COVID-19 and Trade Regulations
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The immediate responses have thrown up an array of new regulations together with temporary relaxations of existing rules. We take a look at recent developments and the impact – primarily from a UK/EU perspective – of covid-19 on supply chains, tariffs, export insurance, customs, export controls and sanctions.
Supply Chains
The impact of COVID-19 on international, and indeed domestic, supply chains will clearly be profound. The character of the pandemic is such as to wreak maximum mayhem, cycling from a supply-side crunch as production in Asia was hit, to a demand-side crisis as companies in Europe and the US cancelled orders, and back again to supply constraints as reinfections break out and supplier companies fail to survive.The food supply chain, in particular, is increasingly struggling with quarantines, labour shortages, shipping interruptions and export restrictions to ensure domestic consumption needs are met: Russia has proposed a 7 million tonnes grain export quota for April through June; benchmark rice prices in Thailand have risen more than 11% since the end of February; and wheat futures in Chicago have risen 15% since mid-March. Further food security protectionist measures look likely.
Beyond the food sector, manufacturers and retailers are torn between protecting their own financial position on the one hand and extending support to their suppliers on the other, to ensure that they survive until business resumes. While some have cancelled orders and extended payment terms, others have taken delivery of already produced goods and prioritised vendors that supply parts and raw materials critical to revenue generation. (If your contract may be affected, please see our Insight on Supply Chains and the use of force majeure clauses.)
The pandemic is simultaneously undercutting sea freight and raising air freight prices. Order postponements and cancellations threaten to leave shipping containers piling up at ports and warehouses filled. Ships are travelling on longer routes than usual, deliberately delaying the arrival of the cargo, but are likely soon to face falling demand and a consequent hit to freight prices. At the same time, exports of essential goods face sharply increased demand for air freight capacity, combined with a reduction in supply as passenger jets, which usually carry some cargo, are grounded.
For the longer term, the pandemic is exposing vulnerabilities in both critical and non-critical supply chains and may accelerate the re-shaping of global trade that was already underway:
- Companies are starting to re-evaluate the resilience of current ‘just-in-time’ business models. Thin inventories sourced from around the world have always posed a risk, but many companies are now re-evaluating that risk and looking to build up buffer stocks produced closer to home.
- Governments will need to review the risks to national and economic security, and not only for supplies of pharmaceuticals, medical equipment and food. How far this will be done nationally or multilaterally will be critical in avoiding a wave of protectionist trade and investment measures. (See our related blog on COVID-19 and Competition law.)
On 27 March, the G-20 leaders recognised the severe risks that the pandemic poses to international trade. They pledged to work both to ‘ensure the flow of vital medical supplies, critical agricultural products, and other goods and services across borders’ and at the same time to keep emergency measures aimed at protecting health ‘targeted, proportionate, transparent, and temporary’ in the interests of realising ‘a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open’. The challenge of translating these objectives into action remains daunting.
Tariffs
Nonetheless, there are positive signs. The pandemic has already resulted in some easing of import tariffs and of the threat of new measures:- The EU has temporarily lifted duties and VAT on imported free-of-charge goods by state or charitable organizations as well as disaster-relief agencies involved in fighting the pandemic;
- Both sides in the US-China trade deal look eager to prevent the deal from falling apart, to avoid a return to previous tariff levels and increased uncertainty, despite China’s almost certain failure to meet its commitment to buy an extra $200bn in additional US exports over the next two years;
- While the US appears (at the time of writing) to be going ahead with raising its retaliatory tariff on European aircraft from 10 to 15 percent in a long-running dispute over European government support for Airbus, at least the risk of US threats on autos from Europe may subside, to avoid a further hit to stock markets and increases in US car prices.
Export Restrictions on Medical Supplies
Many states have imposed restrictions to protect their supplies of critical medical equipment. Notably, the EU has prohibited the export of a list of personal protective equipment to destinations outside the EU without a licence. Items covered include mouth-nose-protection equipment, gloves, and other protective garments, spectacles and face shields, but will be narrowed to cover only masks from 26 April, the only remaining category where restrictions remain necessary in order to secure an adequate supply to protect the health of Europeans. Member States will be required to consult the European Commission when assessing whether to issue an export authorisation and should authorise exports of emergency supplies needed for humanitarian aid.Other similar measures include:
- Germany: prohibited the export and intra-EU transfer of certain medical protective gear (currently suspended, following the introduction of the EU measures);
- France: requisitioned public and private stocks of respiratory protection masks;
- UK: banned ‘parallel exports’ of some 80 priority medicines (companies buying medicines meant for UK patients and selling them on for a higher price in another country), with a threat of tough enforcement action by the Medicines and Healthcare Regulatory Agency;
- US: invoked the Defense Production Act to prevent the export of personal protective equipment like surgical masks, gloves, and respirators;
- India: restricted the export of 26 drugs and drug ingredients, including hydroxychloroquine (a malaria treatment with possible benefits in treating COVID-19). When the US threatened retaliation, India agreed to license “appropriate quantities… to some nations who have been particularly badly affected by the pandemic”.
Existing Export Controls
Longstanding controls on strategically sensitive items remain in place. Dual-use export control regimes in the EU and US continue to apply, in particular, to full face gas masks, decontamination equipment and protective suits, gloves and shoes, ‘specially designed or modified for defence against biological agents’, as well as to equipment used to manufacture vaccines (such as fermenters, centrifugal separators and filtration systems).However, in the interests of enabling international collaboration on the search for treatments and a vaccine, samples of the COVID-19 virus itself (SARS-CoV-2) are not so far subject to export licensing, unlike most other dangerous viruses including the SARS coronavirus.
The UK’s Export Control Joint Unit issued guidance (on 20 March and 9 April) relaxing some requirements for export licence applications, including doubling the time to respond to requests for further information about applications and accepting digital signatures on supporting documents. Compliance audits will be conducted remotely, not on-site. The processing of licence applications will continue but the time taken may be extended if the Unit experiences staff shortages.
Companies who have staff working remotely overseas need to ensure against any unlicensed transfers of controlled software or technology – the controls apply even to transfers between staff within the same company, if they are located in different countries.
Sanctions
EU sanctions regimes generally do not prohibit trade in food, medicine and other humanitarian goods, while the US permits such transactions under ‘general licences’ to countries where trade may otherwise be prohibited or severely restricted. Companies should, however, take care to evaluate the applicable licence exception and ensure that the entire proposed transaction, including payment terms, fully complies. They should remain alert to the risk of unlicensed transactions, such as those with Specially Designated Global Terrorists, particularly the Iranian Revolutionary Guard Corp, which is playing a significant role in Iran’s COVID-19 response. In the case of Iran, the US has issued a new licence (‘General License No.8’) which authorises transactions involving the Central Bank of Iran for the export of food, medicine and medical devices.Export Insurance
A number of countries have strengthened measures to help maintain trade flows during the pandemic. UK Export Finance has expanded the scope of its Export Insurance Policy to cover transactions with the EU, Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland and the USA. The insurance that can cover up to 95% of the value of an export contract should customers become insolvent or their governments’ actions make fulfilling the contract impossible. Similarly, the US Export-Import (EXIM) Bank announced in March a number of initiatives to provide temporary relief to the US exporting community.Customs
Finally, customs authorities are implementing relaxations to their rules on an exceptional basis in order to support businesses. In the UK, HM Revenue and Customs announced a number of temporary measures on 1 April affecting traders with existing authorizations or applications for temporary storage, customs special procedures such as inward processing or customs warehousing, simplified declarations, guarantees and Authorized Economic Operators. Traders unable to comply with the conditions of their authorization due to COVID-19 may request permission to temporarily vary the conditions. Priority will be assigned to authorization applications for supplies of food, medical, and pharmaceuticals. For traders unable to renew authorizations that are due to expire, HMRC will automatically extend the authorization during the crisis.Brexit
Finally, the disease has disrupted the already highly compressed timetable for the negotiations on an EU-UK free trade agreement (as well as plans for parallel negotiations with the US and other countries). By now, three rounds were supposed to have been completed. But only one has so far been held, on 2-5 March, revealing deep differences, most notably over the EU’s insistence that the UK must remain ‘dynamically aligned’ with the EU’s regulations in a wide range of areas including competition, state aid, the environment, labour and food safety standards. Dates have now been set for three further rounds by videoconference, followed by a high-level meeting in June to take stock.In the meantime, the clock is ticking towards the 30 June deadline for a decision on whether to extend the Transition Period beyond the current expiry date of 31 December. The UK Government remains committed, politically and in law, to no extension. But concern is rising that, if the negotiations run out of time, there will be no deal in place on 31 December, resulting (among many other consequences) in tariffs on EU-UK trade that could further disrupt businesses already severely hit by the lockdown.
Conclusion
The changes to trade regulations and trade flows we have seen so far are only the start of the response to COVID-19. There will be many more to come as the crisis evolves and eventually a time when regulators begin to unwind the temporary measures that have been put in place.The trade team at Fieldfisher is already assisting businesses to navigate these changes and to plan for the future. If you think that we may be able to help you during this difficult time then please do not hesitate to get in touch.
Authors
Andrew Hood, Partner, International Trade and Regulation, FieldfisherRichard Tauwhare, Advisor, International Trade and Regulation