GARY SAMPSON. Covid-19 and Tensions in the World Trading System

A collective G20 response to emerging trade tensions in the production and trade of medical products is critical to avoiding politically appealing but self-defeating trade policies.

A collective G20 response to emerging trade tensions in the production and trade of medical products is critical to avoiding politically appealing but self-defeating trade policies. Nowhere is this more apparent than in the world trading system.  The World Trade Organization provides a unique and time-tested forum for constraining countries from resorting to such measures. Managing export restrictions, eliminating tariffs and non-tariff barriers on health-related products, and expanding the scope and membership of existing agreements are examples.

The COVID-19crisis has developed a feeling of insecurity among a growing number of people resulting in a questioning of liberalism, a surge of anti-globalisation, and a strengthening of populism and nationalism. Many countries are prioritising their own citizens with the objective of varying degrees of self-sufficiency and independence.

For some, we have a unique opportunity to change the very basis of our economy and society, claiming now is a watershed moment. That now is the time to adopt industry policies to rebuild a diminishing manufacturing sector, achieve self-sufficiency in strategic areas of the economy, reverse globalisation and even put a halt to global warming.

If history tells us anything, it is that economic nationalism is coupled with rampant protectionism: subsidies, increased border protection, export controls along with a plethora of other clandestine trade distorting measures, all of which fall outside the discipline of internationally agreed norms, leading to a degeneration of the discipline of the international trading system.

The objective of the Australian government would appear to be to return to where we were; to continue with three decades of uninterrupted growth coupled with an economy more resilient to overseas shocks, and due to the impact of the virus, more inclusive nation security goals.

The centre piece of the government’s policy appears to be to support aggregate demand via the Job Keeper and Job Seeker schemes to make sure that the economy operates as close to its potential as possible, given the budget crippling measures needed to decrease the infection rate.

While this may well be one necessary condition to get to the other side, it is certainly not a sufficient condition.

Other things must fall into place. Most importantly there is a dire need to maintain and strengthen the global trading system with the discipline of rules bringing predictability and stability to international commercial operations, not least in the sphere of medical products.

The recent G 20 Trade Minister’s Communique stated: “… emergency measures designed to tackle COVID-19, if deemed necessary, must be targeted, proportionate, transparent, and temporary, and that they do not create unnecessary barriers to trade or disruption to global supply chains, and are consistent with World Trade Organization (WTO) rules”.

This commitment certainly seems at odds with what many of the G20 countries, along with the other 144 WTO members of the WTO, have done over the past decade, by design or default, to marginalise the only organisation capable of stabilising the global trading system in the post-virus world. If there is a watershed moment, it is the possibility to restore the rules-based trading system to its former place of prominence.

Notwithstanding some 70 years of tedious trade negotiations, what is quite perverse is that much of what the WTO governments are calling for is already provided for in the various WTO texts agreed to by all 164-member countries. Rules to ensure “targeted, proportionate, transparent, and temporary measures that do not create unnecessary barriers to trade or disruption to global supply chains” are part of the life blood of the WTO.

Tariffs and Trade

Focusing on the trading system as part of the solution is all the more important as international trade was in rapid decline prior to the pandemic. The WTO has estimated that world trade may fall by as much as 32 per cent in 2020. The most optimistic WTO scenario for 2020 is that trade will shrink by 13%, a bigger drop than in the 2008-09 banking crisis recession. The modal figure for decline in international trade next year is 24%.

World trade (imports plus exports) in what the WTO has identified as “medical products important for fighting COVID-19 was $2 trillion in 2019. Trade of medical products described by the World Health Organisation (WHO) as “critical and in severe shortage in COVID-19 crisis”, totalled $597 billion.

No country is entirely self-reliant in the products and equipment it needs for its public health systems – most rely heavily on imports. Perversely, numerous countries maintain high tariffs on imports of medical products critical to fight disease.

The world average tariff on all medical products is relatively low at 4.8% due to successive rounds of WTO negotiations coupled with the weight of low tariffs in advanced economies in world averages. Nevertheless, world average tariffs are high for some items – personal protective products face world average tariffs of 11.5% – and as high as 27% in some countries. In terms of individual countries – particularly developing countries – tariffs remain extraordinarily high. There are 98 WTO countries that have a tariff average for all medical products greater than 10 % and 76 with average tariffs higher than 20%. The same is true for individual products; for hand soap, the world average tariff is 17% and tariffs in some countries are more than 65%. Face masks, another critical personal protective product , are subject to 9.1% tariff on average worldwide.

For Australia, tariffs on medical products are low; 1.5% for all medical products, 0.3% for medicines, 2.7% for medical supplies, 0.4% for medical equipment, and 3.9% for personal protective products.

From a policy perspective, what is needed is a reduction to zero of all tariffs on medical products for all countries. This would permit global resources to move from areas where they are not efficiently utilised to areas where they are internationally competitive. The only organisation with the mandate and expertise to do this is the WTO; more so as there is a precedent.

During the WTO Uruguay Round negotiations, thirteen trading partners (including Australia) accounting for approximately 90 percent of global production agreed to a “zero-for-zero initiative” for pharmaceutical products. The signatories of the “Pharma Agreement” agreed to periodically update the list of items eligible for duty elimination as new pharmaceutical products were developed. The most recent update in 2011, added 735 to include more than 10,000 products. This is a principal reason why tariffs on medical products in advanced countries (including Australia) are low.

If a multilateral agreement is out of the question, an open ended plurilateral agreement would make sense. This is presumably what Singapore and New Zealand have in mind. These countries have notified the WTO that they will not only eliminate tariffs for medical products in their trade, they will refrain from imposing export prohibitions or restrictions on essential goods including medical, hygiene, and pharmaceutical products.

Export restraint and Transparency

A further consequence of the pandemic is the use of export restraint measures to increase self-sufficiency in medical products. The logic is simple: consumers hoard products and prices increase. Fearing shortages and price increases, governments resort to restricting exports to ensure adequate domestic supplies while shielding consumers from price increases. Hoarding is exacerbated when there is an expectation that everyone else will do so. Export restraints have been likened to a football match where all spectators stand up at the same time and no-one gets a better view.

Eighty countries have introduced export prohibitions or restrictions to address the pandemic, including 146 WTO countries and eight non-WTO countries. The products and restrictions vary considerably; most have focused on medical supplies (e.g. face-masks and shields), pharmaceuticals and medical equipment (e.g. ventilators), but others have extended the controls to additional products, such as foodstuffs and paper towels.

Formally the WTO deals with export restrictions. Export restrictions are certainly an area where global cooperation is required. Knowing who is restricting, producing and trading which restricted items is critical in securing adequate supplies for all countries. Only with this knowledge can a sensible decision be taken via coordination at the global level.

For this reason, transparency and notification of the export restraints applied by countries is vital. The importance of transparency and notification is fully recognised by the G 20: “We recognise the importance of transparency in the current environment and our commitment to notify the WTO of any trade related measures taken, all of which will enable global supply chains to continue to function in this crisis, while expediting the recovery that will follow.”

Of the 146 countries imposing export restraints, only 51 have notified the WTO of their export restrictions on medical products.

Australia has export measures, but unlike numerous other countries, they have notified the WTO in accordance with the exemption provisions. The notified measure is temporary and applies to protective equipment designed to “prevent individuals and criminal syndicates from hoarding, price gouging and profiteering on non-commercial exports from Australia. Legitimate commercial and humanitarian exports are exempt”.

Domestic content and Self Sufficiency

The G 20 Governments agreed to avoid “unnecessary interference with international trade”. What does “unnecessary interference” mean? Does it include self-sufficiency in specific industries for national security purposes? And who judges “necessity” in such cases?

There is little doubt that countries will work to achieve independence or self-sufficiency via industrial and trade policies, with varying degrees of fervour depending on the Government concerned.

There is nothing in WTO agreements that prevents any member from acting to protect its national security. Claims for a security exception from WTO rules are ‘self-judging’. As governments rarely challenge the use of protection for national security purposes, it has rarely featured in formal dispute settlement either under GATT 1947 or the WTO. In one of the very few cases (Czechoslovak complaint concerning United States), the GATT panel put it this way: ‘every country must be the judge in the last resort on questions relating to its own security. On the other hand, every Contracting Party should be cautious not to take any step which might have the effect of undermining the General Agreement.’

Protection for national security has been the least utilised provision not only in the GATT and WTO but also in US trade law, with only 14 investigations over the period 1980–2016; only two of which resulted in trade restrictions. In April 2017 the US President requested the Department of Commerce to investigate whether steel and aluminium imports ‘threaten to impair’ US national security. In February 2018 the Department of Commerce found that imports of steel and aluminium imports do impair national security; the President concurred, and tariffs were put into effect in March 2018.

This measure is being challenged in the WTO by the affected countries who assert there is no security threat to the claiming state.

Using the steel industry’s own numbers, a minimal amount of domestically produced steel in the U.S. goes towards defence industries, not 80% as alleged by President Trump. US defence consumes about 3 percent of domestic steel consumption; imports are 16 percent of domestic consumption, and following penalty tariffs, imports from China (the so-called villain in the piece) are just 2 percent of the 16 percent.

The $350 billion U.S. “Paycheck Protection Program” to provide subsidies to US businesses during the pandemic lock-down, requires the applying business to sign an agreement that provides: “To the extent feasible, I will purchase only American-made equipment and products.” Domestic content schemes are clearly domestic subsidies and are WTO illegal. According to Steve Charnovitz, a prominent international trade lawyer: “This may be the largest WTO-illegal subsidy in the history of international trade law. A disaster provides opportunity, and the COVID-19 disaster is giving the United States yet another opportunity to engage in discrimination and protectionism in international trade”.

Conclusion

Depending on how a successful vaccine enters global distribution channels, the COVID-19 virus may have the paradoxical consequence of bringing countries together, not driving them apart. Rather than causing the demise of globalisation, it could help begin a new period in which globalisation is not as deep but at least is better managed and more equitable.

What is certain is that a collective G20 response, with regular follow-up mechanisms, is critical to avoid politically appealing but self-defeating trade policies. The World Trade Organization, marginalised as it has been lately, provides a unique and time-tested forum for countries to refrain from self-defeating trade policies. Managing export restrictions, eliminating tariffs and non-tariff barriers on health-related products, and expanding on the scope and membership of the WTO “Pharma Initiative” on trade in pharmaceuticals, are examples. The WTO could also encourage progress on a common framework on cross-border movement of health professionals and a collective understanding that the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights does not limit governments’ actions to safeguard affordable access for new vaccines and drugs.

The post COVID-19 world economy will require more, not less, global trade cooperation. Reforming the WTO has become more pressing than ever to help update rules in line with the dramatic changes brought about by the pandemic. The G20 countries have allowed international collaboration on trade to unravel. They now have a chance to seize on the crisis to sow the seeds for renewed global trade cooperation.

Gary Sampson is Professor of International Trade at the Melbourne School of Business, former Director at the GATT and WTO, and Senior Counsellor to the Director General

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Gary Sampson is Professor of International Trade at the Melbourne School of Business, former Director at the GATT and WTO, and Senior Counsellor to the Director General.

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