1 Introduction
The COVID-19 pandemic has challenged health systems all over the world. The capacity of health systems to fight pandemics depends on many different factors, such as the institutional framework and governance of health care, financing mode, access to medicines, etc. In strengthening this capacity, international trade in medical goods also has an important role to play to ensure access to medical equipment, products for prevention, testing and treatment, in particular pharmaceuticals and other related goods. The OECD analysis highlights trade interdependencies between countries proving that no country has been able to efficiently produce all the goods that are necessary for fighting the virus (OECD, 2020) As a consequence of the COVID-19 outbreak, global demand for medical products as well as international trade flows increased significantly. In 2020, imports and exports of medical goods grew by 16%, whilst before the pandemic their growth amounted to around 5% annually. The share of medical goods in world trade reached 6.6% in 2020, up from 5.3% in 2019 (WTO, 2021).
As due to the pandemic international trade in medical products gained particular attention, there is a need to identify changes in global trade patterns, including changes in trade competitiveness that occurred during the pandemic. Although there is a growing number of analyses that show current trends in international trade of medical products, they focus on trade policy responses (Evenett et al., 2021; Baccus et al., 2021) or challenges for selected regions (Vickers et al., 2020; Hakobyan & Cherif, 2021). Changes in global trade patterns of pharmaceuticals caused by the pandemic, including trade competitiveness, have not been studied in depth. This chapter aims at filling this gap by comparing international trade flows in pharmaceuticals before and during the COVID-19 pandemic. The main objective of the chapter is to investigate the shifts in export patterns and competitiveness of global players in the market of medical products, i.e., the US, Germany, Switzerland, Ireland, and China using trade indicators such as export shares, the Revealed Comparative Advantage (RCA) index and the Trade Intensity Index (TTI).
The study is structured as follows: Section 2 summarizes main findings of recent empirical literature regarding trade in medical products focusing on trade in pharmaceuticals. Section 3 describes the methodology and data used in this study. Section 4 contains the results and discussion, and Section 5 concludes.
2 Trade in Medical Products – a Literature Review
The pharmaceutical industry being high-growth and innovation-intensive industry is regarded as a strategic sector in many countries. Medicines produced by the pharmaceutical industry as well as international trade of drugs are highly important for a proper functioning of healthcare systems due to its direct impact on the health of society. In the 21st century, the pharmaceutical industry has experienced important structural changes, driven by technological and institutional changes (Munos, 2009), the COVID-19 pandemic being one of such shocks that have affected all parts of the industry’s value chain (Mikic et al., 2020). Due to these changes, some adjustments occurred at enterprise level followed by market structure reconfiguration, both domestically and globally. Although the majority of pharmaceutical companies are multinationals, there are still some national differences in pharmaceutical regulation that may impact international trade flows. The areas in which the regulatory framework may differ across countries include patent protection, the registration process for new medicines, national pricing and reimbursement strategies and procedures (Garattini & Padula, 2018). Furthermore, public health policies may also pursue specific objectives such as access to medicines, control of health care expenditures or support to medical innovation, which may result in some restrictions on the free movement of pharmaceuticals. The empirical literature confirms that the differences among countries regarding the regulatory framework influence the size of trade and international competitiveness of the pharmaceutical sector. Despite growing international interdependence, which has fostered the harmonization of pre-market standards in the pharmaceutical industry, various modes of state regulatory governance result in lack of convergence in post-market standards (Wiktorowicz et al., 2018). Differences in the regulatory framework between countries and their impact on trade in pharmaceutical products were proved for various countries. Mahajan (2018) studied the case of the Indian pharmaceutical industry and showed that changes in the product patent regime had an impact on the size of research and development expenditure, trade as well as revealed comparative advantages in foreign trade of drugs. A comparative assessment of pharmaceutical trade of India and China confirmed the role of governments in both countries in shaping the international competitiveness of the pharma industry. In both countries, a rapid growth of pharma exports had been noted already before the COVID-19 pandemic. In India, pharmaceutical exports have been growing at a steeply increasing pace, while China saw gradual growth. India has traditionally been oriented towards the domestic market as well as the less regulated markets of Africa, Asia, and Latin America, while in China the policy focus is placed on transforming the pharma industry from a generic drug orientation towards an innovation-driven drug production and trade (Sami, 2014). A study on US biopharmaceutical competitiveness revealed that foreign price controls inflated the US trade deficit, which appeared to be about two-thirds larger than it would have been without price differences (Ezell, 2020, p. 15). In the case of Hungary, the mode of privatization significantly influenced further development of the pharma industry in this country, affecting the value chain paths; some parts of the value chain were moved outside the country (Antalóczy et al., 2020), which had an impact on export and import directions.
Apart from country case studies, the global perspective on trade flows and their impact also seems to be important. Globalization of pharmaceutical trade was proved to improve healthcare coverage of the Millennium Development Goals (Yuan et al., 2019). Some studies however, while admitting the positive contribution of international trade to satisfying health needs, also found the adverse impact of global trade liberalization on limiting the capacity to ensure universal health coverage (Missoni, 2013).
When it comes to empirical studies on competitiveness in trade of pharmaceutical goods, a comparative analysis of a wide set of traditional and new indices of trade competitiveness calculated for 28 developed countries for the years 2000–2012 showed that Ireland, Slovenia, and Greece relied on comparative advantage, which was based on production factor endowments, while Belgium, the US, and the Netherlands were able to create competitive advantage in trade based on R&D and innovation. Only a few studied countries, namely Germany, Switzerland, the United Kingdom, and France enjoyed both comparative and competitive advantages in the analyzed period (Mousavi et al., 2018).
Some of these trends were confirmed by Reis and Pinto (2022) for the years 2013–2015. Using a wide range of indicators, evidence on pharmaceutical value chains confirming the center-periphery relationship was provided. The centers to which the US belongs in America as well as Switzerland and Germany in Europe specialize in high-value added activities and benefit more from the participation in global value chains than other countries. Brazil, Russia, and Saudi Arabia belong to the global peripheries as they are weakly integrated into global value chains of the pharmaceutical industry. There is also a group of countries, such as China, India, Mexico, Hungary, and Poland which are large exporters of pharmaceuticals, but they build their competitiveness on low costs, which translates into low prices, having also a high content of foreign value added in their exports and deficits in charges for the use of foreign intellectual property (IP) by the pharma industry. Ireland, Israel, Singapore, Austria, Canada, Italy, and Spain are in-between these center-periphery groups, as they are strong exporters and importers of pharmaceuticals having average levels of foreign value added in their exports and enjoying surpluses in IP charges (Reis and Pinto, 2022). A study on competitiveness factors of the pharmaceutical industry used a survey conducted among participants from pharmaceutical companies to prioritize these determinants. The analysis shows that the two key factors which matter the most for competitiveness of pharmaceutical companies are human capital and macro-level policies (Shabaninejad et al., 2014).
The COVID-19 pandemic has had a very serious impact on international trade, its volumes, as well as geographical and industry patterns. Sector-level gravity modelling based on trade data for 28 countries and their trading partners shows that sectoral characteristics such as the scale of remote work, integration into global value chains or characteristics of goods matter for the strength and direction of trade effects (Espitia et al., 2021). During the pandemic, the supply of medicines has become more important than ever; therefore, the study of short-term changes in international trade that occurred in pharmaceutical trade between 2018 and 2020 may shed some light on future trends in trade in this product group, which is highly important for public health.
3 Methodology and Data
This analysis uses the Harmonized System (HS) classification as a base to distinguish medical products. Products are categorized according to the specific HS 6-digit subheading codes and grouped into four categories according to the World Trade Organization (2020; 2021) classification of products that are relevant to COVID-19 prevention and treatment. These are: pharmaceuticals, medical equipment and technology, medical consumables, and personal protective products.
Export patterns will be analyzed using international competitiveness indicators, such as annual exports growth, geographical structure of exports, the Revealed Comparative Advantage (RCA) index, and the Trade Intensity Index (TTI).
The RCA index is based on the formula developed by Balassa (1965; 1979) and is commonly used to assess export potential. For an overview of the advantages and disadvantages of the index and other alternative measures of international specialization see: Hoen & Oosterhaven, 2006; Misala, 2014; Laursen, 2015). The RCA index is defined as follows:
RCAKi = (XKi/ΣXK) / (XWi//ΣXW),
where:
XKi is exports of commodity group “i” from country “K” to the world
ΣXK is total exports from country “K” to the world
XWi is the world’s exports of product i
ΣXW is the world’s total exports
i – sector according to the abovementioned classification
K – studied country.
An RCA greater than 1 (RCA > 1) indicates the existence of a revealed comparative advantage, while an RCA lower than 1 (RCA < 1) means a revealed comparative disadvantage. The higher the value of a country’s RCA for product i, the higher its export strength (specialization) in this product. The growth of this index over time shows improvement in the competitive position of a good in the world.
The RCA indices showing either the existence or lack of a revealed comparative advantage in trade were calculated for the five leading exporters for each of the four groups of medical products singled out in the WTO classification. This preliminary screening of major trends in trade of medical products is followed by an in-depth analysis of international competitiveness in trade of medical products. The RCA indices for leading world exporters of drugs are compared to determine their comparative advantages in the times of the COVID-19 pandemic.
The Trade Intensity Index (TII) is used to assess bilateral trade potential. It is calculated using the following formula:
Tij = (xij/Xit) / (xwj/Xwt)
where:
xij is the value of country exports of product i to country j
xWj is the world’s exports of product i to country j
Xit is the country’s total exports of product i
XWt is the world’s total exports of product i.
A value of the index higher than one (TII > 1) indicates that a bilateral trade is larger than it could be expected, given the partner country’s involvement in world trade.
The analysis covers the period of the COVID-19 pandemic, that is, the years 2019 and 2020.
4 Results
In 2020, the value of world exports of medical goods amounted to US$ 1,159 billion, growing by 16% compared to previous year, that is, four times higher than in 2019. During the same period, imports of medical products grew by 16.5% (compared to the 5.2% growth a year before), reaching US$ 1,183 billion billion in 2020, and as a result the share of medical products in world trade increased from 5.3% to 6.6% (WTO, 2021). Figure 9.1 compares the structure of medical exports by four main product groups in 2018 and 2020. As expected, pharmaceuticals take the highest share in total exports of medical products standing at 54% in 2018, but decreasing to 52% in 2020 due to the increase in the share of personal protective products. The remaining three categories of medical products have similar shares ranging from 13% (medical equipment) to 18% (medical consumables).
The structure of medical exports by four main product groups in 2018 and 2020
Source: Author’s elaboration based on WTO data (WTO, 2020; 2021)
The five leading exporters include Germany, the US, Switzerland, the Netherlands, and Belgium. Among the world’s top ten exporters there is only one emerging economy, namely China, which occupies the seventh place, the others being developed countries. The same ten countries are also top importers of medical goods, they are however ranked in a different order. The US occupies the first place in terms of the imports value, followed by Germany, China, Belgium, and the Netherlands (WTO, 2020). These 5 countries deliver nearly a half of the total value of all world exports of medical products. Table 9.1 illustrates the relative importance of medical goods relevant to combating COVID-19 and their subcategories in each country’s total exports in 2019. In some countries, exports of medical products have a double-digit share in total exports. Switzerland and Germany took the lead in terms of the pharmaceutical export value. In both the medical equipment and medical consumable segments, the US and Germany are main sources of the world’s exports, while in personal protective products the top two exporters are China and the US.
Top ten exporters of medical products in 2019
Source: Author’s elaboration based on WTO data (WTO, 2020)
Looking at the values of medical exports from an individual country perspective, it can be noted that the relatively strongest dependency on medical export is in Ireland, where such exports constituted around 38% of the country’s total exports. In Switzerland, this share was as high as 29%, while in China it was only 2%, and in the US it reached 7%.
Pharmaceuticals constituted a vast majority of medical exports in Switzerland (88% of exported medical products in 2019), Italy (75%), Belgium (74%), and Ireland (71%). In China, personal protective products are key medical exports goods constituting 49% of total medical exports in this country.
The analysis of RCA indices for top ten exporters of medical products show that high trade values do not necessarily translate into specialization in trade. Switzerland and Ireland are the world’s leaders in terms of relative trade specialization in medical products, which is confirmed by the high values of RCA indices in these two countries, with Switzerland holding a predominant position in the trade of pharmaceuticals. There is only one country, namely China, among the world’s top ten exporters of medical goods that do not enjoy comparative advantage in overall medical trade. The RCA index below one (RCA = 0.333) indicates that medical goods are not part of China’s trade specialization.
However, RCA indices calculated separately for each of the four medical product groups show that patterns of comparative advantages of the analyzed top exporters differ significantly. In trade of medical equipment, three countries from the analyzed group – France, Italy and China – do not enjoy comparative advantages, with the two latter also not revealing relative specialization in trade of medical consumables. When it comes to personal protective products, the US, Switzerland, the Netherlands and the UK are in a relatively disadvantageous position (Table 9.2).
RCA index for four groups of medical goods trade of top 10 world’s exporters, 2019
Source: Author’s elaboration based on WTO data (WTO, 2020)
Trade of pharmaceuticals is relatively advantageous for top eight exporters, except China and the US. The RCA indices did not change much over the 2019–2020 period. The highest values of RCA indices are for Ireland and Switzerland (Figure 9.2), which confirms a relatively strong position of these two countries in the world market.
Revealed Comparative Advantages for trade of COVID-related pharmaceuticals: selected top exporters compared in 2019–2020
Source: Author’s elaboration based on UN Comtrade (WITS, 2021) and WTO (2021)
Having discussed the diversity of the overall pattern of trade of the world’s top ten exporters of medical goods, it is worth to gain a more detailed picture looking at their bilateral trade performance with key trade partners in the medical goods segment reflected in the values of the trade intensity index. Lack of detailed data for all ten countries limits this analysis to four selected exporters and their key export markets for which data is available. The analysis covers export of medical goods from the US, Germany, Switzerland, and Ireland to their two main trade partners. The results are presented in Table 9.3.
Trade Intensity Index (TTI) for medical goods: selected top exporter compared, 2019
Source: Author’s elaboration based on WTO data (WTO, 2020)
The values of the trade intensity index calculated for bilateral trade of medical products between the United States and Germany are below one, for both trade directions: for Germany as exporter to the US and for the US exports to Germany. This shows that a bilateral trade flow of medical goods between the US and Germany is smaller than expected taking into account the importance of both countries in world trade. Switzerland, the third largest world exporter of medical products, has quite intense trade with Germany but lower than its exporting potential with the United States. The opposite situation occurs in Ireland, where large trade connections with the United States and smaller with Germany are noted. This can be explained by huge investment of US multinationals in Ireland resulting in high intensity of intra-company trade flows. Trade intensity of the world’s two key exporters of medical goods – Germany and the US – with China (the world’s 7th exporter) also requires a comment. TII for both countries’ exports of medical products to China is higher than one, which indicates that both countries fully use their trade potential regarding the delivery of medical products to the Chinese market.
As far as trade intensity of pharmaceuticals is concerned, UN Comtrade data allow results of bilateral trade of the selected top exporters of medical goods to be compared with the intensity of total bilateral trade with the partner. Table 9.4 above shows the results for bilateral trade of pharmaceuticals compared to total bilateral trade for the US, Germany, Ireland, and China.
Trade Intensity Index for bilateral trade of pharmaceuticals: selected top medical exporters compared, 2019
Source: Author’s elaboration based on UN Comtrade data (WITS, 2021)
Bilateral trade of pharmaceuticals as well as total bilateral trade is very intense in both directions between the US and Ireland, between Germany and Switzerland, and between the US and Switzerland. However, among these pairs, there are only two countries that have higher pharma export intensity than total bilateral exports. This is the case with US exports of pharmaceuticals to Ireland and Swiss pharma exports to the US. There is also one important feature of the TII pattern regarding bilateral trade of pharmaceuticals. It should be noted that the US, Germany, and Switzerland have higher than expected values of the TII for their pharma exports. It might be attributed to increased exports of vaccines during the pandemic; however, this hypothesis should be further tested with the use of more detailed trade data.
5 Conclusion
This chapter focuses on a pattern of international trade in medical products that are used to tackle the COVID-19 pandemic. According to the World Trade Organization classification, four categories of COVID-related medical products have been distinguished: pharmaceuticals, medical equipment, medical consumables, and personal protective products. Pharmaceuticals constitute the most important group among these four, as they account for over a half of the total value of medical product trade. The major exporters of medical products are the United States, Germany, and Switzerland, but leaders differ for each of the studied groups of goods. Switzerland takes the lead in exports of pharmaceuticals, the US occupies the first place in both medical equipment and medical consumables exports, China is the most important world supplier of personal protective products. The analysis of Revealed Comparative Advantage (RCA) indices showed that high trade values do not necessarily translate into specialization in trade. Switzerland and Ireland have the highest comparative advantages in trade of pharmaceuticals. The US and China, having relative specialization in overall medical exports, do not reveal comparative advantages in trade of pharmaceuticals. The analysis of bilateral trade intensity of top five exporters of medical goods – the US, Germany, Ireland, and Switzerland, China shows huge differences among the studied countries. In particular, the TII pattern is diverse for trade in pharmaceuticals, with high bilateral trade intensity in bilateral trade between countries that have strong linkages through multinational corporations’ networks that belong to the same language group, and share similar socio-cultural heritage, for example between Ireland and the US, or between Germany and Switzerland.
These findings point to further research directions. First, it would be interesting to study the changes in trade patterns using more disaggregated trade data. Second, the role of multinational companies as drivers of bilateral trade in medical goods, including pharmaceuticals, could be another future research topic. Last, but not least, gravity models can be used to further explain bilateral trade determinants.
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