Talking Trade blog
Hand soap in a pandemic
Published 02 April 2020
As the infection numbers for COVID-19 continue to rise globally, the impact on medical facilities and health care workers is also skyrocketing. Getting needed supplies from where they are to where they need to be is a challenge for all kinds of companies. Hospitals and clinics are also struggling with ensuring that necessary equipment is available to treat patients and workers.
Effective management of medical supply chains is more urgent than ever.
Many news stories have focused attention on shortages of masks, ventilators and face shields, with health care providers and citizens alike unable to find sufficient capacity in the markets.
Partly as a result, an increasing number of governments have imposed restrictions on the export of these key supplies. The idea is to ensure that domestic workers and patients benefit from access to more stable levels of critical equipment.
Constricting supplies will likely have devastating impact on many countries, especially in the developing world, that do not have the ability to make or procure needed supplies and equipment domestically.
The supply chains for medical equipment, like most products, have largely been built for global markets. Having separate domestic lines has been seen as too costly and wasteful or simply impossible to create and deliver.
However, with the virus, medical supply chains have been exposed by the crisis to be as brittle and subject to massive disruption as other types of chains.
There is another type of challenge that firms face in bringing important products to market—a variety of government policies that can limit supplies. This includes tariffs on a wide range of products that are important in combating the spread of the virus.
Again, the primary focus has been on face masks and ventilators, but personal protective equipment (PPE) is not the only category of goods that hospitals, health providers, and patients require.
Take the simple example of soap. Citizens are being urged to significantly ramp up handwashing to slow or stop the spread of the coronavirus. This practice obviously requires soap.
Yet governments have surprisingly high tariffs rates in place for soap. These rates can slow or stop the flow of soap into the market. Vietnam, for instance, has a 27% MFN tariff in place for soap. Nigeria charges 30%, South Africa is 20%, Brazil is at 18%, and Indonesia and India both at 10%.
Developed economies also charge tariffs, including 13 CHF/100 kg into Switzerland, 6.5% in Canada, 4% in Europe, and 5% in Australia.
Not every country applies an MFN tariff on soap. Japan and Mexico, as examples, are duty-free.
% MFN Tariffs for Soap: Selected Countries (HS340130)
Source: Thomson Reuters: OneSource
Soap is also a product often delivered in high volumes. For companies supplying markets with such items, even relatively low tariffs across a large number of shipments can quickly become quite expensive.
Unfortunately, soap is not the only product of relevance that also includes tariffs higher than zero—everything from disposal paper products for surgery to hospital beds and gowns and IV tubing often comes with tariffs attached.
There are two ways to improve the trade flows for critical items like soap: to better utilize existing free trade agreements or to get governments to suspend or eliminate tariffs on such products.
New Zealand just committed to the latter step, by removing its 5% tariff from soap in the wake of a broader effort to eliminate tariffs on key medical items.
Free trade agreements can also bring better access, lower risks and improved supply sourcing. For example, under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), soap tariffs are currently duty-free for every member except Vietnam (which has fallen from 27% to 7.5%). ASEAN’s internal agreement, ASEAN Trade in Goods Agreement or ATIGA, also delivers tariff-free treatment to all soap products made and exported across Southeast Asia.
FTAs do not always help the supply chain for soap. Many countries have limited access to FTA benefits in any form, as they have few in existence or the quality of the deals on offer may be low, with soap excluded from tariff cuts. The rules of origin for the manufacture of soap may be impossible to follow in a specific agreement.
And, as with all FTAs, the agreement only lowers tariffs for products moving between members. Non-FTA partners cannot enjoy lower tariffs or even duty-free treatment on soap products. Firms that want to ship from Asia to Nigeria, as an example, will still pay 30% tariffs at the border.
Global companies that want to make soap and use FTAs struggle to meet the various compliance aspects of different deals that may require different production methods to meet different FTA rules of origin. Each FTA may need a slightly different set of documentation to be submitted to customs authorities. The complexity of managing all the various FTAs can mean that global firms simply opt not to use the agreements at all.
Why are the tariffs on soap so high in so many markets? It’s unclear, but since governments have traditionally used tariffs as the primary means to protect domestic producers from foreign competition, it is likely that the original reason for high duty rates stemmed from complaints from local companies. Many smaller firms, in particular, make soap.
While unilateral removal of tariffs is always an option for governments, it has become less common. Instead, governments tend to keep tariffs in place and use them as “bargaining chips” in either ongoing FTA talks or global trade negotiations.
Maintaining tariffs on items like soap allows governments to offer benefits to signing FTAs, as only partners will get better rates. It also gives governments an opportunity to trade off tariffs on soap for better tariff access on something like semiconductors or eggplants or wooden furniture in future trade talks.
The result, however, is that consumers in most countries around the world pay higher prices for soap than they might otherwise. In normal times, the price impact may not be so worrisome.
But in a time of pandemic, when continuous handwashing is of paramount importance in slowing the spread of the virus, tariffs are another obstacle to better global health.
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