The right and wrong way to use trade policy to fight pandemics

Last June, members of the World Trade Organization (WTO) agreed to waive some patent provisions involving COVID vaccines. The aim was to help developing countries get more jabs into arms. 

A year later, the waiver hasn’t been used, but it has become been a serious distraction. As wealthy countries look to make medical supply chains more resilient, poorer ones will struggle to participate because of their tariffs. 

India and South Africa proposed the waiver in 2020. They never explained why undermining patents on COVID vaccines was the way to go and argued the burden of proof wasn’t theirs. The idea was to make it easier for developing countries to use a compulsory license. These are already allowed under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, but the waiver — dubbed the TRIPs waiver — drops important measures meant to ensure that compulsory licenses aren’t used inappropriately, such as where generics are reexported from developing countries to more lucrative markets. It also says that the TRIPs agreement’s regulatory data protection provisions will not prevent an eligible country from authorizing a COVID vaccine. 

Over the last year, however, not a single compulsory license has been sought out by a developing country. In fact, there’s been no activity at all under the TRIPs waiver. The main reason is that hundreds of voluntary licenses have been agreed with generics producers in developing countries, 91 percent of which include a “technology transfer” clause. Compulsory licenses put these benefits at risk, with no guarantee of lower prices. Moreover, there’s no evidence that threatening a compulsory license helps in negotiating for a voluntary license. 

What the TRIPs waiver has succeeded at doing is taking the focus off of developing country tariffs. This is a problem because various global pacts on medicines and medical supply chains are based on eliminating tariffs, and developing countries will be hard-pressed to meet these terms. 

First, there’s the WTO’s Agreement on Trade in Pharmaceuticals, which has been zeroing-out tariffs among its signatories for almost 30 years. Not a single developing country is a member. 

In April 2020, New Zealand and Singapore agreed to a Declaration on Trade in Essential Goods for Combating the COVID-19 Pandemic. It calls for eliminating tariffs, non-tariffs and export restrictions on medical supplies. The idea quickly caught on. Australia, Brunei, Canada, Chile and Myanmar joined as well. 

Here in the U.S., Sens. Tom Carper (D-Del.) and Thom Tillis (R-N.C.) introduced the Medical Supply Chain Resiliency Act last month. It would enable President Biden to negotiate trade deals on key medical goods with “trusted trading partners.” Importantly, the act protects intellectual property, while at the same time getting rid of various import barriers. 

For developing countries to join global pacts like these, they’ll have to do something about their tariffs. This won’t be easy, because the problem is more complex than it looks at first glance. 

Let’s start with most favored nation “applied tariffs.” These are the import duties that are charged on a daily basis. According to my calculations of data provided by the WTO Tariff Tool, on final vaccines, and in ascending order, the tariffs are not terribly high. Cameroon, Congo and Yemen have most favored nation applied tariff rates of 5 percent, Pakistan’s is 5.7 percent, Chile’s is 6 percent, and India’s is 10 percent. Keep in mind that there are “mark-ups” charged by distributors across the supply chain. 

Next, consider the most favored nation (MFN) “bound tariffs” — the legal limits on the rates these countries have committed to under the WTO. In ascending order, again using the WTO Tariff Tool, I calculated that Yemen’s most favored nation bound tariff is 18 percent, Chile’s is 25 percent, India’s is 40 percent, Pakistan’s is 60 percent, and Cameroon and Congo have no limits on their tariffs, because both were able to keep them “unbound” when they joined the WTO.  

Subtract the applied rate from the bound rate, and the difference is called “tariff overhang.” So, for example, India has 30 percentage points of tariff overhang. This provides the government with wiggle room to change rates in response to economic or political circumstances. The problem is that it also creates uncertainty about which rate will obtain over a stretch of time, and thus deters trade. 

Uganda is an extreme case. On the one hand, Uganda’s most favored nation applied tariff is zero, making it an attractive market. On the other hand, Uganda has no bound rate, which means the country has unlimited tariff overhang at its discretion. This is why it’s highly misleading to look at an applied tariff rate in isolation from the country’s bound rate, assuming there is one. 

Tariffs on vaccine inputs jack up these costs. MFN applied rates average 28.6 percent. The WTO says 23 of the 27 top vaccine manufacturing countries have tariffs of at least 5 percent on five of the key 13 ingredients. India’s are at least 5 percent on all 13.  

Take, for example, the input “prepared culture media” used to develop or maintain viruses. Looking at top developing country manufacturers, in ascending order, I calculated that China’s most favored nation applied rate is 3 percent, Thailand’s is 3 percent, Egypt’s is 5 percent, India’s is 10 percent and Brazil’s and Argentina’s are 14 percent. I calculated their MFN bound rates as 3 percent, 33 percent, 10 percent, 40 percent, 20 percent and 20 percent, respectively, indicating that tariff overhang on inputs is as much of a problem here as it is on finished vaccines. 

Proponents of the TRIPs waiver like to argue that extraordinary times call for extraordinary measures. But sometimes the most extraordinary measure is also the most obvious one. In the fight against COVID, this should have meant slashing tariffs, rather than suspending patents. To prepare for the next pandemic, the Medical Supply Chain Resiliency Act should serve as the template, not the TRIPs waiver. 

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, and a global fellow at the Wilson Center’s Wahba Institute for Strategic Competition. Follow him on Twitter @marclbusch.