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Andrew Hood and Cliodhna McDonough look at the key issues necessary to support business and the community in developing a long-term and sustainable response to the challenges highlighted by COVID-19.
The COVID-19 pandemic has triggered an unprecedented increased demand for some medical devices, such as masks, ventilators and medical gowns, as well as significant disruptions to global medical device manufacturing and supply chain operations.
The UK, EU, and international response to the pandemic has been a blend of openness and protectionism; we look at the key issues necessary to support business and the community in developing a long-term and sustainable response to the challenges highlighted by COVID-19.
Multinationals in the medical supplies sectors routinely divide their production process — from R&D, manufacturing of components and assembly of final goods to distribution, marketing, sales and maintenance — efficiently across countries with different comparative advantages. The current pandemic has compelled the examination of where to manufacture products, store inventory, source materials, undertake final assembly and, ultimately, shorten the device supply chain in a cost-efficient way. At a time of growing international trade tensions, the pandemic has placed a spotlight on the interdependence of global supply chains and brought to the fore issues concerning supply chain management.
The EU is one of the largest global producers of medical products, and the biggest exporter. When it comes to imported medical products, particularly pharmaceuticals, the EU sources the vast majority from the US and Switzerland with the majority of its Personal Protective Equipment (PPE) imported from China.
On March 20, 2020, as a reaction to the pandemic, the EU Commission invited all Member States, as well as the UK, to formally request temporarily lifting customs duties and VAT on imports of necessary medical equipment during the crisis. EU customs legislation (Council Regulation (EC) No 1186/2009) provides for the possibility to grant duty relief for the “benefit of disaster victims,” and EU VAT law (Council Directive 2009/132/EC) has mirroring provisions as regards exemption from VAT on the final importation of certain goods. All Member States including the UK accepted the invitation and the Commission swiftly approved all requests received.
The EU Commission also introduced temporary restrictions on the export of medical supplies to counter domestic shortages, leading to a rush by international manufacturers to repurpose facilities to increase supply. The current crisis is further exacerbated as some EU Member States have restricted the intra-community movement of pharmaceuticals and medical device products by imposing export bans.
On a global scale, the pandemic has tested countries' preparedness to address emergencies of the supply of medical goods and forced them to review their supply chain capabilities. By April 2020, at least 75 countries had restricted exports of medical supplies and medicines, including some EU Member States who temporarily restricted the free movement of certain goods across the EU. These restrictions also raise the concern that unilaterally imposed export restrictions for medical device products, especially those that are neither essential in treating COVID-19 nor at risk of shortages, are incompatible with the movement towards increased trade liberalization. Many in Industry are now looking for partnership to produce both domestically as well as using the global supply chain in efforts to reduce risk and build up resilience against future crises. However, attempts to reshore supply chains is no simple task in terms of both cost efficiency and operations.
Whilst it is critical that countries keep adequate stocks and domestic production capacity of life-saving equipment, in many cases it is simply not feasible for companies to stockpile regardless of demand requirements. Being overly dependent on any one location for essential medical products -whether the source is the US, China or Europe - brings its own associated risks.
No country is self-sufficient, no matter how powerful or advanced it may be. Trade allows for the efficient production and supply of medical supplies and equipment as the pandemic progresses. Any country's desire to ensure the self-sufficiency of its production and distribution capacity — particularly understandable in the context of medical products — needs careful management in order to avoid damage to the global trading system and multilateral co-operation.
An efficient global medical device supply chain arguably requires the sharing of resources and increased global cooperation, not less. Analysts believe that if the EU and the UK are to build up resilience against future crises, their efforts must focus on gathering data in conjunction with industry on supply chain risks and embedding deeper regulatory co-operation with key global countries. While political leaders called for medical goods to be produced within their national borders, policymakers are torn between the demands for self-sufficiency and the need to keep markets open.
Many in the life sciences industry believe that a crucial opportunity has arisen for policymakers to negotiate trade agreements based on reciprocity, building on what governments have already done in the liberalization of their import and export regimes whilst continuing to harness multilateral negotiations. This in turn would continue to safeguard the free flow of trade.
The European Commissioner for Trade, Phil Hogan, proposed a longer-term solution to reinforce global preparedness for future crises, suggesting that the international community should launch “a comprehensive negotiation of a plurilateral agreement that would lead to a level playing field, including the possible permanent liberalization of tariffs on medical equipment”.1
Further trade solutions have been suggested by the European Centre for International Political Economy (ECIPE) based in Brussels, which proposed a Global Agreement on Medical Equipment and Supplies (GAMES) in April 2020. This agreement can be negotiated within the WTO as a plurilateral agreement, by stopping the re-imposition of tariffs. Even though tariffs in medical products are low for some countries, such agreement will have immediate positive effects. First, by providing legal certainty that import tariffs will remain low it will encourage investments in new production of medical supplies needed to fight COVID-19. Second, while the average applied tariff might be low for most developed countries; other countries can achieve significant gains by lowering their tariffs.2
As part of its Brexit strategy, in May 2020, the UK's Department for International Trade set out the details of the UK's new tariff regime, the UK Global Tariff (UKGT). The new regime will replace the EU’s Common External Tariff on January 1, 2021 at the end of the transition period. Almost all pharmaceuticals and most medical devices will be tariff free under the UKGT. Brexit has afforded the UK an unparalleled opportunity to renegotiate its own international trading relationships in order to encourage the availability of medical supplies in the most efficient way.
Businesses cannot, however, rely entirely upon the international trade agreements to ensure security of supply and safe delivery of medical equipment. If supply chain resilience is to be enhanced against both present and future global pandemics, then suppliers, manufacturers and distributors must ensure they have suitable risk management strategy in place. Organizations should risk assess the robustness of their global supply chains against impacts from disruptions such as transport logistics and international manufacturing slowdowns and remodel their supply chains as necessary. Companies may also need to identify potential alternate sources of supply, substitute products, and/or conservation measures to mitigate disruptions. .. Now is the time for Industry to use the experience of any supply chain disruptions to develop a risk management plan, reprioritize, test existing processes, and make necessary updates in order to mitigate risks during the next crisis.
Andrew Hood, is Partner, Regulatory and Trade, and Cliodhna McDonough is Director, Regulatory, both at Fieldfisher.