State of trade: COVID-19's impacts on trade regulation and supply chain risks

In brief 10 min read

The COVID-19 pandemic has impacted many aspects of international commerce and will continue do so for some time. In this Insight, we discuss three critical trade-related impacts of the pandemic on Australian businesses, namely: its effect on international trade agreement negotiations, Australia's regulation of international trade, and key supply chain risks for Australian importers and exporters.

Key takeaways 

• The pandemic is affecting the negotiation of several proposed agreements that would directly or indirectly bear on Australian companies' trading relationships, including the Regional Comprehensive Economic Partnership.
• The Australian Government is providing temporary support for some exporters and importers, and has introduced targeted restrictions on exports.
• The risk environment for Australian businesses with internationalised supply chains is becoming more complex, as the pandemic heightens bribery and corruption, counterparty, modern slavery and political risks.

Impact of COVID-19 on international trade agreement negotiations

International trade agreements increasingly regulate trade rules between countries, and the pandemic is affecting the negotiation of key deals that were to be concluded in 2020. As these deals have the potential to bear directly or indirectly on Australia's trading relationships, Australian businesses should monitor negotiations, even while global trade and international supply chains are disrupted.

• The Regional Comprehensive Economic Partnership (RCEP) is a proposed mega-trade deal between Australia, China, India, Japan, New Zealand, South Korea and the 10 ASEAN member states¹ that would create a-16 member trade bloc governing over a third of global trade. In November 2019, the RCEP economies concluded text-based negotiations and pledged to sign an agreement at an ASEAN summit in June 2020. Since the outbreak of the pandemic, China (with support from Malaysia, Thailand and South Korea) has pushed to finalise RCEP as scheduled. Despite recent tensions in the Australia–China relationship, by all accounts Australia also intends to finalise the deal later this year. However, other RCEP economies are reconsidering their reliance on Chinese manufacturing. In particular, India's Ambassador to China has indicated that India will not resume negotiations until the pandemic has 'stabilised'.
• An Indonesia–Australia Comprehensive Economic Partnership Agreement will enter into force in July 2020, as scheduled. Under the agreement, 99% of Australian goods (by value) will enter Indonesia duty-free or under significantly improved preferential arrangements.
• Formal negotiations for an Australia–UK Free Trade Agreement will launch in June 2020, following a two-month pandemic-induced delay.
• A Phase One China–US Trade Deal entered into force on 15 February 2020, pausing their 18-month trade war. The deal obligates China to purchase an additional US$200 billion of US products and services by 2022. Critics have commented that the effects of the pandemic on the global economy and the China–US relationship might scuttle the deal. While President Trump has threatened additional tariffs against China, American and Chinese trade representatives have recently reaffirmed their countries' commitment to implementing the deal.
• The World Trade Organization (the WTO) has been unable to resolve trade dispute appeals since 2019, because the US has blocked the appointment of new judges to the Appellate Body of its Dispute Settlement Panel. In response, 20 WTO members (including Australia, China and the EU) recently adopted an interim arbitral system, the Multi-Party Interim Appeal Arbitration Arrangement. The Arrangement represents a significant reassertion of the global rules-based system of trade.

Impact of COVID-19 on Australia's regulation of international trade

Several categories of laws bear on the capacity of Australian companies to import and export goods and services. Australia's regulatory response to the pandemic has focused on securing supply of key medical equipment while supporting a free and open trading system. Australian businesses should monitor the opportunities created and obligations imposed by domestic regulation of international trade.

• Targeted restrictions on exports: At the time of writing, export restrictions have been instituted by 80 countries, primarily on the export of medicines, personal protective equipment and other medical devices. Australia imposed a temporary prohibition² on the non-commercial export of face masks, gloves, gowns and goggles, alcohol wipes and hand sanitiser on 30 March 2020, subject to a number of exemptions, including humanitarian relief. These changes are not, however, indicative of a broader Australian trend towards more stringent controls – indeed, Australia was party to two joint ministerial statements to the WTO, committing to maintaining open trade lines to facilitate the flow of goods including essential goods, food and medical supplies.
• No restrictions on imports: Australia has not imposed any import restrictions as a result of the pandemic.
• No humanitarian easing of trade sanctions: Several international and non-governmental organisations have called for a humanitarian easing of trade sanctions. For example, the UN Special Rapporteur on the Right to Food called for existing sanctions against Cuba, Iran, Syria, Venezuela and Zimbabwe to be lifted, to allow financial aid, food and medicines to flow to at-risk populations. The US Department of the Treasury's Office of Foreign Assets Control, which administers US sanctions, has released guidance on how existing US sanctions laws provide for the provision of humanitarian aid to sanctioned countries. However, the Australian Sanctions Office has not announced any humanitarian easing of trade sanctions, or released similar guidance.
• Temporary government support for importers: The pandemic has significantly disrupted supply chains, including by reducing freight capacity and increasing logistics costs. To assist key sectors to overcome these disruptions, the Australian Competition and Consumer Commission has issued several 'interim authorisations', including to the medical, pharmaceutical and mining sectors. These allow sector participants to work cooperatively to manage critical services and supplies during the pandemic.
• Temporary government support for exporters: The Australian Government has announced additional funding to assist exporters, under the following programs:
  • business-saving loans between $250,000 and $50 million for exporters unable to gain finance from commercial sources, under a new $500 million capital facility to be administered by Export Finance Australia;
  • increased emergency freight flights to Asian markets for Australian primary products (eg agricultural and seafood products); and
  • an Export Market Development Grant scheme, which will assist small and medium enterprises to market Australian exports abroad.

Impact of COVID-19 on the risk environment for Australian exporters and importers

The economic pandemonium the COVID-19 pandemic has unleashed has heightened risks faced by businesses whose supply chains extend beyond Australia. Exporters and importers should reassess their exposure to the following forms of risk in the current climate.

• Bribery and corruption risk: One consequence of the disruption caused by the pandemic is that businesses are having to bolster their supply chains by engaging with new offshore suppliers. Another is that businesses are having to rely on third-party agents to overcome logistics issues. Further risks exist around accessing and implementing government programs to support businesses, and the making of donations or grants by companies to support local communities.
  
  Such engagements always create foreign bribery risk; however, this risk is heightened in the prevailing economic environment, where financial decline and greater competition for resources negatively incentivise risky behaviour. In these circumstances, it is essential that businesses require strict compliance with existing anti-bribery policies and procedures, and conduct thorough anti-bribery screening and adopt proper controls before engaging with new third parties. This is particularly so given that regulators and law enforcement agencies in Australia, the UK and the US have publicly communicated their expectation that firms continue to comply with anti-bribery, corruption and fraud laws during the pandemic.
  
  
• Human rights and supply chain / modern slavery risk: The supply chain disruption caused by the pandemic has had knock-on effects in the areas of income inequality, increased risk of worker exploitation and adverse human rights impacts. A number of major retailers have refused to bear the costs for work already completed, or to contribute to wages or severance pay for dismissed workers, while eg surging production demand for personal protective equipment has led to reports of forced labour and debt bondage of migrant labour from countries such as Nepal, Bangladesh and Myanmar. Addressing these vulnerabilities in their supply chain will be an important step for companies seeking to insulate against reputational risks.
  
  The Australian Border Force (the ABF) has released guidance on how firms can mitigate the risk of vulnerable workers in their supply chain becoming exposed to modern slavery as a result of the pandemic, and has extended the deadline for companies to submit their modern slavery statement by three months. The guidance underlines the ABF's expectation that companies continue to address modern slavery risks during the pandemic, and be prepared to report on steps taken through their modern slavery statements.
  
  
• Counterparty risk: Given the disruption to international commerce, there has been much focus on whether parties can rely on 'force majeure clauses' in international commercial contracts to suspend performance of their obligations or terminate the contract completely. Allens has published guidance on the enforceability of force majeure clauses and the doctrine of frustration in the 'Contractual obligations' section of our 'Responding to COVID-19' hub  . 
  
  In assessing counterparty risk arising from domestic transactions, the most important considerations are whether a force majeure clause covers an event (eg a pandemic or a government-imposed shutdown) and the extent to which the event affects a party's performance of its obligations under a contract. However, in assessing counterparty risk from international transactions, an equally important consideration is the choice of law clause. Different countries have different concepts of force majeure and frustration – in particular, common law jurisdictions do not automatically imply force majeure clauses, while many civil law jurisdictions, including China, do imply force majeure clauses into contracts. Consequently, counterparties to some international transactions may be able to exercise force majeure more easily than others.
  
  
• Political risk: Political risks are heightened during times of economic crisis. International traders therefore should consider the application of their force majeure clauses in the event of key political risks materialising, such as escalating international trade wars, currency controls or nationalisations. 
  
  Indicative of the uncertainty exporters face in the current climate, the Chinese Government has recently imposed anti-dumping duties on Australian barley exports, following a 16-month investigation, and suspended beef imports from four Australian abattoirs. Although these actions can be seen in the context of longer-running trade disputes, the timing of the Chinese Government's announcements has coincided with the Australian Government's advocacy for an independent international investigation into the origins of the pandemic.

Actions you can take now

• Ensure your business continues to monitor international trade developments and changes in domestic regulations, to be aware of both potential opportunities and obligations in the global marketplace.
• Consider the increased potential risks that your business may face and prepare appropriate risk mitigation strategies.