Import dependence on essential medical goods during a pandemic

Fernando Leibovici, Ana Maria Santacreu 14 June 2020

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The ongoing COVID-19 pandemic has led to a massive increase in the demand for essential medical equipment to combat the spread of the disease. For instance, goods such as masks, gloves, respirators, and COVID-19 tests are playing a key role in allowing healthcare workers to respond to the ongoing pandemic. While supply has been gradually increasing to try to satisfy the high demand for these goods, countries continue to face supply shortages and are increasingly forced to ration these goods.

Amidst the growing fear of these supply shortages, countries have been resorting to trade policy to meet domestic demand. According to Evenett (2020), “a growing number of governments have been sickening their trading partners by banning or limiting the export of medical supplies.”

In our recent paper (Leibovici and Santacreu 2020), we document that the heterogeneous response of trade policy across countries is systematically related to the extent to which countries are net importers or net exporters of essential medical goods. We then develop a general equilibrium model of international trade to study the role of trade of essential goods in mitigating or exacerbating the effect of a pandemic like COVID-19.

Trade policy changes during COVID-19

We combine data on import liberalisations and export restrictions from Global Trade Alert with international trade flow data on essential medical products to fight COVID-19 from UN COMTRADE. We find that, of 109 countries studied, 29 countries have implemented some type of liberalisation on essential medical products since April 2020, whereas 59 countries have imposed restrictions. Moreover, recent changes to trade policy for essential medical goods appear to be systematically related to countries’ positions as net suppliers or net importers of these goods. As of 24 April, 86% of the countries with a trade surplus in these goods have recently imposed restrictive export policies, while this has been the case for only 46% of the countries with a trade deficit.

Trade of essential goods during a pandemic

These findings suggest that international trade plays a fundamental role on the cross-country impact of a pandemic.1 In Leibovici and Santacreu (2020), we investigate the role of international trade of essential goods in mitigating or exacerbating this impact.

We ask two questions:

1. To what extent does the impact of a pandemic depend on whether countries are net exporters or net importers of essential goods?

2. What is the role of international trade in mitigating or exacerbating the impact of the pandemic?

We address these questions using a dynamic quantitative general equilibrium model with two countries and two sectors: one sector producing essential goods (i.e. medical equipment) and the other sector producing non-essential goods. There are adjustment costs to capital and labour in each sector.

We assume that both countries are symmetric throughout except that one country is relatively more productive in essential goods while the other is relatively more productive in non-essential goods, leading the former to be a net exporter of essential goods and the latter to be a net importer of essential goods.

To what extent does the impact of a pandemic depend on whether countries are net exporters or net importers of essential goods?

We find that, in our model, a global pandemic has significant heterogeneous effects across countries: net importers of essential goods are relatively worse off during a pandemic than net exporters. There are two main forces at play. First, given that it is costly to reallocate production inputs across sectors, producers of essential goods cannot sufficiently boost production, leading to a substantial increase in their relative price. Then, while the price of essential goods increases similarly in both economies, the effect on welfare depends on the countries' sectoral trade imbalances. Both countries earn relatively more for their sales of essential goods, and both countries have to spend relatively more for their purchases of these goods. However, given that the net importer is less productive in essential goods, this country sells less than it purchases, while the reverse is the case for net exporters. As a result, net importers of these goods are relatively worse off.

In Leibovici et al. (2020) we document that the US relies heavily on imports of essential medical goods. Thus, according to the model, the US is likely to be relatively worse off from the supply shortages of medical products amid the COVID-19 pandemic than if it were to be a net exporter of these goods.

What is the role of international trade in mitigating or exacerbating the impact of the pandemic?

We find that the level of international trade barriers at the onset of a pandemic can significantly alter its economic implications. In our model, higher initial trade costs imply that the net importer runs a smaller trade deficit of essential goods than in a world with lower trade costs, while the net exporter runs a smaller trade surplus in these goods. Therefore, while a pandemic continues to lead to a substantial increase in the relative price of essential goods, the relative impact on the home and foreign countries is mitigated. We thus conclude that while higher trade barriers on essential goods may reduce the amount consumed of these goods, they mitigate the potential vulnerability of net importers of these goods when a global pandemic hits.

These findings have important implications for the design of international trade policy. Even if countries may benefit on average from having cheaper access to goods, the reliance on international trade might put these countries in a vulnerable position if these goods are essential and either the supply or demand of these goods is subject to global shocks.

While these findings are informative about the ex-ante design of international trade policy, they are silent about the impact of trade policy changes implemented once a pandemic hits. We thus conclude our analysis by asking: What is the impact of raising trade barriers in response to a pandemic?

In contrast to the previous findings, we now find that raising trade barriers when the pandemic hits can significantly exacerbate the welfare cost faced by net importers of essential goods. As a net importer, the home country's production structure is such that it relies considerably on the foreign country for its consumption of essential goods. Thus, an increase in trade barriers on these goods exacerbates the already painful situation faced by the net importer, making the relative price of essential goods even higher.

Concluding remarks

These results suggest that the design of international trade policy for essential goods may suffer from a time-inconsistency problem. Net exporters of essential goods may ex-ante prefer to live in a world with low trade costs, but when a global pandemic hits they might be tempted to renege on their previous commitments and increase trade barriers. The reverse is the case for net importers of essential goods, as they ex-ante prefer to live in a world with high trade costs on these goods; but, when a global pandemic hits, they would be tempted to renege on their commitments and instead decrease trade barriers.

Events such as the current pandemic can lead to increased sentiment against international trade openness. Our research suggests there are no blanket solutions. Trade openness can be effective at addressing local shocks such as domestic pandemics, but it can raise tensions in the context of a global shock such as COVID-19. The design of trade policy agreements needs to be considered carefully to ensure we get the benefits of trade while minimising the potential pain when global shocks hit. This is a key challenge raised by COVID-19—one we should try to meet to avoid falling back into a world with high trade barriers and the large costs that it would entail. In Baldwin and Evenett (2020) several contributors discuss how governments should react to this type of crisis.

Finally, although we do not explicitly model supply chains, our column is related to an ongoing discussion on the disruption of global value chains amid COVID-19. The current pandemic raised questions on the potential vulnerability of relying on foreign supply chains during a global shock, leading to a surge in arguments for protectionism and self-reliance (Bonadio et al. 2020). As Pinelopi Goldberg argues, global coordination is important, given that global value chains can diversify risks through international trade.

References

Bonadio, B, Z Huo, A A Levchenko and N Pandalai-Nayar (2020), “The role of global supply chains in the COVID-19 pandemic and beyond”, VoxEU.org, 25 May.

Baldwin, R and S Evenett (2020), COVID-19 and Trade Policy: Why Turning Inward Won’t Work, a VoxEU.org eBook, CEPR Press.

Baldwin, R and E Tomiura (2020), “Thinking ahead about the trade impact of COVID-19”, Chapter 5 in R Baldwin and B Weder di Mauro (eds), Economics in the Time of COVID-19, CEPR Press.

Evenett, S (2020), “Sickening thy neighbor: Export restraints on medical supplies during a pandemic”, VoxEU.org, 19 March.

Leibovici, F and A M Santacreu (2020), “International Trade of Essential Goods During a Pandemic”, COVID Economics: Vetted and Real-Time Papers 21, CEPR Press.

Leibovici, F, A M Santacreu and M Peake (2020), “The US reliance on other countries for essential medical equipment”, VoxEU.org, 13 April.

Endnotes

1 Baldwin and Tomiura (2020) have also discussed how international trade is one of the mechanisms through which the consequences of COVID-19 have spread internationally.

https://www.project-syndicate.org/commentary/covid19-case-for-global-supply-chains-by-pinelopi-koujianou-goldberg-2020-05 

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Topics:  Covid-19 International trade

Tags:  COVID-19, coronavirus, international trade, import reliance, essential goods

Economist, Federal Reserve Bank of St Louis

Senior Economist, Federal Reserve Bank of St Louis

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