One of the key changes to our post-pandemic world will be the reshaping of global trade.
July 5, 2020
One of the key changes to our post-pandemic world will be the reshaping of global trade. The catch-word is “globalism,” a world-view that mankind benefits globally from free trade. There are derivative effects of free-trade that expand further on exactly what “globalism” means. Chiefly – national sovereignty and nationalism. Global trade agreements seek to lower trade barriers. Nations become less protective, exposing constituencies to the pressures of global economics. This is nowhere more dramatically demonstrated than in the movement of industry in steel and automobile production. Younger people may not realize that only a generation ago Americans made TVs, shoes and towels. Today little of that remains. Nationalism also declines because people begin to realize that keeping wealth to yourself is not as important as maximizing economic efficiencies. A greatest example of that is the European Union. While most people can maintain pride in their heritage, they also find value in encountering people who are different, travel abroad and enjoy sampling ethnic cuisine.
While there are factions that march against globalism, most people prefer to enjoy the benefits of advancing world trade. We have our TV made in South Korea, our phones and computers are comprised of components from several Asian countries, the car we drive is assembled in Mexico, and fresh vegetables we procure at the grocery store in the middle of winter are delivered from Chile. All that at prices that would otherwise be higher if made in the good ol’ US of A; or as in the case of winter raspberries, simply not available at all.
Then the pandemic comes along.
Suddenly we realize that medical supplies are in short supply because they are all manufactured in China. The press jumped all over China because, big surprise, they held all the production for themselves to cover their own crisis. Then it was discovered the U.S. no longer made its own antibiotics. The Chinese cornered that market as well. Europe was similarly affected. Countries were beginning to rethink globalism.
Let’s call it strategic globalism.
Strategic globalism enters into the trade equation the “national interest.” For purposes of fighting the pandemic, the U.S. and Europe began to realize that preparedness required planning and a recognition of real tensions in world trade during a health crisis. We should not be surprised that China withheld critically needed supplies to fight its own battles. Would we have done any different? Suppose the U.S. was the global center of mask production and the crisis began here and supplies ran short. Would we continue to send critical supplies overseas, all in the name of free trade? I seriously doubt it.
So – it is a given that the supply chain needs to be balanced. It is balanced in two ways. First, accumulation of inventories that cover for a potential crisis. Second, the deliberate reshaping of trade conditions to allow for production domestically. Both will cost the average American. Inventories in medical supplies are not static. They have to be cycled. That means on-going overhead. That overhead will be paid somehow, either through a medical tax or through general government appropriations.
But domestic production? Now it gets interesting. Now begins the unraveling of trade agreements, the return of tariffs and other protections. Manufacturers are not going to reopen plant capacity in the U.S. because of patriotism. It will have to be profitable. If it costs 35% more to manufacture antibiotics in the U.S., then how will that cost be recovered? It will be recovered through protective measures that make it possible for manufacturers to sell antibiotics for 35% more. And you are the buyer!
Now to calm our nerves a bit, we need to realize that the big loser in the pandemic is China – and that for many reasons. Even if China was not run by Communists, it would still come out of this whole mess looking bad. The supply chain needs to be diversified. This would mitigate the necessity of bringing production back into the U.S., at least to some degree. Masks can be manufactured anywhere. Some can be made in Malaysia, some in Mexico, some in Indonesia. Where this is going is another smack at globalism – quotas. The quota system has been used in the past to control trade between countries. Strategic globalism can use quotas to guarantee that supply sources are diversified. If you run a business that imports antibiotics, you can get them from China. But once it hits a certain volume, you need to find other sources.
No other country is better at quotas than Japan. Japan is an economic powerhouse with very few natural resources. Getting all its oil from the Persian Gulf, while cost-effective, is not strategically wise. So it works at diversifying its sources of energy production. It has to account for multiple sources of iron and food. While it may not have formal quotas in place in every instance, the derivative effect of their economic policy is to shape where they trade.
Another example is the natural gas market in central and eastern Europe. They have for decades been dependent on Russia. That has been an unhealthy arrangement. As a result, governments have invested in diversifying their sources of natural gas, as well as diversifying energy production, using more solar and wind generation. Setting up quotas is not necessary in this case, but the result is the same.
This kind of thinking will need to be applied to pandemic preparedness. This means that somewhere in Washington, DC, there will be an agency that will develop the plan and implement the solution. What it will look like will prove quite interesting, and will impact the cost of living for every American. Will manufacturing return to the U.S.? Will that involve tariffs? Or will a quota system evolve where critical items are carefully monitored to avoid over-dependence from a single source?
In the end, globalism will not go away. It is here to stay. The world is too interactive. Despite what was realized about some supply items during the pandemic, not everything is made in China. Southeast Asia has been one of the best success stories since the Vietnam War. There is a lot of trade amongst those nations and that energy existed before China emerged as an economic power. Latin America has also been growing. Don’t be surprised if you find that your bottle of antibiotics was imported from Taiwan, the mask you are wearing made in Malaysia, and the gloves your doctor is wearing produced in Indonesia. The benefit to you is that you are paying much less for those items because they are being made at the lowest cost possible – strategically, of course.
* I find this tidbit of information peculiar. How is it that amongst suppliers China ranks 11th and 12th, yet monopolized the production of masks? It demonstrates that statistics don’t tell the entire story. In this case, it is evident that each of these suppliers were manufacturing their supply in China – or so we presume.
Image courtesy of FreePik
By Eric Niewoehner
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