sign in sign up
<<
Home , Government procurement

The & Government Policy Nexus:

Before and After The COVID-19 Pandemic

Simon J. Evenett1 University of St. Gallen2 and the St. Gallen Endowment for Prosperity Through Trade3

21 December 2020

To be published in In Sue Arrowsmith, Luke Butler & Christopher Yukins (eds.) Public Procurement in (a) Crisis: global lessons from the COVID-19 pandemic. Hart Publishing. 2021.

1 The author thanks Professor Sue Arrowsmith and Robert Anderson for comments on an earlier version of this chapter 2 Professor of & Economic Development. Email address: [email protected]. 3 Founder of the new non-profit Foundation to house the Global Trade Alert and other - related initiatives.

I. Introduction

Since being declared a pandemic by the World Health Organization on 11 March 2020, COVID- 19 has spread to every continent. There has been an attendant surge in demand for medical , medical equipment, and medicines. That public sector organisations are responsible for sourcing these essential items implicates government procurement policy. That patterns of international specialisation imply that sourcing can come from abroad implicates trade policy. The COVID-19 pandemic amounts to nothing less than a major stress test for the extant trade and government policy nexus. How well did current institutional arrangements and practices fare? If the statements of senior policymakers in the major trading powers are to be believed, the curt answer is: Not well at all. Should policymakers’ words translate into deeds then there could be implications for national procurement policies, for the conduct of unilateral trade policy, and for the negotiation and possible renegotiation of relevant provisions in regional trade agreements and for the plurilateral Agreement on Government Procurement (GPA) at the (WTO). Nine months into the pandemic the purpose of this chapter is to reflect on the implications of this stress test for the trade and government procurement nexus. Drawing on data collected on government policy response and on the recent analyses of others, this chapter will ask whether current arrangements and practices are fit for purpose. If not, why not? Do any deficiencies reflect lacunae, blind spots, or implicit assumptions that turned out to be false? Perhaps any failings reflect the fact that the extant nexus was not designed to cope with pandemics in the first place? It is not claimed that these observations are the final word—after all, at the time of writing (December 2020) there is no end in sight for the pandemic. Two thoroughly tested vaccines have been approved but global distribution of vaccines has barely begun. The remainder of this chapter proceeds as follows. The next section describes the organising logic of what is termed the trade and procurement policy nexus before the pandemic hit. As will become evident, this logic had three important consequences which were to come to light once the pandemic results in a surge in demand for medical kit. The third section of this chapter describes the initial trade policy responses as governments scrambled to source medical kit and the consequences for the international supply chains implicated. The backlash against those supply chains that followed and its consequences for the trade and government procurement nexus is discussed in the fourth section. The concluding section of this chapter draws out three root causes that must be faced if a more effective trade and government procurement nexus is to be designed.

II. The Trade & Procurement Policy Nexus before the Pandemic

This section describes the organising logic and consequences of the inter-relationship between trade and government procurement policies before the COVID-19 pandemic. Although it refers to a nexus this does not mean to imply that there is a global accord or understanding concerning the relationship between these two policies. Nor it is implied that the better practices that follow 2 of 16

have been implemented everywhere. Rather the goal is to describe how this nexus was supposed to work and then to highlight three facets of that nexus that were ultimately cast in a poor light as the pandemic unfolded. The starting point is the assumption, as discussed in chapter 2, that value for money in public procurement is best achieved through competitive tendering processes. For those where cross-border supply is technically feasible, suppliers based abroad are a potentially valuable source of competition. It follows that public purchasing policies and practices should be adopted that encourage bids from suitably qualified foreign firms. In turn this has implications for the transparency of public procurement procedures (including the publication of tender announcements in international languages, such as English) and for due process rights of bidders, as again was discussed in chapter 2. It also implies eschewing price preferences, bans on sourcing from any group of technically qualified bidders, and other forms of discrimination.4 Trade policy can be aligned with this logic as well. Governments can commit not to charge tariffs on goods sold to public bodies. They could also refuse to undertake anti- and countervailing investigations against foreign bidders for state . Regional trade agreements can be signed that reduce or eliminate discrimination against foreign bidders, locking in what trade diplomats refer to as ‘market access’ to public procurement systems.5 The range of public bodies covered by those market access ‘disciplines’ can be negotiated as well. On this logic, greater coverage of public bodies in trade accords is better. Similar initiatives have been undertaken by the members of the plurilateral GPA.6

4 The international dimension to public procurement processes are handily described and assessed in the contributions to A Georgopoulous, B Hoekman, and P Mavroidis, (eds) The Internationalization of Government Procurement Regulation (New York, Oxford University Press, 2018). A factual overview of the size of national public procurement markets and the means that governments deploy to favour locally-based firms can be found in J Goudron and J Messent, ‘How Government Procurement Measures Can Affect Trade’ (2019) 53 Journal of World Trade 679. 5 For an overview of government procurement provisions in regional trade agreements see R Anderson, A Müller, K Osei-Lah, J de Leon, and P Pelletier, ‘Government procurement provisions in regional trade agreements: a stepping stone to GPA Accession?’ in S Arrowsmith and R Anderson (eds) The WTO Regime on Government Procurement: Challenge and Reform (Cambridge, Cambridge University Press, 2011). For a finding that after competition policy provisions, among other behind-the-border policies it is the government procurement provisions of regional trade agreements that have the largest positive effect on the level of bilateral trade see K Hayakawa, F Kimura, and K Nabeshima, ‘Nonconventional Provisions in Regional Trade Agreements: Do They Enhance International Trade?’ (2014) 17 Journal of Applied Economics 113. 6 For a timely account of the flexibilities available to members of the GPA, a subject also discussed in chapter xx of the present volume, see R Anderson and A Müller, ‘Keeping Markets Open While ensuring Due Flexibility for Governments in a Time of Economic and Public Health Crisis: The Role of the WTO Agreement on Government Procurement (GPA)’ (2020) 29 Public Procurement Law Review 189. For assessments of the working of the GPA before the pandemic see R Anderson and N Sporysheva, ‘The Revised WTO Agreement on Government Procurement: Evolving Global Footprint, Economic Impact and Policy Significance’ (2019) 28 Public Procurement Law Review 71, B Hoekman, ‘Reducing Home Bias in 3 of 16

At this point in the argument three considerations that are implicit in, or that arise from, the organising logic described immediately above should be emphasised. The first observation is that it is only the public sector practices of the importing jurisdiction that mattered. When sourcing occurs from abroad no consideration was given in the argument above to the government policies of the nations where firms from. To the extent that international trade agreements included provisions on government procurement, the ‘problem’ being tackled was the behaviour of the importing nation’s government, not the policies of exporting nations. The second observation is that, according to this organising logic, one advantage of sourcing from abroad is that it is risk reducing. Cross-border sourcing is seen as particularly valuable if there is a sharp, unexpected reduction in the capacity of domestic or locally-based firms to supply goods to public bodies. From the perspective of any one government, the option to source from abroad was seen as a plus. The consequences of other governments having the same option was either overlooked or known but regarded as unimportant. The third observation is that, to the extent that the emphasis on value for money results in intense price-based competition bidding firms have strong incentives to keep costs as low as possible. Private sector firms designed and executed supply chains based on so called Just In Time principles in response to these incentives. Those supply chains typically involve constituent firms holding few inventories of parts, components, and final produced goods as well as maintaining as little redundant production capacity as possible. The goal here is not to denounce this organising logic—the author has based policy recommendations on this logic many times in the past and is yet to be persuaded by an alternative logic.7 Instead, as is argued in the next section, the pandemic has rudely called into question the validity of the three observations outlined immediately above.

III. The Initial Trade Policy Response to the Pandemic

In many nations governments are directly responsible for the supply of public health services. In those nations where private sector provision of health care is the norm, the state is still seen as having overall responsibility for public health. In both cases, the rapid spread of a coronavirus through populations with the resulting increased demands on national health systems rapidly became a first order matter.

Public Procurement: Trade Agreements and Good Governance’ (2018) 24 Global Governance 249, and B Taş, K Dawar, P Holmes, and S Togan, ‘Does the WTO Government Procurement Agreement Deliver What It Promises?’ (2018) 18 World Trade Review 609. 7 G Deltas and S Evenett, ‘Quantitative Estimates of the Effects of Preference Policies.’ In B Hoekman and P Mavroidis (eds), Law and Policy in Public Purchasing: The WTO Agreement on Government Procurement. (Ann Arbor, University of Michigan Press, 1997) and S Evenett and B Hoekman, ‘Government procurement: market access, transparency, and multilateral trade rules’ (2005) 21 European Journal of Political Economy 163. 4 of 16

In turn this puts pressure on state bodies to source needed medical kit. In the case of COVID-19, as argued by the Director-General of the World Health Organization as early as March 2020: ‘We can’t stop COVID-19 without protecting health workers.’8 This imperative is in addition to taking steps to curb the spread of COVID-19 among the population. Both implied a surge in demand for personal protective equipment (PPE) as well as for the medical goods and equipment needed to treat persons hospitalised with COVID-19. PPE, medical goods, and medical equipment differ in the complexity of the associated manufacturing processes. Some items, such as medical ventilators, are produced in elaborate supply chains spanning multiple countries. What all this medical equipment had in common is that it could be potentially sourced from abroad. Faced with a huge surge in demand for medical kit governments sought to expand domestic production as, for example, in the case study countries of UK, xx and xx9. Once convinced that this would not suffice, two further steps were taken by governments that harmed trading partners. The first was to engage in bidding wars for what medical kit was available on international markets. This may have resulted in governments realising that what domestic production was available could be “lost” abroad and, as a result, limits on were put in place. As documented in the joint European University Institute, Global Trade Alert, and World Bank trade policy monitoring initiative on essential goods10, governments resorted to various following policy interventions that directly or indirectly limited exports of medical goods and medicines, namely: outright export bans; export control policies, including export authorisation policies; export quotas; non-automatic export licensing requirements; state requisition policies that de facto frustrate exports; state exhortation to local producers not to export; and requirements that local producers reserve a minimum percentage or amount of their production for the local market. China11 and France12 requisitioned certain medical goods produced within their borders. Other countries, such as Indonesia, began with ministers imploring local firms not to export face masks

8 World Health Organization (WHO) ‘Shortage of personal protective equipment endangering health workers worldwide’ 3 March 2020. 9 See Chs xxx. 10 See further: https://www.globaltradealert.org/reports/54. In the interests of transparency, note that the current author was involved in the design and implementation of this joint initiative. The International Trade Centre (ITC), the World Customs Organization (WCO), and World Trade Organization (WTO) also monitored government resort to trade restrictions and trade reforms since the onset of the pandemic. The joint initiative’s findings were chosen because, in so far as the essential goods sectors of food, medical goods, medical equipment, and medicines are concerned, its coverage is by the largest. 11 For details of the relevant State Council decision see http://www.nhc.gov.cn/xcs/s3574/202002/d8f0567e45c5488bb9ecf23312038bf2.shtml 12 For details see The French Government Gazette, Decree n 2020-190 of 3 March 2020, published on 4 March 2020: https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000041679951&categorieLien=id and 5 of 16

etc and then followed up with a formal export ban.13 As Figure 1 shows, a total of 91 jurisdictions implemented 207 export controls on medical supplies and medicines since the beginning of 2020.

Figure 1: Export controls on medical supplies and medicines January to October 2020

As the map in Figure 1 shows, by and large, the export bans spread from the Far East westwards as COVID-19 spread. What is also telling is that the governments of some G-20 members— Australia, Canada, and Japan—did not impose formal restrictions on producers within their borders from shipping to buyers abroad. Therefore, imposition of such restrictions was a deliberate public policy choice. There was nothing inevitable about the imposition of these export controls.

The French Government Gazette, Decree n 2020-147 of 13 March 2020, published on 14 March 2020: https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000041721820&categorieLien=id 13 See the statements by an Indonesian government minister reported here: https://www.thejakartapost.com/news/2020/03/05/dont-export-masks-minister-pleads-amid-coronavirus- panic-buying.html. 6 of 16

Moreover, existing multilateral trade disciplines did not preclude the resort to such controls.14 For that matter, few regional trade agreements contain provisions curbing the use of export controls either. Consequently, no government was at risk of losing a WTO dispute settlement proceeding on account of their decisions to restrict exports of medical goods, medical equipment, and medicines. Even if the WTO’s Appellate Body was still functioning, arguably by the time any case was fully litigated the medical emergency could be over.

14 J Pauwelyn, ‘Export restrictions in times of pandemic: Options and limits under international trade agreements’ in R Baldwin and S Evenett (eds.) COVID-19 and Trade Policy: Why Turning Inward Won’t Work (London, CEPR Press, 2020). 7 of 16

Figure 2: Liberalisation of import regimes for medical supplies and medicines January to October 2020

The consequences of these export restrictions for firms operating cross-border supply chains to manufacture medical goods and equipment soon became apparent.15 A chorus of criticism from leading international business associations and senior corporate executives followed. It was far from evident that senior officials acted with much understanding of the manner in which cross-

15 See the cases studies presented in M Forini, B Hoekman, and A Yildirim, ‘COVID-19: Expanding access to essential supplies in a value chain world’ in R Baldwin and S Evenett (eds.) COVID-19 and Trade Policy: Why Turning Inward Won’t Work (London, CEPR Press, 2020). 8 of 16

border supply chains work, the consequences of their export controls, and the potential for retaliation by other governments. However, it would be inaccurate to recount only the disruption to pre-pandemic cross-border sourcing patterns. As Figure 2 makes clear, since the beginning of this year a total of 106 customs territories have implemented 240 reforms that eased the importation of medical goods and medicines. Measures to facilitate trade were taken as well. Taxing the importation of soap makes little sense when populations are being urged to wash their hands frequently.

Figure 3: Imposition and phase-out of trade policy in the medical goods and medicines sectors January 2020 to December 2021. Source: Compiled from the European University Institute, Global Trade Alert, and World Bank trade policy monitoring initiative on essential goods. Data extracted 30 October 2020.16

Using the most fine-grained international trade data available globally for 2019 (the latest year for which the United Nations COMTRADE database is currently available), it has been calculated17 that these trade reforms covered $165.2 billion of trade in medical goods and medicines. In

16 This chart was first published in S Evenett and J Fritz, Collateral Damage: Cross-Border Fallout from Pandemic Policy Overdrive (London, CEPR Press, 2020). 17 S Evenett, M Fiorini, J Fritz, B Hoekman, P Lukaszuk, N Rocha, M Ruta, F Santi and A Shingal, ‘Trade Policy Responses to the COVID-19 pandemic crisis: Evidence from a New Dataset’ (2020) EUI Working Paper RSCAS 2020/78. 9 of 16

contrast, the export controls mentioned earlier implicated $134.6 billion of cross-border commerce.18 Another important consideration is that many governments announced that their trade measures relating to medical goods and medicines would be temporary. If this were the case and the measures were very short lived, then some might be tempted to conclude that these were exceptional circumstances with little or no longer-term implications for the design and execution of national public procurement regimes and for international trade agreements. Unfortunately, on the basis of the information currently available, no such sanguine conclusion is merited. Figure 3 plots the number of export controls and import reforms in this sector that have been in force each month since the beginning of the year. This figure also plots, based on announced revocation dates, the number of trade measures that are expected to be in force from now until 2021. On current information around 31 per cent of the export curbs announced this year will not have been removed by the end of 2021. Meanwhile, approximately 43 per cent of the import reforms implemented to date will remain in force during 2021, with much of the unwinding occurring from August 2020 to March 2021. A permanent change in the policy towards cross- border flows of medical goods and medicines cannot be ruled out. This may lead some to rethink the desirable trade and government procurement nexus in at least these sectors. There are good reasons to believe that other public policies implicating the cross-border supply of medical goods and medicines are in the works, and will now be considered.

IV. Emergent Policy Trends affecting the Trade & Government Procurement Nexus

As the author has documented at length elsewhere, if their public statements are anything to go by, senior policymakers in many major trading powers have concluded that cross-border supply chains failed during the early phase of the pandemic.19 Criticism has even come from policymakers whose governments did not disrupt supply chains with export restrictions on medical goods and medicines, such as Japan. For example, then Prime Minister, Shinzo Abe, is reported announcing the following shift in Japanese government policy: ‘for those products with high added value and for which we are highly dependent on a single country, we intend to relocate the production bases to Japan. Regarding products that do not fall into this category, we aim to avoid relying on a single country and diversify

18 Readers are cautioned that, to the extent the pattern of cross-border demand for medical goods and medicines differed in 2020 from 2019, then these estimates (based on observed 2019 trade flows) may be misleading. These statistics are reported here because they follow an accepted methodology for trade coverage calculations and they represent the best information currently available. 19 S Evenett, ‘Chinese Whispers: COVID-19, Global Supply Chains in Essential Goods, and Public Policy’ (2020) 3 Journal of International Business Policy 408. 10 of 16

production bases across a number of countries, including those of the Association of Southeast Asian Nations [Asean].’20 Earlier, on 7 April 2020, as part of a stimulus package, the Japanese government announced the creation of a 220 billion Yen (approximately $2 billion) fund to entice firms to move factories out of .21 Subsequently, in July 2020 Japan revealed that 87 firms had successfully applied for $653 million of financial support to do so. Another 30 companies will receive financial support to shift production to the ASEAN region. Two charges have been made by these critics of cross-border supply chains.22 The first is that before the pandemic sourcing of medical goods and medicines had become too dependent on China. That dependence, it can be argued, was exposed when China cut off exports of key medical kit during the first quarter of 2020. The second is that the dependence on China gives the government in Beijing too much potential leverage during times of crisis by threatening to cut off or limit supplies of much needed medicines and medical goods. The author’s statement of these objection in no way constitutes an endorsement.23 The policy recommendation that follows from this critical assessment by certain high profile officials is to reconfigure cross-border supply chains. At a minimum this would involve encouraging greater diversification in sourcing patterns and could involve outright supply chain repatriation. Commercial policy and government procurement policy could be implicated if policymakers follow through on this rethink of the merits of cross-border supply chains. To date, four types of policy initiative have been undertaken, each of which implicates the trade and government procurement policy nexus. The first is to award subsidies to firms to shift production out of China. Mention has already been made of Japan’s initiatives in this regard. Media reports suggest that Korea24 and Taiwan25 have also attempted to lure firms to repatriate production, albeit with mixed success.

20 Prime Minister Abe was quoted making these remarks in a news article in the South China Morning Post dated 12 August 2020 available at https://www.scmp.com/week-asia/opinion/article/3096911/coronavirus- has-complicated-china-japan-relations-how-will. 21 For more details about this Japanese initiative see https://www.globaltradealert.org/intervention/79328. 22 For a detailed account see Evenett ‘Chinese Whispers’. 23 To the contrary, the wide body of evidence previously marshalled by the author shows that the performance of cross-border supply chains has been traduced. See Evenett ‘Chinese Whispers’. 24 More information about the success of Korea’s initiatives in this regards can be found in this Financial Times article https://www.ft.com/content/9e6fe3e3-7121-4f35-80d5-013bdda3bf3d. 25 For some information about the Taiwanese scheme to shift production of semiconductor chips amongst other products, see the following Bloomberg articles https://www.bloomberg.com/news/articles/2020-06- 03/taiwan-is-said-to-dangle-335-million-to-woo-foreign-chipmakers. 11 of 16

The second type of policy intervention witnessed to date is to offer state largesse to locally-based firms to expand production capacity at home. As the author has previously documented,26 the governments of Canada27, Brazil28, India29, Italy30, Japan31, Korea32, Russia33, and the United States34 have provided state aid to producers of medical supplies and medicines in the first eight months of 2020. This could amount to a new phase of import substitution, but with the twist that instead of discouraging by imposing tariffs, governments pay firms to displace imports with local production. The third and fourth types of policy intervention directly implicate public procurement policies. As for the third, under the European Union’s Civil Protection Mechanism, in March 2020 the announced the creation of a joint stockpile which: ‘enables the swift delivery of medical equipment such as ventilators, personal protective equipment, vaccines and therapeutics and laboratory supplies. The stockpile, currently hosted by 6 EU Member States (, Germany, , , Romania and ), allows the EU to react to health crises more quickly.’35

26 Evenett ‘Chinese Whispers’. 27 See the following “investments” by Canada’s Strategic Innovation Fund: https://www.canada.ca/en/innovation-science-economic-development/news/2020/08/government-of- canada-announces-major-steps-in-treating-and-preventing-covid-19-through-vaccines-and- therapies.html, and https://www.canada.ca/en/innovation-science-economic- development/news/2020/05/minister-bains-announces-investment-in-antibody-discovery-technology-to- help-treat-covid-19.html. Although framed in terms of supporting companies working on medical research, the official announcements also refer to investments in manufacturing capacity. 28 For more details see https://www.globaltradealert.org/intervention/79270. 29 For more details see https://www.globaltradealert.org/intervention/78924, https://www.globaltradealert.org/intervention/79006, https://www.globaltradealert.org/intervention/78923, and https://www.globaltradealert.org/intervention/79005. 30 For more details see https://www.globaltradealert.org/intervention/79764 and https://www.globaltradealert.org/intervention/79762. 31 For more details see https://www.globaltradealert.org/intervention/79598. 32 Consistent news reports indicate that in May 2020 the Korean government set aside 1.2 trillion Won (approximately $980million) to develop that nation’s medical equipment sector, see https://en.yna.co.kr/view/AEN20200513001100320. 33 For more details see https://www.globaltradealert.org/intervention/79860. 34 See https://www.defense.gov/Explore/News/Article/Article/2319332/acquisition-enterprise-capabilities- to-continue-post-pandemic/ as well as the creation of a Strategic Active Pharmaceutical Ingredients Reserve. Information about the latter can be found at http://www.globaltradealert.org/intervention/79588. 35 Quoted from https://ec.europa.eu/echo/what/civil-protection/resceu_en. 12 of 16

Public sourcing decisions for this stockpile fall under the EU’s Joint Procurement Agreement, the governing legislation for which was last updated in 2013.36 This initiative is discussed in detail by Georgopoulos in chapter xx. The fourth class of policy initiative relates to the implementation of existing public procurement law. As part of an Executive Order on Ensuring Essential Medicines, Medical Countermeasures, and Critical Inputs Are Made in the United States, issued on 6 August 2020, President Trump issued the following instruction: ‘I am therefore directing each executive department and agency involved in the procurement of Essential Medicines, Medical Countermeasures, and Critical Inputs (agency) to consider a variety of actions to increase their domestic procurement of Essential Medicines, Medical Countermeasures, and Critical Inputs, and to identify vulnerabilities in our Nation’s supply chains for these products. Under this order, agencies will have the necessary flexibility to increase their domestic procurement in appropriate and responsible ways, while protecting our Nation’s members, veterans, and their families from increases in drug prices and without interfering with our Nation’s ability to respond to the spread of COVID-19.’37 While this indicates the likely direction of change of U.S. public procurement policy, in fact the Russian Federation38 and Saudi Arabia39 have already implemented measures that direct government spending towards locally produced medicines and medical goods. Each of these four types of policy intervention represents a departure from the organising logic of the pre-pandemic trade and government procurement nexus described earlier. Clearly, the fourth type of intervention, which involves discriminating in favour of local bidders or outright reservation of public contracts for local firms, goes sharply against the logic of eliciting bids from abroad. Building a stockpile need not involve discrimination, although it could. Repatriating production or subsidy-induced import substitution need not deny foreign firms the right to bid, but the associated payment of state largesse will likely put foreign bidders at a disadvantage. Of course, it could be argued that these developments only apply in the medical goods and medicines sectors and, therefore, that the core of the pre-pandemic trade and government procurement nexus will prevail. However, there are two counterarguments. First, to the extent that commercial and public procurement policies are recast towards “essential goods,” then the range of goods deemed essential may expand over time. Indeed, locally-based firms seeking favouritism

36 Decision No 1082/2013/EU, the legal text of which is available at https://ec.europa.eu/health/sites/health/files/preparedness_response/docs/decision_serious_crossborder _threats_22102013_en.pdf. 37 https://www.whitehouse.gov/presidential-actions/executive-order-ensuring-essential-medicines-medical- countermeasures-critical-inputs-made-united-states/ 38 See http://www.globaltradealert.org/intervention/79582 and http://www.globaltradealert.org/intervention/79590. 39 http://www.globaltradealert.org/intervention/80980. 13 of 16

from the state have an incentive to argue that their sector is “essential,” and will no doubt use any emergency or crisis that arises to advance their case. Second, to the extent that these four policy initiatives are seen as integral parts of a wave of new industrial policies or are caught up in intensified geopolitical rivalry, then officials responsible for implementing national procurement policies may have a seat at the relevant decision-making table but they are unlikely to have the greatest clout. Under these circumstances procurement policy could become the tail which is waved by the dog of industrial policy or geopolitical strategy.40 In short, there is no guarantee that the four departures from the logic of a level playing field identified above must be confined to medical goods and medicines.

V. Concluding Remarks: What is Really Going on Here?

This chapter has argued that the onset of the COVID-19 pandemic has revealed gaps in both our thinking about the extant trade and government procurement nexus and in design of the international trade agreements. The latter were designed to circumscribe the behaviour of the governments of importing nations, not to limit the power of exporting governments to disrupt cross-border supply. Arguably, this approach overlooked some risks that could be created by cross-border sourcing, especially when many governments simultaneously scramble to purchase much needed goods and national firms are willing to drop local buyers in favour of foreign customers with deeper pockets. Moreover, as a result of pressures to keep costs down and possibly to satisfy shareholders by returning capital, companies operating supply chains retained little spare production capacity. Consequently, such firms were unable to ramp up production quickly enough to meet societal needs, resulting in government officials who knew little about how production was organised within and across borders taking reflexive and often draconian measures. To chart a better way forward, it is worth reflecting on the following question: what is really going on here? At the core of the matter are three factors: 1. the simultaneous surge in demand for medical goods and medicines in many nations, 2. a lack of compelling information about the sources of supply, and 3. the availability of tools for governments to disrupt cross-border sourcing and supply chains.

40 This argument should not be overplayed as in many nations public procurement law and policy has had to accommodate, for better or for worse, other societal imperatives. At a minimum, the domain where the logic of open international competitive bidding pursuing value for money objectives in public procurement policy will narrow. 14 of 16

Below each factor is discussed in turn, although it is important to remember that these three elements interact with one another. With respect to the first factor, in any redesign of the trade and government procurement nexus the fact that demand can surge simultaneously in many nations for some “essential” item needs to be given serious consideration. The argument that trade is a valuable safety valve when an individual nation faces a localised surge in demand or an idiosyncratic fall in local supply assumes that there are foreign suppliers that can ramp up production to meet the nation in question’s needs. When demand increases in many countries simultaneously and firms are operating with little unused production capacity, the situation is very different. Indeed, this is a recipe for governments indulging in bidding wars scooping up supply where it is available. In such bidding wars those governments with deeper pockets are likely to prevail, an outcome that could have serious adverse consequences for nations with lower incomes. Here open borders can be seen as a vulnerability, increasing the risk that there is little local supply available to meet surging local demand. This is a difficult problem to which, at present, there are few appealing solutions. Some argue that governments should create stockpiles of “essential goods.” In addition to being costly, governments would have to forecast needs accurately, not just the types of goods to stockpile but the amounts as well. There is a serious risk here of making mistakes akin to generals fighting the last war—the last pandemic or other emergency defines the list of goods stockpiled, whereas the next emergency is of a different nature. Another response is to provide firms with incentives to maintain more spare capacity, but this raises the question of which firms to support and how much spare capacity. In addition, there is surely a risk that such incentives are misused to gain over foreign rivals. In sum, there may be solutions to the problem of ensuring sufficient supply during simultaneous demand surges but, unless carefully designed, they may erode rather than reinforce the principle of open, international competition on the merits. With respect to the second factor, a paradox arises. For decades, analysts have advocated transparent government procurement systems that encourage vigorous competition from bidders in pursuit of value for money objectives. Transparency was seen an important part of this package, including because it elicits a greater number of bids for state contracts. Surely the initial phase of the COVID-19 pandemic has shown that, when facing dire circumstances the lack of transparency about the private sector’s capacity to supply essential medical goods, medical equipment, and medicines—in particular, about those firms operating cross-border supply chains—led some governments to (implicitly or explicitly) renounce key tenets of the pre-existing trade and government procurement policy nexus. We have learnt, therefore, that support for that nexus was conditioned in part on a form of transparency little discussed in trade policy circles and government procurement circles, namely, the transparency of the private sector. Following this diagnosis, what is the next best move? If correct, the logic outlined above would point to a two-part response. First, supporters of open internationally competitive procurement 15 of 16

systems would do well to encourage leading private sector firms and business associations to demonstrate any capacity to respond to demand surges. Such confidence building measures might discourage policymakers from disrupting supply chains with export restrictions (the third factor mentioned above). Second, a package of policies must be identified that enables the private sector to scale up production quickly to meet simultaneous surges in national demand for essential goods without opening the back door to crude industrial policy objectives and a modern variant of import substitution. Ideally, international guidelines should be developed and governments encouraged to follow them so that any state largesse does not become a source of commercial policy tension with trading partners.

16 of 16