The coronavirus pandemic has emboldened advocates of protectionism and deglobalisation, with concerns about lost manufacturing jobs gaining traction. According to trade sceptics, the virus has revealed our vulnerabilities to export restrictions and external shocks. They claim widely distributed supply chains have made economies less self-sufficient, and therefore less resilient.
The alleged solution is to restore existing manufacturing operations and reduce reliance on global trade. In fact, supply chain shocks precipitated by the pandemic have pushed a large number of countries to consider — and in some cases implement — policies that would have seemed inconceivable just a few months ago.
Many nations 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. At this point, there is a real risk that, as businesses rethink their global supply chains, hawkish politicians may try to apply unilateral measures like investment restrictions, export curbs and other protectionist policies.
The truth is that severing global supply chains will not make countries more resilient to future pandemics. According to a simulation across 64 countries, the downturn would have actually been worse with renationalised supply chains than under current levels of trade.
The reason is simple. Eliminating reliance on foreign inputs increases reliance on domestic inputs. Since any national pandemic-related lockdown also affects domestic sectors, there is generally no benefit from renationalising global supply chains.
This would be particularly counterproductive in the case of the pharmaceutical industry. The drug market is served by a diverse array of suppliers from all over the world. Globalisation has enabled the pharmaceutical industry to become a dynamic driver of economic growth in countries such as the UK.
Forcing pharmaceutical companies to rely only on local suppliers would likely expose their operations to greater risk of disruption by prohibiting them from adequately spreading risk. In fact, the current pandemic has actually highlighted the robustness and resilience of the pharmaceutical global supply chain. While most countries have suffered shortages of face masks and household goods, the medicine supply has been almost entirely unaffected.
Now more than ever, we need to encourage global production and distribution of drugs and medical supplies. Public-private partnerships involving large manufacturers, international transportation and logistics firms, governments in both developing and developed countries and international financial institutions will be crucial in scaling up the production of the crucial vaccine.
A central idea in this quest for global immunisation will be portfolio diversification – making sure the vaccine candidates do not all share the same risks. To do that, governments should consider the global vaccine portfolio, as opposed to local candidates only, when deciding which projects to champion.
Ricardo Hausmann, a professor at Harvard and former chief economist at the Inter-American Development Bank, notes that “there’s no smart specialisation, there’s smart diversification.” Rather than shielding local companies from foreign manufacturers, smart industrial policy in the 21st century should embrace the strategy of the three Cs: capacity, connectivity and competition.
This includes policies such as strengthening 5G infrastructure, creating free ports and upskilling workforces and building structures for continuous learning. The old industrial policy paradigm was an instrument to pick up winners (badly named national champions) and make some sectors more profitable at the expense of both taxpayers and consumers. The new industrial policy is an information revelation mechanism to figure out how to increase productivity and boost competitiveness.
Successful industrial policy cuts out the less competitive firms through a process known as export discipline, enabling scarce capital and talent to reallocate from floundering companies to successful ones more quickly. Israel, the “startup nation”, has extensively leveraged export credits to encourage firms to develop internationally competitive manufactured goods. For better or worse, this can lead to industry consolidation, as in the case of South Korea’s large conglomerates. But as market concentration increases, investments in R&D and scaled-up coordination can allow for the emergence of new technologies.
It is worth pointing out that global trade has undoubtedly been a force for good. As countries globalise and receive direct foreign investment, their citizens gain access to a large variety of goods and services, lower prices, more highly paid jobs, improved health and higher overall living standards. Choking global supply chains and making it harder to get medical supplies or life-saving treatments is a terrible idea. This is not the time for protectionist policies that would restrict free trade and stifle innovation.
Long live global supply chains!