INDUSTRY INSIGHT

How Are Trade Measures Affecting Chemicals in the COVID-19 Crisis?

By Charles Julien, Counsel, White & Case LLP

As the COVID-19 outbreak rapidly expanded, governments around the world have adopted measures affecting trade, primarily to mitigate the immediate health consequences of the pandemic. More trade-related measures are to be expected in the coming months to address the huge economic spillovers of this modern-day health crisis. Trade in chemicals is not and will not be spared and it will be essential for the industry to consider means to oppose trade-restrictive measures.

WTO Trade Forecast

According to the World Trade Organization (WTO), world trade is expected to fall by between 13% and 32% in 2020, a sharper decline than the one brought on by the global financial crisis of 2008‑2009. A recovery is expected in 2021 but it will be dependent on the duration of the outbreak and the effectiveness of the policy responses.  Full recovery appears even more uncertain considering that the COVID-19 crisis occurred on the eve of an economic recession, merchandise trade volume having already dropped by 0.1% in 2019, weighed down by trade tensions and slowing economic growth.

Source:   WTO Secretariat

“The vast majority of measures adopted so far concern products directly related to addressing the crisis such as personal protective equipment, medical devices and pharmaceuticals.”

Nearly all regions will suffer very sharp declines in trade volumes in 2020, with exports from North America and Asia being hit the hardest. The economic crisis is expected to have an important impact on the GCC states, which already witnessed decline in exports in 2019 (i.e. UAE -12%, Saudi Arabia -9%, Qatar -14%).

Chemicals trade will see a similar trend. The picture is mixed between a predicted 30% decline in demand for chemicals by the automotive, transportation and consumer products industries on the one hand, and an increase in demand for pharmaceuticals, food additives and disinfectant, on the other.

COVID-19 Trade-Related Measures

Governments adopted two types of measures in an effort to mitigate the direct consequences of the pandemic, trade-facilitating and trade-restrictive measures.

Measures aimed at facilitating trade include easing the importation of goods necessary to fight the pandemic, mainly medical supplies and drugs, in the form of eliminated or reduced tariff (e.g. in Qatar), extended time for payment of customs duties, (e.g. in Saudi Arabia), suspension of trade remedies or facilitated air cargo. Some of these measures have concerned chemical products. For example, the Eurasian Economic Commission (including Armenia, Belarus, Kazakhstan and Russia) has temporarily eliminated import tariffs on the products needed to address the COVID-19 pandemic, including numerous chemicals (e.g. propyl alcohol and isopropyl alcohol; methylamine, dimethylamine or trimethylamine).

Other measures adopted to address the outbreak mainly consist of export restrictions (in the form of export prohibition, quotas, licensing and additional tariffs) so as to ensure the sufficient supply of essential goods within the domestic territory. The vast majority of measures adopted so far concern products directly related to addressing the crisis such as personal protective equipment, medical devices and pharmaceuticals.

For example, Oman imposes restrictions on the exportations of face masks and disinfectant and Saudi Arabia on prevention products.  Some countries have also temporarily restricted the exportation of certain essential foodstuffs to ensure sufficiency of food supply, as they fear food shortages resulting from disruptions in the supply chain and possible production and transportation issues.

Finally, a handful of countries took trade-restrictive measures that are not directly linked to the public health emergency situation but more geared toward protecting their domestic industry from its economic spillovers. Relevant to trade in chemicals, India is considering imposing an additional 15% COVID-19 tariff duty on chemicals and petrochemicals imported to India to protect its domestic industry. The tax still needs approval by the government.

As authorities around the worlds will undoubtedly come under more pressure to protect their domestic industries when industrial production resumes, more trade-restrictive measures are expected to be imposed in the coming months.

Countries may decide to increase duties on imports. WTO members are bound by the maximum tariff ceiling (referred to as “bound rate”) they committed to when joining the WTO. If a WTO member, for a given product, applies a tariff below its bound rate, it has a WTO-consistent margin for increasing its tariff.  A tariff imposed in excess of the bound rate will violate WTO rules.

Governments may also be tempted to impose quantitative restrictions on imports even though these measures are inconsistent with WTO rules.

Countries will likely also resort to the imposition of requirements relating to how products are made or the characteristics they must possess, also known as “technical regulations”, to protect their domestic industries. Technical regulations must be non-discriminatory. In addition, whereas WTO members have policy space to determine which policy objectives they want to pursue through technical regulations, WTO law prohibits regulations that create unnecessary obstacles to trade.

“As authorities around the worlds will undoubtedly come under more pressure to protect their domestic industries when industrial production resumes, more trade-restrictive measures are expected to be imposed in the coming months.”

“The first step for an affected industry to combat trade-restrictive measure is to engage with its government to seek support and actions. Industry-wide coordination is essential to give more weight to any concern raised.”

Finally, as we have already started seeing, governments are likely to provide direct support to their industries. There are strict rules concerning the provision of subsidies in WTO law.  Subsidies are prohibited if they are contingent upon export performance or contingent upon the use of domestic over imported goods.  Other subsidies, when they are specific – to an enterprise/industry or group of enterprises/industries – are said to be actionable. Actionable subsidies are not prohibited but can be subject to challenge, through multilateral dispute settlement in the event that they cause adverse effects to the interests of another member or their effects can be remedies through the imposition of anti-subsidy (or countervailing) measures.

Whether governments will choose to act within the strict boundaries of their WTO obligations remains to be seen. They could employ disguised protectionist measures that fit the authorized exceptions on paper, or even publicly disregard their WTO obligations. Whatever the case may be, there are ways for the industry to combat these restrictive measures.

Combatting Trade-Restrictive Measures and Injurious Imports

The first step for an affected industry to combat trade-restrictive measure is to engage with its government to seek support and actions. Industry-wide coordination is essential to give more weight to any concern raised.

Once informed, the government can consider raising concern on behalf of its domestic industry to the country imposing the measure, for example through diplomatic means or in regional fora, (e.g. free trade agreement). The WTO also offers different settings in which concerns can be raised, in particular the Council for Trade in Goods, the Committees for Technical Barriers to Trade, Anti-Dumping Practices, subsidies and Countervailing Measures and Safeguards. As a last resort, if a country is clearly violating its obligations and refuses to remove its measure, a government may initiate a WTO dispute.

Upon request by the domestic industry, a government can also consider the adoption of trade remedies on subsidized, dumped or rapidly increasing imports to address an injury suffered by its domestic industry. In addition, any of the above described measures (i.e. additional import duties; quantitative restrictions on imports; technical regulation; subsidies) could be envisaged to ensure that a domestic industry is in a position to compete sustainably with imports.

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