In
a recent exchange on economic (and medical, for equipment and
supplies) impacts of the China Virus, it was offered that “we
could, as a country do away with our free market and mandate against
globalization.”
Of course, most will recognize that statement as a 'straw man”
argument.1
It was made in response to questions about the outsourcing of US
manufacturing over past decades. Straw man or not, there is a core of
belief underlying it that deserves at least some response, and the
question of outsourcing likewise deserves exploration. What has
brought us to where we are today? How can we reverse the most
egregious results of failed government policies and poor corporate
decisions?
A
Black Swan?
With
the bleating that “it's not our (anyone's) fault,” let's first
consider whether this pandemic is a “black swan” event,2
the idea being that companies (and the government) were innocent
bystanders to an entirely unforseeable cataclysmic event. Serious
pandemics are not rare. The
1918
Spanish
flu" pandemic
killed more than 500,000 people in the United States and 50 million
people worldwide. Between 20 and 40 percent of the global population
was infected at a time when international travel was not at all
routine.
First
identified in China, the 1957-58 "Asian
flu" virus
pandemic caused roughly 70,000 deaths in the United States. The H3N2
virus
caused
34,000 deaths in the United States during the 1968-69 season.
13,000 deaths in the United States from 2009 to 2010 have been
attributed to the Swine Flu virus. So the pandemic part of this is
certainly not a “black swan” event. What about the disruption of
supply chains? “Globalization” is admittedly a recent phenomenom,
but unstable economies and governments are not. Essential products
and commodities should not be hostage to the vagaries of disease,
natural disasters, or the whim of totalitarian governments. Black
Swan? It is not.
The
Prescription
In
regard to our central questions, there are four actions we can take
(and should have taken) that contribute to our current conundrum, and
can largely avoid its repeat, or its severity. First, there is no
need to "do away with free markets" to disincentivize the
export of jobs (and to encourage supply chains that are at least more
diverse, even if still global). This administration has already done
so by negotiating trade deals that make domestic manufacturing more
competitive. NAFTA, the much-maligned trade treaty with Mexico and
Canada, has been replaced by the more balanced USMCA after decades of
inaction by multiple administrations. More balanced trade relations
with South Korea and Japan have been recently put into place, and
there's a “Phase 1” agreements with China that, although limited,
moves us in the right direction.
Second,
and again without "doing away with free markets," there is
nothing novel about regulating trade (which is certainly not and has
not been “laissez faire,” not even in the 18th century...see "The
Stamp Act") nor about protecting certain products and
commodities as strategically and economically essential. In fact,
every country does it. The
explicit aim of the EUs Common Agricultural Policy is to create food
security for
Europe by protecting its agricultural sector.
It's not unreasonable to expect that the previous two administrations
would have been aware that more than 90% of pharmaceutical stocks
(and end-form drugs) were originating outside our boarders, and much
of that in China. Nor would it have been inappropriate to take policy
action permitted by law to ensure some domestic ability to produce
.Article
XXI of
the General Agreement on Tariffs and Trade (GATT) provides that
essential security interests must come within enumerated grounds (for
lawful protection). Certainly pharmaceuticals must easily fall within
“essential security interests.”
Third,
a diversified supply chain would seem to be obvious, since not all
countries are equally reliable and stable (not to say friendly). It
would seem to be reasonable that both the government and industry
would be cognisant of this. One of those $20 million-per-year CEO's
should have been smart enough not to risk the future of his company
by poorly diversifying its supply chain. And no, the "quarterly"
focus on returns is not an excuse to take clearly unreasonable risks
with the shareholder's investment.
Fourth,
and finally, we must distinguish between "countries of origin."
At least some supply chain investment might be made with a nod toward
the kind of government in place in the source country. Is this a
"moral" argument? Yes, in part it is, but from my
perspective, the important thing is that governments like Venezuela,
Myanmar, Pakistan, and yes, China are inherently unstable, because of
socialist, and often totalitarian, governments...which again risks
both the country (for strategic goods) and individual companies (for
everything else).
Summary
Summary
1.
Negotiate improved trade agreements.
2. Use available legal tools to protect the supply of essential and strategic goods and equipment.
3. Build a diversified supply chain.
4. Limit exposure to inherently unstable totalitarian governments.
__________
2. Use available legal tools to protect the supply of essential and strategic goods and equipment.
3. Build a diversified supply chain.
4. Limit exposure to inherently unstable totalitarian governments.
__________
1 A
“Straw Man” is a logic fallacy involving
the misrepresentation
of an argument in order to strike it down.
2
An
unpredictable or unforeseen event, typically one with extreme
consequences.
