Learning from trade policy responses in the COVID-19 pandemic
Governments pressed to meet unprecedented demand
As part of the response to the COVID-19 pandemic governments are greatly increasing their procurement of medical supplies and personal protective equipment (PPE). In early January 2020, China, the world’s largest producer of PPE, reserved supply for domestic use and greatly increased imports from foreign suppliers. Following the spread of the virus internationally, other countries followed suit, 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 controls 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. Many governments are engaging in direct contracting and purchasing supplies from foreign providers.
The mixed results of government intervention
Robust government intervention is critical in emergencies like the current COVID-19 pandemic. Ensuring that scarce critical supplies are allocated to priority uses, notably health care providers cannot be “left to the market.” But export restrictions are second-best responses, as they might result in negative consequences such as 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 and foreign relations repercussions.
Furthermore, firm-specific cases discussed in our recent RSCAS working paper illustrate that export restrictions and requisitions of essential goods may reduce access to critical supplies, increase average prices significantly, augment market volatility, and generate negative spillover effects on other countries.
Long- and short-term supply strategies
Allowing international supply chains to work is critical for ramping up supply. What is needed is for governments to ensure that stocks of essential supplies are built up before crises hit, and that production capacity is spread across different parts of the world to permit supply to be ramped when needed without risk of being blocked or impounded. In the short term, the focus needs to be on supporting supply responses as opposed to disrupting supply chains and engaging in negative sum competition for existing supplies and production capacity.
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.
What is needed instead is cooperation to improve crisis response coordination. Ramping up supply – the critical need at the moment – calls for cooperation among firms and governments to generate and share information on supply-demand trends, improving policymakers and public understanding of international nature of production and the relevant supply chains and identifying frictions impeding production expansion that are due to – or can be overcome through – policy action.
Better information sharing
Many if not most countries did not have the level of information systems necessary for effective crisis response coordination. Authorities did not have a good understanding of 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.
Solutions for today’s political context
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 reflected in the electoral success of political parties that oppose globalization and an open world economy makes any effort to agree to disciplines on export restrictions 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.
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.
The promise of plurilateral initiatives
Since 2018, like-minded WTO members have been 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.
Plurilateral initiatives can also be used 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.