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Implications of the CARES Act for International Trade

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On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the purpose of which is to provide emergency assistance and health care responses for individuals, families, and businesses affected by the 2020 coronavirus pandemic.

The CARES Act does not expressly alter U.S. trade policy, despite requests from some U.S. business groups and Members of Congress that certain trade measures (e.g., elimination or suspension of some U.S. tariffs) be adopted as part of the economic response to COVID-19. However, certain provisions of the Act may presage future trade actions by the United States intended to mitigate perceived vulnerabilities in the supply chain for pharmaceuticals, medical devices and similar goods. Moreover, the law's provision of government financial assistance to certain U.S. industries could lead to new trade disputes. This alert provides an overview of the relevant provisions of the CARES Act and their potential implications for international trade.

 

Measures "Addressing Supply Shortages"

Title III, Part I of the Act sets forth provisions aimed at addressing potential "supply shortages" that could impede the United States' response to the COVID-19 pandemic or future public health emergencies. These provisions do not address direct restrictions on imports, exports, or foreign investment, or an expansion of current domestic procurement preferences. Rather, the provisions generally are aimed at identifying potential supply chain disruptions and vulnerabilities, including those resulting from the United States' reliance on foreign-sourced materials, and at developing recommendations for mitigating them. These provisions include the following:

  • Report on the Medical Product Supply Chain. Section 3101 of the law directs the Secretary of Health and Human Services and the National Academies of Sciences, Engineering, and Medicine to produce a report assessing "the dependence of the United States, including the private commercial sector, States, and the Federal Government, on critical drugs and devices that are sourced or manufactured outside of the United States[.]" This assessment may include analyses of "public health security or national security risks" associated with such dependence, and the "potential economic impact of increased domestic manufacturing" of such items. Based on this assessment, the report must also provide recommendations, which "may include a plan to improve the resiliency of the supply chain for critical drugs and devices…and to address any supply vulnerabilities or potential disruptions[.]" Such recommendations may include, among other things "strategies to…encourage domestic manufacturing[.]" In producing the report, the National Academies are required to consult with relevant stakeholders, including medical product manufacturers.
  • Strategic National Stockpile. Section 3102 of the law amends the Public Health Service Act to expressly require that the United States' Strategic National Stockpile of medical products include certain items, including "personal protective equipment, ancillary medical supplies, and other applicable supplies required for the administration of drugs, vaccines and other biological products, medical devices, and diagnostic tests in the stockpile[.]"
  • Expanded Reporting Requirements on Drug Shortages. Section 3112 of the law expands existing requirements under Section 506c of the Federal Food, Drug, and Cosmetic Act for drug manufacturers to notify the Department of Health and Human Services (HHS) of any anticipated disruptions in the manufacture of certain drugs. Specifically, the CARES Act broadens this requirement so that it applies to the manufacturer of any drug "that is critical to the public health during a public health emergency declared by [HHS]". Moreover, the law newly requires manufacturers to notify HHS in the event of "a permanent discontinuance in the manufacture of an active pharmaceutical ingredient or an interruption in the manufacture of the active pharmaceutical ingredient of [a drug subject to the notification requirements] that is likely to lead to a meaningful disruption in the supply of the active pharmaceutical ingredient of such drug[.]''

    The law further provides that each manufacturer of a covered drug, or of any active pharmaceutical ingredient or any associated medical device used for preparation or administration included in the drug, must develop, maintain, and implement "a redundancy risk management plan that identifies and evaluates risks to the supply of the drug, as applicable, for each establishment in which such drug or active pharmaceutical ingredient of such drug is manufactured."

  • New Reporting Requirements on Medical Device Shortages. Section 3121 of the law amends the Federal Food, Drug, and Cosmetic Act to newly require medical device manufacturers to notify HHS of anticipated supply disruptions. Specifically, this requirement applies to any manufacturer of a medical device that "is critical to public health during a public health emergency" or for which for which HHS determines that information on potential meaningful supply disruptions "is needed during, or in advance of, a public health emergency[.]" The notification requirement applies where there is "a permanent discontinuance in the manufacture of the device (except for discontinuances as a result of an approved modification of the device) or an interruption of the manufacture of the device that is likely to lead to a meaningful disruption in the supply of that device in the United States[.]"

While these provisions do not expressly contemplate restrictions on international trade or investment, they reflect an emerging view in the U.S. government that the United States' "dependence" on foreign-sourced medical supplies constitutes a strategic vulnerability that should be carefully evaluated and mitigated. Thus, the Act might provide a basis for future trade measures taken to address perceived public health security or national security risks, such as new import or foreign investment restrictions or fiscal measures intended to boost domestic production of medical supplies in the United States.

 

Financial Assistance to U.S. Businesses

The Act authorizes the provision of various forms of financial assistance to businesses adversely impacted by the coronavirus pandemic. This includes the provision of up to $500 billion in "emergency relief" in the form of government loans, loan guarantees, and investments, a portion of which will be allocated to industries specified in the Act, as well as "emergency appropriations" of $23.5 billion for assistance to the U.S. agricultural sector. The relevant provisions of the Act are as follows:

  • Emergency Relief. Section 4003 authorizes the Secretary of the Treasury (1) to provide up to $500 billion in loans, loan guarantees, and other investments in support of eligible businesses, States, and municipalities, in order to provide liquidity to these entities "related to losses incurred as a result of coronavirus"; and (2) to provide the subsidy amounts necessary for such loans, loan guarantees, and other investments. The law allocates a portion of the funds towards specific industries, as follows:
    • Up to $25 billion will be available to make loans and loan guarantees for passenger air carriers and related businesses (e.g., inspection and repair services);
    • Up to $4 billion will be available to make loans and loan guarantees for cargo air carriers; and
    • Up to $17 billion will be available to make loans and loan guarantees for "businesses critical to maintaining national security." The Act does not define the term "national security," nor does it specify the businesses considered to be "critical" to national security.
    • The remaining sum of $454 billion (and any unused amounts allocated to the above industries) will be available to make loans and loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providingliquidity to the financial system that supports lending to eligible businesses, States, or municipalities.

The law sets out certain terms and conditions that will govern the provision of these funds, including a requirement that a loan or loan guarantee is sufficiently secured or is made at a rate that (1) reflects the risk of the loan or loan guarantee; and (2) is to the extent practicable, not less than an interest rate based on market conditions for comparable obligations prevalent prior to the outbreak of COVID-19. The law further requires that the loan or loan guarantee agreement "[include] a certification by the eligible business that it is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States[.]"

  • Emergency Appropriations for Agricultural Programs. Title I of Division B of the Act provides the following "emergency" appropriations for agricultural programs:
    • $9.5 billion is provided to the U.S. Department of Agriculture (USDA) to prevent, prepare for, and respond to coronavirus "by providing support for agricultural producers impacted by coronavirus, including producers of specialty crops, producers that supply local food systems, including farmers markets, restaurants, and schools, and livestock producers, including dairy producers."
    • $14 billion is provided to replenish the borrowing authority of the Commodity Credit Corporation (CCC) operated by the USDA. The CCC is authorized by law to carry out a range of activities to support U.S. agriculture, including supporting agricultural commodity prices through loans, purchases, and payments, and procuring commodities for sale to other entities. The Trump administration has utilized the CCC to finance its 2018 and 2019 "trade aid" packages, which provided various forms of assistance to U.S. agriculture producers who were adversely impacted by retaliatory tariffs on U.S. exports.

Because the Act contemplates the provision of direct (and substantial) financial assistance from the U.S. government to businesses (and, in some cases, specific sectors), its consistency with international trade rules could be scrutinized closely by U.S. trading partners. For example, some WTO Member governments might question the consistency of the measures with WTO rules on subsidies, and U.S. exporters might be targeted by countervailing duty (CVD) petitions based on their receipt of financial assistance under the Act. American government support for two sectors in particular – agriculture and civil aircraft – has long been a point of contention among WTO Members and the subject of various trade disputes. The financial assistance provided by the Act might therefore become the subject of future tension between the United States and its trading partners. Of course, provisions of the WTO (and trade agreements generally) permit certain exceptions from the obligations, and any country taking action to protect its economy from the disruption caused by the pandemic can be expected to invoke one or more of these exceptions.

 

Conclusion

Although the CARES Act does not expressly amend U.S. trade policy or implement new trade measures, certain provisions of the Act may presage future U.S. import or investment restrictions or trade disputes. Moreover, implementation of certain CARES Act provisions might raise new trade issues, particularly given the Trump administration's desire to repatriate global supply chains and "America First" trade policy more generally. As such, it will be essential to monitor not only domestic and international responses to the CARES Act but also future U.S. government regulations implementing its many provisions.

 

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