Sickening thy neighbour: Export restraints on medical supplies during a pandemic

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By Simon Evenett

Given the centrality of China to many international supply chains, there is considerable interest in the impact of COVID-19 on global trade flows. And a troubling trade policy dimension is now coming to light. This column reports on and assesses a finding of the Global Trade Alert that 24 nations have recently imposed export restrictions on medical supplies.

In our interconnected world, whenever a global crisis occurs governments must decide whether discriminating against foreign suppliers is part of the solution, or whether foreign knowhow and resources can be tapped for mutual advantage. Decisions to sacrifice open borders on the altar of some other goal are typically influenced by the steps – real or perceived – taken by other governments. At such times, written and unwritten international rules are tested, with consequences that can last well after the crisis dominated headlines. The coronavirus pandemic is no exception.

Given the centrality of China to many international supply chains, there is considerable interest in the impact of the COVID-19 on global trade flows (Baldwin and Tomiura 2020) and on the value and location of foreign direct investment (UNCTAD 2020). However, there is a troubling trade policy dimension that is now coming to light. To appreciate its significance, recall that the Director-General of the World Health Organization has argued that “[w]e can’t stop COVID-19 without protecting health workers” (WHO 2020). Those workers require gloves, medical masks, respirators, face shields, gowns and the like. And as the Coronavirus has spread, glaring shortages have arisen. Consequently, WHO has called on governments to increase production of protective equipment by 40% and to roll back export restrictions.

Drawing upon a recent analysis by the Global Trade Alert (2020), in this column I assess one of the key findings, namely, that a growing number of governments have been sickening their trading partners by banning or limiting the export of medical supplies. Here medical supplies are taken to mean protective medical equipment (such as masks) as well as medicines and their ingredients.

Resort to export restrictions since the beginning of this year

It is important to appreciate that governments can restrict exports of medical supplies in many ways. Not all of them are as salient as a publicised export ban. For example, a government can decree that all relevant medical equipment supplies produced in a country must be sold to the state, which in turn decides not to make any product available to foreign buyers. Governments can also tinker with intellectual property rights legislation, effectively frustrating the sale of a medicine abroad. Ministers may threaten local medical suppliers if they ship goods abroad. Lastly, governments may insist that a local supplier ship a maximum percentage of its production abroad or require tedious paperwork to be filled before approval to export is given. All of these means – some more transparent than others – have been deployed by governments since the beginning of the year.

That these export restrictions are biting is now evident. In early March 2020, the German authorities stopped delivery of 240,000 masks to a Swiss buyer, prompting the government in Bern to carpet the German Ambassador (NZZ 2020). In addition, a French requisition order has prevented Valmy SAS from fulfilling a contract with the British National Health Service to supply millions of masks (Euronews 2020). Similarly, North American buyers of Chinese medical supplies report that orders were not fulfilled once the coronavirus began to spread (CNN Business 2020).

Sorting through press reports, it was possible to identify 24 nations that have imposed either a formal export ban, a de facto export ban, or an export limit on some form of coronavirus-related medical supply. Figure 1 reveals the identities of those nations. That no export restrictions have been found in North America, one in South America, and relatively few in Africa suggests that at this time, distance from China may be a contributing factor.

The pace at which governments are resorting to export restrictions is accelerating. Of the 27 instances of export restrictions imposed by these 24 nations since the beginning of the year, 16 were implemented in the first ten days of March 2020.

Completeness requires acknowledging that India has reversed some of its export restrictions on masks in early February, allowing some to be exported to China. Turning over a new leaf this was not – New Delhi followed up later in the month by banning the export of 26 pharmaceutical ingredients and some of the products made with them, such as paracetamol. Also, very recently Taiwan temporarily lifted an export ban on facial markets. Still, overall, export policy became more restrictive.

Five adverse consequences of limiting exports of medical supplies

The last time export restraints were the focus of much economic research was after many government limited food exports during the commodity price spikes of 2006-8 (e.g. Anderson and Jensen 2017). In that case, export limits were found to raise the level and volatility of world prices while doing little to depress domestic prices, which were driven in part by other factors. As means of ensuring food security, such export limits were of dubious value.

The parallels to recent export bans on medical supplies are inexact. In the present case, the nub of the matter is availability rather than price. Health professionals are in the front line in the fight again the Coronavirus and to reduce the risk of themselves getting sick – or to delay the moment when that happens – they need protective medical kit. Export bans on masks, for example, erode the capability of trading partners to cope with the spread of the coronavirus. Rather than beggar-thy-neighbour, this amounts to sicken-thy-neighbour.

Denying foreign buyers medical suppliers is costly for the imposing nation too for four reasons. First, recall that the purpose of such export limits is to increase the supply available to local hospitals, etc. Whatever temporary gain there is in limiting shipments abroad, the loss of future export sales will discourage local firms from ramping up production and investing in new capacity, which is exactly what WHO has called for. In practical terms, this means that during a pandemic an export ban ‘secures’ certain currently available domestic medical supplies at the expense of future locally produced supplies.

Second, the fiscal inducements that governments will have to deploy to persuade domestic firms to expand production will have to be larger in the presence of an export ban. What may sound like an expedient policy response to a health pandemic actually increases the burden on the public finances at exactly the wrong time.

Third, export bans jeopardise cooperation with other governments. Erosion of trust between trading nations need not be confined to medical supplies and cooperation on health matters. Plus retaliation by harmed trading partners cannot be ruled out – the extensive supply chains in medicines and medical equipment imply that pretty much every nation is vulnerable to some forms of retaliation.

Fourth, one nation’s export ban is a political gift to nationalists and populists in affected trading partners. Calls for protectionist industrial policies are the result – as demonstrated by the recent remarks of Mr. Peter Navarro, the Director of President Trump’s Office of Trade and Manufacturing Policy (Financial Times 2020) – implying that the nation that imposes an export ban may find that conditions of competition abroad have worsened well after the coronavirus pandemic has been tackled.

Less-damaging policy alternatives exist

Proposals for export limits should be tested against alternatives that do not impede foreign purchases. Governments concerned that subsidising domestic production will benefit disproportionately foreign buyers should consider setting price floors for medical devices sold to the state. Such minimum prices could apply to a pre-announced limit of government purchases. Local producers would then be assured of a guaranteed amount of revenue for supplying the state with critical medical supplies.

Where practical, consumption subsidies should be considered as well. If there are concerns that minimum prices or subsidies cannot be afforded by some developing countries, then the World Bank and IMF should stand ready to advance the sums necessary. What matters is that production of critical medical supplies is stimulated globally and that trade policy facilitates their expeditious distribution.

Source: Vox EU



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