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COVID-19 and Protectionism: The Worst May Be Yet to Come

Just as COVID-19 has spread across the globe, so have protectionist measures. Governments in different continents have enacted a number of measures to allegedly safeguard their economies and health systems from the ravages of the pandemic. 

While some actions are reasonable and legitimate, others are suspect and may respond more to political expedience or the preferences of interest groups, potentially complicating international cooperation to deal with the pandemic and global economic downturn.

COVID-19-related protectionist measures come after economic nationalism has been rising over the past few years.

In a fascinating paper, Monica de Bolle and Jeromin Zettelmeyer analyzed the political platforms of major political parties in G20 countries. They found that “parties in advanced economies have become more nationalist with respect to immigration and trade since the global financial crisis, while parties in emerging-market economies have become more nationalist in industrial policy.”

Writing in the fall of 2019 before the onset of the COVID-19 pandemic, the authors feared that “widespread economic nationalism would pose a significant additional obstacle to policy coordination in the event of a global slowdown.” 

Alas, their concerns have been borne out. In 2020, the global GDP downturn will be -4.9%, more than 60% steeper than the IMF estimated as recently as last April. The policy preferences noted by de Bolle and Zettelmeyer have translated into protectionist measures, and unlike the (imperfectly) coordinated response to the 2008 financial crisis, they have resulted in a haphazard international response and, on occasion, a lack of coordination even with neighboring countries.

Restrictions on Medical Equipment

The World Trade Organization, Organization for Economic Cooperation and Development and the United Nations Conference on Trade and Development reports of G20 trade and investment measures covering mid-October 2019 to mid-May 2020 detail myriad measures affecting trade in goods and services, and investment adopted as a response to COVID-19 by virtually all G20 members.

The most common measures are export licensing requirements or related export restrictions on medical ventilators and/or personal protective equipment (PPE), adopted among others by Argentina, Australia, Brazil, the European Union, India, Indonesia, the Republic of Korea, Russia, Saudi Arabia, Turkey and the United States. 

Several countries suspended import taxes, anti-dumping duties and/or facilitated customs procedures for the importation of those same goods that loom large in export restrictions, likely in many cases to little avail. A disagreement over the export of face masks from the U.S. to Canada was ultimately resolved, but trade tensions between erstwhile trade partners could resurface.

Vaccine Nationalism

A few G20 countries, including France, India and the United Kingdom, further restricted the exports of certain medicines, and France has engaged in what is being labeled vaccine nationalism.

The WTO only registered the Eurasian Economic Union as restricting food exports (mostly grains); more recently, Argentina’s federal government announced its intent to nationalize Vicentín, a major soybean processor and international trader that is undergoing bankruptcy proceedings.

Regardless of the COVID-19 denouement, the trend toward growing protectionism is likely to remain for some time, and companies would do well to recognize and adjust to this new reality.

COVID-19 measures regarding trade in services generally tend to facilitate the provision of telemedicine services, but several countries, including Canada, the EU (especially France and Italy) and India have implemented more detailed screening and/or restrictions on investment. 

Restricting Investments

During the pandemic, Canada will subject certain investments to additional scrutiny under the Investment Canada Act. The European Union issued new screening guidelines for investments in health, medical research, biotechnology and essential infrastructure. France included biotechnologies in the list of critical technologies subject to additional screening. Italy included food security, health, banks, insurance companies and financial infrastructure as sectors subject to investment screening during the pandemic. Both France and Italy will review, during the pandemic, foreign acquisitions of 10% or more of shares of companies listed in the EU. 

In addition, the Indian government now requires that an entity of a country sharing a land border with India obtain permission from such government before investing in an Indian company and targeted a number of Chinese apps for retaliation in response to a June 16 border incident.

Beyond general restrictions or those targeting a specific country, additional domestic restrictions on what industries are considered “essential” (and can thus remain open during COVID-19 economic shutdowns) and which ones are not have resulted in significant regional supply chain disruptions in North America and beyond. In some instances, actions by sub-federal entities have caused international tensions, such as the Baja California state government shutting down an Anglo-American firm producing respirator components for its refusal to prioritize the Mexican market.

While the restrictions on exports of ventilators, PPE and medicines have eased, those providing for greater restrictions or screening on foreign investment have not, and vaccine nationalism could yet present a threat to international health cooperation and risk tit-for-tat responses in trade and investment restrictive measures.

Using National Security as an Excuse

A more general risk is for countries to abuse national security exceptions provided for in the WTO and many regional trade agreements to impose further trade and investment restrictions. Before COVID-19, the U.S. was already using Section 232 of the 1962 Trade Expansion Act to restrict imports of steel and aluminium and threatened to impose trade restrictions against Mexico under the International Emergency Economic Powers Act.

In addition, the WTO and regional agreements also provide for exceptions to protect human life and health. Should the COVID-19 pandemic deepen in depth and breadth, a new virus spread, or the economic downturn empower interest groups to seek protection, several countries could use national security and/or public health exceptions to justify protectionism, which could cover much more than ventilators or PPE. 

For instance, could food, fuel, “critical” infrastructure or “essential” industries be covered? With the WTO’s appellate body unable to hear new cases, given it does not have the minimum of three members to function, there is one less roadblock to a potential abuse of WTO exceptions.

What Can Companies Do in These Circumstances?

Given the current weak state of the WTO and the fragile international cooperation to address the pandemic and economic downturn, companies can make their host governments aware of the critical international components of their supply chain. 

That way, the host governments should assess carefully any unintended consequences from granting protection to certain import-competing goods or services, or from including them in a tit-for-tat retaliation list over a trade dispute. In addition, dispute settlement in regional and plurilateral agreements is still functioning. While these agreements do provide for national security and health exceptions, the threat of initiation of dispute settlement proceedings could make trade partners think twice before enacting unwarranted barriers to trade and investment. 

Regardless of the COVID-19 denouement, the trend toward growing protectionism is likely to remain for some time, and companies would do well to recognize and adjust to this new reality.

Antonio Ortiz-Mena

Senior Vice President at Albright Stonebridge Group @Antonio_OrtizM

Antonio Ortiz-Mena is a senior vice president at Albright Stonebridge Group, where he provides strategic counsel and assistance to clients across Latin America. Prior to joining ASG in 2015, Dr. Ortiz-Mena served for more than eight years as the Head of Economic Affairs at the Embassy of Mexico in the United States, and began his career in the Mexican government in 1987, where he held multiple senior advisory roles, including the NAFTA Negotiation Office.

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