The heterogeneous effects of trade policy on trade resilience during the 2020 trade downturn

The COVID‐19 pandemic resulted in large and varying declines in bilateral trade flows. This study investigates whether these diverse effects can be explained by differences in trade costs as measured by pre‐existing trade policies (e.g. tariffs, non‐tariff measures and trade agreements). Results indicate that trade flows subject to higher trade costs declined more than average during 2020. The results also show that trade costs have heterogeneous effects depending on the thickness of trade relationships, with small exporters being relatively more affected by the presence of trade costs. We interpret the results as evidence that the fall in demand during 2020 caused higher‐cost and less‐established suppliers to be squeezed out of international markets.