In-person meetings matter in global trade1 min read . Updated: 19 Nov 2020, 09:28 AM IST
Travel restrictions during the pandemic may have hurt trade by preventing business partners in different countries to meet in person, says new study
The covid-19 pandemic has deeply wounded world trade. The disruption of global supply networks has been among the top concerns for policymakers. But one aspect that got less attention is how travel restrictions can hurt trade by preventing business partners from meeting in person.
A new paper by Bengt Söderlund of Lund University suggests that face-to-face communication is important in international trade, and so, any restriction on movement of people can have large negative effects on business.
The author shows that a 50% increase in business travel time between all countries of the world can bring down trade by around 20%. One way in which high travel costs can restrict trade is by making it more difficult to meet foreign suppliers to gather information and establish trust.
The paper uses business travel costs as a proxy for movement restrictions. This is because while globalization has reduced other trade costs such as transmitting information and moving goods, travel still remains as costly as before.
The author finds that even now, business travel costs can account for over 85% of trade frictions. Such friction makes long-distance trade more difficult.
Söderlund uses a historical example to demonstrate his point. He shows that after airlines were allowed to fly non-stop over the Soviet Union in 1985, flight time between Europe and East Asia reduced substantially. This led to a sharp increase in trade between the two regions.
The finding that travel cost can be a major impediment for trade has wide-ranging implications for policy. For instance, the author says this gives policymakers stronger incentive to improve international flight routes.
During the current pandemic, most travel restrictions are absolute, and not related to increased travel costs that the paper is based on. Nonetheless, this analysis indicates that travel curbs can hit global trade in more ways than just breaking down supply chains.
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