Enhancing Trade Supply Responses to the COVID-19 Pandemic
Bernard Hoekman, Matteo Fiorini, and Aydin Yildirim look at some of the counterproductive trade policy responses to COVID-19 pandemic and suggest ways to expand production of essential supplies.
As part of the response to the COVID-19 pandemic governments are greatly increasing their procurement of medical supplies and personal protective equipment (1). The global spike in demand far outstrips existing emergency stocks and short-term supply capacity. In early January 2020, China, the world’s largest producer of surgical masks and respirators, reserved supply for domestic use and greatly increased imports from foreign suppliers. Following the spread of the virus internationally, other countries followed suit in putting in place export bans and/or requisitioning available supplies for domestic use. According to the Global Trade Alert, an independent trade policy monitoring initiative, as of early April 2020, some 75 governments have implemented some type of export curbs on medical supplies and medicines needed to fight the pandemic. In parallel, a similar number of countries have reduced or removed import tariffs on essential supplies to lower the cost of sourcing products and many are engaging in direct contracting and purchasing supplies from foreign providers.
Firm-specific cases such as the French seizure of surgical masks owned by Mölnlycke, a Swedish company, and the dispute between 3M and the Trump administration (discussed in our working paper) illustrate that while export restrictions and requisitions of domestic supplies of essential goods may seem an obvious and justifiable measure, they give rise to unintended consequences. The result may be to reduce access to critical supplies, increase average prices significantly, augment market volatility, and generate negative spillover effects on other countries. Potential adverse effects go beyond public health and economic consequences and extend to the foreign policy domain, eroding trust among trading partners.
Robust government intervention is critical in emergencies like the current COVID-19 pandemic. Regulation is needed to ensure that scarce critical supplies are allocated to priority uses, notably health care providers and to control speculation. This cannot and certainly should not be “left to the market.” But export restrictions are second-best responses. Reasons include retaliation (emulation) by other nations, reallocation of supplies by companies away from the country imposing restrictions, promotion of panic buying, hoarding and speculation, and negative reputational effects that impact on investor risk perceptions once the crisis has passed.
In the short run many of the downside effects are associated with price spikes and volatility resulting from constraining access to imported inputs needed for domestic plants to ramp up local production rapidly and reducing the availability of final goods. Many firms have organized production in international production networks and need to be able to source parts and components in order to produce, let alone scale up output.
Allowing international supply chains to work is critical to ramp up supply. Arguments that the current crisis points to the need for greater self-sufficiency are misconceived. Serious short-term supply constraints would exist at national level as well following a pandemic. Having to cross a border is not the issue given that it only takes 48 hours or so to get anything from anywhere in the world. Autarky will not make it any faster to get whatever is critical in a crisis to those who need it. What is needed is for governments ensure that stocks of essential supplies are built up before crises hit and diversification of production capacity across different regions that permit supply to ramped when needed without risk of being blocked or impounded. The focus needs to be on encouraging and supporting business responses as opposed to disrupting supply chains and engaging in negative sum competition for existing supplies and production capacity.
There has already been a massive supply response to the sharp increase in demand for personal protective equipment (PPE). All established suppliers have greatly expanded production but cannot ramp up fast enough. Many firms in other sectors have also demonstrated a capacity to produce essential protective gear. To do so firms need information on demand, applicable product and production standards, be able to obtain rapid certification and to source requisite inputs – including from foreign suppliers. Effective two-way communication channels are needed for firms to identify specific bottlenecks that impede ramping up of supply.
Information is critical – for governments and for firms
Firms need to have systems to monitor market conditions and identify slack and chokepoints in their global network to enable adjustments in production to respond to changes in demand. Governments need information systems that allow them to determine where supply capacity exists and that helps to understand the relevant supply chains. Firms generally will have information on supply options, but governments often will not have such information readily to hand. Both sets of actors need to be able to identify bottlenecks in the supply chain in real time and cooperate in addressing them.
This calls for information systems that permit identification of weak links in supply chains and sources of friction impeding production expansion that are due to – or can be overcome – through policy action. Such information systems were not in place in many if not most countries. Authorities did not have a good understanding of the prevailing supply chains and production capacity. Individual lead firms of course know their supply chains but do not share this information as it is a source of competitive advantage. There are exceptions, such as the New Zealand Medicines and Medical Safety Authority, which requires firms to disclose their supply chain, including where active ingredients for medicines are made and where they are packaged. However, most authorities and jurisdictions seem to have been largely in the dark regarding the nature and composition of the relevant supply chains. There is a notable contrast here with other policy areas such as food products, where traceability throughout the supply chain has become a common feature of the production and distribution process.
Standards and certification of products/plants/suppliers are critical for safety, but the associated regulatory enforcement processes can be a constraint in responding rapidly to an emergency. One good practice here is for governments to accept foreign standards during the emergency as was done by the US Centers for Disease Control approving use of respirators that satisfied equivalent foreign standards, including China’s GB 2626-2006 and GB 2626-2019 standards as well as the European EN 149-2001 standards. The existence of common product standards and mutual recognition of standards facilitates supply responses and cross-border production arrangements. This reinforces the value of international regulatory cooperation, mutual recognition arrangements and efforts to determine whether and where regulatory regimes across countries/systems have the same goals – and in such instances work towards establishing equivalence regimes.
The opportunity cost of not having equivalence and recognition regimes in place was illustrated by the decision by China to impose new export license requirements in early April 2020. The government was responding to rejections by several European countries of PPE shipments sourced from Chinese companies on quality grounds. The Chinese authorities feared a reputational backlash and sought to ensure that exported products meet quality and safety standards by limiting exports to firms certified to sell in domestic market (i.e., firms having been accredited as meeting Chinese technical regulations). Companies accredited by buyers in the US or EU – e.g., firms with CE certification – were blocked from exporting by the new regulation until they had obtained certification in China. Cooperation between governments (regulators) to establish recognition and equivalence arrangements for certification and acceptance of foreign standards would help prevent the application of rigid enforcement of national standards with their associated detrimental trade restricting effects, especially in a time of crisis where unilateral action can have very high humanitarian costs.
Beyond unilateralism: international cooperation in the G20 and WTO
The focus of trade policy responses has been on unilateral action to facilitate imports of products that are most salient to combat COVID-19, direct available supplies to domestic use, and to control or prohibit exports. Trade agreements have not been much of a factor in either constraining beggar-thy-neighbor policies or fostering cooperative responses. Experience has made clear that seeking to agree to binding disciplines for export restrictions is doomed to failure. Instead, cooperation should center on improving crisis response coordination by generating and sharing information on supply-demand trends, improving policymakers and public understanding of the organization and operation of relevant supply chains and joint action to minimize supply chain production and distribution bottlenecks and frictions.
The post-financial crisis period has made clear that G20 countries are unwilling to live up to strong trade policy commitments. The attenuation in support for multilateral cooperation that has been evident over the past decade and the electoral success of political parties that oppose globalization and an open world economy makes any effort to agree to disciplines on export restrictions very unlikely to succeed. However, cooperation centered on information exchange, dialogue and peer review may be more feasible. Such efforts should encompass the private sector given that the latter has a much better grasp of the relevant supply chains. Public-private policy partnerships to generate and share up-to-date information on supply conditions and supply chain capacity around the globe would help governments and industry understand the state of play and coordinate policy responses, address supply chain bottlenecks and strengthen supply responses (similar to ideas suggested in the trade facilitation literature).
Following the 2007-08 global food price shocks, which led to a third of global wheat production and over half of world rice output becoming subject to export restrictions, the G20 created the Agricultural Market Information System (AMIS), This has helped countries to generate information on supply-demand balances, stocks, and policies, supported by a network of international expertise. A similar system for the medical and protective product markets that are critical for effective responses to public health emergencies could help promote transparency and provide a platform for governments and relevant international organizations to coordinate crisis responses.
Like-minded WTO members are currently pursuing several potential plurilateral agreements that would apply only to signatories, including on e-commerce, investment facilitation, regulation of services and supporting micro, small and medium-sized enterprises. As part of their COVID-19 response, New Zealand and Singapore have agreed to eliminate applied tariffs for essential medical and protective products, medicines and agricultural products; refrain from export restrictions on such goods and to expedite their movement through their ports. They have indicated they would welcome other countries joining them.
In addition to such trade policy-centric actions, plurilateral initiatives should also be considered to increase the resilience of international supply chains and coordinate responses to global collective action problems, including crisis situations like the current pandemic. A public-private policy partnership to identify and address supply chain bottlenecks and frictions could help support efficient and rapid responses to international emergencies. Another policy area where open plurilateral agreements could add value pertains to mutual recognition and equivalence regimes for technical regulation and certification of protective equipment and medical supplies. Such agreements entail positive and pro-active cooperation to address supply side constraints, complementing desirable unilateral actions to facilitate trade.
Bernard Hoekman is Professor, Robert Schuman Centre for Advanced Studies and Dean, External Relations, European University Institute.
Matteo Fiorini is a Research Fellow in Global Economics at the Global Governance Programme of the European University Institute.
Aydin B. Yildirim is a Marie Curie Fellow at the World Trade Institute, University of Bern.
(1) This column draws on Hoekman, Fiorini and Yildirim. 2020. “Export Restrictions: A Negative-Sum Policy Response to the COVID-19 Crisis”, supported by the EU Horizon 2020 research and innovation program under grant agreement No 770680 (RESPECT).