Simon J. Evenett
Economics Professor at the University of St. Gallen, Switzerland and Global Trade Alert1
There is growing interest in the positive contribution trade policy could make in tackling the COVID-19 pandemic. In part, this reflects the well-founded concern that the effectiveness of health policy responses is being diminished by existing trade barriers and new curbs on the export of medical supplies.
Well-founded—given the resort to trade restrictions on medical supplies and soap summarised here. As of 27 March 2020, 64 export curbs on medical supplies have been introduced by 60 governments since the beginning of the year. Forty-nine of those export curbs have been announced since the beginning of this month, an indication of just how quickly new trade limits are spreading across the globe.
Consideration of the consequences of export curbs on medical ventilators highlights the risks to developing economies during this pandemic. The 25 economies that export significant amounts of medical ventilators include one just one in Latin America and none in Africa, the CIS region, the Middle East, and South Asia. Given the sophisticated technology found in cutting-edge ventilators, it is unlikely that there are local producers in these economies capable of meeting global standards. Therefore, billions of people in developing economies are dependent on international trade for access to this critical technology, used to help patients suffering from advanced stages of COVID-19.
A detailed analysis of global export patterns of medical supplies reveals that concerns about dependence on a very small number of foreign exporters applies to, at most, three types of protective garment. Together, these three account for less than 3.5% of total trade in protective garments. Scare stories that China, India, or any other economy have a stranglehold over the global trade in medical supplies are at odds with the facts. This finding undercuts the security and industrial policy arguments for limiting trade and repatriating supply chains.
The import barriers in place before the pandemic— which essentially tax imported medical equipment, disinfectant, and soap—raise questions about the coherence of many economies’ trade policy. Remarkably, 78 governments tax imports of soap at rates of 15% or more. Fifteen economies currently have non-tariff curbs on imports of protective gear and twenty-three have non-tariff curbs on imported disinfectant. Import restrictions on medical supplies reduce the effectiveness of public health interventions. Whatever political calculus led to these import restrictions needs to be revisited and fast.
In addition to unilateral tariff elimination, calculations are presented here of the total public revenue loss if taxes on imported medical supplies and soap were cancelled worldwide and in regional groupings, such as APEC. Worldwide cancellation would involve a loss to finance ministries of between $4.5bn and $9bn per annum, which is a tiny percentage of the total value of the monetary and fiscal stimuli announced during the past 10 days. It would cost less than $2bn to compensate developing economies outside the G-20 for the revenue losses resulting from cancelling their tariffs on medical supplies and soap. Were APEC members to drop their taxes on these imports the total revenue loss to its members would be between $2.3-$4.5bn depending on what percentage of existing imports benefit from tariff preferences. Even the upper amount is drop in the bucket for a regional grouping that includes the three largest economies of the world.
Working together, governments could quickly and cheaply implement a tariff-and-aid initiative that sweeps away the barriers which impede medical supplies reaching locations where there are desperately needed. This is not a call for a global negotiation—governments could act unilaterally or in groups, with some joining later as momentum builds. A bottom-up initiative has more chance of being implemented in the near term than a top-down one.
More generally, a pro-active approach is advocated here—adjusting trade policies now rather than waiting until after the pandemic and hoping that the status quo ante will be restored. History suggests such hopes are misplaced. Temporary trade distortions imposed during crises often become permanent fixtures in the world trade system.
The following five Guiding Principles should govern the conduct of commercial policies towards medical supplies and soap during the COVID-19 pandemic:
- Coherence — trade policy should enhance rather than reduce the effectiveness of public health interventions. Proper account shall be taken of relevant trade-health linkages, informed by expert advice.
- Do No Harm — eschew trade policies that deprive buyers worldwide of access to medical supplies.
- First Best — trade policy should not be used if a more effective policy instrument exists. Proposed trade policy initiatives must not be considered in isolation; meaningful alternatives must be considered.
- Transparency — trade policy and pandemic era subsidy decisions should conform to global best practices in transparency.
- Scrutiny — in the next month the conformity of existing trade policies with these principles should be evaluated and measures falling short should be removed; all future trade policy initiatives should be tested against these principles.
The application of these Guiding Principles to present situation would require the implementation of 10 specific steps, outlined here in the form of a Package. Given the complexity of trade in medical supplies and the variety of policies available to governments, that Package must go beyond the elimination of both import tariffs on medical supplies and export curbs.
APEC governments should publicly adopt these Guiding Principles and Package individually and should encourage others to do likewise. This would build upon the enlightened approach to securing supply chain connectivity securing supply chains embraced recently by seven economies in the Asia-Pacific region2. Just because there is no time for a global negotiation, and just because G-20 leaders failed to show leadership at their recent virtual summit, puts a premium on pursuing an alternative, bottom-up collaborative approach and fast.