The Global COVID-19 Challenge: Health and Economic Risk Curves

Administrator’s note: The ever-evolving COVID-19 pandemic has posed a challenge to long-term content planning here at Slaw. Please note that this column was written in late April 2020.

The COVID-19 pandemic is a “game changer.” Health and family have always been the priority for me, and that has always been my message to those working with me and my clients. To each and every Slaw contributor & follower: in these turbulent times, I hope you and your family are staying safe.

Governments across the globe are mandating social distancing and related business shutdowns in an effort the “flatten the curve” of the virus, in order to allow health officials to meet the challenges. These steps are necessary. But we must maintain our access to basic necessities in the face of the COVID-19 pandemic. As governments take extraordinary steps to keep the economy functioning, we are all conscious of our absolute dependence on those who keep us fed and take care of our critical health needs.

Many of us are subject to stay-at-home requirements, but at the same time, we need to be able to put food on the table and to rely on energy that keeps the lights on, the appliances and plumbing working, and basic telecommunications operating. We are beginning to really appreciate the basics and to express our gratitude in individual ways to all the essential workers–doctors, nurses, truckers, grocers, police, firefighters, military, farmers, food processors, civil servants (including politicians) and many more. We are learning that more is needed than ad hoc measures and that we can’t depend on random acts of kindness to meet our most basic needs.

Those relative few upon whom the many are so dependent need all the protection and support that our society can muster. And somehow they need reinforcements. We must approach the challenge as one that will be with us for the long term. Our institutions must adapt—and quickly.

Below are a few observations about COVID-19 and international trade.

International Trade and Covid-19

Just as local business is being battered, the global economy is also becoming a victim of the COVID-19 challenge. Some commentators have remarked about a process of “de-globalization.” Well before the events leading to the pandemic started, many stakeholders in the smooth functioning of the international trading system viewed the Trump administration’s “America First” stance and resulting trade policy with alarm and concern. With the arrival of COVID-19, the “me first” instinct is threatening to accelerate and go global.

While this is an understandable reaction to the crisis, international co-operation and a globally-coordinated plan of attack remain the optimal approach against a threat that does not recognize borders.

International trade lawyers are now observing countries applying export controls and related measures that ban the export of critically-needed medical equipment. We should remember that until COVID-19, even the most extreme export restrictions and sanctions have always included exceptions for medicines and other basic humanitarian needs – a recognition of the need to value human life and maintain a basic level of humanity.

Now, the message seems to be that every jurisdiction is on its own. This is short-sighted. The time, energy, and capital–including human–involved in creating over 100 self-sufficient centres will ultimately subtract from humanity’s ability to fight this and future epidemics and pandemics.

We should consider that the raw materials for these products are not universally available and that branch-plant manufacturing can be expensive and inefficient. As an example, take the manufacturing of the much-needed medical masks. When the U.S. administration was recently taking steps to block the export of surgical grade masks to Canada, it was noted that Canadian firms supply the vital pulp that U.S. manufacturers rely upon to produce the mask. As one Canadian supplier noted, restricting trade of medical supplies across the border is counter-productive: “This is a global issue and supply chains, especially of medical supplies making their way to the front lines, should be everybody’s priority.”

The Threat to Supply Chains – “Flattening the Business Risk Curve”

Our economic well-being and our best chance to defeat COVID-19 will ultimately depend on “keeping the blood flowing.” There is no question that global supply chains will have to be modified and more redundancies, safeguards, and options built in. However, we depend on these supply chains–for some, now as never before–to make sure that we have what is essential. The work of keeping these supply chains functioning will take hard work and leadership from both the public and private sectors.

Take the vital Canada-U.S. supply chains, for example. A new approach and co-ordinated strategy is required, one that focuses on the well-being of the “players” and a recognition that the risk calculation has changed. It is encouraging to note that the continued flow of Canada-U.S. trade and the implications of the COVID-19 emergency for vital supply chains has become the focus of Canada-U.S. diplomacy. The objective is to keep the border open for the flow of essential goods and services while eliminating much of the flow that increases the risk of transmission of the virus. A new “risk-based” approach will require constant work.

There are a multitude of North American supply chains. Several are essential and many are critical. In Canada, many firms are navigating provincial directives shutting down all non-essential operations. Of course, critical industries are exempted, including those involved in healthcare, agriculture and food, transportation, maintenance, media and telecommunications, and finance. As the shutdowns continue and the number of firms affected grows, there has been a heavy cost to the economy.

We all recognize that this is price we must accept in order to “flatten the curve.” But due to the lack of a uniform approach to provincial criteria, there has been much confusion as to what is a “critical” or “essential” business. Many trade lawyers have become engaged recently in helping clients navigate through provincial rules and to apply for guidance and/or exemptions. Sometimes an authorization to remain in operation is circumscribed by an order to operate at a reduced or minimal capacity. These firms are operating under a great deal of added pressure.

In the management of border issues and the transport vital to the continental supply chains, the optimal approach would be to work out a uniform set of guidelines. To the extent that is possible, we should aim to avoid cross-border disruptions resulting from the lack of coordination and the application of divergent risk assessments. A “Team Canada” approach and an outreach campaign aimed at our key U.S. partners and stakeholders was an important aspect of Canada’s re-negotiation approach in the NAFTA 2.0 exercise. Perhaps the same formula can work with this new challenge.

The current lack of coherence must be addressed. At the federal level, it appears that the U.S. administration’s focus may differ to some degree from that of Canada’s insofar as the balance between health and the economy. Many U.S. firms in the North American supply chain are now operating pursuant to the U.S. administration’s Coronavirus Guidance for America. The Department of Homeland Security, Cybersecurity and Infrastructure Security Agency has set out sixteen critical infrastructure categories, reached out to the affected U.S. firms, and declared that each one has a “special responsibility to maintain your normal work schedule.” These firms are contacting their Canadian suppliers for assurance that they will continue to receive the needed materials that are required for them to operate at normal production levels.

In the light of the current COVID-19-related restrictions in Canada, businesses are finding it challenging to respond from both a business and legal perspective without important caveats. In addition to the immediate safety issues and concerns for the health and economic welfare of employees, thousands of Canadian businesses that are part of the highly integrated Canada-U.S. market are now facing substantially increased risk in efforts to “stay in the game.”

Bilateral (and multi-lateral) solutions addressing risk and mitigation are the ultimate objective. In the short term, Canadian businesses will need special trade finance tools to manage the financial risk related to maintaining operations, and navigating border and transportation issues. These tools must be tailored to ensure that our businesses continue to be part of the essential North American commercial supply lines. The Canadian government, the banks, and exporters need to work out financing bridges designed to underwrite Canadian companies and give them the confidence needed to manage the challenge of responding to foreign suppliers and customers and managing the risk.

While we “flatten the curve” of the virus we could be also be “flattening the business risk curve.”

Private Sector Tools – Force Majeure and Hardship Clauses not enough

The need for new financial tools to manage business is underscored by the need to address the effects of the COVID-19 pandemic on the basics of international business. In our next article, we will discuss the need for a model “COVID-19 clause” in international contracting. We do have some tools; for example, the International Chamber of Commerce (ICC) does have model Force Majeure and Hardship Clauses, which have been recently updated. [See https://iccwbo.org/publication/icc-force-majeure-and-hardship-clauses/ ] These clauses and related tools are intended to address “Acts of God” and other events that may prevent the completion of a contract and the resulting consequences.

However, global upheaval is changing the calculation of business risk. There appears to be a growing consensus that most current model contractual clauses do not address the “tension” caused differing measures aimed at health concerns (for example, closure of all non-critical operations) vs. business/supply chain measures (e.g. government orders to maintain critical operations). Each business can and will have their lawyers draft clauses and negotiate terms contract by contract. But consider the time saved by a common, universally-adopted clause that is balanced and helps international businesses navigate the COVID-19 storm.

A Global Threat – Global Solutions

 The threat of COVID-19 is global–it does not respect borders. We must fight the temptation to adopt an “isolationist bunker approach” to the fight. Our healthcare workers are in the frontlines of this battle, and we must do all we can to support their work. In the short term, the global supply chains and the powerful engine of international commerce will help meet essential needs. In the long term, international trade and investment will play a lead role in our health and economic recovery.