US, France, Italy, Spain and Germany. Approximately 40pc of exports from Pakistan are destined to the affected western countries, and 9pc to China. This naturally suggests that the implications of the pandemic on Pakistan's exports are likely to be significant as its major export destinations struggle to cope with the crisis.

Major products exported from Pakistan include apparels (HS 61 and 62), other made-up textile articles (HS 63) such as towels and bedsheets, cereals (HS 10) and leather products (HS 42). Apparels constitute about a quarter of the total exports from Pakistan, other made-up textile products constitute 17pc, cereals constitute 10pc, and leather products constitute less than 3pc. Major exports belonging to the "all other products" category include surgical instruments and ethanol.

The affected western countries constitute the most important destination for finished products belonging to the textile and leather industries. More than two-thirds of total apparel and other manufactured textile exports are to the affected western countries. Meanwhile, cereals and "all other products" are mainly exported to countries other than China and the these western states.

With textile and leather industries making up a majority of exports from Pakistan, policies towards economic revival in the affected western countries will influence the pace at which demand for Pakistani products reaches pre-coronavirus levels. Their economic revival will be crucial to Pakistan's exports.

Pakistan reported a significant dip in its exports between 2013 and 2016. Exports had dropped from $25.1 billion in 2013 to $20.5bn in 2016. Since then, exports had been on an upward trajectory, rising 5.1pc a year to reach $23.8bn in 2019. The most prominent increase however was in apparel and cereals exports, at 8.2pc and 11.3pc, respectively.

With apparels mostly destined for the affected western countries, their growth rates can be dampened if demand continues to fall. On the other hand, exports of cereals may not experience such an impact as they are mostly exported to countries facing a less intensive rate of deaths and infection from the virus.

Figures published by the Pakistan Bureau of Statistics (PBS) reveal a sharp contraction in exports since March 2020.

Exports in April 2020 decreased to $960 million, a 54pc reduction compared to April 2019. Exports of knitwear, bedwear and ready-made garments were also adversely impacted in March 2020. But exports of surgical goods and instruments and certain leather products (such as gloves) reported positive growth rates in March 2020, both month-on-month as well as year-on-year.

Share of most-affected countries in global demand

Affected western countries import approximately 50pc of global trade in apparels and other made-up textile articles. Their share of imports is approximately 43pc for leather products. The imports of cereal by the affected western countries is approximately 15pc of its global trade.

Interestingly, China imports less than 5pc of the global trade in apparels, other made-up textile products and leather products. Its import demand for cereals is at 6pc and the import demand for other products is at 11.5pc. China is likely to be dependent on its domestic production of value-added products in textile and leather industry.

None of the products that are frequently exported by Pakistan constitute a significant proportion of the import basket of major destination markets.

This means Pakistan is likely to focus on low-value added products that do not generate significant value in trade. If this happens, it could signal that policymakers among Pakistan's trading partners are not giving a lot of preference to reviving the demand of Pakistani exports relative to other higher valued and more essential items that constitute a larger percentage of their total imports.

Apart from items deemed essential for health facilities as well as important household consumption, it is likely that several apparel and made-up textile products may experience a delayed response from buyers due to dampened demand.

However, destination markets that do not produce low-valued products domestically may rely on imported goods to fulfil their demand. That could provide an unexpected opportunity to exporters in Pakistan. Therefore, certain exporters better able to tap into potential trading relationships through product diversification or via better export strategies may find it easier to revive their export sales.

Significant challenge to exports

Pakistan is likely to face a significant challenge to its exports as it is not only highly concentrated in a select few products but its exports are destined to countries facing the most brutal impact from the coronavirus. The recent disconcerting figures on a sharp decline in trade published by PBS may have to be viewed with a bit of caution though.

The initial lockdown in Pakistan and elsewhere may have abruptly thwarted regular transactions, the shipment of final goods and the transfer of payments from foreign buyers. It is obvious that the exports from Pakistan will be significantly impacted over a longer period of time. The impact of the lockdown in Pakistan may have contributed significantly to the dip as well.

The trend in export figures over the next few months, however, will reveal a better picture of the impact of the trade plunge itself as lockdown in Pakistan is lifted. Also, export bans imposed on selected items are likely to reduce exports.

Pakistani exporters must develop strategies to mitigate the adverse impact from the crisis by targeting a range of products that may reveal potential but are within the range of their own core competencies. For instance, textile exporters successfully shifting towards production of personal protection equipment and face masks may report a spike in their export activity.

It is essential that the government facilitates and prioritises support for exporters identified as having significant potential by not only ensuring continuous movements of goods across their supply chains, both foreign and domestic, but also easing their business constraints.

A holistic approach will be necessary to recover from the crisis that will impact all aspects of the global economy, in particular international trade.