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Trade & COVID-19: External Policy Coherence?

02-07-2020

Bernard Hoekman and Matteo Fiorini, ECDPM Great Insights magazine, Volume 9, Issue 2

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Widespread use of trade policy to maximise access to medical supplies may have had significant knock-on effects internationally. While robust government intervention is arguably critical in emergencies like the COVID-19 pandemic, recent experience offers at least six lessons for external policy coherence.


As part of the response to the COVID-19 pandemic, governments around the world resorted to trade policy to increase their access to medical supplies and personal protective equipment (PPE). Available domestic supplies were requisitioned and export restrictions enacted, as well as measures to facilitate imports and public purchases of critical products. According to the Global Trade Alert, an independent trade policy monitoring initiative, as of end May 2020 over 80 governments had implemented export restrictions and/or lowered barriers to imports of COVID-relevant products.


Trade policy responses in the EU


The European Union (EU) imposed temporary export restrictions for essential supplies such as PPE in March 2020 as did the United States. In addition to trade measures affecting exports from the EU as a whole, individual EU member states – Belgium, Bulgaria, the Czech Republic, Germany, France, Hungary, Italy, Poland and Romania – enacted export controls for specific products, including drugs, PPE, disinfectants and ventilators.

Particularly striking was that in these initial policy responses, some EU member states applied export restrictions to other European nations as well as to non-EU countries. A prominent example, discussed in Hoekman, Fiorini and Yildirim (2020), was French authorities’ requisition of PPE consignments owned by Mölnlycke, a Swedish company. These consignments involved products that had not been produced in France but were being transshipped to destinations in the EU through Mölnlycke’s distribution centre in Lyon. Actions by EU member states to requisition supplies and block exports to other European countries are not prohibited by the EU treaties in situations where the public interest is at stake. Yet, because they impeded the operation of the single market, the national recourse to export controls was an important motivation for the European Commission’s decision on 14 March to issue its EU-wide controls on exports of certain medical and protective equipment to non-EU countries.

The upshot was that a policy first imposed by several member states at the national level was extended to the EU as a whole. The EU-level regulation introduced an export authorisation requirement, depending on assessments of the availability of different products within the EU. Initially, the regulation applied to all non-EU export destinations, but it was quickly amended (on 19 March) to exempt shipments to the four European Free Trade Association members and overseas territories and countries listed in Annex II of the Treaty on the Functioning of the EU. The export authorisation regime was initially scheduled to last six weeks. On 23 April the regulation was extended for an additional month, with the Western Balkans added to the list of excluded countries. It ceased to apply after 26 May.


Unintended consequences


Robust government intervention is critical in emergencies like the COVID-19 pandemic. Regulation is needed to ensure that scarce critical supplies are allocated to priority uses, to control speculation and to ensure health and safety standards. This cannot be ‘left to the market’. But while export restrictions and requisition of domestic supplies of essential goods seem obvious and justifiable in times of crisis, they can give rise to unintended consequences. The result may be to reduce access to critical supplies, significantly increase average prices and augment market volatility. Moreover, from the perspective of policy coherence, policies to maximise supplies for domestic purposes may generate significant negative spillover effects on other countries – not least, the EU’s trading partners, particularly developing countries. A noteworthy feature of the temporary EU export control regime is that it did not distinguish between external partners. In principle it also applied to signatories of economic partnership agreements (EPAs) with the EU and to least developed countries (LDCs).


Effects multiplied


The international price-increasing effects of requisitions and export controls by a major trade power like the EU may be worsened if similar actions taken by other countries affect access to inputs that plants – wherever they are located – need to import in order to ramp up production. Many manufacturers of medical supplies and PPE produce through international networks. They source intermediate inputs from different countries to process into final goods. Allowing global value chains to function is critical to permit such producers to ramp up supply. It is still too early to know exactly what impact the widespread use of export restrictions and competition between governments had on essential supplies. But anecdotal evidence suggests these effects were significant. At this preliminary stage, the COVID-19 pandemic offers at least six lessons for external policy coherence.


1. Reshoring production is not the answer


Many have latched onto the shortages of essential supplies that became evident after the pandemic struck to argue that countries should not and cannot rely on international markets and that the degree of specialisation and extent of global value chains that has emerged over time is undesirable. What is needed instead, they say, is greater self-sufficiency and thus policies that incentivise – or require – ‘re-shoring’ of production. In the EU such arguments are sometimes articulated under the ‘strategic autonomy’ label. They are not limited to essential medical supplies but extend to food and a broad cross-section of industries and technologies deemed strategic.

Such arguments are misconceived. In the case of medical supplies and PPE, serious short-term supply constraints would inevitably also arise if countries had greater domestic capacity, as the need to ramp up supply would still exist following an unexpected demand shock. Having to cross a border is not a binding constraint on firms’ ability to rapidly expand production, given that it takes only 48 hours or so to get anything from anywhere in the world. Autarky will not make it any faster to get whatever is critical in a crisis to those who need it. What is needed is for governments to ensure that stocks of essential supplies are built up before crises hit, and to diversify production capacity across different parts of the world. The focus should be on encouraging and supporting business responses as opposed to disrupting supply chains and engaging in negative-sum competition for existing supplies and production capacity.


2. Better information on value chains and bottlenecks


To ramp up production of essential protective and medical products, companies need information on demand and applicable product and production standards. They need to be able to obtain rapid certification and to source the requisite inputs – including from foreign suppliers. Effective two-way communication channels are needed to enable firms to identify specific bottlenecks that impede ramping up of supply. Firms also need systems to monitor market conditions and identify slack and chokepoints in their global network, so they can make the production adjustments needed to respond to changes in demand. Governments need information systems that allow them to determine where supply capacity exists and help them understand the relevant supply chains. While firms generally have information on supply options, governments seldom have such information readily to hand. Both sets of actors need to be able to identify bottlenecks in the supply chain in real time and cooperate in addressing them.

This calls for information systems that permit identification of sources of friction impeding production expansion that are due to – or can be overcome – through policy action. Such information systems were not in place in many if not most countries. Authorities did not have a good understanding of the prevailing supply chains and production capacity. There are exceptions. In New Zealand, for example, the Medicines and Medical Safety Authority 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 be largely in the dark. 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 (Hoekman and Sabel 2019).


3. Common product standards and recognition arrangements can help boost production


Standards and certification of products, plants and suppliers are critical for safety. But the associated regulatory enforcement processes can constrain rapid response in an emergency. One good practice here is for governments to accept foreign standards during an emergency, as was done by the US Centers for Disease Control and Prevention when it approved use of respirators that satisfied equivalent foreign standards, including China’s GB 2626-2006 and GB 2626-2019 standards and the European EN 149-2001 standard.

The existence of common product standards and mutual recognition of standards facilitates supply responses and cross-border production arrangements. This reinforces the value of international regulatory cooperation, mutual recognition arrangements and efforts to determine whether and where regulatory regimes across countries/systems have the same goals. Where that is the case, the next step is establishing equivalence regimes.

The opportunity cost of not having equivalence and recognition regimes in place was illustrated by China’s decision to impose new export license requirements in early April 2020. The government was responding to several European countries’ rejection on quality grounds of PPE shipments sourced from Chinese companies. The Chinese authorities feared a reputational backlash and moved to ensure that exported products met quality and safety standards by limiting exports to firms certified to sell in its domestic market (i.e., firms accredited as meeting Chinese technical standards). The new regulation blocked companies accredited by buyers in the United States and EU – e.g., firms with CE certification – from exporting until they had obtained certification in China.

Cooperation between governments (regulators) to establish recognition and equivalence arrangements for certification and acceptance of foreign standards would help prevent such application of rigid national standards and the associated detrimental trade-restricting effects. This could be especially important in times of crisis, when unilateral action can have very high humanitarian costs.


4. No way around multilateral cooperation


The post-financial crisis period has made clear that G20 countries are unwilling to live up to strong trade policy commitments (Hoekman and Wilkinson 2020). In light of the attenuated support for multilateral cooperation and the electoral success of political parties opposed to globalisation and an open world economy makes any effort to agree to disciplines on export restrictions very unlikely to succeed. However, cooperation centred on information exchange, dialogue and peer review may be more feasible. Such efforts should encompass the private sector, as it has the best 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.


5. Open plurilateral agreements can be a way forward


The EU is currently pursuing several potential plurilateral agreements that would apply only to signatories, including on e-commerce, investment facilitation, services regulation, and support for 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; to refrain from export restrictions on such goods; and to expedite the movement of these goods through their ports. They have indicated they would welcome other countries joining them. As of this writing, the EU had not done so, presumably reflecting its actions to restrict exports of essential supplies. This is arguably a missed opportunity. Looking forward, participation in such initiatives could bolster the ability of EU governments to respond to shocks like the COVID-19 pandemic with policies that do not generate the types of adverse spillover effects associated with export controls.

Another policy area where open plurilateral agreements could add value is mutual recognition and equivalence regimes for technical regulation and certification of protective equipment and medical supplies. Such agreements can clear a path towards positive and proactive cooperation to address supply-side constraints, complementing desirable unilateral actions to facilitate trade.


6. Considering subsidies’ effects beyond EU borders


Subsidies is another policy area that lends itself to plurilateral cooperation. In the years since the global financial crisis, subsidies have come to account for an increasing share of the trade-related policies adopted by emerging economies and high-income countries. Subsidies are often motivated by legitimate policy objectives. In the context of COVID-19, for example, governments have provided extensive subsidies to domestic firms to help them meet the costs of lockdown policies that have disrupted both demand for and supply of many goods and services. However, these measures inevitably have spillover effects on other countries.

In the EU, subsidy programmes are subject to approval and monitoring by the European Commission, as state aid is subject to EU-wide competition rules. Yet, no such rules exist at the global level. Furthermore, EU competition policy does not consider non-EU markets in its assessments of the effects of state aid and the behaviour of EU firms. Governments are unlikely to be willing to consider stronger multilateral rules on competition policies. However, Hoekman and Nelson (2020) argue that a plurilateral initiative to assess the magnitude of negative spillover effects from subsidy policies would help clarify the extent that different types of subsidy policies have systemic implications. This is an area where the EU has extensive experience and is well placed to take a leadership role. The aim would be a common understanding of the effects of subsidies and approaches for attaining legitimate public policy goals while minimising competitive distortions.


References

Hoekman, B., Nelson, D. 2020. China, climate and COVID-19: Managing subsidy spillovers, 8 May. VOX CEPR Policy Portal.

Hoekman, B., Sabel, C. 2019. Open plurilateral agreements, international regulatory cooperation and the WTO. Global Policy, 10(3): 297-312. Pre-publication version at

Hoekman, B., Wilkinson, R. 2020. Multilateral cooperation, the G20 and the EU: Soft power for greater policy coherence? RESPECT mimeo. http://respect.eui.eu/publications/

Hoekman, B., Fiorini, M. and Yildirim, A. 2020. Export restrictions: A negative-sum policy response to the COVID-19 crisis. RECAS Working Paper. Florence: European University Institute. 


About the authors

Bernard Hoekman is Professor at the Robert Schuman Centre for Advanced Studies and Dean of External Relations at the European University Institute (EUI).

Matteo Fiorini is Research Fellow in Global Economics at the Global Governance Programme of EUI.


Photo by Prachatai / Flickr


This article was published in Great Insights Volume 9, Issue 2

Economic Transformation and TradeCOVID-19Trade

External authors

Bernard Hoekman

Matteo Fiorini