Trade Symptoms of the Pandemic

Just as the novel coronavirus is adding pressure to the daily life of individuals around the world, the pandemic is also exerting pressure on governments to embrace protectionist policies. Since the outbreak began, there have been more than one million confirmed cases around the world—in that same period, 40 economies have imposed export restrictions on medical supplies, others have imposed export restrictions on other essential products like food, and more than 150 counties have put in place travel restrictions. While the United States has not adopted export restrictions, it is flirting with the other side of the policy coin: measures to ensure medical supplies are produced in the United States. Only ten countries have adopted trade-liberalizing measures in response to the pandemic, and seven of those ten took trade-restrictive measures alongside them. On top of protectionist tilt, governments have largely failed to coordinate trade measures despite the pandemic requiring a coordinated response. International institutions such as the World Trade Organization (WTO) and International Monetary Fund are doing their best to track trade measures taken in response to the virus, but it is clear that leadership and concrete coordinating action is needed. Absent that, what should be a global response will continue to be disjointed and fragmented, which will add to the toll the pandemic is already taking on the global economy and human life.

The Parallel Trade Pandemic

As the novel coronavirus continues to spread, available medical supplies and services are becoming increasingly limited. In order to overcome the gap between demand and supply, countries have adopted various trade-related measures. A number of countries, including France, India, and the United Kingdom, have adopted trade-restrictive measures in the form of export restrictions in different forms such as export bans, export authorizations, and threats to revoke licenses of medical suppliers if they export abroad. However, governments have taken these measures out of national interest. Only a handful of countries manufacture the medical equipment currently needed, and only some countries have an adequate stockpile of devices, medicines, and personal protective equipment. And these trade-restrictive measures more often than not will have a disproportionate impact on developing countries that are short on supply and short on manufacturing capacity.

The WTO prohibits export restrictions but allows measures taken to protect human health and compensate for products in short supply. Further, the TRIPS Agreement permits countries to issue compulsory licensing in case of a crisis, a process in which a government allows the production of a patented product without the permission of the patent holder. While these exceptions provide governments policy space to respond to the pandemic, the global trade system lacks a codified set of rules and mechanisms to coordinate crisis response and ensure actions taken to protect life in one country do not cause calamity in another. This has added to the existing chaos in the global economy, as countries continue to take uncoordinated trade actions to deal with a pandemic that demands a unified global response.

These export restrictions and travel restrictions may leave a long-term impact on global economic integration. They have already tested commercial relationships and economic architectures that have been taken for granted. As Italy became Europe’s epicenter for the pandemic, individual countries, not the European Union, took the lead, imposing national and export and travel restrictions that applied within the European Union and internationally. These measures were at odds with the European Union’s goals of European unity, a single market, and the free movement of people within the European Union. Germany, France, and other EU members imposed export restrictions, while Italy requested supplies from countries in the bloc. Italy turned to China for aid, although EU member states are now receiving Italian patients and have supplied Italy with more masks than China has. Eventually, the European Commission established uniform export regulations for goods destined for outside the European Union. Restrictions on movement of people within the European Union are testing the Schengen agreement, which is already under stress due to migration. The crisis may leave grudges between national governments—particularly between governments that are influenced by euroskeptics, such as Italy, and those we are not—over the initial response to the crisis. On the other side of the Atlantic, all non-essential travel has been prohibited across United States-Canada and United States-Mexico borders, which stymies trade in goods and services and challenges the North American economic integration project.

More worrying for the global economy and international trade system, export restrictions and protectionist measures on medical products have spread to food supplies. Kazakhstan has banned the exports of several food products, including wheat flour, sugar, carrots, and potatoes. Vietnam has temporarily suspended new rice export contracts. Serbia has stopped the export of food supplies, including sunflower oil. Russia may also ban shipments of food products in the coming weeks. The UN Food and Agricultural Organization has warned that protectionist measures could cause global food shortages. The pandemic has caused logistical issues, such a shortage in truck drivers and unclear orders for port operations, a retreat of emerging market currencies, and stockpiling, all of which add potential for a food crisis based not on food shortages, but on the inability to get food where it needs to be.

Along with export restrictions and measures limiting movement of people, there have been calls for regionalizing and nationalizing supply chains of essential and strategically important products. As manufacturers in China had their knees taken out from under them early in the outbreak, global businesses and policymakers were forced to reassess supply chain decisions, particularly in the medical sector. White House trade adviser Peter Navarro is pushing an executive order to bring home supply chains for medical supplies and medical equipment, despite massive opposition from the business community. French president Emmanuel Macron has called for France to be “completely independent” in the ability to produce medical equipment by the end of the year. Additionally, state intervention in market operations has been rising. The Trump administration invoked the Defense Production Act to fill the gaps between medical supplies to fight the Covid-19 pandemic. Policymakers who were already skeptical of reliance on China and long supply chains will likely continue to seize on the coronavirus outbreak to push their position.

However, others have seen the wisdom in diversifying supply chains and embracing trade liberalization as a result of the pandemic. Some countries have pledged to keep trade open, and others have reduced or eliminated trade barriers for products necessary to deal with the pandemic. In a statement, the leaders of Australia, Brunei, Canada, Chile, Myanmar, New Zealand, and Singapore have affirmed the importance of not imposing export controls or tariffs and non-tariff barriers, and to remove restrictions on essential goods, especially medical supplies. This week, G-20 trade ministers recognized the importance of free trade, pledged to try to keep supply chains open, and agreed that trade measures should be “targeted, proportionate, transparent, and temporary.” However, they did not announce concrete policy steps to eliminate trade barriers. While some trade liberalization initiatives exist, they remain scattered and disjointed.

Although the United States has not embraced trade restrictions, it has also passed on a prime opportunity to exercise leadership in a time of crisis. The United States has not signed the Singapore-led statement to keep trade open, nor has it taken any initiative of its own to discourage trading partners from taking restrictive actions. U.S. Trade Representative Robert Lighthizer rightly told his G20 counterparts that trade measures taken during the crisis should be proportionate and short term, and that countries should not use the pandemic to further other unrelated trade objectives. Lighthizer also laid out the U.S. response to the coronavirus and motivation behind it: “over-dependence” on foreign production of “cheap” medical supplies created a “strategic vulnerability” that the United States is remedying through supply chain diversification and measures to boost domestic manufacturing. It remains to be seen whether the pandemic furthers the Trump administration down a path of decoupling with China, and whether it will yield additional efforts to reshore manufacturing or encourage the diversification of supply chains.

Liberalizing Medical Supplies – The Pharmaceutical Zero-for-Zero Initiative

Countries need to take the initiative to address the impact of the crisis in a coordinated manner given the ongoing developments and their impact on global economic integration. Trade-restrictive measures and those forcing local production and purchasing are likely to increase prices and curb supply in the short-term and damage economic integration in the long-term. However, reducing or eliminating tariffs on medical supplies and medical devices can ease the production and availability of these products globally and encourage economic integration. A foundation for further liberalization in trade in medical goods already exists. Following the creation of the WTO in 1995, the United States and 21 other countries agreed to reciprocal elimination of import duties on approximately 7,000 pharmaceutical products, chemical intermediates, and certain derivatives used in the production of medicines. The Pharmaceutical Tariff Elimination Agreement, or the zero-for-zero initiative lacks the membership of countries that act as major suppliers of pharmaceutical products such as China, India, and Brazil as well as major importers of pharmaceutical products such as Russia and Turkey. Expanding the membership to include a critical mass of producers and expanding the scope of products covered under this agreement would be a step toward making covered pharmaceuticals more widely available and building resilience in supply chains via diversification. Instead of racing toward reshoring, countries should instead turn to supply chain diversification. Nationalizing supply chains within domestic borders is, at worst, an impossible task and, at best, would raise the price of essential medical supplies, in turn limiting their availability domestically and abroad.

Finding a Cure?

The global pandemic has also brought into focus medical product and technology pricing- and patent-related issues. Canada recently passed legislation that accelerates the process of issuing compulsory licenses for medical products. While Canada already had a law in place that permitted compulsory licensing, this bill allows the government to issue compulsory licenses faster in case of a public health emergency and negotiate compensation later. Similar resolutions were passed by Chile and Ecuador. Moving a step further, the Costa Rican government has asked the World Health Organization to create a voluntary pool of patent rights, regulatory test data, and information that could be shared for developing drugs, vaccines, and diagnostics. This move comes amid concerns that some products may not be accessible for poorer populations. While the TRIPS Agreement permits compulsory licensing in case of a public health crisis, more coordinated global health action may be needed beyond the ability to manufacture patented drugs. The global nature of the crisis requires a temporary reassessment of the balance between innovation and accessibility of medicines, equipment, and care.

Crisis Response at the WTO

The WTO can play a larger constructive role amid the crisis. While it has called for greater transparency in times of crisis and has encouraged countries to notify trade measures adopted to address the pandemic, it can do more. A WTO committee on crisis response should be established to minimize disjointed responses to crises and create a venue for coordinated action and discussion of trade measures taken—notified and not notified—in times of crisis. The WTO is a familiar venue for countries to assess foreign trade measures, request additional information, and head off disputes before they spiral out of control. As trade-restrictive measures proliferate, the WTO’s ability to convene countries and offer a space for mediation prior to dispute settlement is more important than ever.

Staying Out of Critical Condition

The U.S.-China trade dispute and Brexit have been highlighting the vulnerabilities of the global economic system. The Covid-19 pandemic has made the fragility of the international trading regime and commercial ties among countries even more evident. The lack of a captain to steer the ship out of the storm can be felt today more than ever before. Strong leadership with a coordinated global initiative aimed at trade liberalization to deal with this crisis is still needed. Most importantly, the United States and other like-minded countries that have long been allies in the fight for open markets should begin to take concrete steps now to ensure trade restrictions being put in place are removed one the disease abates. Absent that, long-term damage to the global trading system and longstanding commercial relationships will accumulate and may become irreversible.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. Jack Caporal is an associate fellow with the CSIS Scholl Chair. Sanvid Tuljapurkar is an intern with the CSIS Scholl Chair.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2020 by the Center for Strategic and International Studies. All rights reserved.

Sanvid Tuljapurka

Intern, Scholl Chair in International Business

Jack Caporal