Regulating trade in a post-corona world

The novel coronavirus is one of the most disastrous pandemics in recent history. With the death toll continuing to rise and public health systems failing to meet the increasing demand, governments are imposing extreme measures. These measures, in turn, are disrupting countries’ economies and trade.

Pakistan is expected to face a 54 percent decrease in its real GDP growth for 2020, and a 70 percent decrease for 2021, as per the World Bank’s recent report. The main drivers for this slowdown are the services and manufacturing sectors, which collectively account for 80 percent of Pakistan’s economy. Covid-19 could cost the global economy $500 billion per year.

A 2019 joint report from the World Health Organization and the World Bank estimates that the cost of such a pandemic to the global economy may be anywhere between 2.2 percent and 4.8 percent of the global GDP ($3 trillion). South Asia alone could face a loss of 2 percent or $53 billion. Countries like Pakistan are especially vulnerable; a recent report by the UNDP highlights how the Covid-19 crisis will disproportionately impact developing countries, resulting in income losses exceeding $220 billion.

The WTO’s two fundamental instruments on global trade and health – the Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement) and the Agreement on Technical Barriers to Trade (the TBT Agreement) – have been in force since 1995. In the post-Covid-19 world, however, these same agreements may provide legal cover to states wishing to impose non-tariff barriers to trade.

The SPS Agreement regulates the application of food safety, and animal and plant health in relation to global trade. Under the agreement, a sanitary or phytosanitary measure is any measure applied to protect health, or animal or plant life, within the territory of a Member state. This includes, inter alia, protection from risks arising from the spread of diseases. States may set their own standards for products based on scientific principles and international standards and guidelines, and may also impose higher standards if there is sufficient scientific justification for them.

The TBT Agreement deals with the technical regulations related to products, such as their packaging and labelling. It recognizes ‘human health or safety’ as a ‘legitimate objective’ on the basis of which to regulate. Although it aims to ensure that regulations and standards set by countries are not unnecessary obstacles to trade, it allows them to adopt additional measures to meet such a legitimate objective.

With more than half of its exports originating from agriculture, the regulations under the SPS and TBT Agreements become even more relevant for Pakistan. Article XX of the General Agreement on Tariffs and Trade (GATT) further supplements this understanding by allowing contracting parties to adopt or enforce measures ‘necessary to protect human, animal or plant life or health’. As a country heavily reliant on states such as the US, Germany, and the UK to import its produce, Pakistan must ensure strict adherence to these standards.

This compliance cannot be ensured in isolation at the international stage. To effectively meet these standards, Pakistan will have to incorporate tighter checks and balances within its domestic framework at all stages of the supply chain – from how its produce is grown to how the final product to be exported is packaged. While, under normal circumstances, the private sector could operate with relative freedom, the present situation has empowered the government to unilaterally control trade. This, in turn, makes it essential to understand the implications of any regulations imposed.

First, the government now has both the responsibility and the power to decide which markets will operate and to what extent. As trading slowly resumes, the government may pick and choose what it deems to be the most relevant industries. Industries that are export-oriented, such as textile and agriculture, are more likely to receive preference. Players within the industries will also then be required to adapt to these new standards in order to remain operational. This will lead to an increase in internal trade barriers that not all businesses may be able to meet.

Second, if the government takes it upon itself to decide how the market operates, it may completely change the market structure. These decisions will certainly benefit some players, but may equally disadvantage others. If it decides to choose between competitors, it could drive competition out of the market. This model of selective production may enable the state to eliminate competition and create monopolies of the industry players it favours. The end result will be an inevitable increase in prices, hurting the already economically-disadvantaged citizens the most.

Third, the manner in which the government decides to shape the economy may result in a permanently regulated economy. From an equitable standpoint, that could have certain advantages. An increase in power, however, does not guarantee an improvement in the state’s competence to control the economy. The expected benefits of increased regulation must therefore be balanced against the equally expected regulatory abuse.

Faced with the possibility of increased international trade regulations in the form of non-tariff barriers, Pakistan must be proactive in its approach. Regulating trade post-Covid-19 will require a delicate balancing act; one which enables Pakistan to make the most of its export capacity, while ensuring that it does not become a regulatory leviathan.

The writers are faculty colleagues at the Shaikh Ahmad Hassan School of Law, LUMS.