Scaling Up Production of Medical Equipment Worldwide: The O-Ring Problem and a Collaborative Solution Faced with surging rates of infection among their populations, governments are desperate to acquire medical supplies and equipment for their nation’s hospitals and medical professionals. Currently, governments are acting unilaterally, often taking steps that are ineffective, that offer very short-term gains or that harm citizens in other countries. As of today, a total of 75 governments have imposed 102 curbs on exports of medical supplies, medical equipment, and medicines relating to the COVID-19 pandemic. These curbs put in jeopardy the lives of infected people in nations that rely on foreign suppliers, a shameful form of trade policy. Since the current free-for-all is far from ideal, it is worth thinking through what a cooperative international approach would involve including what challenges it would have to overcome. The overall challenge is characterised here as an O-ring: each individual task must be successfully accomplished before it is possible to scale up and make use of sophisticated medical equipment. Key elements of the problem facing policymakers As the COVID-19 pandemic has spread, demand for medical supplies, medical equipment, and medicines has soared in the countries where there are high numbers of infected persons. Front-line medical professionals need personal protective equipment (PPE) to stay healthy and to keep treating those affected. Very sick patients need technologically-sophisticated medical ventilators to keep them alive. However, the installed production base is unable to meet current levels of demand. The overriding problem then is that the implied excess demand or production shortfall needs to be narrowed and as quickly as possible. A second feature of the problem is that subsequent waves of infection by COVID-19 or some variant of it cannot be ruled out. This suggests that the demand for additional medical equipment etc may surge again in the coming months or in a year or so. A third feature of the problem is that COVID-19 strikes at different countries at different times. To date, Africa, Latin America, and South Asia have yet to face the brunt of the first wave of COVID-19. Moreover, some countries where infection rates have fallen markedly (for example, China and South Korea) are worried about a second round of infection being generated. A fourth feature of the problem is that, largely as a result of market forces rewarding specialisation, many nations import medical supplies, equipment, and medicines. Even those nations where these vital medical supplies are made are often importers of specialist or patented goods. These four features of the current pandemic imply that there are sharp and unpredictable gaps between supply and demand for medical supply that can differ across product type, across nations, and over time. Consequences of these features If the estimated levels of demand for key pieces of medical equipment are accurate, and if the rates at which firms have said they can ramp up production are taken at face value, then, for medical ventilators and other sophisticated equipment, barring a miracle it is simply too late in the United States and parts of Western Europe to ensure that the requisite levels of medical capacity in hospitals can cope with the predicted levels of very sick citizens. The ethical dilemmas raised by this observation are not the subject of this note, but they are certainly worthy of deliberation and debate. The focus here is on the implications for tackling the production shortfall and the case for a collaborative international response. This bleak prediction, however, should not be used to dismiss out-of-hand a cooperative international response on the grounds that it is too late. The second feature of mentioned above implies that further waves of COVID-19 are possible before a successful vaccine is found, tested, and distributed. There were three waves of the Spanish Flu in 1918 and, as far as the U.K. was concerned, the second wave had a larger human toll than the first (see Figure 1). Taking steps to reduce future production shortfalls is prudent, even for those nations for which a cooperative international response is “too late” during the first wave. Given that the inherited international patterns of specialisation in medical supplies, equipment, and medicines cannot be significantly changed by even the most aggressive national industrial policy should any second wave hits in the next six to 12 months, then governments cannot realistically expect to “go it alone” without their citizens lives being put at risk. Should a government believe it can outbid others when purchasing from abroad, the most likely response is for foreign nations to ban exports of the sought-after medical supplies. Figure 1: Monthly loss of life from Spanish Flu in the United Kingdom. Notes: Three pandemic waves: weekly combined influenza and pneumonia mortality, United Kingdom, 1918 to 1919 Reference: PD-USGOV-HHS-CDC. See also https://history.blog.gov.uk/2018/09/13/the-flu-that-wasnt-spanish/. The third feature of the problem implies that, even if it is “too late” to prevent deaths caused by medical shortages in Western Europe and North America, it may not be too late to alleviate suffering and to save lives in those parts of the world where COVID-19 is still in its infancy. Moreover, failure to successfully clamp down on the pandemic in Africa, Latin America, and South Asia raises risks of reinfection later in other parts of the world (potentially inducing the second wave). The nature of this pandemic is that must be surmounted worldwide. Since Africa, Latin America, and South Asia tend to import much of their medical supplies, then tackling COVID-19 there requires increasing production in other countries (the fourth feature). But firms may not respond by expanding output if they believe that financially-strapped developing countries cannot pay for vital medical supplies, implying the need for financial aid as part of a cooperative international response. The conclusion is that, even the most dogmatic adherent to “my nation first” economic policymaking should, when confronted with these four features of the current COVID-19 pandemic, recognise that unilateral approaches will fall short. Drawing this conclusion shifts the discussion to collaborative international solutions, however, where important challenges need to be overcome as well. The O-ring nature of this problem and a global mechanism to tackle it Formulating the problem in terms of narrowing the gap between elevated demand and available supply obscures the many pieces that have to fall into place in order to accomplish this goal. Economists refer to situations were a desired outcome depends on the competent execution of several steps as “O-rings,” highlighting the fact that a flawed simple part (an “O-ring”) can compromise the performance of the entire system. Ramping up production of key medical supplies requires several elements to fall into place and by necessity needs some degree of international expert coordination. To appreciate the O-ring nature of this problem consider the case of medical ventilators. They are technologically sophisticated pieces of equipment that require qualified medical personnel for effective use. Such ventilators cannot be delivered and generalist medical personnel be expected to use them to maximum effect. The inherited expertise of the receiving nation’s front-line medical personnel is a contributing factor. Moreover, elaborate supply chains crossing borders have developed to produce parts and components for such ventilators and so production of the latter cannot be ramped up without the former. Raw material needs cannot be overlooked either. Any expansion of production of medical ventilators would need to be matched along its supply chain. It is not solely a matter of repurposing an existing production line. In an era when corporate executives economise on the capital tied up in their business, firms will be reluctant to retain redundant production capacity without compensation. Nor will they expand production if there is too much uncertainty concerning ultimate payment and the purchasing power of buyers. Firms will ignore incentives to scale up production to meet foreign demand if their government bans exports of their products. Moreover, producers will take into account any import tariffs, customs delays, and other non-tariff barriers when assessing the profitability of supplying buyers located abroad. Governments naturally regulate such medical equipment before allowing it to be used on patients. Furthermore, as necessity is the mother of invention, pandemics will induce new ideas about how to deliver the same or better medical outcomes with modified or even radically different types of equipment. Without a transparent and expeditious testing and approval processes, incentives to innovate will be blunted. In sum, there is much more to ramping up production that flicking a switch on an assembly run—or to offering a production subsidy as textbooks would suggest. A global mechanism The COVID-19 pandemic has created sizeable and unpredictable mismatches between supply and demand across different types of medical equipment, across different nations, and over time. Rising to this complex task calls for the creation of a global mechanism that pools risk, that provides incentives for ramping up production, that assures producers a sufficient revenue pool to compete for and compensates them appropriately, and that ensures trade barrier-free distribution and the effective use of key medical supplies in recipient nations. Specifically, the mechanism would have the following ten aspects: 1. Be open to all nations willing to sign up and make contributions according to their level of development. 2. Identify medical supplies potentially susceptible to excess demand during further waves of COVID-19. 3. For each type of medical supply, where necessary define the regulatory standards that would be accepted by all participating governments. 4. Create a procedure for expedited approval of proposed variants of existing equipment and other innovations. 5. Finance expansion of production capacity of manufacturers of key medical supplies and the companies they source from. 6. Incentivise production when needed, including providing incentives to license production of key medical equipment. 7. Facilitate expeditious and trade barrier-free distribution of key medical supplies to where needed. 8. Enhance impact of key medical supplies in the destination country by drawing upon a global reserve of qualified medical personnel. 9. Pool buying power across governments and prevent bidding wars between buyers. 10. Compensate producers appropriately but not excessively from a fund large enough to assure manufacturers that non-payment risk is low. The mechanism could be used to augment existing stockpiles of medical equipment held by the World Heath Organization. Such a mechanism would have to be financed. Concerns about financing should be weighed against the number of lives lost during the first wave of COVID-19 that arose due to medical supply shortages. In a world with a global mechanism that successfully delivers medical equipment where it is needed and that tests populations sooner, suppression strategies can be relaxed earlier and may need to be less severe in the first place. The loss in living standards and the need for greater stimulus packages resulting from little or no collective action should be compared to the cost of creating and executing this mechanism. While the discussion above relates to medical supplies and equipment, at some point a vaccine will be developed for the COVID-19 virus. Consideration should also be given to the manner in which the testing, production, distribution, and financing of any vaccines so developed would be executed under this mechanism. In sum, there is a technocratic multi-faceted solution to the challenge of securing enough medical supplies, medical equipment, and medicines. Adopting it would require a volte-face on the part of certain more nationalistic governments. As the death counts rises from the first wave of COVID-19 infections and the second wave beckons, it is just possible that some governments have a “come-to-Jesus” moment and realise that a properly overseen expert-driven approach offers the prospect of saving more lives than the current dog-eat-dog approach.