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VoxEU Column COVID-19 International trade

New eBook: COVID-19 and Trade Policy: Why Turning Inward Won't Work

Incomes and trade are collapsing worldwide. Many nations have imposed export restrictions on medical supplies and food, raising the spectre of across-the-broad protectionism. This column introduces a new eBook that asks: Should governments turn inward? The answer is “No”. Turning inwards won’t help tackle the health crisis, it will harm many (especially in developing nations), and it will hinder the collaborative spirit that the human race will need to defeat this disease. Trade isn’t part of the problem – it’s an essential part of the solution.

On 26 April 2020, as we wrapped up this eBook, there were over three million confirmed cases of COVID-19 and over 200,000 deaths worldwide (Roser et al 2020).  Those are frightening numbers. But what is even more disturbing is the growth rate; today’s death toll is twice what it was two weeks ago. This explosive growth has forced nations to take ‘emergency manoeuvres.’ 

To slow the spread, governments have imposed what the IMF calls “The Great Lockdown”. Restrictions on our economic, personal, and social lives that would have been unthinkable just three months ago are now viewed as normal. The pandemic has changed the world faster than most expected and in ways few anticipated. 


COVID-19 and Trade Policy: Why Turning Inward Won't Work, co-edited by Richard Baldwin and Simon J. Evenett. Download it for free here.


One of the least anticipated way has been the trade policy response. That is what this eBook is about: COVID-19, trade, and trade policy. Although many of the findings of this eBook are handily demonstrated in analyses of export curbs, our contributors cover the waterfront of pandemic-era commercial policy, putting recent developments in perspective by benchmarking current developments against precedent cases. 

Protectionism is ineffective because it does not directly address the root causes of the challenges facing policymakers during the COVID-19 pandemic. Almost always there is a more effective public policy tool that does not impede trade or gum up supply routes. The right question is not “can this trade policy instrument help?” but “which available policy instrument has the greatest positive impact?” Protectionist trade policy typically fails this test.


… this eBook is about COVID-19, trade, and trade policy. … The authors in this volume argue that such policies are ineffective, are short-sighted, and are violations of basic humanitarian principles.


While international trade in medical supplies and food has been critical in helping first China, then Europe, and now the US during the crisis, all these nations have implemented policies that one way or another hinder exports. The authors in this volume marshal evidence that that such policies are ineffective, short-sighted, and are violations of basic humanitarian principles. 

Export restrictions are ineffective given the reality on the ground in early 2020

The production of medical supplies and medicines are internationalised – as are the transport networks needed to get products to customers. Export barriers make as much sense as breaking up the assembly line in a factory by building walls between production stages.  Moreover, it is impossible to fundamentally alter the pre-pandemic distribution of factories across the world in time for the second wave of infection of COVID-19. Policymakers must deal with the supply chains and patterns of international specialisation at they are, not as they might wish them to be. 

While much has been made of China as the Factory of the World, in fact, for the diverse range of goods that the WTO groups together as COVID-19 “medical products,” in the vast majority of cases there are a large number of nations that are established exporters. To be precise, for the 80 categories of medical product identified by the WTO, in only 14 cases are there fewer than 5 exporting nations that consistently export more than $10 million per year. For 54 types of medical export there are 10 or more nations that consistently export, according to calculations done by the Global Trade Alert Team using United Nations trade data. 

In practical terms this means that a liberal world trading system gives health ministries, hospitals, and other medical service providers a wide range of suppliers to choose from. The fact that the COVID-19 pandemic hit different nations at different times implies that buyers can switch between suppliers and so reduce the risks of depending on any one of them. This facet of globalisation should be seen as a massive risk-mitigation device. But for international trade to deliver its magic supply, routes must be kept open. Too many governments turning inward would frustrate this, exacerbate the coming collapse in world trade, and represents an unforced error of historical proportions. The price paid is not abstract – it is in lives lost. 

Export restrictions are short-sighted since trade partners can retaliate

The chapters by Chad Bown and by Matteo Fiorini, Bernard Hoekman, and Aydin Yildirim illustrate this with case studies. Earlier this month, the Trump administration sought to ban American company 3M from exporting high-end masks (N95 respirators). When 3M pointed out the harmful consequences of the ban, the administration modified the ban – but only after 3M agree to import 167 million respirators from its factory in China (Bown 2020). But since the factory is physically in China, it is the Chinese government – not the US government – which ultimately controls where the 167 million masks will be sold. Moreover, in a subsequent move that might be viewed as retaliation, or at least a ‘shot across the bow’, the Chinese government has decided to heighten quality controls on its exports of medical supplies – including N95 respirators. While they are justified on safety grounds, the new controls could, if cooperation breaks down, be used to block exports to particular nations – including the US.   


… the US and China are big suppliers of PPE to each other ... the US is the largest importer from China while China is the US’s fourth largest customer for US-made PPE. Putting up trade restrictions in such circumstances would be very much like glasshouse dwellers throwing rocks.


The authors in this volume argue that such export curbs are short-sighted – since partners could retaliate – and ineffective – since global supply chains are a reality that cannot be changed overnight. 

Export restrictions are immoral

There is a moral case against unilateral actions of this kind. Few nations in the world have substantial domestic capacity to manufacture medical supplies, to say nothing of high-tech products like genetic tests and vaccines. Export restrictions induce scarcity on world markets, raising prices and causing disproportionate harm to developing nations that cannot afford to compete in bidding wars. This is what happened when food export restrictions led to a spike in world food prices in 2007, as the chapter by Will Martin and Joseph Glauber points out. 


Few nations in the world have substantial domestic capacity to manufacture medical supplies, to say nothing of high-tech products like genetic tests, and vaccines. Export restrictions induce scarcity on world markets, raising prices and causing disproportionate harm to developing nations that cannot afford to compete in bidding wars.


In short, international trade is not a problem in this crisis; it is central to the solution of getting more medical supplies to hospitals. In the 21st century, open trade routes and international supply chains are critical to controlling and defeating the pandemic. The international cooperation to make this happen would yield great benefits. The world’s factories could then amp up production of vital medical supplies, critical medicines, and – eventually – the billions of doses of the vaccine that will finally put the COVID-19 crisis behind us. 

A mindset reset is needed

In his acclaimed history of the origins of WWI, titled The Sleepwalkers, Christopher Clark demonstrated that miscommunication and misunderstandings led largely well-meaning policymakers to declare war and upend a continent. As far as the world trading system is concerned, there are strong parallels to today. 

World leaders need to switch from insular, short-sighted, and ill-conceived policies and to outward-oriented cooperation. This is not impossible. At the start of the 2008-2008 global crisis, G20 leaders committed to keeping trade and investment open. On 15 November 2008, G20 leaders declared: “We underscore the critical importance of rejecting protectionism and not turning inward … within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.”  A few months later at the London Summit, they embraced a spirit of solidarity, declaring: “A global crisis requires a global solution…” Of course, actions and words often fell out of alignment, but the guiding principle was cooperation, not beggar-they-neighbour.

The world today must return to this spirit of enlightened self-interest. National leaders must return to the guiding principle that wellbeing is indivisible – prosperity, if it is to be sustained, has to be shared.


World leaders need to switch from insular, short-sighted, and ill-conceived policies and to outward-oriented cooperation. This is not impossible. At the start of the 2008-2008 global crisis, G20 leaders [declared]; “A global crisis requires a global solution…” Of course, actions and words often fell out of alignment, but the guiding principle was cooperation, not beggar-they-neighbour. 


That economic nationalists in one trading power have buried their heads in the sand does not excuse other governments from taking sensible unilateral action and from developing cooperative responses that keep supply routes open. This may not be the time for grand designs beloved of some, but that leaves plenty of room for mutual interests to manifest itself. The initiative of the seven nation group, put together by New Zealand and Singapore, to keep supply routes open is a case in point. 

We reject the conventional wisdom that profound economic shocks must be followed by protectionism. History teaches us that turning inward does not work. Recent events, documented in the chapters in this book, reinforce that lesson. Past is not prologue. Governments have a choice. 

References

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

Bown, C (2020), “COVID-19: Demand spikes, export restrictions, and quality concerns imperil poor country access to medical supplies,” in R E Baldwin and S J Evenett (eds), COVID-19 and Trade Policy: Why Turning Inward Won’t Work, a VoxEU.org eBook, CEPR Press.

Roser, M, H Ritchie, E Ortiz-Ospina, and J Hasell (2020). “Statistics and Research: Coronavirus Disease (COVID-19)”, Our World In Data (OWID), accessed 25 April 2020. 

Endnotes

1 For the latest data, see “Statistics and Research: Coronavirus Disease (COVID-19)”.

2 See the full text at https://www.nytimes.com/2008/11/16/washington/summit-text.html.

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