THE TRADE IN MEDICAL PRODUCTS: THE STATE OF PLAY
With every passing week in the prevailing pandemic, there is an urgency to understand and provide for the access to medical products and services. But what constitutes the trade in these crucial products? Who sells, who buys, how does it flow and what happens if it doesn’t?
Geneva Health Files looks closely at the story of international trade that makes available medicines and medical services within existing constraints. The pandemic has shown how the restrictions in these pathways, puts the most vulnerable communities at risk of lacking access to both. The Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS), at the WTO met this past week to discuss how the multilateral IP system can play a role in addressing the pandemic. [The events at the meeting will be dealt with in a subsequent post]
This story looks at the structure and components of what constitutes the trade in medical products and services. it looks at the export restrictions that have come to characterize trading in these times.
With the pandemic of COVID-19 showing no signs of abating, this trading space is contentious as barriers between countries go up to secure medical supplies for their respective populations.
Six months into the COVID-19 pandemic, it is time to find out what has the pandemic taught us about trade flows? Already, world merchandise trade is projected to fall up to 30%.
[Incidentally, WHO, WTO and WIPO just released an updated trilateral report on the study on access to medical technologies and innovation]
As the pandemic spread throughout the world, there was and continues to be a scramble for medical products. WTO has called this “an enormous upward shock in the global demand for medical products”, whose supplies depend on international trade and global value chains. This has been exacerbated by disrupted international transport and export prohibitions and restrictions imposed to meet domestic shortages by a number of countries. “While the introduction of export-restrictive measures is understandable, the lack of international cooperation in these areas risks cutting off import-reliant countries from desperately needed medical products and triggering a supply shock. And by interfering with established medical supply chains, such measures also risk hampering the urgently required supply response.”
Trade of products described as critical and in severe shortage in COVID-19 crisis totalled about $597 billion, or 1.7% of total world trade in 2019.
We saw surreal headlines fresh into the pandemic – “US hijacking mask shipments in rush for coronavirus protection“, which in hindsight, was just a precursor to strong winds of vaccine nationalism which could blow out hopes for timely access to vaccines in the poorest countries of the world.
The pandemic has shown the frailties of our supply chains and has affected access to health products at a time when it is needed the most. The multilateral trading system has rules to protect against arbitrary, protectionist trading practices, with hard-won flexibilities to ensure policy space at times such as the current emergency we face. But it is increasingly clear that these rules have not prevented protectionist trading practices.
There is a whole structure of WTO rules that protect this policy space.
According to the WTO rules, member countries can adopt trade measures such as import and export bans, quantitative restrictions on imports and exports, and non-automatic import licensing, in so far as they do not discriminate between members and “do not constitute a disguised restriction on international trade.”
These “general exceptions” are defined in the General Agreement on Tariffs and Trade (GATT) 1994 and the General Agreement on Trade in Services (GATS) – two key WTO agreements.
Notably, the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) empowers members with “flexibilities” to ensure availability and affordability to medicines including the use of compulsory and voluntary licensing and pooling of IP.
Public health and safety measures can also be taken under the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) where members have the right to restrict trade by taking SPS measures necessary for the protection of human, animal or plant life or health. In addition, the Agreement on Technical Barriers to Trade (TBT Agreement) ensures “technical regulations, standards and conformity assessment procedures are non-discriminatory” while ensuring legitimate policy objectives. Further, members are required to notify others in the event of a change in requirements that could affect trade.
EXPORT RESTRICTIONS: THE LACK OF INTERNATIONAL COOPERATION
There has been unprecedented demand for medical products since the pandemic took flight in early 2020. Restrictions on travel have impacted how medical products are transported. It has also been made worse by export prohibitions and restrictions taken by countries to address critical shortages domestically. Further, going forward, as new production becomes available, “trade will be essential to move supplies from where they are abundant to where they are lacking, especially as the disease peaks at different times in different locations”, WTO had noted in a stock taking report on export restrictions earlier in the pandemic.
In this report from April 2020, it had found that nearly 80 countries and separate customs territories have introduced export prohibitions or restrictions as a result of the COVID-19 pandemic, including 72 (taking into account individual EU member states) and eight non-WTO members. While many of these measures have been described as temporary, it remains to be seen how long such measures will run and what will be their aggregate impact on the wider the trade environment. Trade experts believe that the long-term effects could be significant. (Some reports suggest nearly 90 countries had introduced measures to protect supplies of health products.)
WTO warned that “..international cooperation in the area of export prohibitions and restrictions should seek to strike a balance between the shortages in essential medical products being faced in some exporting countries due to the COVID-19 pandemic, and the negative impact that such measures may have on the public health of the importing members, which depend on international trade to obtain these products. There is also a marked risk that too-broad measures that stay in place may irreparably alter the supply chains that produce those goods, or of spill-over into other areas beyond medical goods.”
Countries’ confidence in the trading system depends on predictability in accessing essential goods. Without this assurance, countries are more susceptible to curtailing imports and push for domestic production. Indeed, as many countries have realised as a result of what they call as an “over-dependence” on international supply chains for medicines, for example. This could result in reduced supply and higher prices – far from the optimal outcome.
WTO has found that “transparency at the multilateral level is lacking.” While countries must notify other members of their measures as soon as possible, many have not done so as per procedure. “Economic operators and members are having to cope with a high degree of uncertainty, as it remains unclear what measures have been adopted by which countries, and new measures are being introduced regularly. Insufficient information makes it hard for them to efficiently adjust their purchasing decisions and find new suppliers This could be particularly damaging for those seeking to procure materials needed for the fight against the COVID-19 pandemic,” according to WTO.
THE IMPACT ON EXPORT RESTRICTIONS
Looking inwards can result in disastrous consequences for international trade in such precarious times. WTO has said that governments seek to set up new domestic production systems rather than continuing to work with existing foreign suppliers, it could result in “Self-defeating delays and economic inefficiencies.”.
“Export prohibitions and restrictions applied by large exporters may in the short run lower domestic prices for the goods in question and increase domestic availability. But the strategy is not costless: the measures reduce the world’s supply of the products concerned and importing countries without the capacity to manufacture these products suffer. And exporters also risk losing out in the long run. On the one hand, lower domestic prices will reduce the incentive to produce the good domestically, and the higher foreign price creates an incentive to smuggle it out of the country, both of which may reduce domestic availability of the product. On the other hand, restrictions initiated by one country may end-up triggering a domino effect.”WORLD TRADE ORGANIZATION, APRIL 2020
For all the shortcomings of export restrictions affecting public health globally, the COVID19 response resolution adopted by World Health Organization in May this year, said precious little on these export restrictions, other than referring that they should be temporary, as pointed out by Suerie Moon recently. [WHA RESOLUTION: OP7.3 – Ensure that restrictions on the movement of persons and of medical equipment and medicines in the context of COVID-19 are temporary and specific and include exceptions for the movement of humanitarian and health workers, including community health workers to fulfil their duties and for the transfer of equipment and medicines required by humanitarian organizations for their operations].
As per WTO analyses, export prohibitions and restrictions introduced by countries have varied, but many pertain to medical supplies (such as facemasks and shields), pharmaceuticals and medical equipment (including ventilators). Some have also taken measures to control exports of foodstuffs and toilet paper. Face and eye protection devices (e.g. facemasks and shields) are the most heavily affected category, followed by protective garments, and sanitizers and disinfectants, according to WTO information from April this year.
KEY WTO RULES ON RESTRICTIONS AND PROHIBITIONS
Broadly WTO rules ban export prohibitions and restrictions under Article XI of the General Agreement on Tariffs and Trade (GATT) 1994, (a provision that regulates quantitative restrictions) but allows countries to apply them temporarily to prevent or relieve critical shortages of foodstuffs or other essential products. [Article XI:2(a) of the GATT 1994 allows “export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party”.] Similarly, obligations under the Agreement on Agriculture require countries to give due consideration to the food security needs of others, if they prohibit export of food stuffs. [In addition, under Article XIII of the GATT 1994, if a member introduces or maintains a quantitative restriction in accordance with WTO rules, the application of the measure should be non-discriminatory].
There are also other general exceptions in WTO rules. For example, under “General Exceptions” of Article XX of GATT 1994, that state “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:… [(b) necessary to protect human, animal or plant life or health]..”
In an annex, WTO explains that in the context of COVID-19, Article XX(b) could be used to justify a ban or quantitative restriction on the exportation of goods, so long as such a measure would be necessary and effective in contributing to protecting the health of that country’s citizens. “The trade-restrictiveness of the export ban or restriction would have to be weighed against the contribution it makes to the achievement of the objective of protecting human health. The importing country could come with reasonably available alternatives, e.g. arguing that a less stringent restriction on exports would achieve the same degree of contribution and would be reasonably available to the exporting member,” the document says.
WTO cites information from previous spikes in export prohibitions and restrictions in the context of food shortages (between 2007-2012), and found that some of these restrictions may remain in place for long periods of time and even subsequent to the period of crisis.
THE TRADE IN MEDICAL GOODS & SERVICES
So what does the nuts and bolts of the trade in medical goods look like?
The WTO has classified COVID-19 relevant medical products into four main groups [spread across the different chapters of the Harmonized System (HS) classification], including medicines (Pharmaceuticals)– including both dosified and bulk medicines; medical supplies – refers to consumables for hospital and laboratory use (e.g. alcohol, syringes, gauze, reagents, etc); medical equipment and technology; and personal protective products – hand soap and sanitizer, face masks, protective spectacles.
Analyses by WTO shows based on numbers from 2019 show, Germany, the United States (US), and Switzerland supply 35% of medical products. China, Germany and the US export 40% of personal protective products. Imports and exports of medical products totalled about $2 trillion representing approximately 5% of total world merchandise trade in 2019.
Tariffs on some products remain very high. The average applied tariff for hand soap is 17% and some WTO Members apply tariffs as high as 65%. Protective supplies used in the fight against COVID-19 attract an average tariff of 11.5% and goes as high as 27% in some countries, WTO says.
The organization prides itself on contributing to the liberalization of trade medical products, as a result of tariff negotiations scheduled at the inception of the WTO in 1995; concluding the plurilateral sectoral Agreement on Pharmaceutical Products (“Pharma Agreement”) in the Uruguay Round and its four subsequent reviews and the Expansion of the Information Technology Agreement in 2015.
The 1994 WTO Pharmaceutical Agreement or “Pharma” agreement was concluded during the Uruguay Round negotiations – a plurilateral sectoral initiative on pharmaceutical products. The agreement covers pharmaceutical products, including active ingredients defined by the WHO International Non-proprietary Names (INNs) and other substances used in the production of these products, the WTO says. The current participants in this agreement include Canada; the European Union; Japan; Macao, China; Norway; Switzerland; and the US.
Also important to note is the Information Technology Agreement (ITA), concluded in 1996. Under this agreement 82 countries have eliminated tariffs on most IT products, WTO points out. Subsequently, in 2015, an expansion of the ITA Agreement was agreed by some ITA members to include additional products such as medical equipment. The following as participants in the Information Technology Agreement expansion agreement: Albania; Australia; Canada; China; Colombia; Costa Rica; European Union; Georgia; Guatemala; Hong Kong, China; Iceland; Israel; Japan; Republic of Korea; Macao, China; Malaysia; Mauritius; Montenegro; New Zealand; Norway; Philippines; Singapore; Switzerland; Chinese Taipei; Thailand; and United States.
|1. MEDICAL PRODUCTS – WHO BUYS, WHO SELLS |
Trade in these medical products amounted about $2 trillion and accounted for 5% of the total of merchandise trade in 2019.
World imports of medical products were more than $1 trillion in 2019. More than half of imports are medicines, medical supplies accounted for less than a fifth.
The US, Germany, and China account for 34% of total world imports of medical goods During the last three years, the United States was the largest importer of medical products, accounting for 19% of total world imports in 2019. Germany had a share of 9%, followed by China and Belgium (6%).
The other importers who make up the top 10 importers include the Netherlands, Japan, UK, France, Italy, and Switzerland. In terms of the relative importance of medical goods vis-a-vis each country’s total imports, Belgium and Switzerland’s imports of medical goods represent around 13% of their total imports.
Among the top 10 importers, this share is smallest for China, for which medical imports represent 3% of its total imports.
Personal protective products represent 13% of medical imports valued at $135 billion in 2019. The US followed by Germany are the biggest importers and together account for more than 22% of total world imports of these products.
The US and Germany are the biggest bilateral trade partners for medical products; and both the US and Germany are the main suppliers to China, according to WTO.
Medical exports of Ireland and Switzerland amounted to 38% and 29% respectively of their total goods exports, which highlights the importance of these products to their respective economies.
In contrast, exports of medical products only account for less than 2% in China.
Nearly 40% of personal protective products exports come from China, Germany, and the US.
Total exports of protective products, including face masks, hand soap, sanitizer and protective spectacles, were valued at $135 billion on average for the period 2017-2019. About 17% or $23 billion came from China, the top exporter, followed by Germany and the US.
These three exporters account for more than 40% of world exports of protective supplies.
China is the top exporter of face masks with 25% share China supplied 25% world exports of face masks in 2019, and together with Germany and the US, the three contribute to almost half of the world face mask supply. Singapore, US, Netherlands, and China export more than half the world’s respirators and ventilators.
MFN APPLIED TARIFFS
WTO tariff statistics show that the average Most-favoured-nation (MFN) applied tariff on COVID-19 relevant medical products for WTO Members is around 4.8%.
The average MFN applied tariff on medicine is the lowest among different categories of medical products, at 2.1%.
On average, the MFN applied tariff on medical equipment is 3.4%. Medical equipment ranges in complexity from microscopes to ultrasonic scanners, and include respirators or ventilators. This includes products covered by ITA Expansion.
Medical equipment is another area in which the WTO has achieved some trade liberalisation. Eighty per cent of the medical equipment covered by this category are covered by the Expansion of the Information Technology Agreement (ITA-exp). ITA-exp will eliminate the tariffs and lower the cost for imports of technology-intensive medical equipment by 2023, WTO says. [Respirators or ventilators, which are in shortage of in the current health crisis, are not covered by the ITA nor ITA-exp.]
The world average tariff on this product is 3.3% but some Members apply higher rates About 11.5% tariff on COVID-19 relevant personal protective products. Protective supplies include those related to prevention like hand soap and sanitizer, hand gloves, and face masks.
These protective medical supplies have an average applied tariff of 11.5%, more than five times higher than those for medicines. The global average applied tariff for hand soap is 17%. Face masks are another critical personal protective product, which are subject to 9.1% MFN applied tariff on average.
More than 75% tariffs have been bound On average, WTO Members made commitments not to raise their applied duty above a fixed ceiling (i.e. a bound duty rate) for over three out of four medical products. In general, there is a significant policy space (water), with the average bound rates five times as higher than average applied. All WTO Members have made commitments in their tariff schedules on a least one medical product.
2. TRADE IN SERVICES
Services now generate more than two-thirds of economic output, attract over two-thirds of foreign direct investment, provide most jobs globally and account for over 40 per cent of world trade. The United Nations Conference on Trade and Development (UNCTAD) projects that the COVID-19 pandemic could bring global foreign direct investment flows to their lowest levels since the 2008-09 financial crisis.
In the WTO framework, trade in services is defined in the General Agreement on Trade in Services (GATS). It comprises four modes of supply: 1 – cross-border supply; 2 – consumption abroad; 3 – commercial presence; and 4 – movement of natural persons.
The type and extent of effects on trade in services vary by sector and mode of supply. Trade in services that involves proximity between suppliers and consumers has been severely impeded. GATS mode 2 (i.e., supply in the context of the movement of consumers abroad) and mode 4 (involving the temporary movement of natural persons) have been largely paralysed.
WTO notes that the contraction of air passenger traffic worldwide has led to a considerable reduction in air cargo capacity and has increased the price of this means of transport. This is potentially problematic, given that countries typically rely on air cargo to transport urgent medical supplies and other goods around the world. Crucially, when the health services in one country become overwhelmed and depleted, getting supplies and medical staff quickly from other countries may be the only way to address the crisis efficiently and effectively.
Health Services: Telemedicine
Telemedicine is not new, but the current crisis could have a major impact on the prospects for expanding the supply of online health services, with possible implications for trade. The COVID-19 crisis stimulated a surge in the use of telemedicine services.
Some jurisdictions have reviewed laws and regulations to facilitate such services, mainly on a provisional basis. Easing access to telemedicine services, even on a provisional basis, could help to slow the spread of COVID-19 in affected economies, as well as assist in the sharing of knowledge and experiences in detection of the virus, monitoring and response. However, international telemedicine remains a challenge given the wide regulatory diversity and differing national capabilities. For instance these services often face geographic regulations, such as requiring the health professional to reside in the jurisdiction of the patient. Also, a pre-existing relationship between the patient and the health professional is typically a precondition for telemedicine services.
International cooperation at the governmental level, in particular among health, IT and telecommunications policy-makers and companies is needed to address the challenges of a reliable and sustained increased cross-border supply of services related to telemedicine. Facilitating entry of medical personnel in a second-phase response to the crisis, several governments have revised some of their travel and border measures to ensure that the cross-border movement of essential foreign health workers was not unduly burdened. Some WTO members created special-entry avenues for health and social care workers, with particular entry visas and extended visa validities. The need for additional health workers increased substantially in the past months, and in some cases, foreign workers moved to different health systems specifically to support the COVID-19 response.
THE KEY TO ACCESS TO MEDICAL PRODUCTS: TECH TRANSFER?
In the context of COVID-19, the key to improve access to medical products, is by improving local manufacturing capacities by relaxing patent rules. That is what the last six months have shown.
While there has been a greater desire for local production facilities to reduce reliance on overseas suppliers, the reality on the ground is different, making local production very difficult. There are, what some call “unjustifiable” patent restrictions even on the production of face masks. [South Africa’s proposal at the recent TRIPS Council meeting cited the example of the difficulties of 3D-printing ventilators in acute emergencies, due to patent restrictions.]
Gargeya Telakapalli, Research Associate, People’s Health Movement told Geneva Health Files, ” We do need to understand that patents are a significant barrier in accessing Personal Protective Equipment too. A simple example would be the N95 mask by 3M corporation, which has 400 odd patents on it. Having no patent barriers along with improving manufacturing capabilities would have allowed for easier local production at affordable rates and solved the issue of non availability of N95 masks for a frontline worker. “
The irony was that the corporation did not release the patents even to the state of Kentucky where it is manufactured and trump had to use some defense related law, he added.
An erosion of confidence in the multilateral trading system, in particular if restrictions negatively impact the most vulnerable, especially least-developed countries, whose healthcare systems are already strained. It would be difficult for importing members to trust a system that fails to produce tangible benefits in times of crisis and may lead to general calls to ensure that production of medical and other products only take place at the national level: WTO
The world has to come together to solve basic questions on technology transfer, and implement intentions in practice. To be sure, there are existing provisions that enable technology transfer including Article 66.2 in the TRIPS Agreement that essentially spells out the obligation for developed countries to provide incentives for technology transfer. [The recent meeting of the TRIPS Council at WTO also considered a new template for annual reporting on the technology transfer to LDCs under Article 66.2 of the TRIPS Agreement.]
Watch this space for more.
WHO, WTO and WIPO updated trilateral report on the study on access to medical technologies and innovation
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