## 3. Trade Patterns amid Shocks and a Changing Geoeconomic Landscape

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### Shifting Trade Patterns
- Since 2022, the Caucasus and Central Asia (CCA) region has witnessed a notable uptick in overall trade activity, reflecting heightened transit trade and trade diversion.
- Key trade-diversion outcomes linked to Russia’s war in Ukraine:
  - In 2022, the CCA’s share in EU, Russian, and US nonhydrocarbon exports increased by 25, 22, and 53 percent, respectively.
  - In 2022, the CCA’s share in EU, Russian, and US nonhydrocarbon imports rose by 47, 43, and 27 percent, respectively.
  - Russia’s shares in EU and US nonhydrocarbon exports and imports declined markedly (Figure 3.3).
- CCA trade reorientation and global value chain integration:
  - Increased share in China’s nonhydrocarbon exports, reflecting greater traffic through the Middle Corridor and sharply rising transported volumes (Box 3.1).
  - Expansion in imports from and exports to major trading partners across many product categories, especially extractive industries and manufacturing: iron and steel, electrical machinery, chemicals, and vehicles.
  - Participation in global value chains increased in all CCA countries except Tajikistan.
  - Several CCA countries (Armenia, Azerbaijan, Georgia, Kazakhstan, Uzbekistan) increased their use of foreign inputs in production and exports, surpassing the volume of their exports used in other countries’ exports (Figure 3.6).
- Sectoral export value changes for CCA (2022 versus 2019–21 average) showed positive value changes in categories including Ores, Copper, Electrical machinery, Inorganic chemicals, Nuclear, Cereals, Vehicles, Salt, Fertilizer, Flour, Zinc, Apparel, Aluminium, Iron and steel (Figure 3.4).

### Red Sea Security Tensions Disrupting Trade in MENA
- The Red Sea (including the Suez Canal and Bab el-Mandeb Strait) is a crucial pathway: about 15 percent of global trade and 30 percent of global container trade transited through the Suez Canal before the onset of the conflict.
- From November 2023, attacks on commercial vessels traversing the Bab el-Mandeb Strait raised security concerns and caused a sharp rise in maritime insurance premiums.
- Shipping cost impact:
  - From the onset of the conflict in Gaza and Israel until March 2024, the cost of shipping a standard 40-foot container from China to the Mediterranean Sea has risen from about $1,000 to over $4,000.
- Trade volume impacts:
  - Trade through the Suez Canal dropped by over 50 percent between November 2023 and the end of February 2024.
  - Cargo trade volumes in some MENA countries reliant on Red Sea ports contracted during this timeframe.
  - Example: Throughput of Jordan’s Port of Aqaba fell by nearly half between November and the end of February, prompting some rerouting through land transport.
  - Example: In Saudi Arabia, Jeddah’s port activity decreased as authorities partly diverted trade flows to the port of Dammam in the Persian Gulf.
- Prolonged tensions in the Bab el-Mandeb Strait could have a deeper negative impact on trade and output, especially for countries bordering the Red Sea (Box 3.2).

### Rising Trade Restrictions
- Global trend: trade interventions increased by 70 percent since 2019.
- The average number of trade interventions affecting countries in the Middle East and Central Asia (ME&CA) has nearly doubled since 2019, with restrictions varying across countries (Figures 3.9 and 3.10).
- Categories of interventions include export and import policy instruments, subsidies and state aid, and trade defense instruments.
- New trade interventions (Number, 2020–22) show variation across ME&CA economies with import measures, export measures, and other measures recorded (Figure 3.10).

### Assessing the Impact of Geoeconomic Fragmentation on ME&CA
- Three illustrative scenarios assessed via a structural bilateral gravity model (185 countries, 2012–19 data) examine potential trade and output gains and losses from rising geoeconomic fragmentation:
  - Scenario 1: EU and US cease all trade with Russia while trade between other countries proceeds as normal.
  - Scenario 2: World separates into three blocs (Western, Eastern, neutral); trade halted between Western and Eastern blocs; ME&CA countries remain in the neutral bloc.
  - Scenario 3: Same three-bloc separation; ME&CA countries align into blocs based on votes in the 77th UN General Assembly Session during 2022–23.
- Net effects depend on two opposing forces: loss of trade partners (reducing trade and output) versus trade diversion (redirecting trade toward countries that can trade).
- Scenario outcomes (baseline percent changes):
  - Scenario 1: Trade diversion and commodity price effects produce positive but modest output impacts, primarily in CCA countries (Figure 3.11).
  - Scenario 2: ME&CA countries remaining neutral could see exports increase by 2–3 percent and economic output rise by up to 0.4 percent.
  - Scenario 3: Several ME&CA countries would experience losses:
    - Exports decline: CCA –1.1 percent; non‑GCC MENA and Pakistan –7.4 percent.
    - Mild declines in output for affected groups.
  - GCC countries would be less impacted under scenario 3, positioned to benefit from trade diversion due to lower tariffs and nontariff barriers.

### Policy Actions to Expand Trade Gains and Prevent Losses
- Policy measures calibrated to reduce the gap with advanced economies on long-standing barriers can materially affect trade and output under fragmentation scenarios:
  - Policy levers considered:
    - Reducing trade restrictions (composite index of tariff and nontariff barriers).
    - Upgrading infrastructure (proxied by the World Bank’s Logistics Performance Index).
    - Improving the regulatory environment (regulatory quality index).
  - Calibration note: policy actions are calibrated to achieve a 20 percent reduction in the gap of such factors between ME&CA countries and advanced economies.
- Estimated impacts under scenario 1 (relative to baseline without policy action):
  - Lowering the trade restriction gap with advanced economies could boost exports by 14 percent for CCA countries and by more than 15 percent for the group containing non‑GCC MENA countries and Pakistan.
  - Upgrading infrastructure could increase exports by about 7 percent in the CCA and 8 percent in non‑GCC MENA countries and Pakistan, driven by improved intra- and interregional trade flows.
  - Improving the regulatory environment could increase exports by more than 3 percent for the CCA and around 6 percent for non‑GCC MENA countries and Pakistan.
- Translation to GDP:
  - These export gains could translate into higher annual output in the CCA (between 1 and 2 percent) and among non‑GCC MENA countries and Pakistan (between 1 and 3 percent).
- Caveats:
  - The structural gravity model focuses on pre‑COVID‑19 years (2012–19) and assumes structural parameters invariant to degrees of geoeconomic fragmentation; intermediated trade through third countries may yield additional effects not captured, implying results may represent a lower bound for intermediary countries.

### Scenario 1 (and related scenario findings)
- Scenario 1 (chart extract): numeric label shown as "17.4".
- Scenario 2: reducing trade barriers would increase exports by:
  - "more than 17 percent" for CCA countries,
  - "more than 20 percent" for non-GCC MENA countries and Pakistan,
  - "6 percent" for GCC countries.
- Scenario 2: export gains from upgrading infrastructure would reach:
  - "6" percent in GCC,
  - "22" percent in CCA,
  - "24" percent in non-GCC MENA countries and Pakistan.
- Scenario 2: export gains from improvements in the regulatory environment would reach:
  - "6" percent in GCC,
  - "3" percent in CCA,
  - "11" percent in non-GCC MENA countries and Pakistan.
- Scenario 2: additional output gains from policy actions translate into "0.4 to 6.3 percent", especially for CCA and non-GCC MENA countries and Pakistan.
- Scenario 3: policy actions can prevent medium-term economic losses and improve trade and output, though improvements are generally less pronounced than in scenarios 1 and 2.
  - Under scenario 3, reducing trade restrictions could increase exports by:
    - "more than 11 percent" for the CCA group,
    - "about 8 percent" for the non-GCC MENA and Pakistan group.
  - Scenario 3: upgrading infrastructure would similarly boost exports and output across the region.
  - Scenario 3: improving regulatory quality leads to export and output gains and reverses adverse effects for the CCA and the non-GCC MENA and Pakistan group.

### Regional vulnerabilities and illustrative Red Sea shock (prolonged disruption through end‑2024)
- Simulated shock: increase in trade costs by "1 percent of freight value" for trade traversing the Red Sea (equivalent to a full-year rise in maritime insurance premiums at the level observed as of mid-March 2024 for vessels traveling through the Red Sea).
- Estimated trade impacts:
  - For countries bordering the Red Sea (Egypt, Jordan, Saudi Arabia, Sudan, Yemen): exports are estimated to decline by "10 percent" on average.
  - For the rest of MENA and Pakistan: the decline in exports is "about half" of the decline seen for the Red Sea–bordering group.
- Estimated impact on economic activity:
  - Decline of "1 percent" for economies bordering the Red Sea.
  - Decline of "0.3 percent" for other MENA countries and Pakistan.
- Chart markers in Box Figure 3.2.1 include values such as "−12", "−10", "−8", "−6", "−4", "−2", "−1.0", "0", "−0.9", "−0.8", "−0.7", "−0.6", "−0.5", "−0.4", "−0.3", "−0.2", "−0.1".

### Policy recommendations (short and medium term) and MENA-specific measures
- Short-term priorities:
  - Prioritize trade facilitation measures and improvements in “soft” infrastructure (digital technology and customs management) to consolidate shifts in trade patterns into stronger trade and GDP gains.
  - Reduce nontariff barriers by improving customs efficiency, including by expanding the use of digital technology.
  - Simplify import and export license processes.
  - Tackle technical barriers at the border.
- Medium-term priorities:
  - Reduce infrastructure gaps and enhance regulatory quality to boost trade and mitigate impact of trade shocks and geoeconomic fragmentation.
  - Reduce infrastructure bottlenecks and harmonize and streamline regulatory requirements.
  - Facilitate regional linkages and connectivity (for example, by developing alternative trade corridors).
  - Further integrate into global value chains to bolster competitiveness and contribute to higher income per capita (Raei, Ignatenko, and Mircheva 2019).
- MENA-specific measures to mitigate Red Sea disruptions:
  - Improve supply chain management and prepare for alternative sources of supply in most affected sectors.
  - Seek alternate shipping routes and assess air freight capacity needs.
  - Invest in transportation infrastructure to strengthen and expand regional linkages and connectivity, including developing innovative sea-land routes.
  - Cultivate a more diversified trade profile across partners, products, and routes to enhance resilience.

*Prepared from "3. Trade Patterns amid Shocks and a Changing Geoeconomic Landscape" (April 2024) — IMF staff calculations and accompanying figures.*

### 3. Trade Patterns amid Shocks and a

### 3. Trade Patterns amid Shocks and a Changing Geoeconomic Landscape

### Shifting Trade Patterns
- Since 2022, the Caucasus and Central Asia (CCA) region has witnessed a notable uptick in overall trade activity, reflecting heightened transit trade and trade diversion.
- Key trade-diversion outcomes linked to Russia’s war in Ukraine:
  - In 2022, the CCA’s share in EU, Russian, and US nonhydrocarbon exports increased by 25, 22, and 53 percent, respectively.
  - In 2022, the CCA’s share in EU, Russian, and US nonhydrocarbon imports rose by 47, 43, and 27 percent, respectively.
  - Russia’s shares in EU and US nonhydrocarbon exports and imports declined markedly (Figure 3.3).
- CCA trade reorientation and global value chain integration:
  - Increased share in China’s nonhydrocarbon exports, reflecting greater traffic through the Middle Corridor and sharply rising transported volumes (Box 3.1).
  - Expansion in imports from and exports to major trading partners across many product categories, especially extractive industries and manufacturing: iron and steel, electrical machinery, chemicals, and vehicles.
  - Participation in global value chains increased in all CCA countries except Tajikistan.
  - Several CCA countries (Armenia, Azerbaijan, Georgia, Kazakhstan, Uzbekistan) increased their use of foreign inputs in production and exports, surpassing the volume of their exports used in other countries’ exports (Figure 3.6).
- Sectoral export value changes for CCA (2022 versus 2019–21 average) showed positive value changes in categories including Ores, Copper, Electrical machinery, Inorganic chemicals, Nuclear, Cereals, Vehicles, Salt, Fertilizer, Flour, Zinc, Apparel, Aluminium, Iron and steel (Figure 3.4).

### Red Sea Security Tensions Disrupting Trade in MENA
- The Red Sea (including the Suez Canal and Bab el-Mandeb Strait) is a crucial pathway: about 15 percent of global trade and 30 percent of global container trade transited through the Suez Canal before the onset of the conflict.
- From November 2023, attacks on commercial vessels traversing the Bab el-Mandeb Strait raised security concerns and caused a sharp rise in maritime insurance premiums.
- Shipping cost impact:
  - From the onset of the conflict in Gaza and Israel until March 2024, the cost of shipping a standard 40-foot container from China to the Mediterranean Sea has risen from about $1,000 to over $4,000.
- Trade volume impacts:
  - Trade through the Suez Canal dropped by over 50 percent between November 2023 and the end of February 2024.
  - Cargo trade volumes in some MENA countries reliant on Red Sea ports contracted during this timeframe.
  - Example: Throughput of Jordan’s Port of Aqaba fell by nearly half between November and the end of February, prompting some rerouting through land transport.
  - Example: In Saudi Arabia, Jeddah’s port activity decreased as authorities partly diverted trade flows to the port of Dammam in the Persian Gulf.
- Prolonged tensions in the Bab el-Mandeb Strait could have a deeper negative impact on trade and output, especially for countries bordering the Red Sea (Box 3.2).

### Rising Trade Restrictions
- Global trend: trade interventions increased by 70 percent since 2019.
- The average number of trade interventions affecting countries in the Middle East and Central Asia (ME&CA) has nearly doubled since 2019, with restrictions varying across countries (Figures 3.9 and 3.10).
- Categories of interventions include export and import policy instruments, subsidies and state aid, and trade defense instruments.
- New trade interventions (Number, 2020–22) show variation across ME&CA economies with import measures, export measures, and other measures recorded (Figure 3.10).

### Assessing the Impact of Geoeconomic Fragmentation on ME&CA
- Three illustrative scenarios assessed via a structural bilateral gravity model (185 countries, 2012–19 data) examine potential trade and output gains and losses from rising geoeconomic fragmentation:
  - Scenario 1: EU and US cease all trade with Russia while trade between other countries proceeds as normal.
  - Scenario 2: World separates into three blocs (Western, Eastern, neutral); trade halted between Western and Eastern blocs; ME&CA countries remain in the neutral bloc.
  - Scenario 3: Same three-bloc separation; ME&CA countries align into blocs based on votes in the 77th UN General Assembly Session during 2022–23.
- Net effects depend on two opposing forces: loss of trade partners (reducing trade and output) versus trade diversion (redirecting trade toward countries that can trade).
- Scenario outcomes (baseline percent changes):
  - Scenario 1: Trade diversion and commodity price effects produce positive but modest output impacts, primarily in CCA countries (Figure 3.11).
  - Scenario 2: ME&CA countries remaining neutral could see exports increase by 2–3 percent and economic output rise by up to 0.4 percent.
  - Scenario 3: Several ME&CA countries would experience losses:
    - Exports decline: CCA –1.1 percent; non‑GCC MENA and Pakistan –7.4 percent.
    - Mild declines in output for affected groups.
  - GCC countries would be less impacted under scenario 3, positioned to benefit from trade diversion due to lower tariffs and nontariff barriers.

### Policy Actions to Expand Trade Gains and Prevent Losses
- Policy measures calibrated to reduce the gap with advanced economies on long-standing barriers can materially affect trade and output under fragmentation scenarios:
  - Policy levers considered:
    - Reducing trade restrictions (composite index of tariff and nontariff barriers).
    - Upgrading infrastructure (proxied by the World Bank’s Logistics Performance Index).
    - Improving the regulatory environment (regulatory quality index).
  - Calibration note: policy actions are calibrated to achieve a 20 percent reduction in the gap of such factors between ME&CA countries and advanced economies.
- Estimated impacts under scenario 1 (relative to baseline without policy action):
  - Lowering the trade restriction gap with advanced economies could boost exports by 14 percent for CCA countries and by more than 15 percent for the group containing non‑GCC MENA countries and Pakistan.
  - Upgrading infrastructure could increase exports by about 7 percent in the CCA and 8 percent in non‑GCC MENA countries and Pakistan, driven by improved intra- and interregional trade flows.
  - Improving the regulatory environment could increase exports by more than 3 percent for the CCA and around 6 percent for non‑GCC MENA countries and Pakistan.
- Translation to GDP:
  - These export gains could translate into higher annual output in the CCA (between 1 and 2 percent) and among non‑GCC MENA countries and Pakistan (between 1 and 3 percent).
- Caveats:
  - The structural gravity model focuses on pre‑COVID‑19 years (2012–19) and assumes structural parameters invariant to degrees of geoeconomic fragmentation; intermediated trade through third countries may yield additional effects not captured, implying results may represent a lower bound for intermediary countries.

_International Monetary Fund, Regional Economic Outlook—Middle East and Central Asia, April 2024 (chapter text)_.

### 1. Scenario 1

### ch3 - 1. Scenario 1

### Key findings from scenario simulations
- Scenario 1 (chart extract): numeric label shown as "17.4".
- Scenario 2: reducing trade barriers would increase exports by:
  - "more than 17 percent" for CCA countries,
  - "more than 20 percent" for non-GCC MENA countries and Pakistan,
  - "6 percent" for GCC countries.
- Scenario 2: export gains from upgrading infrastructure would reach:
  - "6" percent in GCC,
  - "22" percent in CCA,
  - "24" percent in non-GCC MENA countries and Pakistan.
- Scenario 2: export gains from improvements in the regulatory environment would reach:
  - "6" percent in GCC,
  - "3" percent in CCA,
  - "11" percent in non-GCC MENA countries and Pakistan.
- Scenario 2: additional output gains from policy actions translate into "0.4 to 6.3 percent", especially for CCA and non-GCC MENA countries and Pakistan.
- Scenario 3: policy actions can prevent medium-term economic losses and improve trade and output, though improvements are generally less pronounced than in scenarios 1 and 2.
  - Under scenario 3, reducing trade restrictions could increase exports by:
    - "more than 11 percent" for the CCA group,
    - "about 8 percent" for the non-GCC MENA and Pakistan group.
  - Scenario 3: upgrading infrastructure would similarly boost exports and output across the region.
  - Scenario 3: improving regulatory quality leads to export and output gains and reverses adverse effects for the CCA and the non-GCC MENA and Pakistan group.

### Regional vulnerabilities and illustrative shocks (Red Sea)
- Illustrative scenario for prolonged Red Sea disruptions (assumes current level of disruptions continues through the end of 2024):
  - Simulated shock: increase in trade costs by "1 percent of freight value" for trade traversing the Red Sea (equivalent to a full-year rise in maritime insurance premiums at the level observed as of mid-March 2024 for vessels traveling through the Red Sea).
  - For countries bordering the Red Sea (Egypt, Jordan, Saudi Arabia, Sudan, Yemen): exports are estimated to decline by "10 percent" on average.
  - For the rest of MENA and Pakistan: the decline in exports is "about half" of the decline seen for the Red Sea–bordering group.
  - Estimated impact on economic activity: decline of "1 percent" for economies bordering the Red Sea and "0.3 percent" for other MENA countries and Pakistan.
- Box Figure 3.2.1 displays one-year impacts and numerical markers including negative changes for Exports and GDP (chart labels include values such as "−12", "−10", "−8", "−6", "−4", "−2", "−1.0", "0", "−0.9", "−0.8", "−0.7", "−0.6", "−0.5", "−0.4", "−0.3", "−0.2", "−0.1").

### Policy recommendations (short and medium term)
- Short-term priorities:
  - Prioritize trade facilitation measures and improvements in “soft” infrastructure (digital technology and customs management) to consolidate shifts in trade patterns into stronger trade and GDP gains.
  - Reduce nontariff barriers by improving customs efficiency, including by expanding the use of digital technology.
  - Simplify import and export license processes.
  - Tackle technical barriers at the border.
- Medium-term priorities:
  - Reduce infrastructure gaps and enhance regulatory quality to boost trade and mitigate impact of trade shocks and geoeconomic fragmentation.
  - Reduce infrastructure bottlenecks and harmonize and streamline regulatory requirements.
  - Facilitate regional linkages and connectivity (for example, by developing alternative trade corridors).
  - Further integrate into global value chains to bolster competitiveness and contribute to higher income per capita (Raei, Ignatenko, and Mircheva 2019).
- MENA-specific measures to mitigate Red Sea disruptions:
  - Improve supply chain management and prepare for alternative sources of supply in most affected sectors.
  - Seek alternate shipping routes and assess air freight capacity needs.
  - Invest in transportation infrastructure to strengthen and expand regional linkages and connectivity, including developing innovative sea-land routes.
  - Cultivate a more diversified trade profile across partners, products, and routes to enhance resilience.

### Additional analytical notes
- Sources referenced for the simulations and charts: CEPII Gravity data set; and IMF staff calculations.
- Regional definitions used in the analysis:
  - CCA = Caucasus and Central Asia
  - GCC = Gulf Cooperation Council
  - MENA & PAK = Middle East and North Africa and Pakistan

*Prepared from "3. Trade Patterns amid Shocks and a Changing Geoeconomic Landscape" (April 2024) — IMF staff calculations and accompanying figures.*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2024/april/english/ch3.pdf_