Supply Shortage in medical devices during the Corona-crisis:
Is the solution stockpiling and less international trade?

Remarks of Alan Wm. Wolff, Deputy Director-General World Trade Organization (WTO)

A Panel Presentation with Andreas Freytag, Anabel Gonzalez, Joerg Wojahn

On the occasion of the launch of the G20 Trade and Investment Research Network.

4 September 2020

My thanks to the Department of Economic Policy, Friedrich Schiller University, Jena, for organizing this panel on the occasion of the launch of the G20 Trade and Investment Research Network and inviting the WTO to participate in a discussion regarding Supply Shortage in medical devices during the Corona-crisis: Is the solution stockpiling and less international trade?

Introduction

The pandemic appears to have caught all governments off guard.  Medical equipment, from the simplest personal protective device, such as disposable masks, to the most sophisticated, such as ventilators, all were in immediate short supply.  COVID-19 test kits, disinfectants and sterilization products; medical consumables (e.g. syringes, needles, certain machines, electrocardiographs and infrared thermometers), protective garments (e.g. gloves or masks), and different kinds of medical and surgical furniture(1) — all were needed, and those needs could not be fully met.

Stockpiles where they existed were wholly insufficient.  Domestic manufacturing could not immediately respond.  Trade did not appear to be reliable.  The rules of the trading system, not being highly prescriptive, provided little comfort to those seeking foreign sources of supply.     

Six months into the pandemic, its onslaught against the world’s population has not ended.  Supply issues, in countries where the pandemic has eased, are less acute, but remain. 

As of August 14, just three weeks ago, the United States, which one would anticipate is at least in the middle of the pack of industrialized countries for its capability to address shortages, still listed medical device shortages of various categories of personal protective gear, testing materials and ventilating equipment(2).  If advanced industrialized countries are experiencing shortages, it can readily be assumed that developing countries and especially the least developed are far worse off.   

This panel has been convened to examine options to deal with global crises where medical supplies are suddenly and urgently needed.  Two options are mentioned in the title of the panel, stockpiling and international trade.  A logical third option is government-supported investment in relevant manufacturing capacity.  Each has its advantages and drawbacks.  Each has a role to play in crafting a solution sufficient to meet the challenge.  The most relevant of the three to the Members of the World Trade Organization (WTO) is, of course, international trade.  The question to be faced at the WTO is whether international trade can be made more reliable for the remainder of the pandemic and for future global outbreaks of disease and other global crises.  Underlying this question is a more fundamental one: Will world trade, on which much of global prosperity rests, grow or shrink after the pandemic?

Stockpiling

Building stocks is clearly an option for those countries with the necessary resources to do so.  Stocks can be created from either domestic production or from foreign supplies when either are available.  From the standpoint of international trade, creating stockpiles of emergency medical gear does not normally present any great concerns.  Creating a stockpile does not limit imports.  While it could affect the quantity of products available for export, that for the present is only a theoretical problem. 

There are, however, practical limits to stockpiling.  Respirators, for example, age and are no longer reliable.  Sooner or later, stockpiles are not maintained.  This has been the case in the United States, where reportedly a decade ago the outbreak of the swine flu drew down stocks of masks, and the stockpile was not replenished.(3)  Earlier this year, when COVID-19 appeared on its shores, it has been estimated in one report that the U.S. stockpile of masks was enough to meet only 1% of projected national needs.  France has reportedly had a similar experience.(4)  There can be little doubt that these two countries were not alone in this regard. 

Domestic manufacturing

  The U.S. Center for Disease Control cites three measures of capacity – conventional (meeting normal needs), contingency and crisis.(5)   Conventional needs are not met by stockpiles, but from commercial inventories and manufacturing that is already in place.  Contingencies might be met from these sources supplemented by a stockpile. 

While a stockpile might provide some cushion, a surge in critical demand needs to be met either from international trade or, as another option, increased manufacturing output.  In World War II, the production in the United States of aircraft suitable for war grew from a pitiable 3600 planes in 1940 to close to an annual production rate of 100,000 by 1944.  Even then, ramping up production took time.  In a pandemic, even compared with fighting in a world war, there isn’t that much time.

In both cases, war and a pandemic, governments are required to step in.  Production capacity existed for normal commercial demand.  Market incentives were not in themselves likely to be sufficient to bring about an immediate manufacturing response.  From a WTO perspective, government involvement in increasing domestic production during the pandemic has not been a matter of concern.  No current fear has been expressed in Geneva at the WTO by Members that governments may overinvest in the production of personal protective equipment, creating excess capacity as has characterized the production of steel for the last half century.  While industrial subsidies more generally are a topic of potential concern for future discussion, due to current shortages there is no call for governments to avoid non-economic (non-market-justified) investment in medical supplies.  

A consideration for relying on a resort to manufacturing in a crisis is whether it is sufficiently flexible to convert normal commercial production to immediate needs, from fashion wear to surgical gowns, from making beer to making disinfectant (both are actual examples of successful conversions).  The workforce must be as flexible as well as the machinery being adaptable. Jena is a known as a source of great scientific talent as well as manufacturing expertise.  The application of science to industrial production is particularly needed to deal with a surge in demand during a crisis.  Part of the agility required is not only to respond to demand but to be able re-convert to normal operations to aid in the recovery, once the health emergency has receded.  Again Jena shows what can be done, moving from a state-dominated economic system to a market-driven economy, with the reunification of Germany. 

In short, industry must be as shock- and heat-resistant as Jena glass to be prepared for future crises, the shape of which, and therefore needs, cannot be predicted with accuracy.

International trade

The third option for access to medical supplies  – relying on imports — works well in general but not necessarily in the short term.  At the onset of a pandemic, demand for essential products skyrockets everywhere — if not all at once, then in waves that arrive close enough together to put pressure on the supplies available for trade.  Imports may also be less  available due to export controls in their country of manufacture or due to pre-emptive purchasing by foreign governments.  Importing can also, as a practical matter, be constrained by an importing country’s financial capacity.

The WTO rules do not prevent the application of export restrictions where a condition of short supply exists.  Article XX of the General Agreement on Tariffs and Trade (GATT) provides as a general exception:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

*.    *.   *

(j)  essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. (6)

The WTO’s rules are enforceable, but in a global crisis, governments decide by themselves — without being required to coordinate or consult with others — whether to limit their exports.  For restrictions on exports of food and other agricultural products, the WTO Agreement on Agriculture requires that the country imposing an export restriction take into account the impact on other countries.  There is no parallel requirement with respect to manufactured goods.  In the exigencies of a global pandemic, there is neither an established process nor understanding of how a WTO Member’s entitlement to  “an equitable share of the international supply of such products” will be made operational, nor is there specific guidance as to when an export restriction should be terminated. 

What the WTO does provide is transparency.  Members’ were called upon in this crisis to notify their trade measures promptly.  On the whole, they rose to that challenge, providing Members’ officials with information needed to better plan their countries’ responses to the global health and economic emergency.   

Assuring the availability of essential medical supplies

The first two options discussed above – stockpiling and investing in additional manufacturing capacity —  come with added costs and inefficiencies.  Governments underwrite actions that the market will not alone support.  For this reason, the solution to the problem of shortages of medical supplies will, at least for the immediate future, rely on all three methods of assuring supply – stockpiling, investment in manufacturing capacity and trade. The choices made by any individual country will depend heavily on its financial and technological capabilities, but also on its assessment of the reliability of access to supplies through trade .  Of the available options, relying on international trade is the most efficient and economical choice.  For these reasons, trade will, in the long run, dominate the range of solutions – if the multilateral trading system, the WTO, can help assure security of this method of supply. 

 

Solutions put forward by WTO Members Relating to the COVID-19 Pandemic

For the WTO, the reality of the pandemic was brought home forcefully with the lockdown of its facilities on the 16th of March of this year.  Activity did not cease, quite the contrary, it went online.  The WTO began to collect and disseminate information on Members’ individual trade responses to the pandemic.  Some Members imposed export control regimes for essential products.  A substantial number suspended their tariffs on imports of critical supplies and otherwise facilitated trade.  Within 9 days of the WTO lockdown, Australia, Brunei Darussalam, Canada, Chile, Myanmar, New Zealand and Singapore declared themselves committed to maintaining open and connected supply chains, ensuring that trade remained open, including via air and sea freight, to facilitate the flow of goods including essential supplies. 

On the 15th of April, one month after the lockdown, Singapore and New Zealand agreed formally with each other to:

a.  Eliminate applied tariffs for essential goods including medical, hygiene, pharmaceutical products and agricultural products;

b.  Refrain from imposing export prohibitions or restrictions on essential goods including medical, hygiene, pharmaceutical products and agricultural products;

c.  Expedite the movement of these essential goods through sea and airports.

On 22 April, 49 countries led by Canada, accounting for 63% of global exports of agriculture and agri-food products and 53% of imports of these products, signed a joint statement expressing their commitment not to impose export restrictions on agriculture, as well as other undertakings.(7)

On 26 June, the Cairns Group (Argentina, Australia, Brazil, Canada, Chile, Costa Rica, Indonesia, Malaysia, New Zealand, Paraguay, Peru and Uruguay) issued a statement including fifteen commitments with respect to their own conduct while engaging in agricultural trade during the pandemic.(8) 

Other declarations calling for increased international coordination in response to the trade effects of the pandemic have been issued.  Examples include joint ministerial statements

  • On 5 May, initiated by Switzerland, and joined in by a number of other WTO Members, both developed and developing (WT/GC/11);
  • On 12 May, initiated by Korea and joined in by Australia, Canada, New Zealand and Singapore, including a call for facilitation of essential cross-border travel (WT/GC/214);
  • On 15 May a G20 statement calling on governments imposing COVID-19-related measures not to create unnecessary barriers to trade or disrupt global supply chains, and including the oft-repeated formula that the measures be “targeted, proportionate, transparent, temporary and consistent with WTO rules” (WT/GC/216), and a series of recommended steps to be taken to facilitate trade, including the promotion of e-commerce consistent with national laws;
  • On 4 June, ten WTO Members on 4 June 2020 called upon the WTO Secretariat to prepare a factual report to facilitate Members’ understanding of COVID-19 related measures and initiatives and their impact (G/C/W/780); 
  • On 16 June 2020 the Ottawa Group (Canada, Australia, Brazil, Chile, European Union, Japan, Kenya, Republic of Korea, Mexico, New Zealand, Norway, Singapore and Switzerland) pledged itself to “lead by example” with respect to transparency, withdrawal of trade-restrictive measures, maintaining open trade in agriculture, fostering WTO e-commerce negotiations, promoting implementation of the Trade Facilitation Agreement and advancing identification of ways forward to facilitate trade in medical products.  (WT/GC/217).
  • On 25 June, some thirty WTO Members called upon the European Union to suspend any action to reduce maximum residue levels for plant protection products in light of COVID-19.  (G/SPS/GEN/1778/Rev.2); and
  • Also, on 25 June, the African Group, cited the World Food Programme estimate that deteriorating employment and other factors may have already pushed almost 12 million people in Sub Saharan Africa into acute food insecurity since February 2020, compounding existing crises of the region.  The Group called for negotiation of policy space, the elimination of trade distorting support and other agricultural negotiating objectives; it called for WTO Members to address the development aspects of e-commerce, consider balance of payments needs, and articulate special and differential treatment across all trade agreements and negotiations.  (WT/GC/219).

Under discussion among Members, but not yet formally tabled at the WTO, is a concept paper produced by the European Union dated 11 June.  It is noteworthy for its comprehensiveness.  It suggests an initiative “consisting of a possible enhancement of the current WTO disciplines applicable to trade in essential goods, a schedule of collaboration in times of crisis and the reciprocal elimination of tariffs on pharmaceutical and medical goods with a binding effect.”  

The proposal is divided into three parts — permanent tariff elimination, disciplines relating to essential goods in crisis situations, and other disciplines irrespective of the crisis.  The paper notes that the parties to the 1994 Pharmaceutical Agreement accounted for 90% of world trade at the time of entry into force, but now only account for 66% of the trade in these products.  The Pharmaceutical Agreement has not been updated in terms of its product coverage since 2010.  To this Agreement providing for duty-free treatment could be added, the EU paper suggests, medical goods. 

Further, the crisis response, the Paper continues, could include limiting the duration and scope of export controls for healthcare goods, providing for an exchange of information on needs and availability, tariff suspensions, creating an understanding on the application of “the equitable share of supply” standard under the GATT’s exceptions, providing also for consultations, listing best practices for standards, streamlining customs procedures, engaging in joint public procurement while lifting adherents’ own discrimination in public procurement, reducing the burden of import licensing, and providing for enhanced transparency. 

The third tranche of measures would address dealing with regulating remanufactured goods for purposes of knowledge sharing, as well as the creation of a permanent framework for collaboration and transparency. 

Discussions of pandemic related proposals will continue later this month.

Long term effects on global value chains

On 14 April, the ASEAN Member States at a Heads of State meeting instructed their Economic Ministers to explore an arrangement to preserve supply chain connectivity for essential goods, having themselves resolved to “strengthen long term supply chain resilience and sustainability, including through better transparency, agility, [and] diversification.  Supply chains have experienced dislocations not only at their points of inception and delivery but in between as distribution systems lost their capacity to perform as they would in normal times. 

On 27 August, McKinsey Global Institute issued a brief that included the heading  Moving from globalization to regionalization, stating that —

The pandemic has exposed the world’s risky dependence on vulnerable nodes in global supply chains. . . . We could see a massive restructuring as production and sourcing move closer to end users and companies localize or regionalize their supply chains.(9)

Looking at a number of major causes of disruption to supply chains, McKinsey, in a major study released on 6 August(10),  estimated that

the five value chains most exposed to our assessed set of six shocks collectively represent $4.4 trillion in annual exports, or roughly a quarter of global goods trade (led by petroleum products, ranked third overall, with $2.4 trillion in exports).(11)

The Report does not specify that any rearrangement of supply chains will result in a major movement toward on-shoring, but that up to a quarter of current global value chains will see a shift, to diversify away from a single dominant foreign source, with some greater regionalization (near-shoring) as well as some greater reliance on domestic production.  It Is important to note, that according to the survey undertaken by McKinsey, COVID-19 is not the chief motivation for changing a global supply chain for all industries.  The Report cites a range of factors that can play a dominant role, including location of skill sets, climate events or other natural disasters (earthquakes, flooding and tsunamis, for example), trade disputes, geopolitics.  Each can force change.   

Conclusion

Dependency on imports for critical supplies is not a totally unfamiliar experience.  In the 1970’s there were two oil shocks due to embargoes placed on exports by the then major producers of oil.  One of the first responses was to assess the risks of the problem becoming more widespread.  During the second oil embargo, when I was U.S. Deputy Trade Representative, I called for an interagency review of import dependencies that created potential vulnerability for the United States.  The issue at that time involved a single primary cause: cartelization.  The conclusion reached was that there was nothing comparable to U.S. dependency on foreign oil.   

Being warned of the risks of supply disruptions does not always result in adequate precautions being taken.  The chief economist of Shell Oil Company during the 1970s, Pierre Wack, predicted both of the two oil crises.  For the first one, his company re-deployed their assets including shipping, and weathered that economic storm well.  For the second, as he related the story, management heard him but did not act.  The company suffered from its unwillingness to incur the costs of preparation to mitigate the harms predicted. 

In response to the pandemic, ensuring security of medical supplies now deemed essential has become a high priority.  For these goods, at least for the near future, just-in-time delivery within supply chains is likely to be replaced to a degree with seeking just-in-case(12) delivery, with some increases of inventories held for critical components and food stocks. 

Carrying large inventories as well as public stockholding have economic limits, especially since the financial resources of both firms and governments are at a minimum.  Deciding whether to even undertake these measures depends on an assessment of and appreciation of risks

Given the range of forces in operation, one can suppose that the McKinsey Report may be accurate in predicting the potential for some shrinkage of global value chains, and not due by any means solely to COVID-19.  As long as the pandemic remains a threat, there will be a significant effort to avoid relying on a limited number of distant foreign sources for critical supplies.  As noted, there is very likely to be some re-shoring and near-shoring of critical medical supplies (including pharmaceuticals) for countries and firms having the financial capacity to do so.  But as the Report notes, weighing against this are existing supplier relationships, investments in place, and always, economic costs, all of which are strong forces that resist change.    

Across the full range of goods, trade flows are likely to return to trend in accordance with established patterns as the world economy recovers from current depressed demand. Supply chains cannot and will not be rolled up completely.  That is not going to happen. The answer to security in a time of pandemics, is more trade not less.  For this to happen, there needs to be active engagement among WTO Members to reach agreement on rules in some cases, guidance in others, as to how an enhanced level of security can best be achieved through trade.  

Notes