Deputy Director-General Alan Wolff

The Ottawa Group’s November 23 Communication and Draft Elements of a “Trade and Health” Initiative

On Monday, Novemer 23, Canada hosted a virtual meeting of the Ottawa Group on WTO reform. The Group includes Australia, Brazil, Canada, Chile, the European Union, Japan, Kenya, Republic of Korea, Mexico, New Zealand, Norway, Singapore and Switzerland. Deputy Director-General Alan Wolff provided comments and urged the Members to “translate their statements about reforms to global trade rules into formal proposals and concrete requests at the WTO.” WTO, 23 November 2020, DDG Wolff calls on Ottawa Group to table formal reform proposals at WTO, https://www.wto.org/english/news_e/news20_e/igo_23nov20_e.htm. DDG Wolff provided seven options for the consideration of the Ottawa Group on WTO reform, the first four of which used trade and health as one example.

“First, an observation: the game must be in play for key players to conclude that they have to join. If negotiations are not under way, there may be a substantial delay in attracting participation.

“Declarations, such as on trade and health, should be turned into formal proposals as soon as possible and should be embraced by all WTO members.

“And if some Members won’t come along or seek to delay — a joint initiative is a practical way to proceed and could then be launched as a priority. The time of testing should not be so long as to make a response to the pandemic arrive too late to be responsive to the current crisis.

“Second, Members can ask the WTO Secretariat for and receive support for evaluations of aspects of WTO reform. For example, on trade and health, Members can —

“Request the Secretariat to upgrade its COVID-19-related trade monitoring activities to collect and publish the best information available, not relying solely on notifications and verification. (This would be a more comprehensive and in-depth activity than that which takes place at present, which in itself was an upgrade from pre-COVID monitoring.)

“Request the Secretariat to work with the WHO, relevant UN agencies and other stakeholders, to highlight trade issues affecting vaccine production and availability, and to propose ways to eliminate obstacles. (This would go beyond existing activities and result in proposals put to the WTO Member- ship).

“Third, Members can

“Propose that the Director General convene a small, representative, ambassador-level group of Friends of Trade and Health to identify how the trading system has performed during the pandemic and to issue preliminary conclusions and recommendations for useful changes in approach within a short, defined timeline.

“Propose that the WTO Secretariat embark now upon the necessary supporting work without delay.

“Propose that the Director General constitute other ‘Friends’ groups to advance consideration of institutional reform and other issues of current importance, and providing possible solutions, such as with respect to the relationship to current and future WTO Agreements of the Paris Accord on Climate Change, the disciplining of fossil fuel subsidies, addressing border adjustments likely with the adoption of carbon taxes, assessing the impact on markets of subsidies and other state interventions, employing trade to reduce income inequality, making the WTO more effective for economic development within and among Member economies, improving the trading system with respect to women in trade, providing WTO support for the African Continental Free Trade Agreement, and more generally strategic foresight.

“G20 Members clearly want to enhance preparedness for future pandemics and other crises. Flexible groups with appropriate balance but able to be nimble and responsive are one way to supplement but not supplant the work of committees and joint statement initiatives (JSIs).

‘Propose that an ad hoc horizontal mechanism be created promptly in the event of crises to address — in real time — trade measures that are of concern. The mechanism, similar to trade policy reviews, but not limited to any single WTO Member’s measures, trade restrictive and trade liberalizing, should be constituted immediately for the current pandemic and economic recovery measures.

“Fourth, Members can

“Propose that the signatories of the Pharmaceutical Agreement providing for duty-free trade be updated (last done in 2010), that major nonsigna- tories join and that essential medical supplies be added to the coverage.

“Propose that the signatories of the Information Technology Agreement review and update its coverage, including adding medical equipment.

“Propose that negotiations on the Environmental Goods Agreement re-start in earnest now, with the addition of services.”

The Ottawa Group agreed to put forward a communication seeking action by WTO Members. Each of Canada and the EU (and likely other members) put out press releases. See, e.g., Government of Canada, November 23, 2020, Minister Ng hosts successful ministerial meeting of the Ottawa Group on WTO reform, https://www.canada.ca/en/global-affairs/news/2020/11/minister-ng-hosts-successful-ministerial-meeting-of-the-ottawa-group-on-wto-reform.html; European Commission, Directorate-General for Trade, 23 November 2020, Ottawa Group proposes a global Trade and Health Initiative, https://trade.ec.europa.eu/doclib/press/index.cfm?id=2215&title=Ottawa-Group-proposes-a-global-Trade-and-Health-Initiative.

The Canadian press release states in part, “As countries face a rise in COVID-19 cases, it is essential that governments minimize disruptions to trade flows in essential medical supplies. Today, members of the Ottawa Group took important steps toward a proposed WTO Trade and Health Initiative, which identifies short-term actions to strenghten supply chains and ensure the free flow of medicines and medical supplies.”

Similarly the European Commission press release stated that –

Today the Ottawa Group, a group of 13 like-minded World Trade Organisation (WTO) partners including the EU, agreed today on an initiative, calling on the WTO members to increase their cooperation and work toward enhanced global rules to facilitate trade in essential medical goods. The agreement took place as an outcome of the Ottawa Group Ministerial meeting, hosted virtually by Minister Mary Ng of Canada.

“The Ottawa Group members called for immediate actions in response to the coronavirus crisis such as exercising a restraint in using any export restrictions, implementing trade-facilitating measures in the area of customs and services, as well as improving transparency.

“They also called for further cooperation amongst members, and between the WTO and other international organisations.

“The group also encourages WTO members to refrain from imposing tariffs on essential medical goods during the crisis. Such actions are intended to strengthen the resilience of supply chains and contribute to an effective response to a public health emergency. They can serve as a basis for future permanent commitments on trade in essential medical goods.

“Commission Executive Vice President and Commissioner for Trade Valdis Dombrovskis said: ‘We are proud to promote this trade and health initiative. It aims to encourage stronger global cooperation at WTO level, by facilitating trade in healthcare products. This is critical in the current global health crisis and will also help us in future. But the Ottawa Group trade and health initiative is just the first step. Going forward, the EU will work to promote resilient global healthcare systems, as well as accessible and affordable healthcare products universally.’

“The communication will now be submitted later this week to the WTO secretariat, before being presented to the WTO General Council for discussion. It will be used to prepare the 12th Ministerial Conference of the WTO, due to be held in 2021.”

That same day, November 23, the Ottawa Group submitted to the WTO a communication entitled “COVID-19 and beyond: Trade and Health”. WT/GC/223 (24 November 2020). The document is embedded below.

223

The communication is ten paragraphs plus an Annex which is described as “Draft Elements of a ‘Trade and Health’ Initiative”. The communication reviews the social and economic impact of the COVID-19 pandemic and invites “all WTO Members to start working on a Trade and Health Initiative” referencing the Annex. Paragraph 6 of the communication summarizes the specific actions being proposed.

“6. With this objective in mind, we call on WTO Members to make their utmost efforts to prevent further disruptions in the supply chains of essential medical goods. As set out in the Annex to this Communication, we propose specific actions relating to export restrictions, trade facilitation,
technical regulations, tariffs, transparency and review, and call for the WTO to enhance its cooperation with other relevant international organizations, such as WHO, WCO, OECD as well as G20, given the context of the on-going evaluations of the global response to COVID-19. These proposed actions are not intended to be prescriptive and do not cover the universe of possible
measures that could support trade in essential medical goods. Rather, they reflect emerging best practices and should provide sufficient flexibility to be adapted to differing national circumstances.”

The Ottawa Group is hoping to get the support of all Members on a joint statement early in 2021 on a Trade and Health Initiative which could serve as a starting point for negotiations for new WTO commitments at the 12th Ministerial Conference in the summer of 2021 in Kazakhstan.

On export restrictions, the Annex calls for greater oversight of such restrictions without eliminating them outright.

On customs, services and technical regulations, the Annex calls for Members to share information and experiences on best practices in trade facilitation during a crisis (customs procedures, services (including freight, logistics, distribution and transport)) and on standards and technical requirements looking towards regulatory alignment.

On tariffs, the Annex calls on Members to “make best endeavours to temporarily remove or reduce tariffs on goods that are considered essential to fighting COVID-19 pandemic”.

On transparency and review, the Annex calls on Members to enhance transparency during the pandemic with the aim of identifying supply chain disruptions and avoiding such disruptions.

On the topic of cooperation of the WTO with other organizations, the Annex both encourages the WTO Secretariat to continue it outreach on measures related to COVID-19 and the studies developed by the Secretariat with a focus “on the causes and effects of the disruptions in the supply chains of essential goods and drawing on research of other international organizations.” The WTO Director-General is also encouraged to “intensify cooperation” with other organizations (including the G20) to improve “the analytical capacity of Members to monitor market developments in trade and production of essential medical goods.”

Finally, the Annex asks Members to review the effectiveness of the identified elements at the 12th Ministerial Conference “with a view to adopting possible commitments regarding trade in essential medical goods.”

Conclusion

There have been many communications put forward by different groups of Members at the WTO in the last eight months on actions that would make sense in terms of limiting export restraints on medical goods or avoiding such restraints on agricultural goods, about the need for effective trade facilitation measures to reduce barriers to movement of medical goods, and on other topics related to the COVID-19 pandemic.

The Ottawa Group’s communication from Monday is an effort to come up with an early possible deliverable that could garner broad WTO Member support. As a result it seeks a joint statement with agreement on the statement for early 2021. The Group also provides five draft proposals for such a joint statement. The proposals don’t eliminate existing flexibility (e.g., export restraints) but try to tighten disciplines via increased transparency. The proposals encourage development of best practices on a range of trade facilitation and regulatory alignment issues. The proposals also encourage what is obviously in most Members self-interest — reducing or eliminating tariffs on medical goods during the pandemic. The proposals also call on Members to do a better job on transparency on measure taken during the pandemic with a focus on identifying disruptions to supply chains and addressing the same in short order. Finally, while the WTO already cooperates with other organizations, the proposals point to specific areas where enhanced cooperation would be helpful.

In an organization where Members have a low level of trust in each other, a joint statement on the need for a Trade and Health Initiative such as proposed by the Ottawa Group is probably all that can be achieved in the short term. Something along the lines outlined in the Annex would indeed be a confidence builder if achieved early in 2021. The ability to review developments at the 12th Ministerial and start negotiations on trade in essential medical goods at that time will also be important if accomplished. The more ambitious options presented by DDG Wolff should be considered but realistically are unlikely to either happen or get started ahead of the 12th Ministerial.

Let’s hope that the WTO membership can come together to support the Ottawa Group proposal. The EC has indicated that the Communication will be taken up at the December General Council meeting. That will be an early opportunity to see if there is likely to broad support for the initiative.

WTO possible actions to facilitate recovery from COVID-19, the Ottawa Group’s June 16 Communication

A number of WTO Members have submitted proposals for action by the WTO Membership to address the global trade challenges flowing from the COVID-19 pandemic including speeding recovery and minimizing future disruptions from later health challenges. Most proposals address what to do about export restrictions, simplifying import procedures and/or reducing import duties, and improved transparency of actions taken.

The Ottawa Group June 2020 Statement: Focusing Action on COVID-19

The latest contribution comes from the “Ottawa Group” and was submitted on June 16, 2020. June 2020 Statement of the Ottawa Group: Focusing Action on COVID-19, WT/GC/217. The Ottawa Group is a group of WTO Members who describe themselves as “champions of WTO reform”. The group consists of the following WTO Members — Australia, Brazil, Canada, Chile, European Union, Japan, Kenya, Republic of Korea, Mexico, New Zealand, Norway, Singapore and Switzerland.

The Ottawa Group statement provides the following introduction followed by six areas for potential WTO action:

“The world continues to grapple with the profound human health and economic impacts of the COVID-19 pandemic. In response to these challenges, thinking has begun on trade policy actions that would support an inclusive, sustainable, and resilient recovery as well as what trade rules should be adapted or developed to guide collaborative policy responses to future global crises. In this context, the WTO must play an important role in helping ensure coordination and coherence between actions its members take. This will require initiative and engagement by WTO Members in order to be successful.

“In this environment, there is an opportunity for the Ottawa Group to provide leadership, critical thinking and analysis, as well as ideas and proposals on potential actions that the broader WTO membership could take. In order to make best use of resources, this paper sets out six areas where concrete actions could be taken.” Page 1

The six action items are identified with a discussion of why the area is important and what steps the Group views as important to take. The Ottawa Group recommendations are summarized at the end of the communication (pages 4-5):

Summary:

Action Item 1: Transparency and Withdrawal of Trade-Restrictive Measures

Action Point: Ministers instruct officials to: 1) ensure any measures introduced in response to COVID-19 are promptly notified in accordance with relevant WTO requirements; 2) support efforts by the WTO Secretariat to collect and share information and best practices on trade-related measures taken in response to COVID-19 5/; 3) discuss the principle of ‘targeted, proportionate, transparent, temporary and consistent with WTO rules’; and 4) lead by example and withdraw or end any trade restrictive measures introduced in response to COVID-19 as quickly as possible.

“5/ Including by: (a) returning to the quarterly cycle of trade monitoring reports as during the financial crisis; and (b) including trade-related economic support measures in the trade monitoring reports and (c) and to the extent possible, making a technical assessment of members’ trade-related economic support measures in reaction to COVID-19.

Action Item 2: Keeping Open and Predictable Trade in Agricultural and Agri-Food Products

Action Point: Ministers instruct officials to: 1) engage in ongoing discussions on the fulfilment of joint declarations on maintaining predictable and open agriculture trade; 2) lead by example, and withdraw or end any emergency measures introduced in response to COVID-19 that may adversely affect trade in agriculture as quickly as possible; and 3) advance analysis and consideration on what steps WTO Members could take to continue improving agriculture trade based on the lessons learned from COVID-19 to ensure that future crises will not undermine trade, food security, and the stability of agricultural markets in the long-term.

Action Item 3: E-commerce

Action Point: Ministers instruct officials to prioritize and accelerate work on the Joint Statement Initiative on E-commerce, including through informal and virtual discussions, ahead of the rescheduled MC12 in 2021, including by the development of a consolidated negotiating text by the end of 2020 at the latest. In this regard, we will support the efforts of the co-convenors.

Action Item 4: Trade Facilitation – Use of Information Technology and Streamlined Procedures

Action Point: Ministers instruct officials to identify ways to take full advantage of the opportunities for trade facilitation in the Trade Facilitation Agreement (TFA) and to promote best practices for the implementation of the TFA. This includes how the adoption of digital solutions can support the movement of essential goods across borders as smoothly as possible.

Action Item 5: Initiative on Medical Supplies

Action Point: Ministers instruct officials to advance analysis and consideration in order to identify what steps WTO Members could take to facilitate trade in medical supplies to help ensure that the world is better positioned to deal with future health emergencies and to help ensure that versatile, diversified and resilient supply chains exist that allow all members access to vital medical supplies. This work should include analysis of the objectives and effects of policies affecting trade of medical supplies in response to the current pandemic and support for international organizations, including the WTO, in analyzing the potential impacts and outcomes of measures and recommending policies.

Action Item 6: Deepen Engagement with Stakeholders

Action Point: Ministers instruct officials to explore how best to pursue intensified engagement with stakeholders in order to better inform policymaking.”

The Ottawa Group proposals include topics not addressed in other proposals, such as the importance of prioritizing conclusion of the e-commerce joint statement initiative. During the pandemic, the critical importance of e-commerce to and expanded use by many businesses and consumers has reduced the damage to economies and to global trade. All Ottawa Group members are participating in the ongoing e-commerce talks, talks involving 84 countries or territories.

On issues like export restraints, the Ottawa Group has some positive ideas while reflecting the reality that some Ottawa Group members have used export restraints on medical goods during the pandemic. The idea of giving definition to the terms “targeted, proportionate, transparent, temporary and consistent with WTO rules” could be useful for administrations to be able to evaluate intended actions. However, the spread of a pandemic such as COVID-19 and internal political pressures to help one’s own population will render any such clarifications of marginal actual assistance if the underlying challenge of global supply/demand imbalance is not addressed on an ongoing basis.

As has been seen in agricultural goods, increasing information on global supplies both reduces the likelihood of countries imposing export restraints and gives trading partners greater leverage in pushing for roll backs of export restraints imposed by individual countries where there is no actual shortage. The Ottawa Group’s recommendations on agricultural goods reflects that the ability to disarm restrictions where shortages do not in fact exist.

The Ottawa Group submission from June 16 is embedded below.

WTGC217

EU’s June 11, 2020 Concept Paper, Trade in Healthcare Products

Some WTO Members, including Ottawa Group member countries, have taken unilateral action to liberalize trade in medical goods by reducing tariffs (at least temporarily) and by streamlining entry of medical goods needed for handling the pandemic. Some members, like the EU, have suggested creating an expanded medical goods duty-free agreement to go beyond the 1995 pharmaceutical agreement. For example, in a concept paper of 11 June 2020 entitled Trade in Healthcare Products, the EU, inter alia, provides in the Annex (pages 9-14) a list of goods that WTO Members could consider for total duty elimination. https://trade.ec.europa.eu/doclib/docs/2020/june/tradoc_158776.pdf The EU notes in a footnote that its concept paper “is meant to contribute to an exploratory discussion on a possible initiative to facilitate trade in healthcare products and is without prejudice to the EU’s position in potential negotiations.” Page 1 footnote 1.

The EU concept paper covers a number of other areas besides tariff eliminations, but for purposes of this note, the discussion will be limited to the product coverage for possible duty elimination. The EU provides a list of 152 6-digit HS categories in its Annex. At the six-digit level, import categories may cover many products not relevant to a particular pandemic, but the six-digit HS level is the most fragmented level of harmonization provided by the Harmonized Commodity Description and Coding Systems. Interestingly the EU Annex does not cover all products identified by the World Customs Organization and World Health Organization as relevant to fighting the COVID-19 pandemic. Specifically, there are thirty products (with accompanying HS numbers that are in the WCO list that are not in the EU proposed Annex. See World Customs Organization Prepared jointly with the World Health Organization, HS classification reference for Covid-19 medical supplies, 2.1 Edition, http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/nomenclature/covid_19/hs-classification-reference_2_1-24_4_20_en.pdf?la=en.

Specifically, under the WCO’s Section II dealing with face and eye protection, there are two face and eye protection products which are not part of the EU list (HS 9004.90 and 3926.90); four of five glove categories are not in the EU list (HS 3926.20, 4015.19, 6116.10, 6216.00); and eight of nine of the other products are not in the EU list (HS 6505.00, 3926.20, 4015.90 and 4818.50, 6210.40, 6210.40, 6210.50, 6210.50).

Similarly, in Section III, disinfectants and sterilisation products, two products in the WCO list are not covered by the EU (HS 2207.10, 2208.90).

In Section IV, oxygen therapy equipment and pulse oximeters, there is one product in the WCO list not covered by the EU Annex (HS 9026.80).

In Section V, other medical devices and equipment, the EU Annex doesn’t cover three products covered by the WCO list (HS 8413.19, 9028.20, 7324.90).

In Section VI, other medical consumables, there are four products shown in the WCO list that are not part of the EU Annex (HS 2804.40, 3923.29, 3926.90, 3926.90).

Section VII of the WCO list covers vehicles; with the exception of wheelchairs (which are covered by the EU Annex), the other three WCO products are not covered — ambulances, mobile clinic vehicles, mobile radiological vehicles (HS 8703, 8705.90, 8705.90).

Finally, in the WCO’s Section VIII, other products, three of four products in the WCO list are not covered by the EU Annex (HS 8421.39, 7311.00, 7613.00).

Because the WCO/WHO list reflects items needed by countries dealing with the COVID-19 pandemic, it is unclear what the logic is of not including such items in a proposed duty-free list compiled by the EU. Many of the items not included in the EU Annex (e.g., gloves, face shields, etc.) would be needed in addressing the current as well as future pandemics. If there is an effort to seek a duty-free agreement on medical goods, presumably the list will change from that put forward by the EU to be more comprehensive.

While the United States under the Trump Administration is not likely to enter into an agreement to eliminate tariffs on medical goods while the pandemic is afoot (as indicated by Amb. Lighthizer), the reality is that nearly all of the goods in the EU Annex are already duty free in the United States. Specifcally, 135 of the 152 6-digit HS items are duty free (Column 1 rate) in the U.S. in 2020. That is 88.8% of the HS categories. On a dollar value basis, 98.4% of imports into the U.S. during 2019 of products in the EU Annex are under HS numbers that are duty free. Of the remaining 1.6% of imports, a large part of the imports would be duty free under an FTA or GSP or other preferential program. Imports from China, some of which may be subject to supplemental duties flowing from the Section 301 investigation and resulting additional tariffs on Chinese goods, are 6.2% of total imports and some of those goods, if covered by additional duties, are subject to existing or potential exclusions.

Stated differently, should there be an effort to do a sectoral duty free agreement, in considering whether there is a critical mass, sponsors should be evaluating the existing tariff structures of non-participants.

The EU Concept Paper and the WCO list are embedded below.

tradoc_158776

hs-classification-reference_2_1-24_4_20_en-1

Deputy Director-General Alan Wolff’s Jun 17 speech, Pandemic underlines need to improve trading system’s relevance and resilience

This past week, Deputy Director-General Wolff spoke at a Think20 virtual panel on Policy Recommendations for a Post-COVID 19 World. DDG Wolff reviewed both actions that the WTO has taken (transparency on actions taken by Members; developing a trade forecast; providing a forum for members to share proposals and consider collective action) and proposals that had been put forward by Members. See https://www.wto.org/english/news_e/news20_e/ddgaw_18jun20_e.htm.

DDG Wolff identified two imperatives — “where the current rules are least prescriptive, they should be strengthened”; “where collective action would be helpful it should occur.” He then reviews WTO Members who have put forward proposals (Korea, Canada, Singapore, New Zealand, Switzerland, the Ottawa Group, the Cairns Group) and provided his summary of some of the suggestions made:

“Some specific suggestions that have been made include the following:

” A major effort can be undertaken to increase transparency. Member notifications can be supplemented by enhanced monitoring and reporting of measures by the Secretariat.

“There is little guidance in the WTO rules as to the appropriate use of export controls where it is felt that there exists short supply. Further guidance could be crafted. Sometimes the existence of extensive policy space is contrary to the common interests of all.

“Government interventions to procure needed supplies reduce the scope for market forces to determine competitive outcomes. A number of the practices witnessed in the last three months in response to the pandemic are not explicitly regulated by the current WTO rules. Included under this heading would be subsidization conditioned on supplying the domestic market, and pre-emptive government purchasing and investment. Additional disciplines could be considered.

“Leaving the allocation of scarce necessities solely to market forces may also not be a completely satisfactory alternative if the poorest countries are priced out of participation.

“Consideration can be given to agreeing, as in the WTO Agreement on Agriculture, to require that a country planning to impose an export restriction consider the effect on others of applying the measure.

“Additional provisions could provide for prior notice before export restrictions are put into place and a commitment to engage in timely consultations.

“Consideration can be given to including in any restrictions a sunset clause and providing for a roll-back of current trade restrictions.

“Multilaterally-agreed guidance could be given for the sharing of scarce medical supplies, including vaccines.

“Concerted efforts could be made to have relevant tariff liberalization, not just for medical goods, equipment and pharmaceuticals, but more broadly.

“Consideration can be given to creating, a Members’ Emergency Task Force or other mechanism to flesh out options for consideration by Members.

“Where options are devised by groups of Members, an effort and process are needed to gain broader Member support for their recommendations and to assure implementation of concrete steps forward.

“A Long-Range Policy Planning Network for the Multilateral Trading System could be created. There is insufficient attention paid to assessing the future needs of the multilateral trading system, in part due to the daily need to deal with current challenges.

“For the recovery, there are at least three immediately identifiable ways
in which the multilateral trading system can contribute. Consideration
can be given to:

“Lowering the costs of trade by lowering tariffs and other impediments to trade broadly;

“Engaging in a collective effort to accelerate the implementation of
the Trade Facilitation Agreement, and

“Working with international financial institutions and banks to
foster the restoration of trade finance.”

A broad array of suggestions have been made at the WTO as can be seen. The challenge, of course, is in generating momentum for group action. If the major players are not pulling in the same direction, it is hard to see how that momentum will be generated. Typically times of crisis create opportunities for bold action. Is today’s crisis such an opportunity considering the significantly different perspectives of China, the EU and the U.S.?

Many developing countries (and those who claim developing status at the WTO) typically have the highest tariffs and can be motivated for short-term tariff action on specific goods (as this pandemic has demonstrated), but have not shown a willingness to lead on tariff liberalization when developed countries typically have very low tariff levels already. Is the pandemic a reason for such countries to rethink their contribution to the global trading system?

A number of the proposals go to the functioning of the WTO and its governance. Considering the desire by many for broader reform but with significant differences in what type of reforms are appropriate, can the proposals identified generate consensus support in the coming months?

With the economic damage to the world’s economies much larger than originally projected, certainly there has never been a greater need for collective action to minimize human health and economic costs from the pandemic and to speed economic recovery. The coming months will show whether the great divides among the majors can be bridged for the good of all.

Recent World Bank and OECD forecasts show deeper 2020 economic contraction, need for increased global cooperation

The year 2020 is now forecast to result in the sharpest economic contraction since World War II. This is the first recession in 150 years flowing entirely from a health pandemic. With data collected over the last five and a half months (Dec. 31 – June 13), confirmed COVID-19 cases are more than 7.625 million globally and total deaths are more than 425,000 (with both numbers viewed as significantly understated). The global trend line on new cases continues to rise as of June 13 while the number of reported deaths has declined from its peak and stabilized at a high rate.

The International Monetary Fund’s forecast for 2020 went from affirmative growth at the beginning of the year to a decline of 3.5% in April. A recent report from the World Bank now projects global GDP contraction of 5.2% while a June OECD report shows estimates of global GDP contraction of 6.0% if COVID-19 is limited to a “single-hit” scenario and 7.6% contraction if there is a second wave of COVID-19 cases in 2020. See World Bank, Global Economic Prospects, June 2020 at 4, Table 1.1, Real GDP, https://www.worldbank.org/en/publication/global-economic-prospects; OECD Economic Outlook, June 2020, at 13, Table 1.1, https://www.oecd-ilibrary.org/sites/0d1d1e2e-en/index.html?itemId=/content/publication/0d1d1e2e-en.

The OECD outlook data show for a single pass of COVID-19, declines for the world at 6.0%, the G20 at 5.7%, OECD at 7.5%, the U.S. at 7.3%, the Euro area at 9.1%, Japan at 6.0%, non-OECD at 4.6%, China at 2.6%, India at 3.7%, and Brazil at 7.4%. Id at 13, Table 1.1. The projections if there is a second wave of COVID-19 cases are significantly worse for all countries.

The OECD’s projection for the U.S. is for greater contraction than the recent estimate from the Federal Reserve of 6.5% in 2020. See, e.g., https://www.politico.com/news/2020/06/10/fed-economy-shrink-65-percent-2020-311212.

The World Bank’s estimates for 2020 are similar for some areas and lower for the United States (-6.1%) but shows China growing versus the OECD projected contraction. Here are the data for 2020 for selected countries from the World Bank publication:

United States -6.1%

Euro Area -9.1%

Japan -6.1%

China +1.0%

Indonesia 0.0%

Thailand -6.0%

Russia -6.0%

Turkey -3.8%

Poland -4.2%

Brazil -8.0%

Mexico -7.5%

Argentina -7.3%

Saudi Arabia -3.8%

Iran -5.3%

Egypt +3.0%

India -3.2%

Pakistan -2.6%

Bangladesh +1.6%

Nigeria -3.2%

South Africa -7.1%

Angola -4.0%

The World Bank and OECD also have different levels of trade contraction projected for 2020 in their June publications. The World Bank’s projection is for a contraction of 13.4% (page 4) while the OECD’s projection is for a contraction of 9.5% in 2020 (pae 13). These projections compare to the latest WTO projections of contractions between 13% and 32%. April 8, 2020, WTO press release, Trade set to pluge as COVID-19 pandemic upends global economy, https://www.wto.org/english/news_e/pres20_e/pr855_e.htm.

Foreward to the World Bank’s Global Economic Prospects

The World Bank’s recent report in its foreward by the Bank’s President David Malpass provides a stark summary of the challenges for many emerging markets and developing economies and the efforts of the World Bank in finding solutions. The foreward (pages xiii – xiv) is reproduced below:

Foreword

“The COVID-19 pandemic and the economic shutdown in advanced economies and other parts of the globe have disrupted billions of lives and are jeopardizing decades of development progress.

“This edition of the Global Economic Prospects assesses the impacts of the pandemic and analyzes possible courses and outcomes. It presents clear actions needed by the global community and national policymakers—to limit the harm, recover, and rebuild better and stronger than before.

“The report describes a global economy suffering a devastating blow. Our baseline forecast envisions the deepest global recession since World War II. The report also includes an exhaustive analysis of the outlook for emerging market and developing economies, many of which are now fighting on two fronts—containing the domestic outbreak and its consequences while coping with the economic spillovers from the deep recessions in advanced economies.

“Looking a layer deeper, the report investigates the depth and breadth of the economic and humanitarian storm. The COVID-19 recession is the first since 1870 to be triggered solely by a pandemic. The speed and depth with which it has struck suggests the possibility of a sluggish recovery that may require policymakers to consider additional interventions. For many emerging market and developing countries, however, effective financial support and mitigation measures are particularly hard to achieve because a substantial share of employment is in informal sectors.

“Beyond the staggering economic impacts, the pandemic will also have severe and long-lasting socio-economic impacts that may well weaken long-term growth prospects—the plunge in investment because of elevated uncertainty, the erosion of human capital from the legions of unemployed, and the potential for ruptures of trade and supply linkages.

“The World Bank Group is committed to helping alleviate financing breakdowns from the COVID-19 crisis in ways that work toward a more resilient recovery. Some examples include expanding and increasing the coverage of safety net programs, providing trade finance, and supporting the working capital needs of small and medium-sized enterprises. In the broad COVID-19 response for the poorest nations, World Bank Group resources are being scaled up dramatically and debt service payments by official bilateral creditors were suspended on May 1, with comparable treatment expected by commercial creditors.

“Yet these steps toward financing and liquidity will not be enough. Even before the pandemic, development for people in the world’s poorest countries was slow to raise their incomes, enhance living standards, or narrow inequality. The pandemic and economic shutdown in advanced economies and elsewhere are hitting the poor and vulnerable the hardest – through illnesses, job and income losses, food supply disruptions, school closures and lower remittance flows.

“Thus, policy makers face unprecedented challenges from the health, macroeconomic and social effects of the pandemic. To limit the harm, it is important to secure core public services, maintain a private sector and get money directly to people. This will allow a quicker return to business creation and sustainable development after the pandemic has passed. During this mitigation period, countries should focus on targeted support to households and essential public and private sector services; and remain vigilant to counter potential financial disruptions.

“During the recovery period, countries will need to calibrate the withdrawal of public support and should be attentive to broader development challenges. The Global Economic Prospects report discusses the importance of allowing an orderly allocation of new capital toward sectors that are productive in the new post-pandemic structures that emerge. To succeed in this, countries will need reforms that allow capital and labor to adjust relatively fast—by speeding the resolution of disputes, reducing regulatory barriers, and reforming the costly subsidies, monopolies and protected state-owned enterprises that have slowed development.

“To make future economies more resilient, many countries will need systems that can build and retain more human and physical capital during the recovery—using policies that reflect and encourage the post-pandemic need for new types of jobs, businesses and governance systems.

“Emerging market and developing economies are devoting more public resources to critical health care and support for livelihoods during the shutdown, adding to the urgency of their allowing and attracting more private sector investment. This makes the financing and building of productive infrastructure one of the hardest-to-solve development challenges in the post-pandemic recovery.

“The transparency of all government financial commitments, debt-like instruments and investments is a key step in creating an attractive investment climate and could make substantial progress this year. Faster advances in digital connectivity are also necessary and should get a vital boost from the pandemic, which heightened the value of teleworking capabilities, digital information, and broad connectivity. Digital financial services are playing a transformative role in allowing new entrants into the economy and making it easier for governments to provide rapidly expandable, needs-based cash transfers.

“This edition of the Global Economic Prospects describes a grave near-term outlook. The speed and strength of the recovery will depend on the effectiveness of the support programs governments and the international community put in place now; and, critically, on what policymakers do to respond to the new environment. The World Bank Group is committed to seeking much better outcomes for people in emerging market and developing countries, especially the poor. During the crisis, we call on policymakers to act fast and forcefully: our interventions should be no less powerful than the crisis itself.”

Editorial by Chief Economist to OECD June Economic Outlook

Echoing the challenging times ahead in 2020, the OECD’s Chief Economist Laurence Boon reviews the tightrope that OECD countries face before a vaccine is available. The editorial is reprinted below (pages 7-9)

Editorial

After the lockdown, a tightrope walk toward recovery

The spread of Covid-19 has shaken people’s lives around the globe in an extraordinary way, threatening health, disrupting economic activity, and hurting wellbeing and jobs. Since our last Economic Outlook update, in early March, multiple virus outbreaks evolved into a global pandemic, moving too fast across the globe for most healthcare systems to cope with effectively. To reduce the spread of the virus and buy time to strengthen healthcare systems, governments had to shut down large segments of economic activity. At the time of writing, the pandemic has started to recede in many countries, and activity has begun to pick up. The health, social and economic impact of the outbreak could have been considerably worse without the dedication of healthcare and other essential workers who continued to serve the public, putting their own health at risk in doing so.

Governments and central banks have put in place wide-ranging policies to protect people and businesses from the consequences of the sudden stop in activity. Economic activity has collapsed across the OECD during shutdowns, by as much as 20 to 30% in some countries, an extraordinary shock. Borders have been closed and trade has plummeted. Simultaneously, governments implemented quick, large and innovative support measures to cushion the blow, subsidising workers and firms. Social and financial safety nets were strengthened at record speed. As financial stress surged, central banks took forceful and timely action, deploying an array of conventional and unconventional policies above and beyond those used in the Global Financial Crisis, preventing the health and economic crisis from spilling over into a financial one.

As long as no vaccine or treatment is widely available, policymakers around the world will continue to walk on a tightrope. Physical distancing and testing, tracking, tracing and isolating (TTTI) will be the main instruments to fight the spread of the virus. TTTI is indispensable for economic and social activities to resume. But those sectors affected by border closures and those requiring close personal contact, such as tourism, travel, entertainment, restaurants and accommodation will not resume as before. TTTI may not even be enough to prevent a second outbreak of the virus.

Faced with this extraordinary uncertainty, this Economic Outlook presents two possible scenarios: one where the virus continues to recede and remains under control, and one where a second wave of rapid contagion erupts later in 2020. These scenarios are by no means exhaustive, but they help frame the field of possibilities and sharpen policies to walk such uncharted grounds. Both scenarios are sobering, as economic activity does not and cannot return to normal under these circumstances. By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments.

The pandemic has accelerated the shift from ‘great integration’ to ‘great fragmentation’. Additional trade and investment restrictions have sprung up. Many borders are closed across large regions and will likely remain so, at least in part, as long as sizeable virus outbreaks continue. Economies are diverging, depending on when and to what extent they were hit by the virus, the preparedness of their healthcare system, their sectoral specialisation and their fiscal capacity to address the shock. Emerging-market economies have also been shaken by the crisis. Commodity prices have plummeted. Large capital outflows, plummeting remittances, weaker healthcare systems and a large share of informal workers have threatened their health, economic and social resilience. Everywhere, the lockdown has also exacerbated inequality across workers, with those able to telework generally highly qualified, while the least qualified and youth are often on the front line, unable to work or laid off, with the effects further compounded by unequal access to social protection. Private debt levels are uncomfortably high in some countries, and business failure and bankruptcy risks loom large.

Extraordinary policies will be required to walk the tightrope towards recovery. Even if growth does surge in some sectors, overall activity will remain muted for a while. Governments can provide the safety nets that allow people and firms to adjust, but cannot uphold private sector activity, employment and wages for a prolonged period. Capital and workers from impaired sectors and businesses will have to move towards expanding ones. Such transitions are difficult, and rarely happen fast enough to prevent the number of failing firms from rising and a sustained period of unemployment. Governments will need to adapt support and accompany the transition, allowing fast restructuring processes for firms, with no stigma for entrepreneurs, providing income for workers in between jobs, training for those laid off and transitioning to new jobs, and social protection for the most vulnerable. We have previously called for a rise in public investment in digital and green technologies to promote long-term sustainable growth and lift demand in the short term. This is even more urgent today with economies having been hit so hard.

Today’s recovery policies will shape economic and social prospects in the coming decade. Ultra-accommodative monetary policies and higher public debt are necessary and will be accepted as long as economic activity and inflation are depressed, and unemployment is high. However, debt-financed spending should be well targeted to support the most vulnerable and the investment necessary for a transition to a more robust economy. Public support needs to be transparent and fair. Corporate support from governments must come with transparent rules, with private bond and equity holders taking a loss when government steps in, so that their rewards for taking risks are not excessive. Improving employer-employee relationships should accompany ongoing public support for workers and firms, paving the way for stronger social cohesion and ultimately a stronger and more sustainable recovery.

The recovery will not gain steam without more confidence, which will not fully recover without global cooperation. Confidence needs to be boosted both at the national and international levels. Household saving rates have soared in most OECD countries, with high uncertainty and rising unemployment holding back consumption. Trade disruptions and the associated threats to supply chains also impede the necessary reduction in uncertainty for investment to resume. Global cooperation to tackle the virus with a treatment and vaccine and a broader resumption of multilateral dialogue will be key for reducing doubt and unlock economic momentum. The international community should ensure that when a vaccine or treatment is available it can be distributed rapidly worldwide. Otherwise the threat will stay. Likewise, resuming a constructive dialogue on trade would lift business confidence and the appetite for investment.

Governments must seize this opportunity to engineer a fairer and more sustainable economy, making competition and regulation smarter, modernising government taxes, spending, and social protection. Prosperity comes from dialogue and cooperation. This holds true at the national and global level.”

With a lack of Global Cooperation, the WTO is limited to a monitoring of actions by Members and providing transparency

Many of the challenges facing countries, their companies, workers and citizens are not trade related as reviewed in the World Bank and OECD excerpts provided above. But trade does play a role and for many countries a central role in terms of access to needed medical goods and other items. The WTO, as the GATT before it, offers significant leeway to Members to impose export restraints during health emergencies and in other situations. Where there has been a lack of global planning and preparedness for a pandemic, as has been the case with COVID-19, the world finds itself in a situation where demand for medical goods far exceeds supply for extended periods of time for different countries. The desired trade approach of keeping markets open sounds good and is critical for countries with import needs but is typically ignored by many countries that have production capacity and/or inventories, at least temporarily, as all governments look to protect their own populations first.

The G20 has announced some trade actions they are pursuing to ensure trade remains open, although important issues like limiting export restraints and promoting import liberalization are hortatory in nature reflecting the fact that many G20 members have taken and some maintain export restraints or are not supportive of other than ad hoc liberalization initiatives that are necessarily other than temporary.

Two recent speeches by Deputy Director-General Alan Wolff review what the WTO has been able to do to date in the pandemic (limited to seeking notifications of actions by Members, publishing information on the same, developing a trade forecast), what WTO Members have proposed as potential WTO initiatives (to date proposals have been from mid-sized economies and are open for signature by other Members) and the opportunities and challenges for reform of the WTO moving forward. See DDG Wolff, “The challenges are not over”, June 5, 2020, https://www.wto.org/english/news_e/news20_e/ddgaw_05jun20_e.htm; DDG Wolff, “There can be no permanent retreat from what has been created”, June 10, 2020, https://www.wto.org/english/news_e/news20_e/ddgaw_11jun20_e.htm.

The information collected by the WTO and posted on its website, the information notes on various trade topics affected by the pandemic, the efforts to interact with other multilateral organizations and with the business community are all helpful for Members and their constituents to understand what is happening in the trade environment and how the pandemic is affecting areas of trade, types of Members and so on.

It is also the case that initiatives proposed and actions taken by individual countries to improve the market environment, ensure greater market openness and speed availability of medical goods are helpful even if not embraced by the entirety of the WTO membership.

But there is little doubt that there is not the level of global cooperation nor the leadership from the major players to minimize the global fallout from the pandemic or to maximize the speed of the global recovery.

There is no obvious road ahead to greater cooperation or to the meaningful emergence of leadership by the majors in the remainder of 2020. Let’s hope that observation proves to be incorrect. The costs of failure to better cooperate and for the majors to lead in fact are likely unprecedented and will affect the lives of billions of people.

The future of the WTO — restoring relevance

The World Trade Organization has 164 Members at present with 23 more countries or territories in the process of accession. Nearly all international trade in goods and services is handled by WTO Members and those seeking accession.

At the beginning of 2020, the WTO officially turned 25 years old. Despite some successes in the first 25 years in terms of negotiated improvements, the WTO set of agreements are largely reflective of the world in the 1980s. Advances in technology, manufacturing make-up and importance of certain service sectors (e.g., e-commerce) are not covered by the existing agreements.

The WTO’s negotiating function has been nearly moribund on a multilateral level for more than a decade, with most successes at the WTO keyed to actions by plurilateral groups of Members (action by the willing). A system built on consensus decision making has been the hallmark of activity during the GATT and now during the WTO years but has proven unworkable in moving many topics forward amongst an expanded membership.

Similarly, the dispute settlement function of the WTO, long referred to as the “jewel” of the WTO, has been in a state of crisis for the last several years and now has a nonfunctioning Appellate Body (“AB”) as longstanding systemic concerns of the United States about the Appellate Body’s operation and adherence to the Dispute Settlement Understanding (“DSU”) have led to the United States blocking appointments of Appellate Body members until the system is corrected consistent with the DSU. With only one of seven AB members still in place as of December 11, 2019, the AB is unable to hear appeals (as all appeals must be heard by three AB members).

At the same time, many WTO Members have not kept current with notification requirements contained in each Agreement and intended to help Members understand actions of trading partners and their likely compliance with WTO Agreement obligations. This lack of full transparency limits the ability of Members to address issues and seek compliance with underlying obligations.

With the increased importance of China and other countries with economic systems not consistent with the GATT’s and now WTO’s architecture, there have also grown concerns by some Members on the ability of the WTO to handle different economic systems under the existing rules with the U.S., EU and Japan seeking new rules addressing some of the major elements flowing from the different systems.

The WTO, unlike other multilateral institutions, has a process of self-selection of developing country status. Least developed countries do have a clear definition consistent with other organizations. As there has been substantial economic development of many countries describing themselves as “developing” during the first 25 years of the WTO’s existence, there is conflict on the need to change current classification and/or the need for special and differential treatment.

On top of all of these ongoing concerns, the COVID-19 pandemic has resulted in WTO Members acting first for their own domestic interests, particularly in light of huge shortfalls in global supplies and capacity for medical supplies versus the needs of countries facing spikes in the number of cases. The result has been dozens of export restraints (styled as temporary) and dozens of unilateral actions by countries to reduce duties, simplify or prioritize entry procedures for medical supplies. While the WTO has established a webpage for COVID-19 information and provides information on actions taken by Members (either export restraints or import liberalizing), the WTO Members have not agreed on a course of action for all Members to pursue.

The COVID-19 pandemic has also disrupted the functioning of the WTO as in-person meetings have been cancelled for the last several months, and many developing countries have insisted that virtual meetings not be used for decision making, essentially halting the negotiations on areas like fisheries subsidies.

The challenges reviewed above raise the question about the WTO’s continued relevance and as importantly what reforms are needed to restore the WTO’s relevance going forward. The short-term challenges for the WTO are compounded by the decision by Director-General Azevedo to step down at the end of August which will divert much energy at the WTO into the process for finding a replacement Director-General.

Deputy Director-General Alan Wolff’s virtual presentation at a webinar hosted by the Korean International Trade Association

Earlier today, the WTO’s Deputy Director-General Alan Wolff made a virtual presentation in a webinar that was hosted by the Korean International Trade Association. The title of the presentation was “COVID-19 and the Future of World Trade. A link to the presentation can be found here. https://www.wto.org/english/news_e/news20_e/ddgaw_27may20_e.htm.

Everyone interested in the future of the multilateral trading system should take the time to read DDG Wolff’s presentation. The presentation reviews actions needed by WTO Members to respond to COVID-19, measures WTO Members can take to assist with the economic recovery from the pandemic, and systemic reform that WTO Members should consider. It is the last of these that takes up the bulk of the presentation.

In talking about reform, DDG Wolff states that —

“It is necessary to understand what values the multilateral trading system is designed to promote before it can be reformed.

“A serious inquiry into this subject would serve three purposes:

“(1) to know the value of what we have in the current system,

“(2) to determine if the values of the current system enjoy the support of all WTO Members, and

“(3) to address the degree to which the WTO is of sufficient continuing relevance as it is at present or whether it needs fundamental change.

“My list of the underlying values of the WTO has 16 entries. They include a number of basic principles.

“The first two, not obvious to all of us today, are supporting peace and stability. This was the key concern of the founders of the multilateral trading system in 1948 and the central objective of conflict-affected and fragile acceding members today.

“Other values, such as nondiscrimination, transparency, reciprocity, international cooperation and the rule of law are more obvious. Still others are more nuanced, less obvious perhaps, and emerge only upon reflection. They include well-being, equality, sovereignty, universality, development, market forces, convergence and morality.

“A recent addition to the list is sustainability.

“A serious discussion of WTO reform is long overdue. The pandemic simply adds to the urgency of it taking place.”

Not surprising, DDG Wolff’s review of the sixteen entries is well done and presents a much broader understanding of the importance and value of a global trading system than trade negotiators, businesses, workers, and governments generally bring to the table.

I won’t review the presentation in detail as the value of the presentation in my view is in reviewing the entirety. While DDG Wolff presents the detailed analysis as a possible road to a better future, there are issues identified which similarly suggest the need for a new set of agreements. Consider his discussion of “convergence”:

“Convergence

“A corollary of the principle that market forces are to dictate competitive outcomes is that the rules of the WTO are based implicitly, but without doubt, on convergence and not coexistence. If the desire is to have systems where market forces are not allowed to operate and deliver results, an underlying unstated assumption of the multilateral trading system would not be valid.

“Coexistence would require a different WTO. Where there is no agreement on convergence, a new modus vivendi will inevitably be sought. The arrangement is likely to settle at a lower level of trade than the WTO rules would otherwise provide.”

The United States has in fact raised this exact issue with the WTO Membership in reviewing the market economy basis of the WTO and the incompatibility of state-directed/controlled economies like that of the People’s Republic of China (and others).

Will WTO Members be able to rise to the current needs to engage in reform that supports the 16 principles reviewed in DDG Wolff’s paper? The future relevance of the WTO and the future dynamism of the global trading system depend on it.