Introduction
The trade war between the US and China could have far-reaching effects on both small and major global economies, especially during the COVID-19 pandemic. The economies might become culprits of the trade war. Braunstein and McPherson-Smith (2019) assert that trade wars arise when one or several countries places tariffs on imports to offset a trade deficit, which refers to the lack of balance between incoming and outgoing products. The US-China trade war has its root in President Trump’s 2018 announcement of 25% and 10% tariffs on imported steel and aluminum, respectively (Brett, 2018). The motive was to offset a trade deficit because the US imports more than it exports to other countries, such as China and Mexico. The US versus China trade war has since escalated with the latter retaliating with similar tariffs on imports from the former. This situation led to an unfavorable global economic climate characterized by adverse effects on key traders, as is the case with Luxembourg and Saudi Arabia.
Luxembourg Versus Saudi Arabia Foreign Trade Approaches
Luxembourg and Saudi Arabia are important participants in the international trade arena. The contributions of these two countries to the global economy cannot be overlooked, as they both import and export goods and services in large quantities. Each of the two has a unique advantage enabling it to trade competitively against global rivals. However, neither of these countries has enough capacity to withstand the global economic disturbances anticipated from the continued US-China trade war. The contemporary global supply chain systems have become increasingly sophisticated and delicate. It means that both minor and major tariffs could lead to unexpected consequences, such as a rise in prices and a fall in demand for products and services other than the targeted ones (Brett, 2018). Nevertheless, the warring countries’ major trade partners, as is the case with Luxembourg and Saudi Arabia, are equally exposed to the risk of unintended implications because of the delicate nature of global supply and revenue chains.
The comparison between Luxembourg and Saudi Arabia requires a review of their respective economic indicators, which serve as the basis of the countries’ global rankings. With a GDP of $786 billion, Saudi Arabia ranks in position 18 in economic size globally. On the other hand, Luxembourg’s economy is ranked 72nd, with a $70 billion GDP. Based on the calculated GDP average over five years, Saudi Arabia ranks 124th and Luxembourg 88th (“Luxembourg vs Saudi Arabia,” 2020). These figures are a clear indication that Luxembourg has a relatively more stable economy compared to Saudi Arabia, although the latter has a larger one and could be making significant milestones in economic growth. Besides, this data points to the level of the countries’ engagement in international trade. Table 1, adapted from Georank.org, shows the two countries’ exports and imports trends relative to their respective GDPs.
Table 1: Exports, Imports, and Economic Structure
The tabled figures give a clearer glimpse of the respective country’s participation levels in foreign trade. For instance, 211.6% of Luxembourg’s GDP is derived from exports compared to 39.9% in the case of Saudi Arabia (“Luxembourg vs Saudi Arabia,” 2020). A similar pattern is evident in the case of imports into the two countries, which are expressed as a percentage of their GDP. Particularly, imports comprise 175.5% of Luxembourg’s GDP, which is a comparatively higher ratio compared to 26.7% in the case of Saudi Arabia (“Luxembourg vs Saudi Arabia,” 2020). These ratios indicate that Luxembourg’s economy is relatively more reliant on international trade compared to Saudi Arabia. Nevertheless, the current account balance, also called the balance of payments, is $3.4 billion for Luxembourg versus $70.6 billion for Saudi Arabia (“Luxembourg vs Saudi Arabia,” 2020). Luxembourg is bound to experience significantly more adverse effects of the US-China trade war than Saudi Arabia.
Impact of COVID-19 on Trade Between Luxembourg and Saudi Arabia
World economies are experiencing the devastating effects of COVID-19 differently depending on the measures adopted to counter the pandemic. However, the pandemic crippled international trade due to directives meant to cease international travel. Both Luxembourg and Saudi Arabia could not continue with their normal international trade operations throughout the period when the virus caused havoc in major international markets, particularly the US and China. The Luxembourg government responded to the coronavirus outbreak swiftly by imposing travel restrictions on March 15, 2020. Key parts of the economy closed, and traders could not export commercial services and popular merchandise, which include iron, non-alloy steel, and tires (“Coronavirus: Impact,” 2020). Similarly, the country could not import products, such as cars and petroleum oil, from Saudi Arabia, since the pandemic had stalled business operations in both countries (Elgin et al., 2020). In essence, Luxembourg’s economy, which showed stable growth at the start of the year, has been declining since April.
The situation was the same for Saudi Arabia’s international trade with the rest of the world, especially Luxembourg. Measures, such as travel restrictions and social distancing directives, affected the country’s leading economic industries detrimentally. Ostensibly, Saudi Arabia’s economy thrives on large-scale public works by the authorities, foreign direct investments, an exceptional financial system, and the country’s oil deposits wealth (Braunstein & McPherson-Smith, 2019). Unfortunately, the measures to combat the spread of COVID-19 affected these fundamental economic sectors’ operations, limiting the country’s capacity to engage in international trade. The country could not import goods and services from Luxembourg and other key trade partners, as these were equally battling the COVID-19 pandemic (Elgin et al., 2020). Production of goods had stalled throughout the world because governments focused on measures to protect their citizens. As was Luxembourg’s case, Saudi Arabia could not engage in international trade amidst the coronavirus pandemic, leading to a potential economic recession.
Recommended Measures to Improve Economic Conditions
In overview, countries are adopting various measures in response to the aftermath effects of the coronavirus pandemic. In Luxembourg and Saudi Arabia, governments must be on the front line in helping companies involved in international trade to recalculate and make a comeback based on the shifting global market dynamics. As the first recommendation, each government should establish a task force to facilitate local businesses with all possible support systems needed for a swift reestablishment. This recommendation is founded on the fact that local businesses play a critical role in strengthening a country’s economy, which is a critical requirement for a flawless exchange between the local and global economies.
Secondly, each government must develop a comprehensive economic recovery strategy depending on its unique needs. An effective strategy must feature a clear plan detailing how the government intends to support exporters and importers struggling to return to business (Elgin et al., 2020). For instance, governments in both countries might have to consider the possibilities of having support packages, which could include postponements and exemptions from specific government dues. This second recommendation is founded on the fact that exporters need to cope with the international trade arena changes, particularly the combined effect of the COVID-19 pandemic and the intensifying China versus US trade war. Coping with the dual challenge without sufficient support from the government could remedy failure and frustrations.
The governments in the two countries should also consider the idea of customized economic stabilization programs for various industries based on the degree of the pandemic impact. Different industries have unique challenges that might require special consideration for the certainty of a successful relaunch. Elgin et al. (2020) assert that companies in highly volatile industries might require support in maintaining employees during the first few months of resuming operations. Such initiatives might have a far-reaching positive effect on the economy because supported companies will be empowered to resume business from an advantaged position. Besides, these stabilization programs might result in a massive recovery of previously lost jobs due to the pandemic.
A fourth recommendation that could help improve the two countries economic situations swiftly would be to involve leading trade partners in a gradual, although hastened, opening of the boundaries to allow international flights. The respective governments might need to establish strict measures to avoid the further spread of the disease. A vital element of the agreement would be the requirement that the governments must ensure full compliance with containment measures in their respective countries. However, only a few flight companies should be allowed to operate under strict measures, which may require an ongoing vetting process to determine the level of compliance.
References
Braunstein, J. & McPherson-Smith, O. (2019). The US-China trade war and its implications for Saudi Arabia. Belfer Center. Web.
Brett, D. (2018). Which countries are most at risk of a trade war? Five questions answered. Schroders. Web.
Elgin, C., Basbug, G., & Yalaman, A. (2020). Economic policy responses to a pandemic: Developing the COVID-19 economic stimulus index. Covid Economics, 1(3), 40–53.
Luxembourg vs. Saudi Arabia: Economic indicators comparison. (2020). Georank. Web.
Coronavirus: Impact on the Luxembourg economy. (2020). Luxembourg Trade and Invest. Web.