Don’t let a lack of trust lead to turmoil in trade

The global extent of the COVID-19 pandemic has led to much hand-wringing about the future of globalization. Disputes over trade in critical goods have led to predictions of a future autarky. In response to a dispute over face masks, Ontario Premier Doug Ford declared that ”I’m not going to rely on President Trump, I’m not going to rely on any Prime Minister or President from any country ever again.” The US media has criticized US exports of ventilators and personal protective equipment in the months leading up to the crisis’s arrival in the US; the clear implication being that those goods should have been used for Americans. 

However, such responses are misguided. It may well be commendable to have some excess capacity ready to produce strategically or medically critical goods. But for every country to be self-sufficient in such goods in all cases is not only inefficient, but will likely make future pandemics worse, not better. 

Take the example of US exports of ventilators and masks to China in January. In fact, that equipment likely saved lives in China, while in the US it would have sat idle for additional months.  Similarly, efforts by China and Mexico to dramatically increase their own exports of such medical gear––with China largely recovered from the pandemic and Mexico yet to be hit as severely as the US––have likely saved lives in the United States. Hopefully, the pandemic will not be as severe in Mexico as it is in the US, but if it is, Mexico will in turn depend on US industrial capacity to meet its needs. 

Even the supposed cautionary tale of the economic consequences due to COVID-19 has in fact shown the flexibility of trade networks. If China, the US, and Mexico were independently responsible for ramping up production in their own countries, they would never meet the needs caused by the pandemic. However, because each country is able to import from the others at the height of the crisis and then export to its trade partners after the crisis has peaked, the global ability to deal with the crisis is made far more robust by this exercise of free trade. 

Moreover, insisting that every country be responsible for all of its own essential goods will lead to fewer for everyone. As George noted in Protectionism or Free Trade, “when industry is diverted from more profitable to less profitable occupations, though the capital and labor so transferred may be compensated by duties or bounties, there must be a loss to the people as a whole.” Even if the only goods in an economy were those essential to combating epidemic disease, and even if all countries were hit simultaneously, still a global division of labor would outperform attempted autarky. Suppose, for example, that every country has the capital needed to produce facemasks, fewer have the factories needed to produce ventilators, and only a small number have the universities and research facilities needed to study tests, treatments, and vaccines. 

In this scenario, a single country choosing to be self-sufficient in all three will necessarily be less efficient. Rather, where existing capital and expertise are sufficient only to produce facemasks, effort should be concentrated there, so as to free up resources to produce ventilators elsewhere, and to work on producing tests where that is possible. In each instance, free trade should be used to distribute these goods effectively. Or, more realistically, different elements of the production chain could be concentrated where it is most efficient; firms with the capacity to design and test new ventilators or tests should do so, and leave the assembly to firms where this is the most productive use of labor. There is essentially no question among economists that, on the whole, this will lead to a greater overall production, which in turn will allow the world as a whole to be better equipped to handle crises of this kind and magnitude.

In the recovery from the economic crisis brought about by the pandemic, we are sure to see (and indeed are already seeing) a resurgence of the old arguments for protectionism.  Just as the 1929 crash led to a surge of tariffs in the US and Europe, we should expect the same in the coming months.

It is understandable that those left unemployed by the crisis may be resentful of imports; after all, the common inference is that every good imported from abroad is a loss of an employment opportunity for a worker at home. The key will be to prevent this patriotic sentiment from translating into protectionist legislation, by demonstrating the absolute necessity for both imports and exports in this challenging time. 

For example, the meat processing industry in the United States is in crisis. Tyson Foods, one of the largest companies in the industry, has warned that due to closures in the US many products will not be available. This will of course have effects throughout the agriculture industry. Other industries can expect to be similarly disrupted, and thousands of firms will likely go out of business in the next few months. Those businesses that remain will need the largest possible pool of markets to sell to, as well as venders to purchase from, in order to minimize the longer-term disruption. 

Similarly, the recovery from the pandemic will likely mean that, initially, consumers will have fewer options of firms from which to choose.  Lowering barriers to trade will allow consumers to continue purchasing in a competitive market, reducing the monopoly power (and accompanying high prices and low quantities) than would otherwise result. 

However, arguments such as these are unconvincing to a person who is out of work. To be effective, those promoting  free trade need to be cognizant of the temporary labor displacements so often associated with free trade and thus be open to programs to blunt their impact. Henry George wrote of the weakness of the free traders in his own time:

“On the other hand, the opponents of protection have, for the most part, not only professed no special interest in the well-being of the working-classes and no desire to raise wages, but have denied the justice of attempting to use the powers of government for this purpose…While protesting against restrictions upon the production of wealth they have ignored the monstrous injustice of its distribution.”

The same problem exists today. Though they support many good policies with regard to trade and immigration, “neoliberals” are often accused of an overreliance on a technocratic view over a human one, causing them to lose ground among the working classes to both leftists and populists.

George himself knew the best way to sell free trade: it must be paired with economic justice. Generous programs to help people who have been harmed by the COVID-19 related recession are a necessary companion to free trade policies. George described an ideal tax system: one that is capable of raising revenues without dragging down the economy. Such a system will be needed now more than ever. But ‘selling’ it will require pairing it with spending decisions that prioritize poverty alleviation.

The obstacle to all this is political will. In a crisis especially, demagoguery is more rewarded than rationality. So pronouncements like those of Premier Ford in Ontario will undoubtedly be the norm for some time. However, it is necessary to fight against these protectionist tendencies so as to allow for a stronger recovery. Protectionist demagogues must be met not only with rational economic theory and data, but with genuine concern for the well-being of the people and a determination to make the increased wealth and efficiency derived from free trade which works for them. 

Photo by chuttersnap on Unsplash

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