Trump's trade policy is hampering the US fight against COVID-19

Chad Bown 16 March 2020

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First posted on: 

PIIE Trade and Investment Watch, 13 March

An alarming unintended consequence of President Donald Trump’s misguided trade war with China has suddenly threatened to cripple the US fight against the COVID-19 pandemic. The administration’s tariffs on Chinese medical products may contribute to shortages and higher costs of vital equipment at a time of nationwide health crisis. In the last two years, Trump’s policy has forced China to divert the sales of these products – including protective gear for doctors and nurses and high-tech equipment to monitor patients – from the United States to other markets, and now the US medical establishment faces looming trouble importing these necessities from other countries, which may be hoarding them to meet their own health crises.

To deal with this issue, the Trump administration quietly announced on 10 and 12 March 2020 that it would temporarily reduce some tariffs imposed on Chinese products to treat the coronavirus pandemic. But those actions, which effectively acknowledged that trade wars can endanger public health, covered only a handful of urgently needed products. Trump’s tariffs had been slapped on nearly $5 billion of US imports of medical goods from China, about 26% of all medical goods imported from all countries. Now that there are potential supply shortages globally, the US health crisis demands that the administration comprehensively and permanently reverse these policies of self-harm.

This calamity was hardly unforeseen. In August 2018, the Trump administration’s US Trade Representative convened a hearing to ask the public whether it should impose tariffs on such products. Matt Rowan, president of the Health Industry Distributors Association (HIDA), warned against the impact that Trump’s tariffs would have on the American health sector. “These products are essential to protecting healthcare providers and their patients every single day,” he said with shocking prescience. “The healthcare products on the proposed list are used widely throughout healthcare settings and are a critical component of our nation's response to public health emergencies.”

His warnings, echoed by many others over the next year, went unheeded.1 Trump’s reversal earlier in March served as an implicit indictment of his administration’s own policy.

But a potential for crisis is not limited to the unnecessary costs and health equipment bottlenecks that Trump’s trade war with China has created. His continued mistreatment of many trading partners, imposition of tariffs and threats of tariffs on their exports may make it difficult now to get new sources of supplies. Even allies are now lashing out and restricting the flow of medical equipment outside of their borders, including to the United States.

President Trump should immediately admit to the problem his policies have created. His administration should permanently and comprehensively suspend the trade war tariffs on critical medical products from China. And with its former allies, the administration should reverse its isolationist approach and reinvigorate the international cooperation that had formed the basis of US policy for over 70 years.

To avoid even worse tragedies to come, the world needs American leadership now more than ever.

Medical products needed to fight COVID-19

Among the many products that industry experts have identified as important for the fight against the COVID-19 pandemic, some of the most important include personal protective equipment, masks, sterile gloves, and goggles that doctors, nurses, and first responders wear to limit the spread of infectious disease.2 Also critical is disposable equipment such as hospital gowns, surgical drapes, as well as thermometers and breathing masks, which patients require during a hospital visit. Finally, relatively high-tech medical equipment – including CT systems, ultrasound systems, patient monitors, and X-ray devices – is used to diagnose and treat patients suffering from the disease. Americans imported about $22 billion of such products from the world in 2019, before the outbreak of COVID-19.

Before Trump began the trade war in 2018, US tariffs on imports of most of these products were fairly low.3 For half of the products imported, the US tariff was even zero. A handful faced nuisance tariffs of less than 4.5 percent, and disposable and other medical headwear had tariffs of 6% to 8% (see appendix table here).

Overall, low US tariffs enabled American hospitals and patients to access a plentiful supply of these products at the highest quality and lowest price, including from China: before the trade war, the United States imported $5 billion of these goods from China, or about 26% of US imports of such products at the time.

Trump’s trade war tariffs on China considerably cut US imports of some medical products from there

President Trump began his trade war with China in early 2018. Over the next two years, he raised US tariffs ranging from 15 to 25% on $360 billion, or two-thirds worth of what Americans buy from China. These tariffs on China were imposed under Section 301 of the Trade Act of 1974.

The Trump administration’s tariffs hit hard many medical products now needed to treat COVID-19. Over time, Trump brought more of such products into the firing lines of his trade war, despite additional warnings to the administration of the potential consequences. As Linda O'Neill, also of HIDA, cautioned in her June 2019 testimony on Section 301 tariffs: “Tariffs on critical health care products put a risk to our nation's public health preparedness.”

Trump’s tariffs resulted in a sharp decline in US imports from China of many of these critical products between 2017 and 2019 (Figure 1). As the American economy grew, demand for health care services for America’s aging population continued to increase, and US demand for imports of these products from the rest of the world overall grew at over 20%. The disruption to trade with China was dramatic.

In the aggregate, US imports of Chinese medical products hit with 10% to 25% US tariffs beginning in 2018 fell by 16%, or nearly $200 million, between 2017 and 2019. At the same time, US imports of these products from the rest of the world increased by 23%.4 The differences were especially large in CT systems, patient monitors and pulse oximeters, and certain types of disposable medical headwear (Figure 1).

Figure 1 The trade war resulted in fewer American purchases of critical medical products from China in 2019

In September 2019, Trump hit even more medical products from China with 15% tariffs. US imports of these products from the rest of the world also grew 23% between 2017 and 2019, while US import growth from China fell to only 13%. The smaller negative effect on these products in 2019 is likely due to the US tariffs being at a lower rate (15%, not 25%) and only being in effect for four months.

Overall, Trump’s tariffs imposed hardship on American medical care purchasers and providers.

In many instances, Americans had no choice but to continue to buy from China, which meant paying an additional cost due to the tariffs. Medical equipment cannot instantaneously sprout up at another plant in some other country. American patients demand the safety that comes through Food and Drug Administration (FDA) testing and certification. This process ensures manufacturing facilities do not roll out defective health care equipment.

As Lara Simmons of Medline Industries had explained to the administration in June 2019, “Finding alternative sources of supply for these products to minimize the cost impact of the duties is not a viable option in the near or medium term.... Starting production in the U.S. or any third country would be a time consuming and expensive process due to the FDA regulatory procedure that is required for these products.” She alerted the administration to the timeline of the tariffs’ impact on US health care preparedness: “This process can take more than two years.”

Even for American consumers who tried to switch to non-Chinese suppliers, doing so would come at a cost. Companies and hospitals would need to shift resources to their procurement divisions to search for new manufactures. New products would need to be tested to ensure interoperability and that they met the same quality standards as the old ones that Trump’s tariffs were forcing them to abandon. These financial resources instead could have been spent on patient care or cutting costs.

Finally, America’s own manufacturers of hospital equipment also faced higher costs because of Trump’s tariffs on other products – specifically, the many parts and components. Trump’s 25% tariffs remain on over $100 billion of intermediate inputs from China.

Failing to heed the warnings, Trump’s tariffs have disrupted the American health care system’s access to medical products, just when they are needed the most in 2020.

Even with the “phase one” deal, Trump’s tariffs on Chinese medical equipment remain

President Trump implemented his “phase one” trade agreement with China on 14 February 2020. Despite the deal, his additional tariffs remained on $360 billion of imports from China.

And his trade war continues to hinder the availability of medical products. Today, $1.1 billion of imports bought to potentially treat COVID-19 remain subject to Trump’s 25% tariffs (Figure 2). His duties on $3.3 billion of imports of other critical health care products were cut to only 7.5% from 15%.

Figure 2 Many critical medical products from China remain subject to Trump’s tariffs, some with partial and temporary exclusions

At the request of AdvaMed, an industry lobby group, Trump quietly and temporarily suspended his 7.5% tariffs on some products on 10 and 12 March 2020. These exclusions not only are temporary but also cover only part of the product categories illustrated in the figures.5 While some exclusions were also granted for other products in late 2018 and 2019, they were unable to prevent the dramatic drop in imports from China in 2019 (Figure 1). And most of the exclusions are set to expire in 2020. Their effectiveness at restoring imports of critically needed supplies may be limited. Temporary and partial exclusions are not enough. Trade uncertainty, driven by Trump’s policy, remains elevated.

If shortages arise globally, a system of temporary exclusions creates perverse incentives for Chinese medical suppliers to make American customers their last choice. Buyers in South Korea and Italy are not threatening China with tariffs. Contracting on a product with a future delivery date is unattractive if there is a good chance American customers decide they do not want the item – or they default on the purchase – because President Trump has ended a temporary exclusion and once again increased the product’s price in America by 25%.

Other countries are restricting their exports of medical equipment, making matters worse for americans

With COVID-19 creating an unprecedented global health crisis, some of these same medical products are in short supply globally. As the pandemic spread to countries like South Korea and Italy, and demand spiked, exporting countries reacted by imposing restrictions.6

Thus far, hospital masks, medical protective clothing, and other personal protective equipment have been the most frequently restricted products, according to data collected by Simon Evenett in the Global Trade Alert. Twenty-four countries have restricted exports of such products between January and 11 March 2020,7 including Germany, France, Taiwan, and South Korea.

Take personal protective equipment and medical protective clothing. For the United States, the main non-Chinese source of imports is Mexico (Figure 3). At the moment, Mexico has not announced any export restrictions, partially because it has relatively few reported COVID-19 cases.8 But that, of course, could change.

Figure 3 The United States may need medical products from many foreign sources to get through the COVID-19 pandemic

Depending on the product, though, the main foreign source of supply for the United States is often quite different. It is also often not China or Mexico. The European Union is the main source of CT systems, hand sanitizers, patient monitors and pulse oximeters, X-ray equipment, and breathing masks (Figure 3). Thus, President Trump’s 12 March statement – subsequently retracted – that he would shut down trade and cargo shipments from the EU could be devastating and lead to supply shortages of the very medical equipment needed to treat COVID-19 that Americans desperately need.9

Trump’s trade war with China, and his general mistreatment of trading partners, including the European Union, has put Americans at risk. With many countries now adopting “me first,” beggar-thy-neighbour export restrictions, the United States may need access to even more friendly foreign suppliers of medical equipment than ever before.

During this crisis, the United States needs to be more open and more cooperative on trade

President Trump should give the American public every chance they need to fight this pandemic by allowing medical professionals and hospitals access to the highest quality, lowest cost, and most accessible supplies, from wherever they can be sourced – including China.

These remain early days. COVID-19, unfortunately, is likely to continue to spread. It is worrisome that other countries are fearing scarcities of medical supplies and restricting exports. The history lesson from global food shortages is that such export restrictions could easily multiply and result in a downward spiral of protectionism.

The answer is not a misguided attempt to bring back all medical equipment production to America. Imagine if this had been done but that the manufacturing facilities had all ended up clustering outside Seattle or New Rochelle, New York, the hotspots of the American outbreak of COVID-19. America’s manufacturing workers are human. Importing medical products from diverse sources globally has huge benefits; conceivably, parts of American production may also be forced to shut down at some point.

But the United States also must lead a policy of international cooperation to fulfil needs tomorrow, not just today. Because the main lesson of pandemics is that any one of us could be next.

Authors’ note: Hexuan Li provided outstanding data assistance. Melina Kolb, William Melancon, and Oliver Ward assisted with graphics. David J. Vanness, Mihir Torsekar, Rod Hunter, and many other experts helped identify COVID-19 related health products. An appendix detailing the medical products needed to fight COVID-19 covered in this analysis is available here. The data underlying this analysis are available here.

Endnotes

1. See also the testimony before the Trump administration of Lara Simmons, Linda O’Neill, and Ralph Ives on Section 301 tariffs, June 20, 2019 (panel 29). As the novel coronavirus did not exist yet, Rowan and others used examples of earlier public health emergencies and pandemics—e.g., Ebola and H1N1—to make the point.

2. This list is not exhaustive and is based on input from numerous industry experts whom I thank (without implicating for omissions) for sharing their insights. These categories derive from 22 distinct 10- (or 8-) digit Harmonized Tariff Schedule (HTS) products. The appendix table at the end of this blog contains details on the traded products considered in this analysis.

3. Some of the tariff cuts on medical equipment were taken through implementation of the World Trade Organization’s Information Technology II Agreement in 2016.

4. These numbers refer to the growth of the aggregate imports of the products in the top panel of figure 1. Some of this may have been trade diversion, or American consumers paying the costs to switch from Chinese to alternative foreign suppliers. However, consider the third panel of products in figure 1 as a “control group,” as these products did not face any tariffs. US imports of these products from the rest of the world also grew at 22 percent over 2017–19. This suggests that, in the top and middle panels of products in figure 1, the growth response of US imports from the rest of the world caused by trade diversion may have been relatively muted.

5. The product exclusions are more disaggregated than the most disaggregated trade data available publicly—i.e., at the HTS 10-digit level. USTR determines exclusions based on product descriptions, which may form only a subset of imports in a given HTS-10 category. Thus figure 2 presents overestimates of the amount of trade excluded from the tariffs.

6. See Soumaya Keynes, New trade barriers could hamper the supply of masks and medicines, The Economist, March 11, 2020.

7. See Simon J. Evenett, Tackling Coronavirus: The Trade Policy Dimension, Global Trade Alert, March 11, 2020.

8. According to the World Health Organization, as of March 12, 2020, Mexico had only 12 reported cases, all of which were imported.

9. James Politi, “Trump forced to clarify Europe travel restriction over cargo claim,” Financial Times, March 12, 2020.

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Topics:  Health economics International trade

Tags:  COVID-19, coronavirus, Trump, US-China trade war

Reginald Jones Senior Fellow, Peterson Institute for International Economics; CEPR Research Fellow

CEPR Policy Research