Worldly wise

The con­ven­tional be­lief that the pan­demic proves the lim­i­ta­tions of glob­al­i­sa­tion is a myth

The Daily Telegraph - Business - - Front Page - Ryan Bourne

There is no con­ven­tional wis­dom more con­ven­tional than the idea the pan­demic proves the lim­i­ta­tions of glob­al­i­sa­tion. In West­min­ster, as in Washington, politi­cians say this cri­sis proves we are dan­ger­ously de­pen­dent on un­re­li­able for­eign­ers, not least from China, for ev­ery­thing from medicine in­puts through to per­sonal pro­tec­tive equip­ment. The UK gov­ern­ment has in­sti­tuted Pro­ject De­fend to as­sess “vul­ner­a­bil­i­ties” in sup­ply chains and iden­tify areas where Britain should be self-re­liant.

Hav­ing faced PPE and ven­ti­la­tor short­ages, it’s nat­u­ral for gov­ern­ments to re­assess stock­piles, and, as part of Pro­ject De­fend, for trade pol­icy to seek to un­lock a more di­verse range of sup­pli­ers. Pri­vate busi­nesses, fac­ing dis­rup­tion and emer­gency gov­ern­ment mea­sures abroad, are sim­i­larly ques­tion­ing their lo­ca­tion and sup­plier de­ci­sions, given up­dated per­cep­tions of risks.

Some re­sul­tant change will amount to fight­ing the last war or prove an over­re­ac­tion. But mar­kets ad­just quickly to new re­al­i­ties.

Yet un­der­neath all this rhetoric about sup­ply chain repa­tri­a­tion lays a per­ni­cious idea: that gov­ern­ment-en­gi­neered self-suf­fi­ciency can im­prove our “re­silience.” Min­is­ters think the cri­sis shows a trade-off be­tween ef­fi­ciency and re­li­able sup­plies. They itch to de­vise man­dates and in­dus­trial poli­cies to “repa­tri­ate” man­u­fac­tur­ing ca­pac­ity in “out­sourced” prod­ucts, such as parac­eta­mol and sur­gi­cal gloves. Greater do­mes­tic pro­duc­tion ca­pa­bil­i­ties, they think, would make our econ­omy more ro­bust to pan­demic-like shocks.

This “re­silience” ar­gu­ment is se­duc­tive, but wrong. Just as an au­tar­kic agri­cul­tural sec­tor would make a coun­try more vul­ner­a­ble to shocks such as bad har­vests, not less, so self-reliance on crit­i­cal PPE and medicines would make us more sus­cep­ti­ble to down­sides from dis­rup­tion of our fac­to­ries. The flip­side of be­com­ing less re­liant on for­eign in­puts is, of course, be­com­ing more re­liant on do­mes­tic ones.

In this cri­sis, for ex­am­ple, we faced lock­downs, busi­ness clo­sures, and sick work­ers just like ev­ery­body else. Four food fac­to­ries here had big Covid-19 out­breaks, re­quir­ing clo­sures and re­duced ca­pac­ity. You prob­a­bly didn’t no­tice, be­cause our food sup­ply is so in­cred­i­bly di­verse. But that strength in di­ver­sity holds for other in­dus­tries too. Economists have found, broadly, that trade di­ver­si­fi­ca­tion re­duces GDP volatil­ity, be­cause “it re­duces ex­po­sure to do­mes­tic shocks and al­lows coun­tries to di­ver­sify the sources of demand and sup­ply across coun­tries”.

Gov­ern­ment-man­dated self­suf­fi­ciency would harm re­silience by mak­ing us poorer too. Even if the Gov­ern­ment just man­dated that cer­tain in­puts for the NHS had to be made do­mes­ti­cally, ac­tively en­cour­ag­ing in­dus­tries which we are rel­a­tively in­ef­fi­cient in would make the econ­omy less pro­duc­tive over­all. In­su­lat­ing that ca­pac­ity from for­eign com­pe­ti­tion would cre­ate high-cost, lazy, bloated sec­tors. A weaker econ­omy means fewer pub­lic funds to deal with fu­ture shocks.

The pan­demic, as a global cri­sis, did throw up an un­prece­dented demand surge for med­i­cal re­sources. But it’s fash­ion­able to claim that mar­kets made this worse by em­brac­ing “just in time” ef­fi­ciency, rather than “just in case” ca­pac­ity. Yet busi­nesses have pow­er­ful profit in­cen­tives to en­sure the in­tegrity of their sup­ply in new re­al­i­ties. It’s dif­fi­cult to see why gov­ern­ment of­fi­cials are bet­ter placed to en­sure “re­silience” than mar­kets adapt­ing to new wants and needs.

Take PPE. Gov­ern­ment data shows 2.47bn in­di­vid­ual items have been dis­trib­uted by the De­part­ment of Health and So­cial Care since Feb 25 – more than for the whole of 2019. Face mask, shields, gloves, swabs, and gown use are up mas­sively. Me­dia re­ports sug­gest 28bn items have been or­dered from do­mes­tic and for­eign sup­pli­ers for the com­ing months.

Would self-reliance for emer­gen­cies on PPE be wise? Main­tain­ing emer­gency ca­pac­ity lev­els dur­ing nor­mal times would be ex­tremely ex­pen­sive. This year’s PPE bud­get, an­nounced in the Sum­mer State­ment, is £15bn. If, on the other hand, gov­ern­ments some­how en­sured pro­duc­tion con­tin­ued at emer­gency lev­els, there would be an ab­so­lute glut of the stuff – rais­ing in­ter­na­tional ques­tions about over­pro­duc­tion and dump­ing.

Thank­fully, the Gov­ern­ment is not aim­ing for full PPE self-suf­fi­ciency. But the same logic ap­plies to in­di­vid­ual mar­kets. Nor is it even clear that politi­cians are well placed to know what ca­pac­ity we would need for fu­ture pan­demics.

In­deed, if they did, why not just buy it up cheaply from the most ef­fi­cient pro­duc­ers and stock­pile it? They can­not do this be­cause crises are un­pre­dictable. The UK had a rel­a­tively small stock­pile of med­i­cal gowns, for ex­am­ple, be­cause they were thought less nec­es­sary for the in­fluenza pan­demic politi­cians had pre­pared for. It should be ob­vi­ous that it would be daft eco­nom­i­cally to set aside do­mes­tic man­u­fac­tur­ing ca­pac­ity to meet all pos­si­ble threats.

True, this pan­demic has seen es­pe­cially re­gret­table ex­port pro­tec­tion­ism, which has no doubt driven the Gov­ern­ment’s self-reliance push. In­dia re­stricted ex­ports of parac­eta­mol. Ro­ma­nia banned the ex­port of a crit­i­cal in­put to ven­ti­la­tor pro­duc­tion. A French req­ui­si­tion or­der pre­vented a com­pany ful­fill­ing a face mask con­tract with the NHS.

But most coun­tries have since re­alised that, given no­body can be fully self-suf­fi­cient in med­i­cal prod­ucts, th­ese “sicken-thy-neigh­bour” poli­cies are self-harm­ing to all. A global agree­ment to re­strict such ac­tiv­ity in fu­ture, or clauses to that ef­fect be­com­ing a sta­ple of free trade deals, would be a bet­ter tar­geted way to pre­vent th­ese de­struc­tive acts than dou­bling-down on “ev­ery coun­try for it­self.”

As a Make UK spokesman made clear on Pro­ject De­fend, “we need ready ac­cess to raw ma­te­ri­als and com­po­nents, many of which are not found in the UK, and also pref­er­en­tial ac­cess to key ex­port mar­kets to make pro­duc­tion at scale vi­able.”

So, yes, by all means let the Gov­ern­ment re­visit our stock­piles, re­view reg­u­la­tions that stop man­u­fac­tur­ers adapt­ing their fa­cil­i­ties, and re­move trade bar­ri­ers that re­strict sup­ply di­ver­sity.

But let’s not de­lude our­selves into think­ing that ac­tive gov­ern­ment reshoring of sup­ply chains will shield us from global in­ter­dic­tion or, in­deed, make us more pros­per­ous.

The Gov­ern­ment wants to en­cour­age do­mes­tic pro­duc­tion of masks, face shields, gloves and other PPE but global trade is the best way for­ward

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