Trade policy choices during and after the pandemic
Ranja Sengupta questions the wisdom of developing countries continuing World Trade Organisation (WTO) talks when the pandemic is ravaging their countries and its full economic impact is not clear.
THE COVID-19 pandemic caused by the novel coronavirus has now unleashed its destructive force across the world and countries are reeling.
There are impacts in terms of continuously increasing infections and deaths, coupled with testing, containment and treatment constraints. There are also massive economic impacts of this pandemic and any efforts to address it (such as lockdowns).
The damage is felt across both developed and developing countries, partially due to lack of capacity as well as lack of timely and appropriate decision-making. The full extent has yet to unfold.
Trade remains a critical part of this scenario since the movement of goods and people across national borders has contributed much to the spread of COVID-19. But trade also matters for the policy choices to deal with the crisis.
The solutions mooted by key institutions and countries in terms of trade policy choices require careful analysis.
There seems to be an opportunistic, even desperate, attempt by some countries to sign more trade agreements as if an agreement on paper will magically solve all real-life problems.
The WTO secretariat and some developed-country WTO members have also been trying to continue negotiations in several areas, including fisheries subsidies and agriculture, through emails, virtual meetings and online technologies.
Some plurilateral negotiations such as those on e-commerce, investment facilitation and domestic regulation in services are also apparently sought to be moved forward.
The rationale for continuing these negotiations when all our countries are being ravaged by the virus, is unclear.
Given the urgent domestic situation in most countries and the digital divide that the poorer countries face, continuing with these negotiations runs several risks.
Firstly, this process is non-inclusive and opaque, and secondly, it is biased in favour of those who lead and can participate effectively through virtual means. The outcomes may be defective and often biased against developing countries and least developed countries (LDCs).
Already, the policy prescriptions being advanced by the Organisation for Economic Cooperation and Development (OECD) and certain rich countries are worrying.
In a policy brief titled ‘COVID-19 and International Trade: Issues and Actions’, released on 10 April, the OECD suggests a higher use of trade facilitation through the WTO’s Trade Facilitation Agreement (TFA), and of e-commerce to solve the crisis.
However, these are sensitive issues for developing countries and LDCs. For example, higher use of e-commerce should not necessitate higher engagement in e-commerce negotiations that are riddled with many regulatory and financial problems for developing countries.
The OECD brief also proposes a global agreement for removal of all tariffs, coupled with either a complete ban or conditions on export restrictions, on medical and other essential products.
Declaration by New Zealand and Singapore
These ideas are reflected in the Declaration on Trade in Essential Goods for Combating the COVID-19 Pandemic, launched on 15 April by New Zealand and Singapore. This was circulated to all WTO members on 16 April as a communique and as an invitation for others to join.
The Declaration pins down a commitment to ‘eliminate all customs duties and all other duties and charges of any kind’ and not to ‘apply export prohibitions or restrictions’ on a number of products listed under an Annex I that includes so-called essential processed food items and medical products.
An additional Annex II covers an extensive list of food products. The participating countries are expected to ‘endeavour’ not to apply export restrictions on these. They are also to enter into arrangements with one or more of the other participants for tariff removal on Annex II products.
The participants will also ‘intensify consultations with a view to removing non-tariff barriers’ and to ‘expedite and facilitate the flow and transit of all products listed in Annex I and Annex II’ through the WTO TFA.
The attempt to eliminate export restrictions is expected and will be echoed in many trade circles. However, it is clear that many countries will attempt to restrict export of essential products to ensure domestic supply in a crisis, even if it means denying these products to other countries.
There is no easy solution to this complex problem.
Countries imposing export restrictions must try to increase production at the earliest possible, so that the restrictions can be eased. In the very short run, with lockdowns galore, this may not always be possible.
However, even in a situation of export restrictions, there should be continued supply to the poorest countries, which do not have the capacity to produce these essential items.
As seen in the case of India's hydroxychloroquine export ban, the most powerful countries do not hesitate to flex their muscles, including by issuing retaliation threats. The scramble for N95 masks also showed how the highest bidders can corner limited global supplies of crucial medical products.
Interestingly, both the New Zealand/Singapore Declaration and the OECD brief (which does advocate conditions on export restrictions if these have to be imposed) do not explicitly mention preferential treatment for poorer countries.
Is tariff removal the way to go?
A WTO report on ‘Trade in Medical Goods in the Context of Tackling COVID 19’, released on 3 April, highlights high tariffs related to, for example, soap (average tariff 17%, high 65%), protective supplies (average tariff 11.5%, high 27%) and masks (high tariff rate at 55%).
The New Zealand/Singapore Declaration and the OECD proposal suggest total removal of tariffs on medical, and if possible, food products, to help solve the crisis.
According to this free-trade mantra, import duties distort demand, which in turn prevents the most efficient producer from supplying at the lowest price to the consumer.
However, while using import duties, countries need to balance two needs: protecting domestic production and livelihoods, and meeting domestic demand.
During the current crisis, there is already excess demand, and any country that needs to import these (maybe cheaper) products to fight the pandemic will autonomously remove or reduce duties to encourage imports. They will thus be free to increase duties later, if they so need.
So the world will automatically see a reduction in these tariffs on a need basis. Therefore, it is not clear why countries need to be forced to eliminate duties through this Declaration.
The purpose seems to be a forced liberalisation of trade in these products in the longer run and undermining the objective of protecting domestic production and supply, as well as livelihoods.
The Declaration appears to be open-ended and does not specify a particular period for which this ‘agreement’ should be in place, although it suggests a review (and not a termination) by mid-2021.
While this may be understandable given the uncertainty over the duration of this pandemic and its after-effects, it implies that countries will liberalise these sectors, including all kinds of agricultural products, for an unknown period of time.
Tariff cuts will generally impact more on developing countries, whose tariff levels on average are much higher than those of developed countries, especially on agricultural products, which are extremely sensitive.
So are developing countries being asked to now cut this protection for their farmers and producers, and expose them to foreign competition forever?
Moreover, countries that have domestic production, perhaps infant industries, both in medical products as well as in food, will want to maintain import duties in order to develop these further.
In the aftermath of COVID-19, many countries will also urgently need to restart and strengthen domestic production capacities to ensure some extent of self-sufficiency in such essential goods.
Even rich countries like the United States and Germany, which already have well-developed medical industries, have hinted as such. But with tariff cuts, developing countries and LDCs cannot pursue self-sufficiency.
Many small and medium-sized enterprises and small-scale farmers in developing countries and LDCs are already reeling from the impacts of the human, health and economic crisis posed by COVID-19. Any tariff removal commitment means their governments cannot protect them from foreign competition, even to maintain domestic supply.
Furthermore, production in the domestic industries in these countries may get reduced. This can create more global shortages and further increase concentration in global markets.
The WTO’s 3 April report itself shows that Germany, the United States and Switzerland supply 35% of medical products, while China, Germany and the United States export 40% of personal protective products.
It is clear that in the absence of self-reliance, rich countries will still have the ability (even if it is more difficult) to buy the needed goods in a crisis. But poorer countries will definitely lack this.
The attempt to liberalise such sectors in the name of the pandemic by espousing the ‘free market’ as the ultimate solution, is to repeat the mistakes of the past.
History, and recent history even more so, has clearly shown there is no ‘free market’ nor ‘free trade’. Those with economic power will dictate, and developing countries and LDCs need to develop at least partial self-reliance in key products.
They need to retain and not give away their policy flexibility in order to survive; to abstain from making further commitments in trade deals may be the best option until the world arrives at its new normal.
Ranja Sengupta is a senior researcher with the Third World Network and can be reached at firstname.lastname@example.org. This article first appeared in SUNS (South-North Development Monitor, No. 9105, 22 April 2020). SUNS is published by the Third World Network.
*Third World Resurgence No. 343/344, 2020, pp 64-65