The Heterogeneous Impacts Of Protectionist Policies On Post Restriction Trade Patterns: How US Priority-Rated Contracts During COVID Affected EU Supply Chains Of Medical Products

Abstract

Temporary protectionist policies are common government tools for responding to major shocks or crises. While potentially effective in the short-term, they may have underappreciated longer-term consequences that extend beyond the policy horizon of crisis-consumed policymakers. Our research explores whether there were lasting impacts on EU medical products' supply chains from one particular US protectionist policy: priority-rated contracts during the COVID pandemic. We show these heterogeneous impacts on EU supply chains by monitoring the share of imports by suppliers' country-of-origin using European official trade data. We employ a Difference-inDifferences approach to estimate the impact of such contracts on EU trade patterns. We find that once terminated, the US share of total EU imports decreases, on average, by 17.8% for affected products, shifting largely to China. In commodity-like products, where price competition dominates buyer decision-making, these effects seem to be negative and lasting. However, that same trend was not observed for Mechanical ventilators: once the policy is lifted, the EU increases its reliance on the US, on average, by 19%. For these technologically complex differentiated products competition revolves not only around cost, but also quality and performance. Due to the unique conditions of the COVID-19 pandemic, we are able to observe such distinct market dynamics, but these heterogeneous buyers' reactions to trade shocks might also be pertinent in other contexts, particularly for export-dependent economies.