This 16-minute podcast was released May 13, 2020.
“The U.S. relies quite heavily on imports of medical equipment that is considered essential to fight COVID,” says Senior Economist Ana Maria Santacreu. She and Economist Fernando Leibovici, both of the Federal Reserve Bank of St. Louis, talk with RC Balaban, digital communications and publications manager at the St. Louis Fed. They discuss their recent research on essential medical equipment and how the U.S. is facing a massive shortage of these supplies during the COVID-19 pandemic.
RC Balaban: Welcome to Timely Topics, a podcast series from the St. Louis Fed. I’m your host, RC Balaban, and with me today is Senior Economist Ana Maria Santacreu and Economist Fernando Leibovici, both with the St. Louis Fed. Thank you both for being here today.
Ana Maria Santacreu: Thanks for having us.
Balaban: Absolutely. Ana Maria and Fernando, I wanted to talk about some of the recent research you’ve been doing on COVID-19. You two have been specifically looking at imports and exports of essential medical equipment and how much different countries rely on that, including the U.S., which is actually a very heavy importer of this type of equipment.
Santacreu: We show that the U.S. relies quite heavily on imports of medical equipment that is considered essential to fight COVID. What we did there is we looked at product-level data for imports of these goods, that includes from personal protective equipment that doctors have to use to avoid contagion, so think of gloves, masks, hand sanitizers, to ventilators and other equipment that is needed to treat patients.
And what we found is that by 2018, the U.S. was importing over 29 billion dollars of these type of products. This represents around 30% of total domestic consumption of essential medical equipment in the U.S., and this is a large number. Now this, in principle, doesn’t need to be a problem if the U.S. can purchase these goods in the large amounts that it needs to fight COVID.
But the problem today is that we’re in the middle of a global pandemic, and it happens to be the case that the U.S.’s main suppliers are also facing a pandemic. What we found in that data is that China and the European Union together account for around half of what the U.S. is importing in these goods, and they are also in need of these type of products. And as a result, what we’re conclude in our blog post is that the U.S. is facing a massive shortage of supply in this essential equipment.
Balaban: Prior to what we’re experiencing right now with the pandemic has this been something that has been a concern?
Santacreu: Given the research that we have done, it seems that this was a concern even before the pandemic. Something that we found in our first blog post is that if we look at the U.S. trade deficit in medical equipment as a percentage of gross output, this has been increasing continuously over time. So just to give you some numbers, in 2012, the trade deficit was around 7% of gross output. And this increased to roughly 14% in 2018. So we do see that the U.S. has been increasing its dependence on foreign suppliers for these type of goods even prior to the current pandemic.
And I mentioned before that China is one of the main suppliers of these goods, and just to put it in context, in 2018, the U.S. administration implemented Section 301.34 against China, and it was already imposing tariffs on imports of these goods. The problem with this is that as the current pandemic hit, we observed these shortages of goods that we need to fight COVID. We observed price increases in these types of products, so these policies were reversed in March, and tariffs went back to almost normal. So this shows that this has been a concern for a while, and this reliance is something that the government has been looking at.
Balaban: What are some other things that can be done to address some of these shortages either in the short term or the long term?
Santacreu: So this is important, and there are policies that can be done in the short term. Thinking about the long term is a little bit more difficult. But in the short term, we can implement policies that encourage domestic production of medical equipment that we need today. So for instance, the government could direct private companies to boost production of these goods. We do see that some companies are producing masks, for example. Now if you think of equipment like ventilators or breathing machines, this may be a little bit more difficult if the companies do not have the installed capacity that they need to produce these type of goods at the massive scale, right? So in that case, we have to think a little bit harder of what can be done. One could think of incentivizing production of these goods from foreign suppliers that are already specialized in these types of products, perhaps by offering paying higher prices. This again may be problematic if these countries are also facing the pandemic, right? Because they need these products to face their own pandemic and they need to solve their own problems.
But I guess that in the short run, we need to think about ways to increase production of these goods domestically. In the long run, we need to think a little bit more about trade policy and what type of coordination devices we can engineer to have countries that are still depending on imports of these type of goods, but once disaster like this has hit and how foreign suppliers can actually help the net importers.
Balaban: I think that leads very well into talking about another blog post that you wrote, “Protectionism and Dependence of Imports of Essential Medical Equipment.” Now in that post, what did you find when it came to dependence on these types of imports?
Santacreu: Yeah. So that blog post was motivated by the fact that there are some countries that are depending a lot on imports of this medical equipment and also by the observation that there are several countries, mainly exporters of these products, that have been implementing export restrictions in these goods mainly because they need them, right, to fight the pandemic.
Now obviously, this protectionist policies are challenging for countries that, like the U.S., depend heavily on imports. So we decided to do a cross-country analysis to study what countries are the main suppliers of these goods, what countries are the main importers, and therefore, what countries are more exposed to these supply shortages.
And we found something interesting. The first finding is that exports and imports of these goods tend to be concentrated in a small set of countries, and that these countries are both exporters and importers at the same time. So for example, China, the U.S., and Germany are the main suppliers of essential medical equipment. Together, they account for 41% of total exports, and they are also the main importers.
But the U.S. alone accounts for one fourth of imports of these goods, right? So again, this just confirms what we found in our first blog post, that the U.S. is the main importer of these type of goods, and it relies quite heavily on foreign suppliers. So what this means is that export restrictions are going to be hitting countries unequally, and those that are more dependent on foreign suppliers are at the higher risk if they cannot boost their domestic production in the short run.
So after these findings, we started digging a little bit more on these issues, and what we found was that the main suppliers of medical equipment are imposing restrictions, but also the main importers of these equipment are liberalizing trade and are reducing tariffs. So the type of trade policy that countries are implementing today in the pandemic seems to depend a lot on whether they are net exporters or net importers of these goods. So this motivated us to write a paper, actually, on these issues from a trade policy perspective, and Fernando’s going to elaborate a little bit more about the findings that we get in that paper.
Balaban: That’s excellent. So, Fernando, can you summarize what you’ve found in your paper so far?
Fernando Leibovici: Yeah. So the analysis that we conducted in the blog post made us realize the importance of trade in allowing countries to gain access to the medical goods that are needed these days to combat COVID-19. So most countries are very dependent on international trade to get their hands on these kinds of goods.
So these findings led us to ask two questions. First, to what extent does relying on other countries for the supply of these essential medical goods does indeed amplify the impact of a pandemic? And the second question that we asked is what are implications for trade bodies? The goal of the working paper is to answer these questions and to do so, we constructed a mathematical mold of the world economy that is designed to capture the key role played by essential medical goods during a pandemic.
Now let me step back for a second and try to say why do we need even a model. Well, the thing is, we cannot run experiments on alternative types of trade policy in the real world, much as we might want, to learn what might work best. Or we could in principle but doing so would be super costly. So economic models are tools that allow us to run experiments in artificial economies, much in the same spirit that scientists in natural sciences run experiments in a lab, what we do is run experiments in our models.
So in this paper, what we do is we use the model to engineer a pandemic, and we found the following. So first, we find that if only one of the countries is hit by a pandemic, then trade is great. Why is this the case? Well, because trade allows countries to rapidly increase the consumption of essential medical goods just by bringing them in quickly from other countries.
Now if a pandemic is global, like COVID-19 is, then things get a little more tricky. Everybody needs these goods during a global pandemic, but it’s hard to adjust and scale up for the actual in the short run as we’re finding out these days, so prices of these goods go up, and they go up sharply. And this benefits countries that produce these goods and it hurts the countries that consume them. So countries that they’re net importers of essential medical goods, like the U.S., are relatively worse off than if they would have been hit by a pandemic relying less on other countries for the supply of these goods.
So what we do next in the paper is we ask, well, what are the implications of these finding for trade policy? And what we find in our analysis is that net importers of essential medical goods are better off living in a world in which trade barriers actually go down when the pandemic hits rather than in a world where trade barriers increase during the pandemic.
So the paper has many other results, but something I want to point out beyond these findings is that we expand even more on the empirical work that we did in our blog post that Ana Maria described earlier. So in particular, we do find that the response of trade policy in the weeks after the onset of COVID-19 has actually been consistent with the implications of our model. We find that it has markedly depended on whether countries are net exporters or net importers of essential medical goods with net importers, like the U.S., being less likely to raise the export barriers and to be significantly more likely to lower import barriers.
Balaban: That is fascinating. So the way it sounds is that if you’re a net importer of equipment such as this and then it turns out that something happens where everybody needs it, like you would with a pandemic, then you would see countries try to reduce any sort of barriers to trade in order to bring some more of that type of equipment over, if possible.
Leibovici: That’s correct, and what you see is actually net importers lowering trade barriers, and what you see is net exporters actually raising them, both to benefit from further price increases and also to keep those goods that were being sold abroad—to keep them domestic.
Balaban: If you could go a little bit more into—from your finding within blog posts, within your research paper—both short-term implications, such as what we’re looking at now with COVID-19 and trying to respond to it, and then also long-term implications, for instance, what are things that need to be considered to prepare for the next time if something like this were to ever hit again?
Leibovici: Yeah, that’s a great question. So our work has implications both for the short run and the long run, like you said. So in the short term, our work suggests that there’s clearly a need to increase domestic production of these goods. Countries can be made better off if they can scale up quickly, so it seems worthwhile spending resources to do so. Moreover, there’s clear policy implications like we discussed, that net importers, countries like the U.S., may be better off lowering trade barriers in these goods to alleviate the pain of the pandemic.
Now in the long term, the implications are broader. So overall, it seems like our findings such as this need to rethink the role of trade policy to regulate trade of essential goods. So one goal that countries may aspire to is to try to find a way to design a system that maximizes access to these key goods when they’re needed the most.
Now clearly, one way to do so would be to just go with the self-insurance, self-reliance route, so to minimize reliance on trade and try to do everything domestically. But that might not be the only way. You could think of global cooperation schemes that allow countries to try to share this risk, the same rules that allow the spreading out of the costs and the benefit of producing these key goods across borders.
Balaban: We’re talking about something that would have to be lots of countries coming together to be able to put together a system like this?
Leibovici: So we’re not saying that it might not be challenging to do so, but it might be worthwhile thinking about keeping those channels open because clearly, trade has a lot of benefits to offer both in essential goods and, of course, in non-essential goods. So I mean events like the ongoing pandemic can lead to an increased sentiment against international trade openness, and our research suggests that there’s no blanket solutions, and more so with essential goods.
So the challenge is to think carefully about how to design trade policy agreements that ensure that we get the benefits of trade while minimizing the potential pain when this global shocks hit. So this is a concern, and this is a goal that we should try to meet to avoid falling back to a world in which trade barriers are high. We know the cost that this would entail.
Balaban: What is it that you would want people listening to this podcast to be able to take away from the research you’ve done, either from your blog post, your paper, the whole thing?
Leibovici: So events like COVID-19 are bringing to the spotlight the key role of trade in goods, not just of essential goods, but all goods in general. And in this particular case, we’re seeing countries do rely significantly on other countries for the supply for these types of key goods that we need to combat COVID-19.
Now the question is, what are the implications? Well, we’re finding that actually trade can amplify the effect of a pandemic for countries that actually do rely significantly on other countries. This raises questions about the design of trade policy and trade policy agreements going forward and how to think of these goods as qualitatively different than non-essential goods that we know have brought huge benefits across countries in terms of economic development. So the key challenge will be to keep in mind that these two types of goods are different, and therefore, we might need to assign policy going forward differently for each of these types of goods.
Balaban: Excellent. Well, Fernando, Ana Maria, thank you both very much for sharing your research with us.
Leibovici: Thanks so much.
Balaban: For more episodes from our Timely Topic series, visit stlousfed.org/timely-topics. You can also subscribe to our series on Apple Podcasts, Stitcher, and Spotify. Thank you for listening today.