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The US Government got into a tussle with the 3M Company, maker of N95 medical masks. The quarrel stems from the Trump Administration’s desire of blocking exports of supplies needed in the COVID-19 fight. Using the powers available to it under the 1950 Defense Production Act (DPA), the administration ordered 3M to halt the sale of N95 respirator masks to customers in Canada and Latin America and to keep them available for use in the US. The US also confiscated a shipment of 3M masks made in China that had been purchased by Germany. These and other uses of the DPA by the administration have met with a decidedly mixed response.
The Canada angle creates difficulties for the administration because Title VII of the Defense Production Act defines the US “defense industrial base” as including Canada. Hence, blocking exports there raises strategic issues. Moreover, it turns out that Canada is the source for material that is used in production of N95 masks. So the US would face a crisis if Ottawa retaliated by blocking this export.
Canada and Germany weigh in
Canadian Prime Minister Justin Trudeau immediately responded. He warned Washington on April 3rd not to stop exports to Canada of “essential goods and services” that could “end up hurting Americans as much as it hurts anybody else” since “integration between our economies goes both ways across the border. We are receiving essential supplies from the US, but the US also receives essential supplies and products” from Canada. If the administration persists in blocking the sale of masks to Canada, it could have even implications for the USMCA, or at least for its early entry-into-force. (The planned June 1st entry-into-force date has already slipped.)
Separately, Berlin protested as “modern piracy” the US confiscation of 200,000 masks that were made in China by 3M as they were about to be shipped out of the Bangkok airport to Germany, where they were purchased by the Berlin police. The City of Berlin has asked the German government to raise the issue with Washington. There were also reports that the White House tried to force the company to send 10 million N95 masks made in Singapore to the US rather than to the Asian markets for which they were manufactured.
Other countries were first to restrict exports
These are major steps and could color the global trade-policy response to the crisis. Admittedly, many other countries began blocking medical-related exports earlier than the US did.
One of those was China. On April 5th the US press reported that American companies have told the government that “China prohibited them from exporting their products from the country as the coronavirus pandemic mounted – even as Beijing was trying to ‘corner the world market’ in personal protective equipment,” according to the New York Post. This is an explosive accusation, reportedly made to the White House by major US companies, although it is somewhat softened by the fact that at the time in question, China was facing the brunt of the global crisis. Since then, China has relaxed its control on exports of medical protective equipment but is, as one source said, now “using it for soft power” — “a humanitarian gesture to try to curry goodwill with American people when some of the problems we’re facing are the direct result of Chinese policies.”
China attempt to corner the PPE market
A senior White House official told the NY Post, “Data from China’s own customs agency points to an attempt to corner the world market in PPE [personal protective equipment] like gloves, goggles, and masks through massive increased purchases – even as China, the world’s largest PPE manufacturer, was restricting exports,” the official said.
Nonetheless, President Trump is being criticized for using the DPA in a piecemeal and heavy-handed way. Thomas Firey, managing editor of the Cato Institute’s magazine Regulation, writes that:
In 3M’s case, the administration apparently was angry to learn that the firm sent a small percentage of its U.S. mask output to other countries in the Americas. Helping health care workers battle the disease in such places as Canada and Haiti doesn’t put America first, it seems. But as 3M pointed out, setting off a trade war over medical equipment isn’t a wise move when COVID infections and deaths are at the beginning of a spike and the world is facing a general supply shock.
Using the DPA effectively
Many analysts as well as members of Congress are now complaining that the president is missing a chance to use the DPA effectively. As one outside expert told reporters, “The DPA is a legal architecture for centralizing, consolidating and understanding where the demand and supply are, where the potentials for manufacturing are, where the bottlenecks in distribution are” and could be used “to completely avoid the dysfunction we’re seeing right now.” Members of Congress of both parties since earlier this year have urged the president to use the DPA.
There is also some question about the use of the DPA to block exports, especially to allied countries who need them. The act, passed in 1950 during the Korean War, has as its objective to “facilitate the production of goods and services necessary for the national security.” Nonetheless, the US is hardly the first country to slap controls on medically-needed exports, and in fact about 60 countries have already done so.
Tariff relief?
At the intersection of trade policy and Covid-19, it’s still not clear whether the president will grant partial tariff relief. Glenn Hubbard, chairman of the Council of Economic Advisers under President George W. Bush and now a professor of economics and finance at Columbia University, writes in the April 6th Wall Street Journal that
…keeping the 2017 corporate tax reforms in place will be particularly important. Raising corporate taxes in a downturn would be extremely harmful to confidence and would risk snuffing out the recovery. While business investment advanced after the tax reforms, uncertainty from tariffs and the China trade war limited the improvement. Removing the tariffs would be a strong tonic for investment.
Possibly the president opposes tariff relief because it would be an admission that tariffs are a drag on the economy. But whether or not some tariff breaks are ultimately granted, they won’t have much of an impact on an economy flattened by the virus. The opposition to even this meager relief indicates the White House’s commitment to trade protectionism is not being shaken by the economic crisis.
Export curbs
In fact, the crisis has reinforced protectionist tendencies, here and abroad, especially the push to control exports by banning their shipment even to countries that contracted for them, and to encourage domestic production of certain items rather than expand their availability through freer trade. Dozens of countries and the EU have already begun restricting exports of medically important items.
Next to the US ban on mask exports, perhaps the most high profile prohibition now is India’s halt to export of hydroxychloroquine, the malaria drug that shows promise in treating some Covid-19 patients. This tendency to hoard products for domestic use is causing concern internationally, with many analysts worried that overall supply of needed goods will be diminished and arguing that the best way to assure that there is adequate supply for all is to remove barriers to trade.
Smaller, poorer countries need medical trade
Meanwhile, many smaller and poorer countries don’t have the ability to make medical products such as personal protective equipment themselves. Blocking access to these products could provoke a humanitarian crisis. This would have enormous implications for the world trading system going forward. Countries would now have a new worry — that they can’t count on trading partners in an emergency and would therefore have to plan and structure their trade policies accordingly.
There is also fear that the measures will spread to restrictions on food exports. While the world has an abundant supply now, there are concerns in the US that a shortage of workers (many of who are here on temporary visas) could cut into the agricultural harvest. At the same time, logistics problems could hamper freight movement worldwide. Already some ships at sea find they can’t dock where expected if they have workers who have contracted the virus.
Truckers, food, and the G20
Within the US and other countries, truckers won’t carry agricultural cargo to a destination if there is no return cargo to be hauled due to a stoppage of manufacturing activity (though the plunge in the oil price is easing the way for one-way trucking). Still, the biggest concern regarding food security is simply that countries will hoard, refusing to export to their usual markets thus creating artificial shortages. These issues came up in the April 30th virtual G20 trade ministers meeting. This followed a virtual G20 leaders meeting the previous week when countries promised to keep supply chains open but didn’t agree not to engage in any export restrictions.
WTO report describes trade in Covid-19 products
The WTO released on April 3rd a report on worldwide trade in Covid-19 medical products. The WTO states that the report “traces trade flows for products such as personal protective products, hospital and laboratory supplies, medicines and medical technology while providing information on their respective tariffs.” The report shows that despite its recent impasse over trade decisions, the WTO retains its importance as a clearinghouse for global trade information. This will be helpful at a time when a debate is going on in many countries regarding whether blocking exports of medical-related exports is good policy.
According to the report, “During the last three years, the US was the largest importer of medical products, accounting for 19% of total world imports in 2019,” followed by Germany and China. The US’s top foreign sources of medical products Ireland, Germany, Switzerland, China, and Mexico; China’s top sources are Germany, US, Japan, France, Italy. The top three exporters of medical products are Germany, the US, Switzerland. China is seventh for all medical products but is the top exporter of personal protective equipment. Japan is not among the top ten exporters of medical products but is the sixth largest importer.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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