What Covid-19 should have taught us about trade

"One of the things that this crisis has taught us, sir, is that we are dangerously overdependent on a global supply chain for our medicines, like penicillin; our medical supplies, like masks; and our medical equipment, like ventilators." Thus, did Peter Navarro, an influential adviser of US president Donald Trump, draw lessons from the Covid-19 crisis for American trade policy.

This view is seductive to protectionists. But it is wrong. The lesson from the crisis is to be better prepared. Self-sufficiency in “essential products” would not be a good way to achieve this. On the contrary, it would be a costly error.

Attacks on cross-border supply chains should not be viewed in isolation. The latest forecasts from the World Trade Organisation suggest that the collapse in trade now could be far bigger than in response to the 2008 financial crisis. It would be very damaging if policymakers responded to the steep decline in their countries' exports by curbing imports. Yet that is what forced "reshoring" of supply chains means. It would be yet another assault on liberal trade.

Covid-19 brought forth a wave of export restrictions instead. The products covered by these prohibitions and restrictions vary. But most of them focused on medical supplies (face masks and shields, for example) and pharmaceuticals and medical equipment (ventilators, for example).

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These restrictions are legal. But that does not make them wise. In a collection of essays on Covid-19 and Trade Policy, Richard Baldwin of the Graduate Institute in Geneva and Simon Evenett of St Gallen ask: "Should governments react to the health, economic, and trade crises by turning inward?" The answer is: No. "Turning inward won't help today's fight against Covid-19 ... Trade is not the problem; it is part of the solution."

Remember that the problem was not with trade, but rather with a lack of supply. Export restrictions merely reallocate the shortages, by shifting them on to countries with the least capacity. A natural response to this experience is for every country to try to be self-sufficient in every product that might turn out to be relevant. That is what Mr Navarro suggests the US should do.

Economies of scale

Yet businesses would then lose economies of scale, as global markets fragmented. Their capacity to invest in innovation would be reduced. Only the largest and most advanced economies could plausibly seek self-sufficiency in such a wide range of technologies. For all others, this would be a dead end.

More relevant, self-sufficiency is not at all a guarantee of greater security. In his chapter in the book edited by Profs Baldwin and Evenett, Sébastien Miroudot of the OECD distinguishes helpfully between "resilience" and "robustness". The former refers to the ability to return to normal operations after a disruption; the latter to the ability to maintain operations during a crisis.

In a pandemic, the latter is probably the more relevant. It is necessary to have access to essential supplies in a pandemic, though it is also necessary to be able to restore production quickly if some of it is disrupted.

The obvious way to achieve robustness is to diversify suppliers across multiple locations. Producing in one’s own country is not a guarantee of robustness. Any given location might be affected by a pandemic, hurricane, earthquake, flood, strikes, civil unrest or even war. To put every egg in one basket, even the domestic one, is risky.

Robustness in supply can thus be achieved through a mixture of a multiplicity of suppliers with holding stocks of essential products. The possibility of importing increases the potential number of suppliers and possibly the access to surplus stocks, too. Protection, however, concentrates risk domestically, reduces the diversity of potential suppliers and diminishes the pressure of competition and economies of scale.

So far, global supply chains in health products have turned out to be robust. Mr Miroudot notes the ability of South Korea to supply Covid-19 test kits globally. He argues that its ability to expand supply quickly “requires international networks, skilled supply chain managers, reactivity, and agility. This type of experience simply does not come from local production and activities shielded from competition.”

A sensible policy

So what would a sensible policy look like? There would be national and global efforts to identify essential products in the event of various emergencies. There would then be monitoring of relevant supply chains and inventories, both domestic and global.

To achieve this, one would need respected and well-funded national and global bodies working alongside private industry. This should be viewed as a fundamental security concern. The pandemic has, after all, posed a vastly greater threat to security than the military threats governments have been spending trillions of dollars to contain.

In the course of such an effort, countries might seek to identify potential vulnerability to supplies from particular partners. Mutual vulnerability can be a source of stability. But countries might regard some sources as too risky. Yet a shift of supply back home need not be the response. Other possibilities exist.

Trade is a vital part of the global response to a pandemic, including the creation and distribution of the vaccine we need. Trade must also remain a large part of the global economy more broadly. The ability to trade freely augments the diversity, and even reliability, of supply. It also creates a big opportunity.

Covid-19 may indeed reverse the integration of production of past decades. We will regret it greatly if it does. – Copyright The Financial Times Limited 2020