Export bans on medical supplies can be lethal
Panic spread by crises is lethal to sound policymaking. And perhaps no policy pursued today is more unsound than bans on the exportation of medical supplies. Such export bans now cover most of the Eurasian continent, and a member of Congress is urging their use in the United States.
Don’t. Please don’t. Even ignoring (which we shouldn’t) the ill effects inflicted on non-Americans, such a ban in the United States would eventually reduce access to medical supplies for Americans.
The U.S. hasn’t yet formally resorted to export bans. But President Trump’s recent scolding of 3M for exporting some N95 masks and threatening that company with unspecified sanctions if it doesn’t bow to administration wishes – which 3M has since done – leaves no doubt that a genuine possibility of export bans now looms.
This possibility is only enhanced by presidential advisor and trade skeptic Peter Navarro’s overt call for a ban on some medical exports, and by letters like the one Rep. Doug Collins (R-Ga.) sent to Secretary of State Mike Pompeo requesting “a temporary ban on all exports of coronavirus testing and diagnostic equipment, personal protective equipment, respirators, pharmaceutical supplies, and any other medical supplies necessary to American hospitals as they fight the ongoing coronavirus outbreak.”
Banning the exportation of medical supplies would, of course, prevent inventories once destined for foreign markets to remain here. But it doesn’t follow that Americans would thereby have greater access to medical supplies. We might well find ourselves with fewer such supplies even today, and we would almost certainly suffer reduced supplies in the long run.
A U.S. ban on exporting medical supplies might even today shrink Americans’ access to such supplies if the inevitable retaliation by other governments is swift. In response to COVID-19, some countries have already banned exports of medical supplies. But most have not. Among the non-ban countries are Australia, Canada, Mexico and Norway. From these four countries alone, we annually import approximately $15 billion worth of medical devices and pharmaceutical products. Retaliation by these and other non-ban countries to a U.S. export ban might well shrink total supplies of medical goods available to us today.
But even if an export ban increased our immediate access to medical supplies, we’d pay the steep price of reduced access in the future. The reason is simple: Such bans lower the expected stream of future earnings of American-based manufacturers of medical supplies. And lower expected earnings, of course, mean fewer incentives to fund the R&D and manufacturing capacity required to produce these supplies to begin with.
Incentives to invest and produce are weakened even by bans that are temporary. A temporary ban imposed today heightens investors’ expectations of similar bans tomorrow and, thus, reduces the net present value of investments in production capacity. This reduction is made even more acute because temporary bans would be expected to be imposed precisely when global demands for medical products spike. Prevented from meeting unusually high demands, companies won’t invest in the capacity to do so.
Given today’s colossal upfront costs of producing many medical supplies – average development expenses alone for a new drug in America are now $2.6 billion – anticipation of access to large markets is often necessary to make new-product creation worthwhile. And even for products already created, more customers means larger production runs and, hence, lower per-unit costs and prices both for foreign and American buyers.
Second only to Germans as exporters of medical products – and with medical-products exports much more than double those of China – American producers depend heavily on export sales. In 2019, these sales amounted to $116.6 billion. We estimate that this figure is roughly 22 percent of total U.S. production of medical products. Losing even just half of these sales would render unprofitable much of America’s production capacity, larger production runs within existing capacity and some R&D. And large losses of export sales are almost certain if an export ban is imposed. Foreign buyers would respond by sourcing more of their medical supplies during normal times from countries less likely than the United States to ban exports during crisis times.
The above considerations amount to a powerful case against banning the exportation of medical supplies even during crises. Myopically keeping a relative handful of already existing medical supplies from being exported today is bad medicine. Doing so would endanger Americans’ health by reducing the quantities and qualities of medical supplies made available through time.
Donald J. Boudreaux is a professor of economics at George Mason University and a senior fellow with the F.A. Hayek Program at GMU’s Mercatus Center. Veronique de Rugy is a senior research fellow with the Mercatus Center.