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Costs in international trade were magnified by uncertainty

Costs in international trade were magnified by high levels of uncertainty, highlighted an analysis by the World Trade Organization (WTO).

Establishing business relationships with foreign buyers or suppliers carries costs. It requires market research on tastes and preferences, the acquisition of language skills and compliance with foreign product or process standards.

Uncertainty reduces the appetite of companies to invest, and investing in fixed export or import costs is no exception.

Thus, according to the WTO, uncertainty magnifies existing trade barriers, adding its own share to trade costs.

Several indicators of uncertainty have been shown to correlate with international trade and economic growth.

Global uncertainty, measured by counting the frequency of words related to “uncertainty” in the country reports from The Economist Intelligence Unit, shows a surprising increase.

In the first quarter of 2020, for example, the level of uncertainty was 60% higher than that triggered by the Iraq war and the 2003 outbreak of severe acute respiratory syndrome (SARS).

Global uncertainty, first quarter of 1993 to second quarter of 2020

Chart: WTO.

A monthly measure of uncertainty derived from the economic policy environment has been high since 2019 due to tensions in international trade, especially between the main economies.

International Trade

While this level of uncertainty decreased in January 2020, it reached a new peak in late May 2020.

Finally, a measure of financial volatility shows that, so far, uncertainty in the US financial market peaked in mid-March, when it approached the level of the Lehman Brothers shock.

 

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