There’s also the small problem that automakers primarily need low‐margin commodity chips made by older equipment (not the bleeding‐edge chips/equipment that the U.S. military needs or that the federal government wants to subsidize): “As such, the necessary tools are hard to come by, and the price of old gear on the secondary market ‘has gone through the roof,” according one industry expert.
Finally, Georgetown’s Abraham Newman points out that the U.S.-China trade dispute also reduced global supply of the chips that automakers and other companies need. As he notes, the Trump administration’s “effort to limit Chinese advances in semiconductors” (via restrictions on exports to China’s largest chipmaker SMIC) “took a major producer of semiconductors basically offline as companies avoided using their product” (thus reducing global supply) and caused companies to “hoard chips to evade U.S. sanctions” (thus increasing demand). One can debate whether U.S. tech policy toward China here is warranted, but we should nevertheless be clear‐eyed about its impact—and thus the efficacy of certain alleged “solutions” to the chip shortage.
Why Skepticism About Supply Chain Nationalism Is Warranted
If all of this sounds like a complicated and ever‐evolving situation, it is. And that’s one of several reasons why we should be skeptical of simple solutions like “renationalizing essential supply chains” to achieve economic “resiliency.”
First, self‐sufficiency policies would produce all sorts of distortions. Most notably, there’s the problem of maintaining pandemic‐level capacity in normal times. The USITC calculated that in 2020, for example, the United States used many times the number of N95 masks, medical gowns, surgical masks, and other essential goods that were used in 2019. Maintaining that much excess capacity in times of normal demand is extremely costly (profitability often kicks in at around 80 percent capacity utilization), and running at that level in non‐pandemic times would produce a global glut—exports of which are certain to cause new trade tensions. Indeed, as noted above, we could already be facing a glut of American‐made PPE, and foreign governments are already speaking out about other nations’ pandemic‐era subsidies.
The second problem is U.S. policymakers’ inability to know which products to target both during and after the pandemic. (Hayek’s classic “knowledge problem.”) Ventilators, for example, were on no one’s radar before COVID-19, and then became a hot commodity in March 2020. So the Trump administration invoked the wartime Defense Production Act (DPA) to force domestic manufacturers like GM and GE to make ventilators. (Yay, problem solved!) Only one small hiccup: Doctors subsequently determined that ventilators were not as critical as once thought, yet producers continued to churn them out under government orders, leading to reports of the goods “piling up” in a strategic reserve or being donated to “countries that don’t need or can’t use them.” According to the USITC’s December 2020 report, other DPA‐funded medical goods production won’t come online until late summer or thereafter, when the pandemic may (hopefully) have subsided. Will we permanently subsidize that new capacity?
Regardless, past government interventions and independent company efforts to expand operations or enter the medical goods market—see, for example, Mark Cuban’s new, subsidy‐less generic drug company in Dallas—raise questions as to whether additional government action is really needed or whether the risks that we thought we discovered last year will be with us this year and next. Indeed, by the time U.S. policymakers decide to intervene again in the U.S. market, it will look much different than the one on which they based their decision and will likely change again by the time any government‐supported production comes online. And as China’s failed attempt to restrict “rare earth” minerals hopefully taught us a decade ago, markets don’t just sit still and wait for crises to occur (and they’re moving once again).
Third, future government interventions could have political, rather than economic, motivations. The poster child here is the Trump administration’s doomed subsidies to Kodak, which reportedly resulted from high‐dollar lobbying and an eye toward Trump’s re‐election. But Kodak’s not alone. According to a July 2020 Congressional Research Service report, for example, the Department of Defense invoked the DPA to give hundreds of millions of dollars, appropriated under the CARES Act to fight COVID-19, to politically connected industries (shipbuilding, semiconductors, space‐based defense, aviation, microelectronics, rare earth mining, etc.) that were—at best—tangentially related to the pandemic. The report adds that these and other pandemic‐related DPA actions lacked transparency and accountability, led to the reassignment of one U.S. official, and were opposed by several House committees because they were not, as Congress intended, “reserved for health and medical countermeasures.”
Finally, there is the very real risk that supply chain nationalism would make the United States less, not more, resilient. As I discussed in my recent paper on manufacturing and national security, nationalist policies intended to boost “essential” industries—for steel, ships, machine tools, semiconductors, and other “essential” goods—have a long track record of high costs, high risks, failed objectives, and unintended consequences. In case after case, the protected industries did not emerge stronger or more resilient—in fact, just the opposite.
Furthermore, protectionism often undermines resiliency by weakening a country’s economy and manufacturing sector—a conclusion supported by decades of research on tariffs and other forms of economic nationalism. Economists have come to similar conclusions in the context of COVID-19: A November 2020 analysis, for example, found that the economic costs of “localizing” global supply chains for medical goods would hurt the economy yet also prove unable to insulate countries from a pandemic‐induced economic shock. Manufacturers who used imported inputs fared worse when their supplier markets were hit by COVID-19 but fared better when their own home market was hit. This conclusion echoed an earlier paper, which found that “renationalization” of supply chains would generally not improve a country’s overall economic performance after a global pandemic.
That may sound odd, but it actually makes sense: Reshoring supply chains might insulate U.S. producers and consumers from external shocks like foreign wars or natural disasters, but those same policies amplify shocks that are primarily domestic (not to mention lowering economic growth and output overall). And this very risk just emerged with respect to semiconductors and the recent winter storms in Texas: Several U.S.-based manufacturers were forced to idle production capacity, thus exacerbating the very chip shortage that nationalists have blamed on “globalization.” This also happened in other protected/nationalized sectors during the pandemic, such as pickup trucks (imports of which face a 25 percent tariff), where domestic supply has been shorter than it has been in more open parts of the same industry (e.g., small cars, which only face a 2.5 percent tariff).
By contrast, extensive literature ties trade openness to improved economic performance more broadly. A 2018 paper summarizing the research on the long‐run, overall gains from trade for the United States calculates total average gross domestic product (GDP) gains of 1.1 percent per year due to increased product variety, lower prices, and higher productivity caused by imports and trade‐induced creative destruction. Other studies have shown similar benefits for the U.S. economy.
Overall, the evidence and analysis refute current arguments that economic nationalism would bolster the U.S. industrial base (and thus national resiliency). Instead, American protectionism has been repeatedly found to weaken the U.S. manufacturing sector and the economy more broadly. And in most industries, the best way to prepare for a pandemic is to diversify, not re‐shore, suppliers, while maintaining significant onsite inventories in case of emergency—something multinational companies are already (and unsurprisingly) doing in response to last year’s supply chain chaos. Where those policies prove inadequate, government stockpiles can step in. But in no case is widescale “repatriation” a good idea.
Summing It All Up
Economic openness and global interdependence risk importing economic shocks—including pandemics—into the United States, roiling supply chains and disrupting our lives. However, this same openness can promote stability and improve the nation’s resilience in times of national emergency. Nationalist policies, meanwhile, present a far greater risk to our ability to withstand and respond to economic shocks—even when such policies are implemented on security, rather than purely economic, grounds.
It’s incredible (or depressing), honestly, that these lessons still haven’t been learned by various politicians and pundits over the last year. The vast majority of the hysteria we heard about empty store shelves and the failures of globalization proved meritless—instead reflecting a single, shocking moment in time that markets, companies, and governments mostly addressed in a matter of months (“seemingly out of nowhere”). Today, some of the biggest impediments to our economic recovery are U.S. trade restrictions, not “free market fundamentalism” or whatever.
Meanwhile, Pfizer and BioNTech were quietly working on their miraculous COVID-19 vaccine, leveraging Pfizer’s substantial pre‐existing U.S. manufacturing capacity, multinational research teams stocked with immigrants, global capital markets and supply chains, and a logistics and transportation infrastructure that had developed over decades to deliver those “cheap consumer goods” that the populist punditocracy loves to hate. The companies went from concept to final delivery of millions of vaccine doses in about nine months—just as their management boldly predicted last April. Surely, some state support (e.g., grants for previous mRNA research and vaccine purchase commitments) was involved, but the Trump administration’s contract with Pfizer expressly excluded from government reach R&D, clinical trials, and manufacturing supply chain issues (i.e., “activities that Pfizer and BioNTech have been performing and will continue to perform without use of Government funding”). Thus, even the uber‐nationalist Trump White House realized that government attempts to “nationalize” and micromanage the vaccine’s development and delivery would have delayed—if not thwarted—those processes, costing numerous American lives along the way.
When time was of the essence and success really, really mattered, they just got out of the way. And it worked.
It’s a wonderful lesson—one that policymakers still stuck in April 2020 may never see.
Chart of the Week
“Some economists say a shrinking workforce threatens China’s chances of overtaking the U.S. as the world’s largest economy” (source)