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Global trade and global shocks: Pompeo Pontone explains why it is crucial to balance comparative advantages with resilience

Although the Covid-19 pandemic is primarily a health crisis, for a year now it has substantially affected all aspects of human life. International trade, for example, has been particularly hard hit, with a sharp decline in overall trade flows. Some figures about the United States: as shown by an analysis from the St. Louis Fed’s Research Division, from January to June 2020, exports of US goods dropped by almost 25%, while imports dropped by about 17%. Furthermore, the trade deficit of the country increased by about 20% and reached a value of $8.65 billion. In particular, the increase in demand for essential medical goods has been an important driving force behind the widening trade deficit of the United States. “The vulnerability of the US trade system has been exposed by the heavy reliance on imports of essential medical goods”, commented Pompeo Pontone, a Professional Investment Specialist and Financial Consultant, in a recent intervention in which he stressed the importance of implementing policies to optimize the trade-off between comparative advantages and resilience.

As confirmed by the study carried out by the St. Louis Fed’s Research Division, the increase in the trade deficit of medical goods accounted for 41.3% of the increase in the US trade deficit. This is because the Covid-19 pandemic has increased the demand for essential medical goods – gloves, masks, respirators, and medicines, just to name a few – which are essential to combat the pandemic. On the other hand, production and global exports of essential medical goods are concentrated in a few countries, mainly in Asia, and most countries in the rest of the world depend on imports of these goods. For example, in 2018 the 36% of the US total domestic consumption of essential medical goods was imported, with the country accounting for 25% of world imports of such products.

As a consequence, the vulnerability of the US trade system has been particularly exposed by the heavy reliance on imports of essential medical goods, explained Pompeo Pontone. “Although trade allows countries with a competitive advantage in producing specific goods to specialize in their production process”, the Professional Investment Specialist pointed out, “it is also crucial to implement policies which can optimize the trade-off between comparative advantages and resilience”. With regard to the heavy reliance of the United States on imports of essential medical goods, and the resulting vulnerabilities of the trade system, the expert also made clear that it is equally important to implement adequate policies which can contribute to reducing the risk of shortage of essential goods during global shocks.

Further information can be found here:

https://research.stlouisfed.org/publications/economic-synopses/2020/09/16/the-dynamics-of-the-u-s-trade-deficit-during-covid-19-the-role-of-essential-medical-goods

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