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The COVID-19 pandemic and international trade Contents

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2UK trade in essential goods

Pharmaceuticals

9.The COVID-19 pandemic has seen the pharmaceutical sector affected by significant and distinctive shocks to both supply and demand. On the supply side, there has been disruption to the manufacture of drugs, much of which takes place in India; and of their active pharmaceutical ingredients (APIs), which is substantially concentrated in China.21 The resulting impact has been compounded by restrictions that some countries have imposed on the export of drugs.22 While reduced freight capacity has not significantly affected the supply of medicines, it has raised costs.23 Border restrictions imposed some friction on the transport of medicines; but in the EU such goods were able to pass through “green lanes”.24 Meanwhile, there were major spikes in demand for medicines to treat COVID-19 symptoms (particularly the over-the-counter analgaesic paracetamol).25 There was also a substantial rise in demand (estimated to be a tenfold increase) for around 20 drugs that are used in the intensive-care setting.26

10.While these shocks have posed major challenges to maintaining adequate provision of pharmaceuticals, we heard that the UK’s supplies have, nonetheless, thus far been maintained at adequate levels. Dr Richard Torbett, Chief Executive of the Association of the British Pharmaceutical Industry (ABPI), told us that the supply chain for prescription-only medicines had “held up in an extraordinary way over the last few months, given the circumstances”.27 Dr Torbett said the particular challenge that existed in respect of a small number of intensive-care medicines was being addressed by the industry “scouring the earth” to find supplies, while also increasing production as far as possible.28 Dr Torbett said that, of around 12,000 prescription-only medicines used by the NHS, only one class had been the subject of a supply disruption notice issued by the Medicines and Healthcare products Regulatory Agency (MHRA).29 Dr Sam Roscoe, Senior Lecturer in Operations Management at the University of Sussex, emphasised the important role of “buffer stock” in the supply chain, which typically contain between three and six months’ supply of medicines.30

11.The NHS has helped to manage demand for drugs by ensuring clinicians do not write prescriptions covering unnecessarily long periods;31 and by giving clear advice on appropriate use of intensive-care medicines.32 The MHRA has worked with the pharmaceutical sector “to enable the speedy import of medicines in large volumes from other countries”.33 In March, the Government banned the “parallel export” (“when companies buy medicines meant for UK patients and sell on for a higher price in another country”) of 80 intensive-care drugs, including adrenaline, insulin, paracetamol and morphine.34 In April, when India’s restrictions on drug exports limited supplies of paracetamol, DIT intervened to secure the lifting of the restrictions, allowing the export to the UK of 2.8 million packets of the drug.35 (The Secretary of State for International Trade told us “we found out that virtually all our supplies of paracetamol came from India”.)36 In addition, the Government informed the House in May that “we will participate in the current joint EU procurement scheme on therapeutics for covid-19 that is soon to launch”.37

12.We heard that the pharmaceutical industry is playing a major role in developing therapeutic drugs, as well as vaccines, against COVID-19.38 We asked Dr Torbett about a recent editorial in the Financial Times which argued that, if necessary, compulsory licensing of such products “must be used”, to ensure they are “universally and cheaply available”.39 He told us that he did not agree. He was “not aware that patent rights have ever really got in the way of access on vaccines”. More fundamentally, he argued that without a system of such rights, financial markets would never grant the pharmaceutical industry access to the US$180 billion that it invests each year in research and development. Dr Torbett found it “disappointing to say the very least” that the Financial Times had raised this point, adding that he was “certainly very proud” of how the pharmaceutical industry was responding to the pandemic.40 We heard a contrasting view from Laura Bannister, of the Trade Justice Movement. She argued that any company developing a therapeutic drug or vaccine “would have a production monopoly on that product for quite some years. That is likely to very significantly increase prices.” Ms Bannister said that compulsory licensing would not eliminate a company’s patent; it would still receive royalties—but it would not have a monopoly on production. She added that pharmaceutical companies made “enormous profits”, substantially greater than their research and development budgets, giving them “huge wiggle room” in financial terms.41 Courtney Fingar, Foreign Direct Investment Editor at the New Statesman Media Group, told us there was “nothing wrong” with relaxing intellectual property protections in response to the pandemic. However, she warned that such measures should not become “a Trojan horse for an overall loosening of intellectual property rights that could be detrimental to the investment environment”.42

Conclusions and recommendations

13.The COVID-19 pandemic has seen the pharmaceutical sector affected by significant and distinctive shocks to both supply and demand, compounded by trade policy interventions in some countries that have impeded trade. Our evidence indicates, though, that UK supply chains for medicines have thus far proved to be resilient, partly due to actions taken by the UK Government.

14.However, supply chains can only be stretched so far, as indicated by the fact that buffer stock of medicines is not intended to last more than around six months. The Government must work with the pharmaceutical industry to ensure that buffer stock is being replenished to help cope with any further wave of the COVID-19 pandemic.

15.Some governments have adjusted intellectual property provisions to allow for compulsory licensing of therapeutic drugs or vaccines in respect of COVID-19. The UK Government should evaluate the case for putting in place such enabling measures in order to make these drugs and vaccines available as quickly, widely and cheaply as possible.

Medical supplies

16.Witnesses told us that the impact of the pandemic on medical supplies (equipment and consumables) was similar to that in respect of pharmaceuticals, with major shocks to both supply and demand. Several categories of such supplies are critical in dealing with the pandemic, not least Personal Protective Equipment (PPE). We did not consider the availability of PPE at the front-line in health and social care settings, since it lies outside the field of trade policy.

17.Mark Roscrow MBE, Chair of the Health Care Supplies Association, told us that the situation was “almost a perfect storm”. The pandemic had begun in China, where “a significant amount of manufacturing capability and capacity” was concentrated, which was then closed down.43 The suspension of production in India and northern Italy during the pandemic also had an impact on the supply of medical products.44 We were told that the situation was compounded by several countries imposing restrictions on exports of medical goods, including PPE.45 DIT and the Foreign and Commonwealth Office (FCO) worked to overcome supply-chain blockages caused by other countries’ export restrictions, which, the Secretary of State told us, “resulted in the sourcing of 18.5 billion items of PPE”.46 Peter Ellingworth, Chief Executive of the Association of British HealthTech Industries (ABHI), told us that the two departments had “worked incredibly hard” in this respect; and the ABHI had spoken to the Secretary of State for International Trade, finding her “very helpful”.47 At the same time, the Government suspended import duties and VAT in respect of medical supplies.48 Disruption to freight services also affected supply chains, with consignments switching from sea freight to air freight (to expedite supplies) at a time of very constrained capacity and steep price rises in the latter sector.49 At the same time, the imposition of border controls had also affected supply chains.50 Mr Ellingworth said the increase in demand for medical supplies had been “exponential”,51 with companies facing the risk of demand outstripping supply.52 Demand for ventilators had increased three- or fourfold; and “several years’ supply” of PPE was being demanded all at once.53

18.We heard that the Department of Health and Social Care (DHSC), and the NHS had played a crucial part in planning procurement of supplies.54 Mr Ellingworth said that companies supplying ventilators and other equipment for use in intensive-care units had proved to have resilient supply chains, which were structured so as not to be overly dependent on raw materials and components from a single location.55 In urgently procuring large quantities of medical supplies from around the world, it had been necessary to exercise vigilance in respect of the quality of goods and the risk of fraud.56 Checks on the quality of goods leaving China, while welcome, were causing delays to supplies.57 The ABHI emphasised the importance of maintaining an ethical supply chain that “does not breach standards in terms of modern slavery, child labour etc.”58 On this point, Ms Truss referred us to the Government’s Modern Slavery Strategy and said “this is something we are looking at very closely”, with DIT Ministers having been “involved in detailed discussions” on it.59

19.Mr Ellingworth noted the contribution of UK-based businesses in helping to fill gaps in the supply chain by assisting with the production of products such as ventilators and PPE.60 We heard about the role of the MHRA and the Health and Safety Executive in facilitating the rapid development of new domestic suppliers of such goods.61 We also heard about the part played by preparations for a no-deal Brexit in maintaining supplies of medical goods. While there had been a stockpile of supplies for this eventuality, its usefulness was limited by the fact that it contained “business-as-usual” products, rather than those that would specifically be needed in a pandemic.62 One aspect of the no-deal preparations that had proved useful was the procurement of an airfreight facility to deal with potential port blockages.63 We further heard about the role played by preparations for a flu pandemic. These included pre-arranged “just-in-case / just-in-time” contracts to supply medical products in the event of a pandemic;64 and stockpiles containing a volume and range of products based on demand during the last flu pandemic.65 However, the assumptions on which these preparations had been based meant that they were “trumped” by the scale and nature of the COVID-19 pandemic.66

20.We asked Mr Roscrow about the impact of the UK not participating in several EU joint procurements of medical goods (which the Government has said was due to “an initial communication problem”).67 He thought it was “doubtful” that this had left the UK at any disadvantage.68 He said, in the context of the EU PPE scheme:

The normal procurement approach probably does not fit what is required. We are looking at trying to get hold of product extremely quickly. We need to be agile. We need to be flexible and we needed to respond to that. A lot of companies are looking for upfront payment of a significant amount of money to support securing product, and we probably needed to be agile to be able to do that and not get caught up in any bureaucracy that would have hindered the ability to get product into the UK.69

The Government stated in May that participating in these procurements “would not have allowed us to do anything that we have not already been able to do for ourselves” and that it would consider participating in future procurements “on a case-by-case basis”.70

21.DIT informed us that “The UK Government’s overseas network is focussed on the purchase of PPE internationally based on requirements set out by DHSC which cover the whole of the UK.” Under an agreed UK-wide strategy, the UK Government had “shipped millions of pieces of PPE to Scotland, Wales and Northern Ireland”. Overseas procurements by the devolved governments were in addition to this UK-wide approach.71 In May, the Scottish Government’s Cabinet Secretary for Health and Sport told the Scottish Parliament’s Health and Sport Committee that DIT’s overseas network and the FCO were not assisting the devolved governments with new overseas procurement requests for PPE. The Scottish Government thought that overseas posts should be providing such assistance and the matter had been raised with the UK Secretary of State for Health and Social Care, Rt Hon Matt Hancock.72 The Scottish Minister for Trade, Investment and Innovation wrote to our Chair in July and said that:

Regrettably, Scotland’s Cabinet Secretary’s call for urgent official discussions, which was supported by other DAs [devolved administrations], was not answered by Mr Hancock, who responded by emphasising his unaltered support for the instruction given to the FCO/DIT overseas network. Rather than offering an opportunity to discuss the issue, Mr Hancock only offered assurances that orders made on behalf of the entire United Kingdom would be coordinated with the devolved administrations and fairly distributed.73

22.The Northern Ireland Executive has confirmed that DIT was not involved in any procurement of PPE carried out by the Executive’s Department of Finance.74 The Welsh Government informed us that the NHS in Wales had “not sought Department for International Trade support for any internationally sourced orders of PPE.” The Welsh Government’s own overseas office network had provided support in this regard. Less than 2% of PPE provided to health and social care settings in Wales had been supplied through UK Government procurement. A DHSC proposal “for a centralised UK-wide approach to PPE procurement” had not proved “feasible”, with the devolved governments being concerned about possible disruption to existing supply chains. The Welsh Government had, nevertheless, “continued to collaborate on a revised UK-wide approach to PPE procurement” and had “offered support to other parts of the UK through mutual aid”.75

Conclusions

23.The medical supplies sector has also faced an unprecedented combination of shocks to both supply and demand, compounded by some governments’ trade policy interventions; and UK supply chains in this sector have also thus far proved to be resilient.

24.The Government has acted to try and ensure continuity of medical supplies by means including overseas procurements of Personal Protective Equipment for the whole UK, involving Department for International Trade staff in overseas posts and the Foreign and Commonwealth Office. We recognise that there have been different experiences with PPE procurement across the UK.

Agri-food products

25.The agri-food sector is the UK’s “largest manufacturing sector”, valued at £113 billion and employing nearly four million people.76 We heard from Bob Doherty, Professor of Marketing at the University of York, that the sector was highly integrated internationally, with the UK importing around 47% of its food, 30% from the EU and 10% to 15% from developing economies.77 It is made up of two subsectors—grocery and out-of-home. The grocery sector was very concentrated and retailers relied on “just-in-time” production methods.78 Despite some initial shortages caused by panic buying, we heard that the supply chain showed itself to be flexible and robust in the face of “a huge, unprecedented challenge.”79 Andrew Opie, Director of Food and Sustainability at the British Retail Consortium (BRC) told us that the biggest challenge was the speed at which things changed, and the influence that had on consumer behaviour. He identified the main issue as one of logistics rather than supply and told us: “There was plenty of food and we always knew that there was food out there. It was just about getting it to the shops and on to the shelves quickly enough.”80 He said the sourcing of food imports had held up relatively well, particularly regarding those from Spain and Italy, despite the heavy impact of the virus in those countries.81

26.The pandemic also prompted the imposition of export restrictions by major food commodity exporters, such as Kazakhstan, and increased stock-holding by countries to protect their own populations.82 According to the Food Policy Research Institute, by mid-April 2020, 15 countries had introduced export bans, across a range of 21 products.83 Fiona Smith, Professor of International Economic Law at the University of Leeds, told us these measures could cause “resilience problems going down the line” but that it was “outside the control of the UK.”84 In April 2020, the UK and a group of other WTO members, representing 63% of global agri-food exports, issued a joint statement agreeing not to impose restrictions on their food exports in response to the pandemic.85 However, Professor Smith told us that rules on export restrictions were limited and WTO members could impose “a temporary ban on the export of critical foodstuffs.”86 She said that for future trade negotiations, it would be important for the UK to map export restrictions on foodstuffs onto supply routes, so there was a clear picture about the level of protection for imports and exports.87

27.In addition to considering the supply of essential agri-food goods, we also heard evidence about the impact of the pandemic on UK food exporters. Ian Wright, Chief Executive Officer of the Food and Drink Federation, told us that the picture for exports was “patchy” and dependent on where the customer was: “If the customer is in retail, the exports have continued. If the customer is in hospitality, the exports have probably declined sharply or ceased.”88 Professor Doherty noted that exports to the EU had “held up reasonably well”, but there had been issues with exporting to countries where ports were closed, such as China and South Africa. He said there were concerns about price fluctuations and a price drop when products which had been stockpiled, such as pork, came onto the international market later in the year.89 Ian Wright highlighted a concern about access to freight transport in the future and said the industry would need the support of DIT and the Department for Environment, Food and Rural Affairs to restore the UK’s position on food exports as the pandemic eased.90

Conclusions

28.UK supply chains in the agri-food sector have also so far successfully withstood the challenges posed by major global shocks to supply and demand, compounded in some cases by governments’ trade policy interventions. While agri-food supply chains are likely to remain resilient, this is dependent on their ability to engage logistics and respond to rapid changes in consumer behaviour.

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