The Coronavirus Is Not a Good Argument for Protectionism

Protectionists have been emboldened by the Trump administration’s approach to trade policy, and some are now using COVID-19 as an argument to support their cause. In most cases, it’s not worth responding, but I don’t think of economics columnist Noah Smith as an economic nationalist, so if he is saying things along these lines, I feel like it merits a response. Here’s what he said in his column yesterday:

Offshoring Left the U.S. Unprepared for Coronavirus

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But a new problem threatens to reverse even this tepid progress: a shortage of personal protection equipment. Medical workers who do coronavirus testing need to wear masks, gowns and other items to prevent them from being infected after dealing with large numbers of infected patients. Another problem is a shortage of the cotton swabs used to carry out the tests.

It seems almost unthinkable that shortages of these simple materials could hamstring the medical system of the country with the biggest economy on the planet. Economist and long‐​time policy adviser Larry Summers wondered how this could happen:

The reason is offshoring. Over the years, the U.S. has outsourced the production of items such as masks, mostly to China — which is now reluctant to allocate any of its production capacity to the U.S., given its own needs and the deteriorating relations between the two countries. Making these objects is technologically somewhat challenging, but it’s also a low‐​margin, commoditized business — there’s little in the way of network effects or brand value or patents to yield big profits. So it made sense for the U.S. to focus on higher‐​value things at the beginning and end of the supply chain — medical services that make use of masks, marketing and distribution, and innovation of technologies used to create better masks.

This was an example of thinking on the margin. Economics predicts that businesses decide what to produce based on what makes a little bit more profit. The siren song of marginal profit drew the U.S. relentlessly away from mask production.

The problem is that when the economy suffers a huge shock such as a war or a pandemic, the margin vanishes. The U.S. economy is projected to shrink by 30% or more in the second quarter as a result of the coronavirus, and the necessity of doing mass testing has created an abrupt shift in the demand for protective equipment and swabs. What made economic sense yesterday doesn’t make sense today.

Eventually the U.S. will reconfigure its economy in response to these shocks. Domestic mask and swab factories will open, or existing facilities will be repurposed to make them. But that will take time, and the U.S. needs more testing now. Lockdowns can suppress the virus, but only at great economic cost; as soon as restrictions end and people go back to their jobs, coronavirus will come roaring back unless the country has a strict regime of widespread testing and contact tracing in place. Thus, every day that the economy fails to provide enough masks and swabs is another day that it has to remain in shutdown.

If businesses will always make decisions on the margin, then it’s government’s job to insure the country against big shocks such as pandemics and wars. The U.S. could have used trade barriers and government support to make sure that the entire supply chain for medical equipment stayed in the country. But government action against offshoring has long been stigmatized, including by Summers himself, who in 2012 lambasted offshoring skeptics as “Luddites.”

The coronavirus crisis should cause advocates of unrestricted free trade to rethink their blanket opposition to protectionism. An economy based entirely on far‐​flung supply chains is more profitable in normal times, but when a crisis hits, it can quickly become a liability. Items such as masks and swabs are too crucial to be left to the whims of international markets.

There is a valid but narrow point buried in his argument, but it requires a lot more nuance than what he is offering. It’s true that if you are in the midst of a geopolitical conflict with a particular country, you wouldn’t want to be dependent on them for certain essential products. For example, during World War II, we wouldn’t have wanted to be dependent on Germany for rifles or for penicillin.

So yes, you want to make sure that you are not getting all products that are, in some sense of the term, essential from a single country, which could be the subject of a geopolitical conflict, or could be susceptible to a natural disaster. (You also may want to consider whether it really makes sense to have that geopolitical conflict. There are concerns with China, but they could certainly be handled better than we are currently handling them.)

But that’s a very narrow proposition, and it doesn’t translate into “offshoring left the U.S. unprepared for coronavirus.” It also doesn’t necessitate a rethinking of support for free trade. Rather, it requires a country to take a look at what products are essential for security or public health or some other policy, and to make sure it has a diverse and reliable supply of those products. To be clear, that does not mean “reshoring” all production of those products to the United States. Offshoring has many benefits, and in fact helps ensure a supply of these essential products, because there are risks to having your own country as the sole supplier. We want to have good trading relationships with the rest of the world, because when (inevitably) something goes wrong with our own production, we want to be able to quickly get help from others. We are better off if this manufacturing knowledge is distributed around the world. We just want to make sure that we have sources of supply in countries that we can count on.

So is Noah right that offshoring is to blame here? No. Every country needs to have a plan for ensuring that it can get medical equipment when it needs it. But it’s costly and risky to seek self‐​sufficiency in this production, and it’s better for everyone to maintain a cooperative international approach to making these products.