OECD

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.

Digital Services Taxes – New U.S. Section 301 Investigations on Nine Countries and the European Union

In 2019, the United States initiated a section 301 investigation on France’s digital services tax (“DST”), made a finding that France’s DST “is unreasonable or discriminatory and burdens or restricts U.S. Commerce.”  84 Fed. Reg. 66956 (Dec. 6, 2019).  Additional duties of up to 100% were proposed on French goods valued at $2.4 billion.  France agreed to hold up application of its tax until the end of 2020 and the U.S. agreed to hold up tariffs to give the Organization for Economic Cooperation and Development time to conclude discussions on a possible agreed international tax structure for digital services.

On June 2, 2020, the U.S. Trade Representative announced the initiation of 301 investigations on nine countries and the European Union who have either implemented DSTs or who have such DSTs under development.  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/june/ustr-initiates-section-301-investigations-digital-services-taxes.  The countries who are subject to the investigations include Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.  The notice of initiation of the investigations will appear in the Federal Register on June 5, 2020 but was posted on the USTR website on June 2.  https://ustr.gov/sites/default/files/assets/frn/FRN.pdf.

Because of the COVID-19 situation, written comments are being accepted but it is unclear if there will be a public hearing.  Written comments are due by July 15, 2020.  The Federal Register notice pre-publication is embedded below.

USTR FR notice 301 investigation on digital services

The focus of the investigation will be on the following aspects of DSTs:

“The investigation initially will focus on the following concerns with DSTs: discrimination against U.S. companies; retroactivity; and possibly unreasonable tax policy. With respect to tax policy, the DSTs may diverge from norms reflected in the U.S. tax system and the international tax system in several respects. These departures may include: extraterritoriality; taxing revenue not income; and a purpose of penalizing particular technology companies for their commercial success.”  Page 5.

Based on the prior investigation into the French DST, there is little doubt that all of the programs will be found to violate Section 301 of the Trade Act of 1974, as amended, in some respect.

For example, in the French case, the USTR made five findings relevant to some or all of the current investigations:

‘First, the evidence collected in this investigation indicates that the French DST is
intended to, and by its structure and operation does, discriminate against U.S. digital companies.”

“Second, the evidence collected in this investigation indicates that the French DST’s
retroactive application is unusual and inconsistent with prevailing tax principles and renders the tax particularly burdensome for covered U.S. companies, which will also affect their customers, including U.S. small businesses and consumers.”

“Third, the evidence collected in this investigation indicates that the French DST’s
application to gross revenue rather than income contravenes prevailing tax principles and imposes significant additional burdens on covered U.S. companies.”

“Fourth, the evidence collected in this investigation indicates that the French DST’s
application to revenues unconnected to a presence in France contravenes prevailing international tax principles and is particularly burdensome for covered U.S. companies.”

“Fifth, the evidence collected in this investigation indicates that the French DST’s
application to a small group of digital companies contravenes international tax principles counseling against targeting the digital economy for special, unfavorable tax treatment.”

USTR, Section 301 Investigation, Report on France’s Digital Services Tax, Dec. 2, 2019, pages 1, 3, 4, 5.  https://ustr.gov/sites/default/files/Report_On_France%27s_Digital_Services_Tax.pdf.

The EU and the EU-member states covered have DSTs similar to France’s (without retroactivity) with some DSTs already in effect.  Other countries’ systems appear to be similar as well with many countries already applying their DST.  https://ustr.gov/sites/default/files/assets/frn/FRN.pdf.

The full USTR report on France’s DST is embedded below.

Report_On_France’s_Digital_Services_Tax

Where taxes are already in place, action by USTR will be likely even ahead of the end of the year absent agreement with the trading partner to postpone collection.  The start of investigations at this time will enable the U.S. to complete the investigation this summer or early fall, take public comments on possible tariffs to be added if no resolution with individual countries or the EU is possible.  More specifically, the U.S. will have handled domestic legal requirements to act if other DSTs go into effect without an OECD agreement or where the tax imposed is not consistent with the OECD terms.  As stated in the USTR press release yesterday, “’President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies,’ said USTR Robert Lighthizer. ‘We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.’”  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/june/ustr-initiates-section-301-investigations-digital-services-taxes.

Conclusion

The OECD efforts to develop an agreed model for taxing digital services are supposed to conclude this year.  The U.S. and its leading digital services companies have been very concerned about the efforts of trading partners to impose taxes that will effectively apply only or disproportionately to them.

At the same time, the COVID-19 pandemic has added pressure on governments to find new sources of revenue, and digital services are an inviting target.

Expect this to be a very important issue in the second half of 2020.  Failure to find an acceptable solution to the United States will result in a significant escalation of trade tensions both with the EU and with many other countries going forward.

 

 

 

 

 

COVID-19 – OECD first policy brief on trade issues related to the pandemic

As the world moves towards two million confirmed COVID-19 cases later this week (week of April 13) and global deaths near 125,000, the EU and the United States continue to hold center stage with the largest number of cases and deaths. As of April 11th, the EU represented 39.29% of confirmed cases and 57.9% of deaths. The UK (now not part of the EU) was 4.25% of confirmed cases and 8.77% of deaths. The United States had 30.34% of confirmed cases and 18.39% of deaths. Collectively, the EU, UK and US have had 73.88% of confirmed cases, 85.07% of deaths despite having just 10.86% of the world’s population. See attached table.

Situation-update-worldwide-as-of-11-April-2020

The rate of infection is picking up in a wide range of countries, including in areas with larger populations and often lower per capita incomes. Prior posts have looked at a range of issues surrounding COVID-19 and trade policy responses, including proposals from business groups, intergovernmental organizations and the actual response of countries and territories attempting to deal with the global health pandemic.

On Friday, April 10, the OECD released the first in a series of policy briefs on trade issues related to COVID-19, The title of the policy brief is simply, COVID19 and International Trade: Issues and Actions. https://read.oecd-ilibrary.org/view/?ref=128_128542-3ijg8kfswh&title=COVID-19-and-international-trade-issues-and-actions.

The policy brief starts with the statement that “In a challenging and uncertain situation, trade is essential to save lives – and livelihoods”. Going beyond the March 2020 OECD Interim Economic Outlook estimate of the impact of global growth (halved to 1.5%), the policy brief estimates that each month extension of containment measures will further reduce global growth by 2 percentage points. The brief then reviews the wide range of challenges to nations and the world in both coping with the health dimensions of the pandemic and the extraordinary challenges to economies, national and private sector debt, employment and other issues. The estimated “initial impact on activity of partial or complete shutdowns on activity in a range of economies” shows GDP declines of 15-35% (page 2, figure 1).

The policy brief then identifies four actions that can be taken by governments to improve trade flows and reduce the negative effects on economies:

“First boost confidence in trade and global market by improving transparency”

“Second, keep global supply chains going, especially for essentials”

“Third, avoid making things worse”

“Fourth, look beyond the immediate: Policy actions now could have a long life”

Improved transparency

The policy brief supports the need for governments to notify trade-related measures that are taken in response to the pandemic to the WTO. The WTO website contains a page on COVID-19 which lists notices provided to the WTO from governments (both trade restricting and trade liberalizing) in response to COVID-19. As of April 9th, 41 notifications had been received. https://www.wto.org/english/tratop_e/covid19_e/covid19_e.htm.

The OECD also shares information it receives with the WTO. In addition, the OECD provides information on agriculture production and trade to the Agricultural Market Information System “to ensure accurate, up-to-date information on market developments and country policies in critical commodities for the global food system.” Page 3.

With more than 60 trade restrictive measures flagged by observers, the efforts at improved transparency are a work in progress obviously dependent upon the actions of WTO Members.

Keeping supply chains going

The OECD policy brief reviews a range of developments since the start of the pandemic which have raised costs and complicated the flow of trade:

  1. Loss of air cargo as part of reduction in passenger flights;

2. Drop in ship traffic and increased procedures and documentation requirements; vs. establishment of some “green lanes” at ports and border crossing points;

3. Location of shipping containers in China at time of pandemic, creating shortages and raising costs;

4. Labor availability at ports reduced in many cases or increased costs from additional protective measures;

5. Limits on mobility of people affecting various trade processes (inspections, etc.);

6. Higher costs throughout supply chains from increased protective measures for workers.

For essential medical supplies, the OECD policy brief calls for removing tariffs, expediting certification procedures and enhancing trade facilitation..

While the policy brief recognizes the need for expanded production in a later section, it doesn’t address the need for increased transparency on or coordination of such efforts to expand production despite the obvious fact that a pandemic which moves around the globe creates temporary acute shortages of medical supplies where trade could minimize harm to populations going through surges in infections.

As reviewed in my post of April 10 on scarcity, a significant part of the health challenge in medical goods in the current COVID-19 pandemic flows from the rapid demand expansion exceeding global supply availability. This contrasts with food security issues in 2020 where there are adequate supplies of key agriculture products but there are concerns because of border closures, mobility issues and the like.

Avoid making things worse

The OECD policy brief has avoiding export restrictions on essential goods as the chief action countries can take to avoid making things worse. The brief reviews the 2007-2008 food price spikes that flowed from large scale export restraints on agriculture products and the harm done to many countries as a result.

In discussing food security, the brief states, “While there is not an immediate threat to global supplies of basic foodstuffs, there is the potential for specific food supply chains to be severely disrupted, including from lack of seasonal workers for planting or harvesting key crops, logistics constraints, and additional SPS and technical measures. Vigilance will be required to ensure that crisis- or policy-induced risk factors do not cause disruptions in supply, in particular if the containment measures related to COVID-19 are long-lived. ” Pages 5-6

For essential medical goods, there is a critical need for expanded production which some governments are pursuing often in connection with their private sectors. Trade challenges on essential medical goods include the use of export restraints, guaranteed purchases and requisitioning of goods. More than 60 countries have imposed export restraints, and, with the US and EU the current centers of COVID-19 infections, many other countries are having great difficulties obtaining adequate or any supplies.

OECD recommendations, such as limiting future export restraints, reducing tariffs and not imposing new tariffs or trade restrictive measures, are similar to those recommended by other groups. However, nothing in the recommendations deals with the very real need for better information on supply availability and expansions vs. current and projected demand, or for the possible role of international organizations or others in coordinating shifting of supplies from countries that have gotten past the worst of the pandemic to others with limited capacities and resources.

Look beyond the immediate: Policy actions now could have a long life

The OECD policy brief examines three sets of issues in terms of future implications — the massive financial assistance being provided, the examination of the shape of global supply chains, and preparing for future pandemics. These are taken up in turn below.

A. Governmental financial assistance

Because of the massive support governments are pumping into their economies to avoid collapse (some $8 trillion based on some recent estimates), there are obvious questions about how such support is structured, how governments will modify their conduct once the pandemic is past or economies have reopened. As the policy brief states,

“The scale of public investments needed during and after the crisis – from health systems and social protection, to access to education and digital networks – underscores the need for support to firms and sectors to be as efficient as possible to maximise available public resources. Well-designed support will also be less market-distorting and give rise to fewer concerns about the impact on international competition. Fairness – in both the national-level distribution of benefits ad in global competition – is essential for maintaining public support for trade and the open markets need to get through and emerge from the crisis.” Page 8.

Key principles for support granted include the following, according to the policy brief:

  1. Support should be transparent (including terms of support);
  2. non-discriminatory and not used to rescue companies that would have failed absent the pandemic;
  3. time limited and reviewed for continued relevance/need;
  4. targeted at consumers vs. tied to consumption of specific goods and services.

B. Global supply chains

An issue important to a number of governments has been the structure of existing supply chains and whether supply chains should be reshored or at least shortened. The OECD policy brief focus on rethinking the “resilience” in global supply chains but cautions against quick answers or simply reshoring.

C. Being ready for the next pandemic

The OECD policy brief also reviews actions the global community should take to be ready for the next pandemic. Five elements of a possible agreement among countries are suggested for consideration:

  1. “Ensuring transparency”;
  2. “Cutting tariffs on essential medical products”;
  3. “Disciplines on export restrictions” (essentially G20 language);
  4. “Upfront investments in co-operative solutions” (including creation of stockpiles at national or regional level);
  5. “addressing the needs of the most vulnerable countries”.

Conclusion

The first OECD policy brief is a useful contribution to the discussion of trade issues that can and should be addressed to reduce the negative effects of the COVID-19 pandemic both in the short-term and in the recovery phase. The proposals are not surprising and reflect underlying views of the member countries. As is true of other papers and proposals for action, collective action depends on leadership and willingness of like-minded countries to act for the common good. With a serious pandemic with dimensions not experienced in 100 years, large and advanced economies have talked the talk of cooperation and keeping markets open but haven’t always walked the walk of greater global cooperation or avoiding trade restrictive measures.

The actions of major governments are not surprising considering the pressing needs for supplies within countries that have been at the epicenter of the pandemic in the early months of its existence or the reaction of others worried about supplies or about food security. Political leaders obviously respond to the needs of their citizens first, particularly where needs are about life and death.

Unfortunately, such local focus doesn’t help smaller and/or economically weaker countries, many of whom may find themselves part of the epicenter of the pandemic in coming months.

Moreover, governments around the world generally have shown a poor ability to spend the money to prepare for future events which are uncertain as to timing or severity. It seems unlikely that the pandemic of 2020 will result in greater collective action and preparation for the future.

Indeed, the extraordinary sums that are being needed to avoid total collapse of economies in 2020 will create additional challenges for the global trading system going forward and will likely limit actual efforts to avoid a repeat in the future.

End note

The OECD has indicated that they have four additional policy briefs in the series under preparation. The future briefs deal with trade facilitation, government support, global value chains for essential goods and services trade (page 11), in addition to a paper looking at COVID-19 and Food and Agriculture: Issues and Actions.