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Short Supply Conditions and the Law of International Trade: Economic Lessons from the Pandemic

Published online by Cambridge University Press:  20 October 2020

Alan O. Sykes
Alan O. Sykes*
Affiliation:
Professor of Law and Warren Christopher Professor in the Practice of International Law and Diplomacy, Stanford Law School. I have benefited greatly from conversations on this subject with Kyle Bagwell and Bob Staiger.
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Abstract

The COVID-19 pandemic has been accompanied by shortages and potential shortages of products critical to the public health response. Many nations have responded with export restrictions on these products, restrictions that are permitted under international trade law as a temporary response to short supply conditions generally and to public health emergencies in particular. This Essay argues that such export restrictions are economically counterproductive from a global efficiency perspective, and that governments acting unilaterally will nevertheless employ them due to international externalities that propagate through the “terms of trade.” This observation raises a puzzle as to why international law should facilitate rather than curtail them. The most plausible answer is that legal authority for such measures is a politically necessary “escape clause” in trade agreements, akin to safeguard measures.

Type
The International Legal Order and the Global Pandemic
Information
American Journal of International Law , Volume 114 , Issue 4 , October 2020 , pp. 647 - 656
Copyright
Copyright © 2020 by The American Society of International Law

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References

1 Fed. Emergency Mgmt. Agency, Prioritization and Allocation of Certain Scarce or Threatened Health and Medical Resources for Domestic Use (Apr. 10, 2020), at https://www.federalregister.gov/documents/2020/04/10/2020-07659/prioritization-and-allocation-of-certain-scarce-or-threatened-health-and-medical-resources-for.

2 Chad P. Bown, EU Limits on Medical Gear Exports Put Poor Countries and Europeans at Risk, Peterson Inst. Int'l Econ. (Mar. 19, 2020), at https://www.piie.com/blogs/trade-and-investment-policy-watch/eu-limits-medical-gear-exports-put-poor-countries-and.

3 Kate O'Keefe, Liza Lin & Eva Xiao, China's Export Restrictions Strand Medical Goods U.S. Needs to Fight Coronavirus, State Department Says, Wall St. J. (Apr. 16, 2020), at https://www.wsj.com/articles/chinas-export-restrictions-strand-medical-goods-u-s-needs-to-fight-coronavirus-state-department-says-11587031203.

4 World Customs Organization, List of National Legislation of Countries that Adopted Temporary Export Restrictions on Certain Categories of Critical Medical Supplies in Response to COVID-19, at http://www.wcoomd.org/en/topics/facilitation/activities-and-programmes/natural-disaster/list-of-countries-coronavirus.aspx.

5 World Trade Org. Press Release, WTO Report Finds Growing Number of Export Restrictions in Response to COVID-19 Crisis (Apr. 23, 2020), at https://www.wto.org/english/news_e/news20_e/rese_23apr20_e.htm; see also World Trade Org. Press Release, COVID-19: Trade and Trade-Related Measures (May 29, 2020), at https://www.wto.org/english/tratop_e/covid19_e/trade_related_goods_measure_e.htm.

6 The subject received some attention after a number of nations enacted export restrictions in response to commodity price spikes in the late 2000s. See Marceau, Gabrielle, WTO and Export Restrictions, 50 J. World Trade 563 (2016)Google Scholar: Robert Howse & Tim Josling, Agricultural Export Restrictions and International Trade Law: A Way Forward, Int'l Food & Agricultural Trade Pol'y Council (2012), at https://www.agritrade.org/Publications/ExportRestrictionsandTradeLaw.html.

7 Chad P. Bown, COVID-19: Trump's Curbs on Exports of Medical Gear Put Americans and Others at Risk, Peterson Inst. Int'l Econ. (Apr. 9, 2020), at https://www.piie.com/blogs/trade-and-investment-policy-watch/covid-19-trumps-curbs-exports-medical-gear-put-americans-and.

8 Simon J. Evenett, Tackling COVID-19 Together: The Trade Policy Dimension, Global Trade Alert, Glob. Trade Alert (Mar. 23, 2020), at https://www.globaltradealert.org/reports/51.

9 World Trade Org., Export Prohibitions and Restrictions (Apr. 23, 2020), available at https://www.wto.org/english/tratop_e/covid19_e/export_prohibitions_report_e.pdf.

10 Id.

11 Bernard M. Hoekman, Matteo Fiorini & Aydin Yildirim, Export Restrictions: A Negative-Sum Policy Response to the COVID-19 Crisis (European University Institute Working Paper RSCAS 2020/23), available at https://cadmus.eui.eu/handle/1814/66828.

12 A classic treatment is Kyle Bagwell & Robert W. Staiger, The Economics of the World Trading System (2002).

13 Hoekman, Fiorini & Yildirim, supra note 11; Joost Pauwelyn, Export Restrictions in Times of Pandemic: Options and Limits Under International Trade Agreements (last rev. May 8, 2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3579965.

14 The reasons for insufficient stockpiles present a complicated and interesting set of economic issues beyond the scope of this Essay.

15 Classic treatments include: Tjalling C. Koopmans, Three Essays on the State of Economic Science (1957); and Gerard Debreu, Theory of Value: An Axiomatic Analysis of Economic Equilibrium (1959).

16 The required assumptions are that all actors are price takers, all firms maximize profits, all consumers maximize utility, and no “non-pecuniary externalities” exist. See id.

17 See, e.g., Erik Nord, Cost-Value Analysis in Health Care: Making Sense of QALYs (1999).

18 This externality only arises if the importing country is “large” in economic parlance—that is, if its market is important enough to foreign exporters that reduced access to it affects their export prices. See Bagwell & Staiger, supra note 12.

19 This observation offers the standard explanation for the Webb Pomerene Act in the United States, which exempts export cartels that do not affect domestic commerce from the Sherman Antitrust Act. See 15 U.S.C. §§ 61 et. seq.

20 Levmore, Saul, Interstate Exploitation and Judicial Intervention, 69 Va. L. Rev. 563 (1983)CrossRefGoogle Scholar. A total ban on exports, of course, cannot be explained by a monopoly motivation as there are no sales abroad through which to capture monopoly rents, but policies to restrict but not eliminate exports may yield monopoly profits.

21 See notes 1–5 supra and accompanying text.

22 See notes 1, 3 supra.

23 See, e.g., Eric A. Posner & Alan O. Sykes, Economic Foundations of International Law, at ch. 3 (2013).

24 See note 13 supra.

25 General Agreement on Tariffs and Trade 1994, Art. XI, 1.4.4, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 UNTS 187, 33 ILM 1153. Duties and taxes are subject to negotiation and “binding” under GATT Article II.

26 I note in passing that GATT does not contain a general prohibition on export taxes. Limits on export taxes must be negotiated much like limits on import tariffs. Thus, even absent the exceptions to Article XI noted in the text, exporting nations could restrict their exports through tax measures.

27 GATT, supra note 25, Art. XI(2)(a).

28 The leading case is China – Measures Relating to the Exports of Various Raw Materials, WT/DS394/AB/R (2012), which held that Chinese restrictions on bauxite exports were not “temporarily applied” and did not address a “critical shortage.”

29 The only significant discussion in the WTO/GATT case law is India – Certain Measures Relating to Solar Cells and Solar Modules, WT/DS456/AB/R (2016), which held that India could not invoke Article XX(j) to justify a violation of the national treatment obligation in GATT when it sought to protect its nascent solar cell industry to avoid a potential future shortage of domestically produced solar cells.

30 U.S. Mexico-Canada Agreement, Arts. 32.1, 2.11(1).

31 Pauwelyn, supra note 13.

32 Staiger, Robert W. & Sykes, Alan O., International Trade, National Treatment and Domestic Regulation, 40 J. Legal Stud. 149 (2011)CrossRefGoogle Scholar (discussing terms of trade externalities associated with deviations from national treatment).

33 But see Rachel Brewster, Unpacking the State's Reputation, 50 Harv. Int'l L.J. 231 (2009) (critiquing accounts of compliance with international law based on reputation).

34 Posner & Sykes, supra note 23. The agreement must also benefit its signatories ex ante. Even if limitations on short supply restrictions promote aggregate global welfare, an agreement to curtail them might not be feasible if the net benefits and costs are asymmetrical and some countries expect to incur net costs. Issue linkage might overcome this problem ex ante, but asymmetrical benefits and costs ex post may still render self-enforcement infeasible.

35 See Bagwell & Staiger, supra note 12, ch. 6 (discussing politically feasible depth of commitments).

36 See Schwartz, Warren F. & Sykes, Alan O., The Economic Structure of Renegotiation and Dispute Settlement in the WTO/GATT System, 31 J. Legal Stud. S179 (2002)Google Scholar.

37 Bagwell, Kyle & Staiger, Robert W., A Theory of Managed Trade, 80 Am. Econ. Rev. 779 (1990)Google Scholar.

38 See note 5 supra.

39 We may also expect that governments elsewhere will take available measures to ramp up production of supplies to which their own citizens have access. If the technical capacity to manufacture locally is available, for example, governments may employ compulsory licensing (or the threat of it) to enable local production. Article 31 of the Agreement on Trade-Related Aspects of Intellectual Property Rights contains the authority for compulsory licensing.