WTO and the challenge of scarcity — are there lessons from COVID-19?

The global trading system has built in flexibilities for nations and customs territories to address scarcity or threatened scarcity at home in the trade rules. Specifically, while GATT 1994 Article XI:2 provides for the general elimination of quantitative restrictions on imports or exports, there are exceptions provided in XI:2. The first permits “Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.” GATT 1994 Art. XI:2(a). There are also general exceptions to WTO obligations contained in GATT 1994 Article XX including measures “necessary to protect human, animal or plant life or health” (Art. XX(b)) although such general exceptions have certain conditions to prevent discrimination in application.

These WTO rules go back to original GATT provisions from 1947/48 and reflect the understandable desire of governments to maintain the ability to look out for their own people in times of crisis particularly to avoid threats from food scarcity or to human health.

Over the last seventy plus years, global trade flows have dramatically expanded in both agricultural and non-agricultural products. Indeed, many countries and customs territories are import dependent on food products. Moreover, with the development of global supply chains for medicines, medical equipment, medical supplies and personal protective gear, few, if any, countries are self-sufficient for medical goods.

The question arises whether in a much more interdependent world, global trade rules need review and modification to deal with actual or perceived shortages of agricultural, medical or other goods.

The 2007-2008 food shortages on critical agricultural products led to dozens of countries imposing export restraints on core products like rice and wheat resulting in expanded shortages, price volatility and social unrest in many countries.

The COVID-19 pandemic has resulted in nearly 70 countries imposing export restraints on certain medical goods and in a number of countries imposing export restraints on agricultural goods in anticipation of potential shortages. The breadth and depth of the pandemic has resulted in a global severe shortage of a wide range of medical products, equipment and protective gear with countries (and within some countries, provinces, states, regions and even individual hospitals and medical facilities) competing against each other for limited supplies, bidding up prices, resulting in price gouging and hording of goods. It has also resulted in efforts by individual countries and companies (whether local or multinational) to ramp up production to meet the surge in demand. Press reports indicate that many smaller countries find themselves shut out of the market for supplies as large countries or groupings (US and EU) lock up available supplies for months going forward.

The two types of shortages are different in type. Food shortages, if real, flow (1) from some form of crop failure and inadequate inventories, (2) from the failure to keep markets open so goods go to markets where there are needs, or (3) from conflicts. That is, the shortage flows from a temporary supply problem. The shortage is not from a sudden upward change in global demand.

Medical pandemics create severe shortages because of the extraordinary growth in demand for medicines, supplies, equipment and personal protective equipment in a very limited time frame. While arguably countries could build up inventories of potentially needed supplies to address any magnitude of surge in demand, few countries effectively do so and long term demand for the products/supplies of interest don’t support massive capacity outside of a pandemic. Supply can be disrupted as it has been in the COVID-19 pandemic through border measures aimed primarily at limiting movement of people potentially infected but affecting the movement of goods as well, through export restraints imposed to ensure some supplies in country, through disruptions of supply chains, and through aggressive purchasing by large and/or rich countries reducing supplies available for other countries. Supply can also be increased through expanded investment (whether permanent or temporary), through diversion of existing manufacturing from other goods to needed goods, or through reducing inventories. Countries, to offset some of the upward pricing pressures, can reduce the cost of supplies by reducing customs duties, by reducing value added taxes or sales taxes on domestic and imported product, by streamlining and greenlaning import entry, by having the central government coordinate purchasing and distribution during the pandemic, by encouraging expanded production and by keeping markets open.

The COVID-19 pandemic has the added dimension that efforts to address the health crisis have resulted in massive unemployment, collapsing GDPs around the world, sharp contraction in global trade and the need to pump huge sums into economies to prevent greater collapse. Such actions by governments to permit economies to rebound in the future both involve much greater state involvement in economies at least temporarily and issues of how WTO rules on subsidies can or should be applied. The WTO, as the US and others have pointed out frequently, is designed for market economies and wasn’t designed to address the consequences of a pandemic of the magnitude of COVID-19. The extraordinary consequences of the current pandemic will challenge WTO members to determine if current rules remain applicable or need modifications.

Possible solutions for food security and for the availability of medical goods

Food security should, in my view, have different solutions in the trade arena than what may be needed for medical pandemics.

For food security, banning export restraints should be theoretically possible if coupled with (1) national, regional or global inventory reserves of key products to address the periodic droughts and other challenges to supply, (2) market access liberalization of the key agricultural products, and (3) rapid resolution if WTO Members violate their commitments. Even though theoretically possible, the global history of famines and the critical role of food security to governments around the world suggests that meaningful change to trade rules to reduce the flexibilities that presently exist to address food shortages is highly unlikely as part of WTO reform.

On medical pandemics, there are theoretically possible steps that countries could take to reduce the personal and economic toll of future pandemics and the damage to global trade flows. Countries historically have done a poor job of investing in research to address future diseases or viruses until a crisis has occurred. Countries could expand R&D efforts before pandemics. Similarly, national, regional, state/province, local inventories of many critical medical goods could be maintained to address pandemic-level needs. But the reality has been that governments, hospitals and medical businesses have generally not invested in the inventory needed for the historically infrequent pandemic level demand. Supply chains can be modified to provide more sources for all inputs versus reliance on suppliers from one or just a few countries. Governments could develop with companies a game plan for where additional capacity could be generated and how quickly if a pandemic arose and update those game plans periodically. Tariffs could be eliminated on all medical goods, supplies, equipment, and personal protective goods. Governments could ensure priority access of imports of such goods that meet international standards. Governments could provide information to the WHO and WTO on capacities of key medical goods on an annual basis to improve the transparency for countries on supplies. Governments could agree to ban export restraints during a pandemic. Governments could authorize international institutions to build regional inventories for access by countries without the financial resources to build inventories on their own.

While only some of the above actions would come within the WTO’s area of competence, it is hard to imagine WTO Members agreeing to the elimination of discretion they currently enjoy for medical emergencies. It is similarly difficult to imagine countries taking actions longer term to address a problem that could be dismissed as a once-in-a-century crisis.

The broader issues flowing from the need for massive government infusions of funds to prevent the global economy from collapsing are certainly important. If not addressed in a way that allows Members to do what they individually believe they need to do in this crisis, the broader issues will further impede forward movement on broad WTO reform.

Challenging times reveal important structural issues for consideration by WTO Members. Let’s hope there is sufficient recognition of the need for addressing the issues to lead to meaningful progress in reforming the WTO. But don’t hold your breath.

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