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Pinelopi Goldberg shows why the pandemic has not strengthened the case for domestic production over global supply chains

Pinelopi Goldberg shows why the pandemic has not strengthened the case for domestic production over global supply chains

The COVID-19 crisis has emboldened advocates of protectionism and deglobalisation. Familiar concerns about lost manufacturing jobs and rising inequality, or the desire in some circles to “punish” (scapegoat) China with higher tariffs, have now been augmented by an argument against global supply chains. According to this view, widely distributed production has made economies less self-sufficient, and therefore less resilient. The solution is to reshore existing business operations, offshore less in the future, and reduce reliance on trade more generally.

The argument for resilience is not new. Concerns about “food security” are regularly used to justify protectionist interventions in the agricultural sector. And, taken at face value, the claim – made frequently in recent months – that food supply chains are more secure because they are domestic seems valid. But, upon closer consideration, the situation is much more nuanced, especially if one adopts a reasonably broad view of “resilience.”

To be sure, trade skeptics would say that the COVID-19 crisis has revealed global supply chains’ vulnerabilities to export restrictions and external shocks. Many countries, including EU member states, initially imposed export restrictions on personal protective equipment (PPE) such as face masks, which may have meant that some importing countries could not obtain these items when they were most in need.

It is not surprising that governments would put their own citizens first in an emergency. Even the World Trade Organisation, which normally outlaws export restrictions, allows exceptions for “essential products.” But the recent export restrictions were short-lived in most countries, and their negative effects were outweighed by the benefits of trade in PPE elsewhere. Having emerged from the crisis earlier than most other countries, China quickly resumed production and increased its exports of PPE to all countries in need, alleviating global shortages at a critical moment. According to the New York Times, China is now manufacturing 12 times more masks per day than it did before the crisis.

A second argument focuses on a particular feature of modern trade: the hyper-specialisation of production and distribution chains that stretch across multiple countries. Specialisation allows global supply chains to minimise costs and maximise efficiency, but it can present complications when production needs to be ramped up quickly.

Recent ventilator shortages brought this point home. The standard ventilator technology used to treat COVID-19 patients comprises 300 different parts whose production spans multiple countries. Manufacturing more ventilators thus calls for close coordination at a time when many countries’ first instinct is to compete for scarce parts. And even if all of the individual parts can be procured, production still requires a high level of technical know-how – a competence that many countries may have offshored.

Nonetheless, proponents of globalisation view these challenges as evidence that global coordination and collaboration are more valuable than ever. They would argue that having multiple sources spread across countries improves resilience. Rather than being “only as strong as its weakest link,” a global supply chain is actually more robust, because it can fix broken links by replacing a source in one stricken country with an alternative source in another country.

Trade skeptics might argue the opposite, claiming that coordination problems could be avoided altogether if the supply chain for ventilators were brought home, as in the case of food. And yet COVID-19 has been running rampant in US meatpacking plants in recent weeks, disrupting one of the country’s critical food sources. The only thing keeping many plants going now is a threat from the federal government under the Defense Production Act.

In reality, domestic supply chains are more robust only in highly unlikely scenarios where all other countries are simultaneously hit by a negative shock. If you are the only one not afflicted by a global crisis, it obviously helps to have production located at home.

In the case of a pandemic, every country is affected, but outbreaks tend to peak at different times. When the United States is facing the worst of the crisis, other countries may have already flattened their epidemic curves, and can therefore serve as a source of trade – and of resilience.

Ultimately, how we manage risk and build resilience is not a question of “global” versus “domestic.” Diversification – geographic or otherwise – is a canonical principle of risk management. By operating multiple plants in multiple locations, businesses can minimise the risk of systemic disruption when any one location is knocked offline (such as by a natural disaster). Similarly, businesses can mitigate the risks associated with political upheavals by spreading operations across countries. Distributing production globally not only maximises efficiency; it is also good risk management.

That said, on the more general question of how we should build resilience, critics are right to object to the obsession with short-term efficiency and profits. This way of doing business clearly has left firms and supply chains too lean to deal with a major crisis like COVID-19. A certain degree of redundancy (or short-term inefficiency) may literally prove lifesaving in the future.

Maintaining redundancy – such as by reserving a certain number of hospital beds or operating an extra mask factory – would have alleviated bottlenecks in the current crisis. In the future, we should look for ways to build in this kind of extra capacity, by thinking in terms of dynamic rather than static efficiency. The COVID-19 crisis offers important lessons; but it has not furnished any good arguments against trade or global supply chains.


Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, is Professor of Economics at Yale University.. Copyright: Project Syndicate, 2020, published here with permission.

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19 Comments

The logic is simple.

If one cannot produce when being healthy, one can certainly not do it when being sick.

Well, that's a first, I agree with you

Gradually and increasingly, you and many other will find out that I present truth in a very simple and digestable, but not necessarily palatable way.

You are mostly full of hot air

Unfortunately, that is when you and many others find the truth unpalatable.

That's YOUR truth you speak of, it isn't everyone else's, and threat and truth have totally different dictionary meanings. Most of what you say comes across as threatening, you will pardon that we thumb our noses at it.

So we'll find out in the re-education camps?

Sits back, awaits the flood of comments about Buy Local, No to China, and whatever. Like NZ Inc has even the beginnings of self-sufficiency in metals as common as Cu, Pb, Sn, Zn, or Al, let alone Li and the multitude of rare-earths needed for contemporary electronics. Exchange is the key to the acquisition of these fundamentals ......trading milk for rubber, meat for rice and sugar, and so on.

The article makes a good case for a retreat from just-in-time in supply chains, to some quantum of just-in-case - capacity expressly reserved for emergencies like an earthquake, a WuHuFlu spike, a civil insurrection etc. JIT may be efficient but it is certainly not now as fit-for-purpose as the management theorists would once have advised.

Couldn't agree with you more about the need for Cu, Pb, Sn, Zn, or Al, and Li etc, but I'm concerned on our over-reliance on what we're trading for them..

I know of instances where the wholesale price for steel in NZ has been higher than the retail price for the same steel out of China.

I have not seen any intelligent details on the practicalities of local manufacturing that would me to think it is anything more than wishful thinking.

Tend to agree - we just don't have the infrastucture at the moment. And the infrastructure we do have (Glenbrook) has its own problems at the moment.

No-one is against trade, but it has become quite something else. Corporations exploiting workers in countries with minimal or no protections for workers, who are paid peanuts, then selling those goods into richer countries. That is not trade, it is just exploitation and should be seen as criminal.
We have long ago overstepped this mark and getting rid of tariffs has seen to it that this sort of thing can continue. It's knowing the price of everything and the value of nothing.
Trade may not stop, but it should not continue in the manner it has. More must be produced locally, we have gone from a fairly self sufficient country to an almost wholly not one, much production does need to return.
Corporations must not be allowed to run this world.

Corporations get their incomes from customers. Large corporations simply have developed the ability to supply large markets of customers. They are a problem if they can achieve positions of market privilege. This is most commonly done via government interventions in markets - the very thing you seem to call for when you call for 'someone' to somehow re-jig trade patterns

The corporations who exploit workers with peanut pay and no protections are invariably local companies with local markets who have no exposure to the judgments of large market places of consumers. You ask any third world worker who they would prefer to work for - the local autocratic exploiter or the local branch of a multinational.

Your points are based on mythical catch cry phrases

"They are a problem if they can achieve positions of market privilege. This is most commonly done via government interventions in markets"

Don't get me wrong, interventions can be problematic. But decades of deregulation have also lead to increasing concentrations of wealth and less competition. An interesting case study is the internet, where a new market with minimal/no regulation started as an egalitarian dream and, for all its benefits, has turned into a gravy train for a handful of US tech giants.

"ask any third world worker who they would prefer to work for"

Still tricky ethical questions here tho: Is it ok to support/encourage the lesser of 2 evils? Is it ok for us to export social ills and pollution? There's a good argument that doing so is the quickest way to lift developing countries out of poverty, a noble cause, but what are the long term effects, and are we going to keep doing so until every country has a similar standard of living? Is that even possible?

Great to question the effects of govt "meddling", and look at the benefits of globalization, but the other side is more than just "catch cry phrases." There are pros and cons. Imo, looking long term, we're looking at net negative.

The way our economy is tracking down, we may not be able to afford to buy half the stuff we used to. We may simply fall into localism as a last resort.

You mention PPE as a specific example, so we have China down playing the virus in January to the WHO and then importing massive amounts of PPE and other supplies.
Also receiving massive amounts of PPE and support from other countries, then trying to SELL some of that PPE back to the same countries e.g. Italy. Also selling faulty PPE which got sent back.
And your saying thats NOT and example of WHY a country should have ample supply of critical equipment and then rely on China, who only started exporting once they were on top of local outbreak (as far as the world can is allowed to know)

"If you are the only one not afflicted by a global crisis, it obviously helps to have production located at home."
I wouldn't say that we haven't been affected, but compared to the US, UK, China, Brazil etc, NZ is doing a heck of a lot better. I do wonder if NZ has a need for increased self-sufficiency? To an extent then, this is a partial agreement with PKG's argument (despite it's obvious US orientation), more redundancy is needed in terms of health and social practice capacity.

My larger concern is more traditional - NZ's reliance on primary export sector and external wealth flows (tourism, migration, international education) has made our trade relationships reliant on an increasingly difficult balancing act between (mainly) two giants. That they have recently become more antagonistic towards each other, and proxies, emphasises our need for diversification - both in terms of markets and in terms of industries.

So it's our tech and innovation sectors I think we need to support more... and education. That would help make us more skills based and less reliant on transport infrastructures.

Speculative..

Hit it on the nail Pinelopi. Supply chain is often misunderstood, and needs to be looked at from both sides, performance and productivity, and as you say, risk management. Risk there are two types, insurable risk and uninsurable risk or'supply chain risk'. Supply chain strategy drives it all, and this remains one of the most sadly lacking and misunderstood areas in business. Also perhaps the greatest opportunity also. Supply chain strategy is of course longer term thinking, where most business has remained short term, financial/shareholder return focused and at the moment more-so often in survival mode. I have seen most business leadership financially driven, rather than the needed supply chain driven, based on processes, networks, and partnerships. Even partnerships are often misunderstood, as is the misused and foundational term 'lean business'. It is the strategy in lean that is often seen missing, it is not simply 'minimizing stocks to near zero' as most people think, it is strategy for continuous improvement, lead time and waste reduction. This is fundamental to the approach. I have got back in to larger scale supply chain, having seen the proposed strategy for the Upper North Island Supply Chain Strategy. I was somewhat supply chain aghast, as nothing seemed to have changed since I was closely involved back in 2008. The proposal I saw was more of a loose business case to move the port, rather than a supply chain strategy at all. Although I do agree there is a strategic case for moving the main import port, there were a number of other reasons and approaches needed to be considered. I responded with an alternative strategy, and sent it to the PM, two ministers, some key stakeholders and on my Linked In account . The other huge challenge, where in hard times there is a greater need to work together and collaborate, things tend to go in the other direction. With investors further and further away from the actual business activities, this distancing makes supply chain development more difficult as the end to end is even more disconnected This disconnect particularly evident in global equities and investment companies and is now so big, it is heading towards being catastrophic. The answer is, supply chain management, if only more could see. Supply chain is almost invisible when fully working and in steady state, and highly visible in times of disruption or changes in dynamics, as we have now.

You only have to read a little history of the 1930 Smoot-Hawley Act to see how US protectionism contributed to the lengthy timespan of the the great depression, how it raised food prices by 40% or so and how tariffs caused other countries to retaliate and caused a 65% reduction in world trade, massive unemployment and ultimately WWII . Anyone who thinks otherwise about global trade needs to go back to the most basic form of education, and for those that don't think history can teach you any lessons feel free to enrole in trump university, just don't expect to advance your education.