Section 5 presents the six stylized facts on the initial impact and recovery of globally engaged firms during the COVID-19 pandemic. Section 5 concludes with policy recommendations.

# **2. Related Literature**

The shock to GVCs and globally engaged firms associated with the pandemic was unique in scope and depth. In contrast to the ‘Great Trade Collapse’ during the global financial crisis (GFC) that was primarily due to a demand shock induced by a financial crisis (Giovanni and Levchenko, 2009; Eaton et al., 2016), the chain reaction effect of global lockdowns imposed to contain the COVID-19 virus had adverse effects on demand, supply, and logistics networks around the world (Brenton et al., 2022). More broadly, the impact of the pandemic may transmit to firms through four main channels (Freund and Mora, 2020): supply (e.g., reduced worker participation due to illness or mobility restrictions); demand (changes in patterns and extent of consumption); financial conditions (e.g., deterioration of credit conditions for banks) and uncertainty due to increased volatility. These channels are magnified for globally engaged firms because global production networks were severely disrupted by the current pandemic crisis. Once a globally engaged firm is affected due to changes in demand conditions, this creates a domino effect on other linked firms, especially if they are not sufficiently diversified. International trade involves higher risk than domestic trade, namely exchange rate risk, default risk, and liquidity problems, hence, globally engaged firms are likely to be particularly vulnerable to financial market frictions and overall uncertainty.

Evidence from the GFC suggests that trade declines in financial crises are due to a reduction in demand, particularly for durable goods (Giovanni and Levchenko, 2009; Eaton et al., 2016) and early evidence for the pandemic indicates that depressed demand was the most frequently reported firm concern initially (Dai et al., 2021; Balleer et al., 2020). Nonetheless, financial channels are also at play. Evidence from past financial crises shows that worsened access to credit and trade finance play a role in reducing trade (Ahn et al., 2011; Amiti and Weinstein, 2011; Chor and Manova, 2012; Crozet et al., 2022). In particular, protecting international transactions from uncertainty and financial risks, through letters of credit for instance, is more difficult during recessions. However, the impact of a crisis on firm exports depends on the main channel of transmission. The GFC had a particularly adverse impact on exports of products heavily reliant on letters of credit which were in short supply by financially distressed banks (Crozet et al., 2022). In contrast, such exports were more resilient in the early stages of the pandemic because banks were not financially distressed and such financing was not in short supply. Securing letters of credit helped exporters cope with the heightened uncertainty by reducing their exposure to risk (Demir and Javorcik, 2020; Crozet et al., 2022).

In the context of the current pandemic, emerging evidence using customs data shows a significant decline in firms’ exports, particularly to destination countries with strict initial lockdown measures. The negative impacts on exports were strong in the first semester of 2020 but followed by partial recovery, indicating some adaptation by globally engaged firms (see Bricongne et al. (2021) and Lafrogne-Roussier et al. (2021) for France, Pimenta et al. (2021) for Portugal, and de Lucio et al. (2020) for Spain). The body of evidence from the ‘Great Trade Collapse’ during the GFC suggests 5