International Trade at a Time of Covid-19

Roy Santana
Expert on tariffs and customs issues at the WTO; occasional lecturer
(the views expressed in this article are those of the author in his personal capacity and should not be attributed to the WTO or its members)

Like many of you, I am currently in full "lockdown mode" and impatiently waiting for the COVID-19 crisis to get under control. And, like half of Europe's population, I am working from home while trying to convince my kids that they have to keep studying!

But, being a #tradenerd, every piece of news that I read or meme that I receive sparks a trade-related question, and the list is getting longer by the minute. I imagine that some of you may have similar questions so, during the weekend and over the past few nights, I have put my anxiety to good use and prepared this post with the 4 things you probably don't know about #internationaltrade and the coronavirus. The usual caveats apply: these are my own personal opinions and they do not reflect in any way the views of the #WTO Secretariat or its Members. 

1. What is the international trade in toilet paper?

Yeah… I never thought that I would be writing about this… It turns out that modern day "water closets" (hence the WC symbol) were invented by Thomas Crapper, a British business man who developed sanitary equipment. While the first documented use of toilet paper in human history dates back to the 6th century AD in early medieval China, modern commercial toilet paper originated in the 19th century with a patent for roll-based dispensers being filed in 1883 (source: Wikipedia). 

This whole situation probably looks surreal for Asian economies where they tend to use to squat toilets and bidets to get the job done, which is reflected in the per capita consumption of toilet paper. The Japanese toilets are similar to the western ones but incorporate water-jets and other advanced features that are the joy of tourists... Some claim that water-based solutions are also more eco-friendly. Sanitation is an important issue that many economies struggle with, and you can read more about it in the website of the World Toilet Organization (the other WTO!).

Anyway, I digress. While I don't know why Westerners are obsessed with hoarding toilet paper and we wait for the psychological answer, I have been asked some very interesting questions which often vary depending on their profession and academic background.

Trade nerds who are trained statisticians or economists wanted to know the HS classification of toilet paper (it's HS subheading 4818.10), so they could check the trade flows. I was also curious on this question, so I asked my friend @Florian Eberth who estimates that the 2018 World imports of toilet paper were approximately 1.994 USD million (excluding intra-EU27 trade). As you can see in the infographic below, and like for many other products, China is by far the largest exporter of toilet paper and the US is the largest importer. The figures below exclude intra-EU27 trade, so it's not clear to me why the EU and Canada are at the same time large exporters and importers of toilet paper. I guess it is linked to normal commercial aspects such as branding, quality, consumer preferences, etc.

In terms of the tariffs levied on the importation of toilet paper, and according to a quick estimate that I did based on data extracted from data.wto.org, the average MFN tariff seems to be around 15%, with some economies applying duties as high as 50%. Ouch! Speak about counting the squares!

For some trade nerds who are trained lawyers, the questions have been completely different. While some wonder about the "WTO justification" of the recent measures in the news (discussed below), others jokingly refer to the alternatives in case people run out of toilet paper and what would happen if governments decide to treat it differently from other products. In WTO terminology: what are the "like products" for toilet paper? Does it include tissues? Wipes? Cotton? Newspapers?

How would the four-prong test to determine "likeness" apply if a WTO Member wanted to treat these products differently? While the end-use will be the same (yes, cleaning), you would also need to take into account consumer preferences and the physical characteristics of the products. In terms of the latter, the ability to easily dissolve in water appears to be a key feature. A few days ago, the media reported that London authorities were concerned by the havoc that would result in the sewage systems if people started using the alternatives. If anybody needed inspiration for a moot court, this is it!  

2. And what about the other products that have been mentioned in the news? How is trade in medical products regulated by the WTO?

This is a trickier question from the HS classification point of view. While the classification of some of the products may be straightforward, there are cases where #Customs will classify differently products that may appear to be similar products to the untrained eye, depending on their specific composition. 

You will find below the HS codes for some of the products that are frequently mentioned in the news, but it goes without saying that these are just indicative. I still don't know the correct HS classification for some of them, so if you are classification expert please help me and explain in the comments below! Trade nerds want to know! 

UPDATE: The WCO released a document with "HS classification reference for Covid-19 medical supplies" so I confirmed the classification of respirators and narrowed down the description of the facemasks classified in 6307.90. This is the direct link. Thanks to Ms Gael Grooby of the WCO for the link.

Now that you have a sense of their HS classification, you can now use one of the different online systems to check their trade and tariff information, including data.wto.org

But, how is trade in medical products regulated by the WTO? As you probably already know, the WTO has different rules that apply to trade in goods, services and trade-related intellectual property rights. There is also a plurilateral agreement on government procurement. Thus, the WTO regulates trade in a large number of products and services that are key for the public health sector.

On the goods side, there are two WTO initiatives that have allowed manufacturing companies operating in the public health sector to slash production costs and reduce consumer prices. The first one is the relatively unknown Pharmaceutical Agreement, also known as the "Pharma" (GATT document L/7430). This plurilateral sectoral agreement from 1994 liberalized trade in several pharmaceutical products and the substances used in their production. It was initially negotiated by Canada, the European Communities, Japan, Norway, Switzerland and the United States, which agreed to bind and to eliminate tariffs on pharmaceutical products and chemical intermediates used for their production. A key component of the agreement was the lists of "active ingredients" which had been assigned an International Nonproprietary Name (INN) by the World Health Organization (WHO). Participants' schedules of concessions include special sections with hundreds of pages reflecting these specialized commitments and have, over the years, included four reviews, which added new products to the Pharma.

World trade in pharmaceutical products classified in HS Chapter 30 (which, yes, does not cover all pharmaceuticals and does not reflect trade in intermediate products) accounted for approximately $250 billion in 2018. The European Union ($191 billion, extra-EU only), Switzerland ($75.2 billion), the United States ($48.4 billion) and India ($14.3 billion) take the lion's share of exports, but their production relies in various degrees on importing chemical substances produced in other economies, such as China and Germany.

Since most economies do not manufacture all the medicines that they consume domestically (i.e. they need to import a large number of them), imports are considerably less concentrated than the exports. The main importers in 2018 the United States ($115.6 billion), the EU ($91.3 billion, extra EU only), China ($27.9 billion) and Japan ($25.5 billion). The World average tariff on HS Chapter 30 is 1.9%, but some economies apply duties as high as 25% and 30% (source: own calculation based on data.wto.org).

The second initiative was the 2015 "Expansion of the Information Technology Agreement" or ITA Expansion, a plurilateral sectoral initiative, which eliminated tariffs and other duties and charges on a large number of high technology products, including a number of medical devices classified in HS heading 90.18. 2018 data on world exports show that the US, the EU, China and Switzerland are the largest exporters of these medical devices. The World average tariff on HS HS heading 90.18 is 2.5%, but some economies apply duties as high as 25% and 30% (source: own calculation based on data.wto.org). During the Doha Development Agenda, a group of Members submitted a proposal on "Open Access to Enhance Healthcare" that would have eliminated tariffs on a large number of health-related products, but it was not agreed.

I am not an expert on the services and IP aspects, but I can recommend a relatively recent joint publication by the WTO, the WHO and WIPO entitled "Promoting Access to Medical Technologies and Innovation. 

3. What are the WTO rules concerning import and export prohibitions? Can WTO Members prohibit the exportation of medical equipment and devices?

There are multiple reports mentioning new export bans and restrictions on different medical supplies. So, what are the WTO rules that apply to these situations? The main one is Article XI:1 of the GATT 1994, entitled "General Elimination of Quantitative Restrictions" which provides that:

"1.   No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party."

Thus, the general principle is that WTO Members are not allowed to ban the exportation or importation of any product. However, in practice, all of them do in order to prohibit or regulate trade in sensitive products, such as trade in endangered species, nuclear materials, drugs & precursors, arms & ammunition, dual use products, etc. And they can do this in a WTO-consistent manner because there is a series of carve-outs and exceptions that authorize them. 

In terms of the carve-outs, it is interesting to note that Article XI:2(a) of the GATT allows "export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting [Member]". During the GATT times, this provision frequently led to tensions as some contracting parties, including the net food importing economies, feared excessive reliance on imported food in case of trade disruptions. As a result of the Uruguay Round, Article 12 of the Agreement on Agriculture established disciplines on export prohibitions and restrictions on foodstuffs, and WTO Members have had several discussions about this in the Committee on Agriculture. The requirements for a Member wishing to institute an export prohibition or restriction on foodstuffs include inter alia giving "due consideration to the effects of such prohibition or restriction on importing Members’ food security" and to "give notice in writing, as far in advance as practicable". However, there are no agreed WTO disciplines clarifying what is meant in Article XI:2 by "other products essential to the exporting [Member]" or how it should be applied in practice. 

In terms of the exceptions, it is well known that the main ones are the "General Exceptions" of Article XX and the "Security Exceptions" of Article XXI of the GATT 1994. Under Article XX:b, WTO Members can deviate from the rules and adopt measures that are "necessary to protect human, animal or plant life or health", but on the condition that: 1) they are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between economies where the same conditions prevail, or 2) are a disguised restriction on international trade. There have been a large number of GATT 1947 and WTO disputes interpreting these requirements, including the famous "necessity test" which is recurrently used by WTO moot courts around the world. 

If you want to learn more about this, read this the compilation of key findings in the WTO Analytical Index for Article XX of the GATT.

4. Will these trade-related measures be notified to the WTO?

If you have read all the way to this section, then you are a certified trade nerd level 10.

A 2012 Decision by the Council for Trade in Goods (G/L/59/Rev.1) requires WTO Members to notify every two years all quantitative restrictions in force on imports and exports, and including seasonal measures. The following measures are explicitly excluded from the QR notification procedures: i) measures covered by the Agreement on Sanitary and Phytosanitary Measures; ii) measures covered by the Agreement on Technical Barriers to Trade; iii) automatic import licensing procedures; and iv) tariff rate quotas (TRQs). However, these trade measures have separate notification procedures and the information can be easily accessed through these links: Import Licensing, SPS, TBT and TRQs.  

A 2019 report by the Secretariat (G/MA/W/114/Rev.2) summarizing the information in the QR notifications show that non-automatic licences (NAL) are the most frequent type of measures, followed by prohibitions (P) and conditional prohibitions (CP). Despite its fame in the textbooks, quotas are nowadays rare. The proportion of these measures appears to be similar for both measures affecting imports and exports. In terms of justifications, Article XX:b of the GATT has been, by far, the most frequently cited.

        What's the bottom line?

Tariffs on some basic supplies appear to be high in some economies, so there might be scope for governments to reduce tariffs or adopt other trade-policy measures to facilitate access to key products to combat COVID-19. Some plurilateral sectoral initiatives at the WTO have contributed to reducing the cost to produce medicines and medical devices. There are many new developments and we don't know yet what is going to be their impact on international trade. However, we do know that the WTO already provides a set of multilaterally agreed rules and a framework through which Members will be able to discuss these issues as they arise.                                        

I would like to conclude by recalling recent words by the WTO Director-General: “This global challenge requires a global response, on the public health front and in the economy.” He stressed that “it is only by working together that we will find solutions”, and added that "the top priority now must be to protect the health and safety of people at risk from COVID-19”. Finally, he cautioned that "maintaining open trade and investment flows will be critical to protect jobs, prevent supply chain breakdown, and ensure that vital products do not become unaffordable for consumers…".  

Are there other obvious trade-related questions that I missed? What was the most surprising to you?

This article was originally published on https://www.linkedin.com/pulse/international-trade-time-covid-19-roy-santana/ and is cross-posted with permission from the author.