Building capacity to help Africa trade better

The Pandemic and its Aftermath: The Role of Trade Policy


The Pandemic and its Aftermath: The Role of Trade Policy

The Pandemic and its Aftermath: The Role of Trade Policy

Received wisdom from a wide spectrum of commentators is that our post-COVID-19 world is going to be different from the one the virus invaded. Predictions vary considerably as to what is going to change, and this is no less the case when it comes to the role of governments in shaping international trade. Trade has been put under severe strain for some years, starting with the Great Recession of 2009, rising geopolitical tensions among major powers, and now the COVID-19 crisis. The last of these could reduce global trade flows in 2020 by as much as a massive 25 per cent or more.

On the policy side, some take the position that countries must become more self-reliant and less dependent on foreign promise in order to manage a crisis like COVID-19. Others argue that openness to trade is an essential centrepiece of effective crisis management and the protection of health in a COVID-19 world.

Certain attitudes on the anti-trade side are a natural extension of rising nationalism, fueled by populist rhetoric, that has become more prevalent recently in some parts of the world. The notion of COVID-19 crisis ‘resilience’ has served for some as a convenient standard bearer of anti-trade sentiment. The attention of policymakers in the COVID-19 crisis context has been on medical equipment and medicines, and to a lesser extent so far on agricultural and food products. But trading arrangements for both product categories is going to be crucial in leavening the damage and deprivation caused by the virus.

According to the Swiss-based Global Trade Alert (GTA)[1], between the beginning of 2020 and the first week of May, some 83 countries imposed 161 controls on exports of medical supplies and medicines. The comparable figures for agricultural and food exports involved 27 countries covering 38 measures. For both product categories, these controls largely took the form of export bans or discretionary export licenses.

While producers of medical and food products have tended to restrict trade, a significant number of importing countries moved their policies in the contrary direction during the same period. In the case of medical supplies and medicines, ninety countries accounted for 123 measures that relaxed restrictions on imports. On agricultural and food imports, 18 countries introduced 24 market opening measures. Many of these measures involved import tariff reductions, the removal or reduction of other taxes and a relaxation of licensing requirements.

Export restrictions reduce supply, raise prices in importing countries, concentrate production, and disrupt supply chains. They aggravate challenges already faced by countries in managing the health crisis. By contrast, countries in need of medicine and food have reduced trade restrictions in their efforts to ensure supplies in the face of the health emergency, at the same time reducing prices to consumers. As has been pointed out in some detail, most notably by Simon Evenett and Alan Winters, the GTA data suggest an obvious bargain. The deal would be that the exporters remove the restrictions they have imposed and importers guarantee the permanency of their reduced import restrictions.

This would not only strengthen markets in a time of acute need, but also lay the groundwork for a sustainable longer-term solution offering shared benefits on both sides of trade transactions. Such a deal requires mutual trust and a commitment to shared solutions internationally. It may seem that such sentiments are hard to come by in today’s world, but a shared crisis from which there is no unilateral escape should foster a willingness among countries to look for shared solutions.

Once started along this path such a deal could be deepened, even if its coverage remained within the confines of health and food products. The GTA has also produced some illustrative numbers on a simple but essential product for fighting COVID-19 infection – namely soap. Out of 164 WTO members, only nine refrain from imposing any tariffs on imports of soap. Thirty-one of those countries charge tariffs of 30 per cent or more and a further 79 charge imports at a rate of over 15 per cent. Prices of soap facing consumers are further increased by costs associated with licensing and domestic taxes. These unnecessarily inflated prices result in more risks to health, more sickness and sometimes death.

In the same vein, it is well documented that overly burdensome administrative requirements associated with trade can add as much or more to the cost of products than do tariffs. A lack of administrative efficiency afflicts many countries around the world. These encumbrances are referred to by economists as deadweight costs. This is because while inefficient outcomes might shift the distribution of income, they do so from a diminished pool of income that is directly attributable to source – those inefficient interventions.

In Kenya, for example, InfoTradeKenya spells out what is required to import pharmaceutical products. Sixty-nine discrete steps are needed to secure authorization to import, involving 15 institutions, and costing thousands of US dollars. Procedures can take up to six months and considerably more.

Some of these procedures will apply initially to new importers and will not need to be repeated. Without further analysis it would be irresponsible to simply assert that these arrangements go beyond what is essential to protect public health and welfare – which after all is undeniably a responsibility of governments. But at the very least data like these would seem to make the case for a thorough review of any possibilities for streamlining and efficiency enhancement.

The importance of administrative efficiency aside, the case for open trade does not mean that more of it is always better than less, regardless of all other considerations. In this context, the former Director-General of the WTO, Pascal Lamy, has drawn a distinction between protectionism and precaution. The former is to do with creating economic advantage for domestic producers. The latter is about meeting public policy objectives, such as safety, health and essential needs.

Trade rules in the WTO allow for action to pursue these important objectives, provided the measures involved are neither inefficient nor designed to achieve protectionist ends as well. The level of intended protection should be treated as a separate matter, measured against the objective of benefiting from present and future gains of specialization. Without such nuancing and a separation of the motives for regulating trade, support for it will be eroded. On the other hand, policies designed to conceal protectionist objectives as legitimate public policy measures undermines trust among trading partners along with the benefits of trade.

These issues have become more important in the shadow of the COVID-19 crisis, where the benefits from trade and the need to address public policy exigencies at home can co-exist in a harmonious relationship that yields mutual benefit. The delicate nature of this relationship has been recognized in initiatives proposed at the WTO by a number of countries for addressing the health crisis, most notably Canada, New Zealand and Singapore, with support from several others. The essence of what these initiatives promote is mutual benefits from open trade under durable arrangements that also recognize the legitimacy of other essential objectives.

At a time when public support for securing the shared gains from trade is being tested, it is more important than ever that governments take full cognizance of the unprecedented health and economic shock visited upon nations by COVID-19. When it comes to trade, this means weaponizing international cooperation to halt and reverse the ravages of the virus, in the full knowledge that no nation, however big or small, can succeed alone in this struggle.

[1] See 21st Century Tracking of Pandemic-Era Trade Policies in Food and Medical Products by the EUI, GTA and World Bank

About the Author(s)

Patrick Low

Patrick Low, a Kenyan and Spanish national, is a Fellow at the Asia Global Institute of the University of Hong Kong and a Senior Adviser for Tulip Consulting. He currently works in an advisory capacity and as a consultant. From 2013-2016 he was Vice-President of research at the Fung Global Institute, Hong Kong, and taught at the University of Hong Kong from 2017 to 2019. He worked for the World Trade Organization from 1995, first on trade in services and then from 1997 to 2013 as the WTO’s Chief Economist. Between 1987 and 1995 he taught at the Colegio de México (1987-1990), and worked in the research arm of the World Bank in Washington D.C. (1990-1994). He was with the General Agreement on Tariffs and Trade (precursor to WTO) from 1980 to 1987. He holds a PhD in economics from Sussex University and has written widely on trade and trade-related issues.

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