EU limits on medical gear exports put poor countries and Europeans at risk

Faced with dangerous shortages at a time of health crisis, the European Union (EU) has announced emergency export restrictions on some hospital supplies that its medical workers need to fight the COVID-19 pandemic. The unexpected policy limits European companies’ sales of an estimated $12.1 billion of medical gear to countries outside the European single market.

The action on March 15 came after an extraordinary two-week period of infighting among European countries provoked by scarcity concerns.[1] But as understandable as the worries were, Europe’s actions could be self-defeating: They may disrupt supply chains, seize up the very production lines Europe depends on, and prompt other countries to impose export restrictions, further limiting Europe’s access to key medical gear. And they may also block EU exports of vital equipment to the world’s poorest victims of the pandemic.

The chain of events that led to this decision accelerated in late February 2020, as Italy plunged into a health crisis that forced it to ration hospital treatment. France and other national governments took trade policy into their own hands, seeking to protect their own citizens. On March 3, President Emmanuel Macron directed the French government to requisition all respiratory protection masks for French health care workers.[2] On March 4, Germany and the Czech Republic followed suit by imposing their own national export restrictions. Thus, as Italy faced shortages, it could not even access equipment made in other EU member states.

The European Commission thus stepped in on March 15. At one level, the resulting EU restriction on exports to countries outside the trade bloc can be seen as a laudable attempt to revive trade of medical goods among EU countries stopped earlier by national policies.[3] The Commission announcement, for example, revealed that EU production of these medical supplies was concentrated “in a limited number of Member States, namely the Czech Republic, France, Germany, and Poland.” Seeing as three of these major suppliers were restricting exports, contributing to shortages and suffering in Italy’s overstretched hospital system, the Commission needed to act. As a result, Germany and France committed to unblock their restrictions on EU sales of personal protective health devices, which Stefano Patuanelli, Italy’s minister of economic development, lauded as “a sign of common sense and European solidarity.”

But there are unintended costs of shifting from national to EU-wide export restrictions. First, European supply chains for medical equipment require access to parts that often must cross an external EU border, sometimes more than once. An overzealous effort to block exports of essential medical goods manufactured in Europe may inadvertently stop trade in inputs needed to make those products in the first place, causing supplies to grind to a halt anyway.

For poorer countries outside the bloc, the consequences of the EU’s export restrictions could be devastating. The EU has long pushed developing countries to open up their markets to imports, facilitating a system in which these countries have come to rely on EU suppliers for their essential medical equipment. The new EU policy threatens to eliminate such countries’ access to global markets for medical imports just when they need it the most.

Finally, the EU risks setting off a spiral of export restrictions by other countries, with the EU paying the price. The EU imports $17.6 billion of the same medical products on which it imposed export controls. It is extremely vulnerable to other countries piling on with export restrictions of their own. And the EU’s beggar-thy-neighbor policy threatens to beget more.

A global, trade-facilitating approach to this pandemic is needed.[4] Instead of taking the lead, the EU’s policy is a step backward and has made the difficult task of multilateral cooperation that much harder.

The EU is blocking exports of five medical products, and a lot of sales to the US, Switzerland, and Norway could be disrupted

On March 15, the European Commission implemented an act[5] that imposed export authorization restrictions on five separate medical products estimated at $12.1 billion in foreign (extra-EU) sales in 2019.[6] Of the restricted products, EU exports of face shields were largest at $7.4 billion, followed by protective garments at $3.1 billion (figure 1). New EU export restrictions were also applied to $900 million of mouth-nose-protective equipment, $400 million of hospital gloves, and $200 million of protective spectacles and visors.

When measured by total sales affected, the biggest disruptions could include exports to the United States, Switzerland, Norway, China, and Russia (see again figure 1). The geographic proximity of relatively small non-EU members, like Switzerland and Norway, means their hospital systems are also likely to suffer if cut off from EU production and sales.

But cross-border supply chains make the effects of the policy much more difficult to predict.

Switzerland, for example, produces other equipment essential to the EU fight against COVID-19 that could be caught up in excessively expansive EU export restrictions. Swissinfo has reported that production in Hamilton Medical, a major Swiss manufacturer of hospital ventilators, has slowed because Romania banned exports of a critical input that Hamilton was sourcing. The lesson is that any EU export restriction puts at risk other EU imports also needed to fight COVID-19. If the product definitions covered by the EU policy are so broad that they also restrict exports of parts and components, the EU may end up losing access to other supplies of equipment it seeks to import.

The EU policy is not a permanent ban and is set to expire in six weeks. But it requires the completion of new paperwork and government authorization before a listed product can be exported outside the EU. This administrative roadblock has a number of likely implications.

Medical supply companies must now allocate financial resources to obtain such legal authorization; this hurdle is problematic because these same firms should be dedicating all available human and financial resources to ramp up production of desperately needed medical goods. Furthermore, if the process for administering the authorization is poorly staffed, delays and errors may occur, resulting in rejection of otherwise acceptable applications.

Combined, these extra costs, as well as uncertainty about whether any given application will be accepted, undoubtedly raise a new trade barrier. Small and medium-sized enterprises (SMEs), as well as small importing countries, are likely to be hit hardest.

That points to one more feature hinted in figure 1: No single country received even 25 percent of total EU exports of the products facing restrictions. The “rest of world” category is so large that many importing countries are now vulnerable to being cut off from EU medical supplies.

Some poor countries are particularly vulnerable to the EU restricting supplies

COVID-19 is fast becoming a global pandemic. Many developing countries lack a sophisticated medical system to treat afflicted patients. Equally worrisome is if they are cut off from foreign medical supplies. Many of these countries are small or lack the domestic industry for the government to encourage additional local production if their populations suddenly face exposure.

Many poor countries, in particular, rely on imports of medical supplies from the EU and would be left vulnerable if the EU cut off their access to its exports (figure 2).[7] Take the countries that source more than 50 percent of their total imports of face shields from the EU. Beyond Norway and Switzerland, EU export limits could significantly affect countries in Eastern Europe (Albania, Macedonia, Serbia, Moldova, Bosnia and Herzegovina, and Ukraine), northern Africa (Tunisia, Morocco, and Algeria), and sub-Saharan Africa (Cape Verde, Senegal, Republic of the Congo, Niger, Angola, and Nigeria).

Furthermore, health care professionals require access to all five of these products to fight COVID-19. Being cut off from even one could significantly hamper the effectiveness of medical care.

Nothing in the EU regulation directs EU civil servants to ensure the poorest and most vulnerable in developing countries, with the fewest available alternatives, are not the first to be cut off during the crisis. The regulation only nods to the seriousness of this issue by indicating that “exports of certain quantities of specific products may be authorised under specific circumstances such as to ensure assistance provided to third countries.”

Other medical products are at risk of EU export restrictions

Another concern is that more EU export restrictions on other medical equipment are yet to come, now that the EU has opened the pandora’s box.[8] The EU is a major exporter of an additional $14.4 billion of other medical products identified as critical to the global fight against COVID-19 (figure 3).[9] These include syringes, catheters, X-ray equipment, CT systems, ventilators, patient monitors, and more.

The world must now be wary that the EU is choosing to address the crisis through trade policy—which shifts the costs onto countries outside the bloc—instead of focusing on incentivizing domestic production and knocking down barriers to intra-EU trade.

The EU’s export restrictions make it vulnerable to other countries’ export restrictions

These export restrictions are particularly short-sighted given how reliant the EU is on imports of key medical supplies (figure 4). In 2019, the EU imported $17.6 billion of the same medical products on which it has imposed export controls. Basic economic forces, as well as other countries responding with export bans of their own, now put at risk EU access to personal protective equipment for hospital workers from foreign sources.[10]

Take face shields, and consider, again, the example of Switzerland. Switzerland receives about 9 percent of EU exports of face shields, which are now under threat by EU export restrictions (see again figure 1). But Switzerland also supplies 7 percent of EU imports of face shields (figure 4). An EU export restriction on face shield sales to Switzerland could benefit hospital workers in, say, Germany, who now have more local availability. But a result would be that Swiss hospital workers may switch and buy from local (Swiss) suppliers instead. This would reduce availability of Swiss face shields for export to neighboring Italy or Austria, thus hurting hospital workers in other EU member states.[11]

Another concern involves retaliatory export restrictions on other medical products. If one country finds the EU has cut off its supply of face shields, it may hit back by restricting its exports to the EU of something else, such as ventilators, X-ray equipment, or syringes. The EU also imports $8.8 billion of these other critical medical equipment from the rest of the world (see panels c and d of figure 4).

Take the mercurial Trump administration. A large share of EU imports of other products its hospitals need to fight COVID-19 is sourced from the United States. The EU’s unilateral export restrictions are certain to energize euroskeptics in the US administration, who already need little excuse to lash out against Europe on trade.[12]

Finally, the top panels of figure 4 provide one more clue about why the Commission felt it necessary to take such a drastic step of imposing export restrictions. The world remains uncertain about the size of medical supplies available from China in the short term to fight the pandemic. In 2019, China provided $8.1 billion, or 46 percent, of EU imports of the products on which the EU has imposed export controls.

The coronavirus outbreak in Wuhan led to a sharp spike in demand for medical supplies within China in January 2020. The impact on overall Chinese supply was uncertain, but production in some areas could have slowed as various parts of the Chinese economy were put under quarantine to help limit the internal spread of the disease. Each of these market forces in isolation could have resulted in a sharp slowdown in Chinese exports of medical supplies to Europe; combined the impact could turn out severe. (At the time of writing, Chinese trade data on medical supplies for January and February 2020 were not yet publicly available. Aggregate Chinese exports to the EU are reportedly down 19.8 percent.) The nature of its state-dominated economy will surely fuel allegations that China imposed de facto export restrictions on medical supplies in January and February, even if no such policy was officially announced.[13]

Export limits are a step backward from desperately needed global cooperation

The COVID-19 pandemic has already proven devastating for human health. The full economic implications of the disease are far from clear. And as Soumaya Keynes of The Economist puts it, “If there is so little solidarity now, what will happen when poorer countries with weaker health-care systems are hit? Beggar-thy-neighbour trade policies never end well.”

For trade in medical supplies, the right policy that countries should take is known. To ensure the hospital equipment to fight the pandemic arrives where and when it is needed the most, policymakers must coordinate and cooperate globally. A reinvigorated Group of 20 (G-20) commitment to transparency and minimizing bottlenecks that obstruct trade would be a positive step.

Without that, the European Commission’s unilateral, stop-gap policy of March 15 could spiral out of control, fueling protectionism in other countries and worsening the shortage of medical supplies. The sooner it reverses the EU-wide emergency export restrictions, the better.

Addendum

On March 20, 2020, after this blog post was published, the European Commission issued revised "guidance on export requirements for personal protective equipment," indicating:

"Reflecting the integrated nature of the production value chains and distribution networks for medical and personal protective equipment beyond the boundaries of the European Union, especially in the four Member States of the European Free Trade Association—Norway, Iceland, Liechtenstein and Switzerland—the Commission has now decided to exempt exports to those countries from the export authorisation requirements. A similar exemption is being granted to Andorra, the Faroe Islands, San Marino and the Vatican, as well as the associated countries and territories that have special relations with Denmark, France, the Netherlands and the United Kingdom (so-called Annex II countries). This change will be effective as of 21 March 2020."

Notes

1. See Soumaya Keynes, “New trade barriers could hamper the supply of masks and medicines,” The Economist, March 11, 2020.

2 The decree was extended on March 13, 2020 and set to expire on May 30, 2020.

3. European Commission President Ursula van der Leyen’s statement also described other Commission efforts to work with industry to expand production, facilitate EU-wide dissemination and sharing through a new procurement arrangement, and ensure the continued free flow of goods across national borders within the EU. On March 19, the Commission also announced a new emergency policy of a “rescEU stockpile of medical equipment.”

4. See also Alan Beattie, EU looks inward in crisis response rather than leading drive to keep trade open, Financial Times, March 18, 2020.

5. Commission Implementing Regulation (EU) 2020/402 of 14 March 2020 making the exportation of certain products subject to the production of an export authorization, Official Journal of the European Union, L 077I, 15 March 2020.

6. Unless explicitly stated otherwise, all flows in this blog post refer to extra-EU trade. The data also include trade involving the United Kingdom, as the post relies on the period when the UK was still an EU member state. Flows are based on EU statistics for trade at the product level but are estimates as the EU export controls are designed at levels more disaggregated than the 8-digit level of the EU’s Combined Nomenclature for its tariff schedule. I have chosen not to include one product category in the estimates—i.e., 6114—as the export controls covered only some of the trade in the category, which itself was so large so as to potentially introduce considerable measurement error. Including products in 6114 increases exports of protective garments from $3.1 billion to $4.2 billion and the estimate for total affected medical goods trade from $12.1 billion to $13.1 billion.

7. Vulnerability is contingent on access to not only foreign production but also domestically produced supply. Local domestic production capacities for these products are not considered here.

8. The concern is not whether the EU policy is WTO-consistent. For example, the EU would likely argue that its export restrictions (otherwise a violation of GATT Article XI) can be justified under Article XI(2)a: “Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.” The concern involves the consequences of the EU exercising this exception in lieu of addressing the underlying problem of supply shortages at its source.

9. See Chad P. Bown, Trump's trade policy is hampering the US fight against COVID-19, PIIE Trade and Investment Policy Watch, March 13, 2020.

10. Some countries may impose export restrictions for reasons of political retaliation. But research from Paolo Giordani, Nadia Rocha, and Michele Ruta examining the export restrictions and food price spike of 2008–11 finds that it may occur as a result of economic incentives. If one country imposes an export restriction in a way that drives up world prices, that creates a multiplier effect in which other countries face an incentive to impose export restrictions of their own on the same product.

11.One channel through which the reduction of Swiss exports to the EU could occur is if Switzerland responded with export restrictions of its own. But it could also arise through market incentives. EU export restrictions reduce the price of face shields in the EU (Germany in this example) and increase the price in Switzerland. The resulting price differential implies Swiss producers (including those who originally exported to the EU) now have a market incentive to sell in Switzerland instead. But that removes a source of supply to their former EU customers (where prices are lower) such as in Italy or Austria.

12. Examples include the Trump administration’s steel and aluminum tariffs, its threat of auto tariffs, and the recent tariff retaliation against European exports in the WTO dispute over subsidies to Airbus.

13. The regulation notes that the EU believes its export restrictions are in response to those already taken by other countries. Without naming names, paragraph (6) states, “Some third countries have already officially decided to restrict exports of protective equipment. Others seems to have taken similar actions on a more informal basis. Some of these countries are also traditional suppliers to the Union market and this is further exerting pressure on the Union market.” In a report published just prior to the Commission announcement of March 15, Simon Evenett of the Global Trade Alert indicated that 24 countries had imposed export-restricting policies in 2020, including Russia, Turkey, and Taiwan, in addition to individual EU member states.