March 23, 2020
Public health crises tend to follow a predictable trajectory, and so does public reaction to them. As far as the coronavirus is concerned, while the peak may, or may not (we’ll see), have passed in China, it clearly has not in the United States, and more bad news is on the way. That, in turn, means the public is preoccupied with how it is affecting them and what they and their families need to do about it. At some point, as the peak passes, attention turns to cleaning up the mess left behind and, eventually, what all this means for the future. This week’s column is about that future—how the pandemic might affect global economic integration. Of course, it is way too early to be definitive about that, but I can offer some speculation.
First, globalization has been enabled by major technological advances that have drastically reduced the cost of transportation and communication over the past 50 years. Those advances are not going away—they cannot be "uninvented"—so the tools of global integration will remain. The specific instruments of transportation and communication, i.e., the companies that provide those services, may come and go, but those that leave the scene will be replaced by others.
Second, the big question is whether those tools will be used in the same way and to the same degree as they have been. We are now, predictably, seeing apostles of autarky like Peter Navarro arguing that anything of importance needs to be made here by Americans for Americans. If that becomes a popular refrain here and elsewhere, we will not see a recovery of world trade and will see instead economic stagnation for a long time. The United States is a mature, slow-growth economy with 95 percent of the world's consumers lying outside its borders. If it wants to grow economically, it has to trade, and that inevitably means importing as well as exporting. The same is true of Europe. So, I think that wise governments, if there are any, will eventually push us back toward global trade as a means of promoting jobs and growth, although that will not occur easily, quickly, or without resistance from the Navarros of the world.
Third, a corollary question is what corporate supply chain managers will do. Trained to find what they need at the lowest cost, highest quality, and most accommodating delivery schedule, they are now moving into a world where that won't be good enough. Even without government "buy national" requirements, which are being considered here in the United States, the coronavirus crisis has taught them that supply chains are a lot more fragile than they thought, that supplies can be suddenly interrupted for unexpected reasons, and that a prudent manager needs to take resiliency into account, which means not only having a Plan B, but a Plan C and Plan D as well, one or more of which includes domestic sources of supply.
That is a transition that will take years since it involves not only identifying alternative sources of supply but training, inspecting, and certifying them, and it will be expensive and lead to sub-optimal outcomes. Some parts and components will cost more; quality might suffer. And companies will become less globally competitive as a result. Companies will invest in alternatives that protect themselves in the event of emergencies, but that will take time and cost more. And it will be uneven. Some companies will figure it out faster than others and move more decisively, just as some governments will.
Frankly, at this point I have more confidence in the supply chain managers than I do in governments. The former will do their job as best they can within whatever rules framework they are given, and their companies will survive. The latter need to avoid two big mistakes. One is, as Peter Navarro correctly put it, to go back to sleep. To assume things can go back to the way they were is simply to guarantee that we will be as unprepared for the next disaster as we were for this one.
The other is to succumb to the “wall” mentality. Building an economic wall around the country and trying to depend on ourselves for everything is an even worse idea than building a wall on the U.S.-Mexico border because it will do far more damage in terms of slow growth and job loss.
The right answer is not to hide behind a wall but to do a better job of assessing our vulnerabilities as a nation and building redundancy and resilience into our economy to ameliorate them.
That will not be easy, and it may take a long time. One of my favorite factoids is that the level of global trade in 1913 was not reached again until 1970. That was not due to a single event like we are experiencing today but rather a succession of them, all more devastating than what we are going through right now. It is a reminder that recovery is always a lot slower than the event that caused the problem in the first place. If the U.S. government is smart, it will keep an eye on planning for the future as it tries to cope with the present.
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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