Diversifying Partners and Slashing Red Tape: A Trade-Oriented Approach to COVID-19

A container ship in Rotterdam. Photo by Alf van Beem.

The COVID-19 pandemic has exposed weaknesses in the European Union’s supply chain for essential medical goods, and those weaknesses contributed to over 130,000 deaths as of June and to a projected contraction of 7.5% in GDP. A multi-sectoral approach to trade, combined with regulatory fast-tracking, can diversify the E.U.’s suppliers and reduce the risks of future shortages resulting from protectionist policies abroad. The E.U. must thus reject complacency and economic nationalism in the face of a potential second wave by securing predominance in the international market for medical goods and protecting the interests of millions of citizens, patients, and medical workers highly dependent on international trade for access to life-saving medical supplies.

Pandemic protectionism from core trading partners like India and China has exposed the E.U.’s vulnerability to supply shocks from major suppliers of medical goods. Europe’s supply chains are not sufficiently diversified: five trading partners provide 75% of E.U. medical imports. Europe’s ability to ramp up production quickly has been reduced by offshoring. This dependency, combined with dwindling stockpiles, leaves the E.U. poorly poised in the international market and vulnerable to supply shocks.

Total E.U. medical-related imports from external partners. Data from Eurostat Comtext.

The E.U.’s initial response included a bloc-wide ban on personal protective equipment exports to hoard stockpiles. French, German, and European Commission leaders have called for repatriating these industries. In our view, neither approach is effective. Protectionism incites foreign retaliation, leading to a breakdown of international trade relations that can exacerbate shortages, damage long-term political ties, and worsen a global recession. Repatriation would likely entail massive subsidies to offset the cost disadvantage. Pandemic protectionism and failure to diversify suppliers puts the E.U. at risk of exacerbating medical shortages in the short-run and forfeiting its leadership in the global medical supplies market in the long-run. Accordingly, the way forward is to optimize its existing supply chain and regulations for medical goods while diversifying import sources. 

The E.U.’s share of global medical imports and exports. Data from the Observatory of Economic Complexity.

Primarily, by sourcing from suppliers other than the U.S., China, and India, supply shocks from these countries will not disproportionately affect total procurements. To achieve this diversification, tariffs and other barriers to trade must be reduced for both non-medical and medical exports from alternative suppliers in least-developed countries (LDCs) by granting those countries special access within the framework of the World Trade Organization. Participation in multilateral supply chain finance programs aimed at supporting producers of critical medical suppliers—such as the one offered by the Asian Development Bank—also must be increased. These dual measures should be followed by the establishment of a permanent body responsible for monitoring the sourcing of medical goods and essential inputs for medical production.

Aside from diversifying suppliers, a more agile regulatory approval would increase the quantity of suppliers authorized to import test kits to the E.U., which would prevent dependency on any single source. Unifying international regulatory standards will encourage innovation and open access for E.U. producers to global markets. In Canada and South Korea for example, accelerated kit approval enabled the large-scale test-and-trace schemes that facilitate reopening. Similarly, the European Medicines Agency should extend its fast-tracked internal approval process to include test kits—beyond just vaccines and personal protective equipment. It should also seek to unify its standards for all medical products with those of the World Health Organization and other trading blocs such as the Association of Southeast Asian Countries, the United States-Mexico-Canada Agreement, and the Mercado Común del Sur.

While the E.U. supplies nearly 50% of global medical products, most of which are high-value and high-tech, it is a net-importer of “low-technology” medical supplies including masks and PPE. To repatriate the $17.6 billion the E.U. spends on low-tech wares would be orders of magnitude more costly. 

E.U. medical exports and imports by category. Data from the Observatory of Economic Complexity.

Rather than export bans to accumulate stockpiles and the steep capital costs of repatriation, the E.U. could focus on constructing time-sensitive, multi-sector preferential trade agreements where medical importers in emerging markets slash tariffs in non-medical sectors for the assurance of stable supplies. For example, the bloc could expand the policy frameworks established by the W.T.O. Uruguay Round agreement and the Singapore-New Zealand Declaration on Trade in Essential Goods, which eliminate import tariffs and customs duties on critical medical goods, across industrial and commercial sectors. Another option is to leverage existing value chains to source low-cost, low-technology medical products from emerging markets in exchange for high-technology goods where the E.U. possesses a comparative advantage. 

COVID-19 has presented the E.U. with the two diametrically opposed alternatives of protectionism on the one hand or the expansion of trade policies on the other. By reducing trade barriers and fast-tracking regulations, the E.U. can better guarantee a sufficient supply of low-value medical equipment, thus avoiding the shortages of the past. In tandem, the E.U. can leverage its high-tech medical industries to establish multi-sectoral trade agreements that help developing nations and solidify its global position. By doubling down on trade and rejecting protectionism, the E.U. will be more prepared for epidemiological and commercial challenges during and beyond COVID-19.

Alqaim Lalani is a rising sophomore at Columbia College studying Economics and History. He currently serves as a board member of the Columbia Economics Society and a staff writer for the Columbia Economics Review. He believes that pluralism is essential for addressing global issues constructively. 

Zizun Zhou is a rising second-year student majoring in Economics and Political Science at the University of Chicago. He is a contributor to the Chicago Journal of Foreign Policy, and currently conducts research in development economics, United States-China relations, and U.S. foreign policy.

Ashley Hitchings is a rising second-year student in Economics and Data Science student at the University of Chicago. She hails from Palo Alto, California and is deeply interested in behavioral economics, fintech, big data, and global affairs. She has previously interned at Stanford University and the Cato Institute, and seeks to better understand how trade policy and development economics factor into international politics.

Nicolas Hortiguera is a rising sophomore at Columbia’s Fu Foundation School of Engineering and Applied Sciences studying Applied Mathematics. He is from Buenos Aires, Argentina, and is interested in the intersection of scientific research and effective policymaking. He currently serves as a junior editor at the Columbia Economics Review.

Ruxandra Nicolae is a rising sophomore at the University of Chicago College planning to study Computer Science and is on the Pre-Medicine track. She is from Chicago and is interested in the intersection of biomedicine and computer science. She is also a collegiate translational medicine fellow in the University of Chicago Hospital.

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