Pandemic Pandemonium: How the Virus Could Change the Trading System
One of the consequences of being stuck at home is having more time to write. You can see that currently in the rapidly proliferating number of pieces devoted to the coronavirus—how to deal with it and what it means—for individuals and their families, for governments (local, state, and federal), and for the world. Right now, most people are rightly concerned with the immediate—how to protect themselves and their families. But as the pandemic passes its peak and moves on, attention will inevitably turn to how to clean up the mess it will leave behind and how it will change things in the future. Here at the Scholl Chair we are going to do our part and add to the volume of reading material with some comments on how the current crisis will affect supply chains and the trading system. That may not be on your screen right now, but it will be, and it is never too soon to start thinking about it. Following are our thoughts about what the future could look like.
(1) Less reliance on foreign sources for medical and public health supplies, but no panic.
The crisis has exposed the economic, health, and political risks of inadequate supply of essential items during public health crises, along with the inevitable demands for “buy national” policies and export restrictions, both misguided attempts to make more stuff here and at the same time prevent anybody else from getting their hands on it. Such policies include import quotas, export restrictions, and import-limiting statutes like Sections 201 and 232. These demands usually fade as panic subsides, but the risk is that policymakers or lawmakers will act in haste and leave a legacy of restrictive rules or policies that may be hard to unravel.
If we are lucky, policymakers and businesses will instead act to reduce reliance on foreign suppliers of medical and public health supplies through positive measures intended to diversify supply chains and a mosaic of domestic policies that leverage our traditional strengths instead of shutting out the rest of the world. Those policies include improved funding for National Institutes of Health grants, U.S. global health programs, basic R&D for next generation medical research, support for an industry consortium on genetic engineering, and an immigration system that encourages retention of scientists and STEM graduates.
Such measures are based on a recognition that an entirely domestic supply chain for complex products is impossible to develop and that a better approach involves federal initiatives to reduce tariffs on medical goods and update the World Trade Organization (WTO) pharmaceutical agreement to cover more products and more countries. We should also expect the government to encourage companies in strategic sectors to develop backup plans for domestic manufacturing in case of future crises.
(2) Supply chains will become nimbler and less reliant on China.
The virus did something the Trump administration could not—bring China’s manufacturing capacity to its knees. In a way, this is the culmination of a trend that has been going on for some time. China’s clear drift back to more state control of the economy, its crackdown on journalists and minorities, rising wages in China as the population ages, and President Trump’s tariffs have all combined to make doing business much more difficult in China than it had been. The size of the market makes it attractive, and foreign companies can still make money there, so do not expect a mass movement of foreigners out of the country. However, for companies that have established supply chains that include Chinese manufacturers but whose focus is primarily other markets, the drawbacks of being there are starting to outweigh any advantages. By forcing the shutdown of production in many parts of the country to deal with the coronavirus, the Chinese government has forced Western companies to reevaluate their presence there even if they had not already begun to do so. As a result, we should expect to see further decoupling as companies adjust their supply chains in order to bring them back closer to the United States or their final market or, at a minimum, to build more agility into them in the form of more diversified sources of supply. That will mean more redundancy and higher costs, but it is an inevitable response for companies that do not want to be caught flat-footed when the next black swan arrives.
Supply chain agility will not only be a function of the factors above but will be affected by technology. In the current crisis, for example, hospital technicians and doctors have turned to additive manufacturing— 3D printers—to supply them with parts and protective equipment. The printing companies are not medical device or equipment companies, but the nature of the technology has allowed them to jump in faster than larger but slower manufacturers like automobile producers. Other technologies that could get a closer look as a result of the crisis include everything autonomous—delivery drones, autonomous long-haul trucks and container ships, and more automated production.
We could, and no doubt will at some point, do a separate analysis of autonomous technologies and their implications for the trading system. They have advantages—not getting sick is one of them, though they are clearly susceptible to their own type of viruses—though many of them remain insufficiently tested for widespread use. In addition, new technologies always bring with them a degree of panic about job displacement. In the past, technological advance has generally led to more new jobs being created than old ones lost, but that has done little to calm worker anxieties, particularly since the workers being displaced often lack the skills to move seamlessly into the new jobs being created. In other words, this transition is not new—it dates back to the Industrial Revolution in the nineteenth century—but this time it will happen more quickly and more broadly, and our collective experience with the pandemic will accelerate that process.
(3) The services trade will be affected as well.
Even though services are now around three-fourths of our economy, they get short shrift in any discussion of trade policy, where the focus is almost always on manufacturing along with a dose of agriculture. Nevertheless, the pandemic will leave its mark on service sectors just as it will on agriculture and manufacturing. For some businesses, particularly those that operate in the cloud or in other digital spaces, the crisis means more business that is likely to remain once the crisis has passed.
The pandemic has accelerated the adoption and scaling of online services in industries that have traditionally relied on in-person interaction or brick and mortar locations. For example, school systems, colleges, and universities have been forced to embrace a fully online education model instead of slowly offering a few additional online classes each year. The nearly $100 billion fitness industry has had to reimagine itself. No longer able to keep gyms open and offer in-person personal training, the industry has had to move online and into the living rooms of its members. Retailers have had to scale up online ordering operations. These investments will hasten a permanent shift toward on-demand, mobile models in a range of industries typically thought to require physical presence and interaction to deliver services. This shift will provide new opportunities for companies typically tied to a physical presence to expand services exports.
Businesses are also adapting to workforces that are majority remote. If the lessons learned now about how to make remote work effective are carried forward, businesses should be more willing to prioritize talent over location. This should expand the pool of talent companies are willing to consider and hire and expand services trade.
On the other hand, tourism will see losses in the short term and medium to long term if concerns about public health remain. Since recovery globally is as likely to be as uneven as the arrival of the virus has been, it will be some time before shipping returns to normal. First, plants producing goods for export shut down in China. They are now reopening only to find that the destinations for their products have shut down as the virus makes its way around the world. And, of course, without goods, shipping, both sea and air, will continue to suffer. If there is a bright spot there, it is that we are seeing a large decline in emissions while travel bans and slower trade persist.
(4) Another look at pharmaceutical intellectual property rights.
The coronavirus has brightened the spotlight on the debate over how best to balance intellectual property protection for pharmaceuticals with affordable access to lifesaving medicines. The pandemic has provided ammunition for both sides of the debate. Brand name pharmaceutical companies, the inventors and patent holders of new drugs, argue that strong intellectual property protections in the United States and abroad are necessary for them to pour significant funds into research and development of new drugs, like a potential vaccine to the novel coronavirus. Generic pharmaceutical producers and other advocates for affordable access to medicines claim strict intellectual property rules with long terms prevent affordable access to generic versions of lifesaving medicines, which is particularly important in light of the pandemic.
This debate is not new and will likely continue once the pandemic is brought under control. However, the coronavirus has already shifted momentum in favor of accessibility. A number of countries, including Canada and Germany, either have adopted or are considering legislation that would make it easier for governments to allow the production of a patented drug without consent of the patent owner—a process known as compulsory licensing. The use of compulsory licensing is a hotly contested issue in international trade policy, and it has up until now largely been fought to a standstill. The magnitude of the coronavirus pandemic, however, may tip the balance in favor of easier access.
(5) The European Union will have much work to do.
The increasing impact of Covid-19 in the European Union has deeply impacted its internal market. Some member states have unilaterally imposed export restrictions and border controls. Travel bans have been put in place. Panic is a normal reaction to crisis, and it generally subsides as the crisis fades. If these measures fade away as well, there will be no lasting damage. But if they persist, then further European integration, both economic and political, is at risk as markets fragment and Europe’s populist movement grows. The European Commission and the member state governments have much work in front of them if they are to head off fragmentation successfully.
(6) The abdication of leadership will have costs.
The one consistent criticism of the president’s trade policies from Democrats has been that he has failed to build coalitions to deal with problems like China that are too big for a single nation, even us. You can see the same thing in his response to the coronavirus. He has been focused on taking care of Americans, even though it is a global crisis. The result is missed opportunities for cooperation that lead to an every nation for itself mentality, resulting in delays in getting aid to those who most need it.
One result of our abdication is that other countries are stepping up, not only our friends like Australia, Canada, and others who have led the campaign against export restrictions, but China, which is supplying aid and medical equipment and claiming the role of hero. As my colleague Matt Goodman has pointed out, in 2009 it was the United States that led the G20 into commitments to keep the financial system running and to avoid protectionism. This time around, the president was on the call, but others have taken the lead—and produced more modest results. That is the short-term cost of our leadership failure—worse decisions and more confusion.
The long-term cost is irrelevance. Other countries are becoming used to us not being there and are building their own coalitions without us. For Americans legitimately tired of the “endless wars” our president has decried, not being the leader may be a welcome development, but it will come back to bite us. It leads to a world where the decisionmakers do not necessarily have our interests at heart. And that’s the dirty little secret of global leadership. We didn’t just do it altruistically, though we may have said so at the time. We led because it was in our long-term interest to shape a world that operated based on principles we were comfortable with, knowing that our failure to do that would produce the opposite—a world where American interests were neither accommodated nor respected. That is not a defense of any and all interventions—an important element of successful leadership is, in the words of the late Kenny Rogers, knowing when to fold ‘em, knowing when to walk away, and knowing when to run. But we should remember that if we continue to self-quarantine as a country, we should not be surprised to see that when this is all over we find a world that is not the same as it was—it will be far less interested in what we do and what we want than it used to be.
(7) Going into quarantine: Covid-19 may be protecting the WTO.
In the short run, the upcoming WTO ministerial conference in Kazakhstan scheduled for June has been postponed due to the coronavirus. Since it appears there would be no movement on restoring the Appellate Body to functionality and that even an agreement on the signature issue of fisheries subsidies seemed in jeopardy, some would argue the delay—probably a full year—is a blessing, albeit a well-disguised one, because it will provide needed time for putting together meaningful agreements. On the other hand, veteran negotiators would say that a deal only arrives at the last minute under the pressure of time, so a year-long delay is simply that—a year-long delay in restoring the organization to a position of global trade leadership.
To make matters worse, another example of our abdication of global leadership is visible in our treatment of the WTO. We have done a good job of identifying its concerns and trying to bully the other members into addressing them (and they need to be addressed), but our tactics so far have accomplished nothing and have only prompted other members to work around us. Just this week, for example, 15 nations, including China, plus the European Union agreed to set up an alternative dispute settlement body without us now that the WTO Appellate Body is no longer functioning. The pandemic is accelerating the movement of global power away from the United States and toward nations that do not have our interests at heart. Among the losers will be international organizations like the WTO that we have supported for years.
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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