Trade, Drugs, and Black Swans

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.

(see:https://theweek.com/articles/900400/coronavirus-really-black-swan-event )

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

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.
__________

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.