Changing the Future Part I
March 30, 2020
Last week I talked about the future of globalization and the supply chains it has enabled. This week I want to focus more closely on the U.S. role and the likely pace of recovery. I don’t plan to go into the details of how the Trump administration has handled the crisis domestically—that is for the thousands of other commenters to debate—but I do want to focus on two aspects of the response that are, or could become, troubling. I will cover one this week and one next week. The immediate problem is the rapid growth of calls to buy national accompanied by proposals to restrict exports of selected items.
Export restrictions are the most pernicious because they harm people at both ends of the supply chain. One of the things we should have learned from painful experience over the years is that if you mess with the market, there are consequences, many of them unintended. The obvious result is that you end up with surpluses in some countries and shortages in others because the normal market mechanism for distributing goods has been disrupted. When that happens, there are price effects. In countries where there are surpluses, prices fall, and manufacturers will lose money and perhaps reduce production. Where there are shortages, there will be price-gouging, people will not be able to get what they need, and, if we’re talking about medical equipment, more people will die than would otherwise be the case.
In addition, since we live in a globally integrated marketplace, many manufacturers, particularly in the United States and Europe, rely on exports to survive and on imports of components to make their products. Export restrictions on them take away a significant source of earnings. Retaliatory export restraints by others make it difficult or impossible for them to produce. The result is domestic production is harmed at the very time you need more of it. The tendency to panic and hoard is universal. When individuals do it, it leads to empty shelves of milk and toilet paper. When governments do it, it leads to disruptions in supply chains that may take a long time to repair and which prevents both buyers and sellers from meeting their needs.
It is particularly tempting to restrict exports in the midst of a public health crisis because inadequate supplies can have serious health consequences. The latest count indicates 63 countries have done that. The correct solution is to mobilize to produce more and also to seek to buy more from whatever sources are available. Restricting exports only leads to others doing the same thing and the consequences I described. So far, the United States has not taken the bait, and we should all hope it stays that way.
A related problem is cries to buy national. These are not new—the Buy American Act dates to 1933—and they often end up being more rhetorical than real. Americans give lip service to buying national and then shop at stores like Walmart, where many products are imported. In the end, people generally act just like the supply chain managers I talked about last week. They look at price, quality, and availability and pick the items that best meet those criteria regardless of origin. In addition, more often than you think, there is no choice. I can say with some confidence those grapes and bananas you’ve been eating all winter did not come from the United States, and neither did the coffee you’ve been drinking.
The French, to the surprise of nobody, has pioneered the concept of “gastronationalism”—the idea that they should only eat things grown in France. While that’s fine if you like wine and cheese, over the longer term, it disrupts the single market the European Union and its predecessor organizations have spent more than 65 years painfully creating. And it often leads to other countries adopting the same policy. That means the French are going to end up stuck with too much cheese, and the Spanish and Italians with too much olive oil, not to mention the Greeks. This misguided attempt to ignore Ricardo’s theory of comparative advantage will leave everyone worse off and probably less healthy.
It is worth noting, however, that, while buy-national demands often take flight during a crisis, they just as often go away once the crisis is over and sanity returns. So, it would be a mistake to panic at this point or to start hoarding cheese. But it falls to the economists of the world to remind everybody that this is a bad idea, and it is the responsibility of governments not to enact laws that they will soon come to regret once the crisis has passed.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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