#CatoCOVID

Beyond its severe toll on human life, public health, and people’s livelihoods and aspirations, the COVID-19 pandemic has exposed vulnerabilities in routines that we have long assumed were reliable and safe. Out of necessity, we are reconsidering how we work, learn, transact, collaborate, and socialize.

This kind of stock-taking may point us toward new and better ways of doing things—provided we succeed at purging bad ideas in the process. Among the ideas most in need of purging is that the pandemic laid bare the intolerable risks of globalization, which must be reined in once and for all.

Proponents of retrenchment see cross-border trade, investment, and migration not as liberating, life-enhancing, and wealth-creating but as vectors across which a local outbreak became a global pandemic. Moreover, they argue that the pandemic revealed the dangers of relying on foreigners. When the time came for global supply chains to show their mettle by getting protective gear and medical equipment to where it was needed as quickly as possible, foreign governments encouraged hoarding and imposed export restrictions, which created supply shortages in the United States.

There is no denying that contracting and spreading novel viruses is easier in an interconnected global economy. After all, COVID-19 originated abroad and was brought to the United States by visitors and returning Americans engaging in various forms of international trade. But it is also true that the international collaboration that is very much needed to contain and subdue SARS-CoV-19, the virus that causes COVID-19, is made possible by that same interconnectedness.

International trade and cross-border investment produce some degree of reliance and risk, but in policymakers’ rush to indict trade and globalization, they dismiss the enormous benefits that Americans get from participating in the global economy as workers, consumers, producers, and investors. Those benefits would be casualties of a protectionist overreaction that would make us poorer, more vulnerable, and less resilient.

While most Americans favor trade and trade agreements, we have a tendency to assume that we can be self-sufficient and that the United States is big enough to provide everything we need—all our commodities, food, manufactured goods, and services. Americans are easily deluded into thinking we can go it alone because the U.S. economy is the world’s largest. In fact, so big is the U.S. economy that the United States can be the world’s largest trading nation but still be the world’s third least dependent on trade. The value of U.S. goods and services trade (imports plus exports) in 2019 amounted to $5.9 trillion, which was 27.5 percent of U.S. gross domestic product (GDP) of $21.4 trillion. That ratio for China was 38.2 percent last year, and the world average was 59.5 percent.

Indeed, the U.S. economy is big enough that Americans could probably endure autarky longer than people in other countries, but the experience would be profoundly costly and immiserating—something that holds true regardless of the size of the economy. The costs would not purchase more jobs or more security. They would only make us poorer by forcing us to divert resources to produce things that we can currently import more cost effectively. This is the case for small, medium, and large economies. Moreover, 95 percent of the world’s consumers and potential supply chain collaborators live outside the United States. We haven’t come close to realizing the potential benefits of deeper and broader global integration.

Yet, policymakers from both sides of the aisle dangle the goal of national self-sufficiency in response to the alleged scourge of globalization. Many seem amenable to top-down edicts to promote self-sufficiency by making international trade and collaboration more expensive. The Trump administration, the Biden campaign, and congressional leadership all support proposals to repatriate supply chains, restrict government procurement spending to goods and services produced domestically, impose tariffs to prevent reliance on imports, and subsidize domestic production of everything from pharmaceutical ingredients to personal protective equipment to semiconductors. Those are all mistaken policy pursuits.

The economic case for free trade has stood strong for nearly two and a half centuries. When individuals are free to focus their productive efforts on what they do best, aggregate output is greater than it would be if everyone attempted to produce all the goods and services each needs or wants. We each specialize so that we can produce more collectively, but specialization is feasible only if people are free to exchange their output.

Without knowing the first thing about making clothing, building houses, growing crops, or treating illnesses, a software engineer can focus exclusively on developing, writing, and debugging code—producing software—and then use some of his output (monetized in the form of a salary) to purchase clothes, food, medical care, and housing. If exchange were not possible, there would be no scope for specialization because everyone would have to allocate their time into suitable increments to try to produce as much of the things they need or want to consume. Imagine how much poorer we would be—in terms of unmet needs and wants—if we had to toil in the tasks of self-sufficiency every day.

Pandemic or not, these facts make the irrefutable economic case for free and inclusive trade. We trade to enable us to specialize. We specialize so that we can produce more in the aggregate. We produce more so that we can consume and save more. Expanding trade across international borders to include more people and enable economies of scale in production is the wellspring of wealth creation and higher living standards.

Trade is an economic endeavor; trade policy—in contrast—is very much a political exercise. The latter is more concerned with how the larger pie created through trade gets divided. Sometimes those political efforts lead to trade barriers, which end up reducing the size of the pie.

Of course, expanding trade isn’t entirely risk-free. Trade means interdependence, which implies reliance on others for certain goods and services. Protectionists and nationalists rarely pass on the opportunity to portray imports as constituting a dangerous reliance on foreign sources—a risk to national security. The pandemic has provided them a fresh excuse for an old argument.

In cases where trade may present legitimate risks to public health or our security, it may be prudent to consider measures that may reduce the risk, including trade restrictions. But we must remember that in addition to the immediate costs of those measures are the unseen, longer-term costs. When we restrict trade, we specialize less, produce less, and consume and save less. We become poorer.

COVID-19 hit when international trade and other aspects of globalization were already under sustained attack from the ideological left and right. The left sees globalization as multinational businesses gaming the system, running roughshod over democratic governance, and limiting the scope for domestic policy and regulatory experimentation. The right sees globalization as an invitation to overreaching global government to bleed America’s national sovereignty. In both cases, the concern is about loss of local control. Sometimes that concern is disingenuous. After all, blaming imports, outsourcing, and foreigners for the country’s home-grown economic and social problems is a time-tested tactic of U.S. politicians. It’s a tactic that’s been elevated to an art form in President Trump’s nationalist “America First” gospel, which borrows heavily from the protectionist hymnals of the left.

Our COVID-19 experience counsels that we develop proactive and prudent public health measures to reduce the likelihood of massive transmissions of deadly viruses, but it makes no case for global retrenchment. If the risks of relying on foreign firms for critical medical supplies and equipment are too much to bear, then diversification of sourcing may be a reasonable response. Diversification is the optimal response to uncertainty. That said, claims that the United States is too dependent on China or anyone else for items necessary to secure public health and national security are vastly overblown. Regardless, using laws and regulations to compel repatriation of supply chains is not diversification. It is a textbook example of putting all eggs in one basket.

Protectionists and nationalists have seized upon the pandemic as an opportunity to portray globalization as the culmination of years of promiscuous policies—comeuppance for U.S. internationalists who sold out America and “shipped jobs overseas.” The pandemic, in this telling, is the final straw and a ripe opportunity to right the wrongs of the past few decades. Central to their story are fallacies and misunderstandings about the nature of trade and whom it benefits.

Protectionists and nationalists portray trade as a zero-sum competition between “Us” and “Them” and argue that we are losing the game. They see exports as Team America’s points, imports as the foreign teams’ points, the trade account as the scoreboard, and the deficit on that scoreboard as proof that the United States is losing at trade.

Of course, trade is not a zero-sum game. National trade statistics reflect the aggregated daily decisions of millions of people, who exchange on terms that both parties find acceptable: the definition of win-win. But protectionists claim that purchasing imports constitutes leakage in the economy. They say that dollars that could have been spent domestically to support U.S. workers and the U.S. economy are instead diverted abroad at great cost. Cheaper foreign goods, they argue, may provide some short-term satisfaction to the consumer, but they subvert the U.S. economy.

Buying cheap T‑shirts, they moralize, may save you a couple dollars but cannot be justified when it causes fellow Americans to lose their jobs. But that logic reflects an attenuated understanding of how trade works. Lower prices are not the objective of international trade. Rather, lower prices are the transmission mechanism through which trade’s benefits are delivered. When consumers can buy cheaper T‑shirts, they have more resources to purchase other products and services or to save, which funds innovation and entrepreneurship and underpins economic growth and wealth creation. The process explains how a new business in Texas gets a loan and begins operating some 6–18 months after a T‑shirt factory shutters in Georgia, even though the resources for the startup aren’t easily traced to the elimination of tariffs on clothing. Meanwhile, the dollars sent abroad to purchase imports always find their way back into the U.S. economy via foreigners’ purchases of U.S. exports and assets, which both underpin economic growth and job creation in the United States.

Without access to output from the rest of the world, Americans would suffer lower real incomes and consume and save less. Before long, the reduced spending and savings would retard innovation and the emergence of new, dynamic firms to challenge incumbents, which is essential to replenishing the economy. It is this creation that justifies the destruction of the T‑shirt jobs.

Another article of faith among those who argue for supply chain repatriation and import substitution is that trade and globalization killed U.S. manufacturing. Regarding the COVID-19 pandemic, they say that requiring the production of pharmaceutical ingredients and critical medical supplies stateside would give U.S. manufacturing the shot in the arm it needs. But that idea is wrong.

U.S. manufacturing has thrived during recent decades of increased openness to trade and cross-border investment. Excepting cyclical and pandemic-induced recessions, real manufacturing output reaches new heights almost every year. In 1953, when the manufacturing sector’s share of U.S. GDP was at its highest (28.1 percent), total manufacturing value-added amounted to $110 billion. Today, manufacturing’s $2.4 trillion in value-added accounts for only 11 percent of U.S. GDP. In other words, the manufacturing sector is creating more value—six times more value in real terms—today, when it is much less important to the economy, than it did when manufacturing was the driver of the economy. And it is achieving that level of output with a manufacturing workforce that is 60 percent its 1979 peak size of 19.4 million workers.

Another commonly invoked myth is that trade disproportionately benefits big business and the rich, widening the gap between large and small businesses and between higher- and lower-income households. However, the facts show the opposite. Trade—and measures that liberalize trade—disproportionately benefit small over large businesses and lower-income over higher-income consumers.

The burdens of tariffs, regulations, and other protectionist measures are greater on small businesses than on large ones. The cost of absorbing tariffs and having internal procedures and personnel to deal with such administrative burdens constitutes a higher share of a small company’s total operating costs. What may be a minor speed bump for large companies can be a significant imposition on small firms. This burden impairs the ability of small companies to gain footholds to effectively challenge large incumbents. For capitalism to function properly, new, small, dynamic enterprises must be able to challenge entrenched behemoths and their old ways of doing business. Today’s startups are tomorrow’s national champions.

Meanwhile, lower-income households spend higher proportions of their budgets on goods than do higher-income households, whose consumption spending tilts more toward services. Not only do people with lower incomes spend more on goods, but they also spend more on imported goods. And, although U.S. tariffs are relatively low on average, they are especially high on life’s basic necessities—food, clothing, shoes, housewares, and building materials. Trade protectionism is a deeply regressive form of taxation, so the pain of global retrenchment is felt especially deeply by people at the lower end of the income and wealth scales.

A lot of anti-globalization sentiment has been directed toward the rules-based international trading system. At the core of this system is the World Trade Organization (WTO), with a growing number of bilateral and regional trade agreements spiraling around it. Complaints about the system range from assertions that it is too powerful and intrudes too much into areas of national autonomy to arguments that it is hopelessly ineffective and has been unable to accomplish much in recent years. It gets criticized for doing too much and too little. Much of the criticism reflects widespread misunderstanding about what the system does and does not do.

Some critics call the system “hyperglobalization” run amok, asserting that trade rules tie the hands of domestic policymakers. Many on the left allege that national and local governments are forced to adhere to pro-market global rules that require openness, encroach into domestic “policy space,” and cause a “regulatory chill.”

Similar complaints about loss of domestic sovereignty come from the right. But criticisms of the global trading system from people such as Pat Buchanan, Jeff Sessions, and Josh Hawley tend to focus not on the crowding out of domestic capacity to engage in regulatory experimentation but on its alleged anti-American bias and its abiding, ultimate objective to ensnare the United States in global government.

Whether starting from the left or the right, reaching that conclusion requires a fundamental misunderstanding of the existing international trade rules. The WTO system of adjudication has only limited power over domestic laws and regulations, with the ultimate decision about how to respond to findings that a law or regulation violates WTO rules being left up to national governments, leaving them plenty of sovereignty over domestic policy.

Unfortunately, even WTO proponents who understand how the system works sometimes contribute to the backlash against globalization by advocating the extension of “trade rules” into areas where they don’t belong. They figure that the rules have worked elsewhere so why not apply them here? But insisting on rules that bridge every cultural difference and address every social ill is inevitably going to foment opposition. One can push too far and too fast, as the European Union found with Brexit.

Another bipartisan myth holds that outsourcing hurts the U.S. economy and its workforce. By “shipping jobs overseas,” businesses are depriving U.S. workers of opportunities, the U.S. economy of value-added, and the federal and local governments of tax revenues. However, outsourcing typically augments domestic production. Rather than a substitute for domestic production—a zero-sum game in which a factory shutters in Ohio and relocates to Mexico to produce for export back to the United States—outsourcing is usually a complement to domestic production. By outsourcing, businesses free up new resources that often lead to new investment, job creation, and output at home.

Just as competition empowers consumers to spend less on products and services, which frees up resources that create wealth, businesses availing themselves of alternative production models are empowered to produce at lower costs, which likewise frees up resources that create wealth. Detractors assert that this outsourcing of production follows the pattern of a “race to the bottom” in which U.S. investment seeks out locations where wages are cheap and labor, environmental, product-safety, and other regulations are weak or nonexistent. But reality doesn’t hew to this cliché.

Globalization wasn’t preordained. Nor was it the product of some binary decision. Nobody consciously flipped on the globalization switch. Globalization happened gradually, as the aggregate sum of millions of individual decisions enabled and shaped by technological, political, economic, and demographic changes.

Innovations leading to dramatic declines in the costs of communication and transportation, the fall of the Soviet Union, China’s economic reforms, the worldwide easing of restrictions on trade and capital flows, improvements in educational attainment, the proliferation of manufacturing skills, and democratization and other forms of political liberalization all served to create new opportunities for international cooperation and collaboration. Globalization happened as the world’s producers responded to the growing demand of the world’s awakening consumer classes, who sought more choices, better quality, and lower prices. Producers, likewise, sought better options and explored new, more cost-effective ways to meet that growing demand. The global supply chains that emerged were the result of a confluence of factors shaping millions of investment and production-location decisions.

Among those factors are indeed wages and the regulatory environment but also skills of the workforce, access to transportation infrastructure, quality of communications infrastructure, tariffs, customs clearance procedures, other trade barriers, proximity to domestic and foreign markets, stability of the economic and political climates, risk of asset expropriation, respect for the rule of law, public health, and so on. It is the total cost—from a product’s inception to its consumption—that matters.

The decades-long trend toward increasing production in accordance with the supply chain model indicates that businesses in many different industries find the benefits to outweigh the costs. It stands to reason that the risk of supply chain disruption due to public health crises will be assigned a higher probability and weighted more heavily going forward than was the case in the past. In other words, businesses and individuals don’t need governments to artificially raise the costs of particular options to signal higher risks when those risks—and their costs—are already taken into account.

Less risk averse businesses likely will make modest adjustments to their calculations and subsequent investment and production decisions, while more risk averse entities may repatriate their supply chains entirely. Risk, risk tolerance, and the array of available options to mitigate risk vary by industry and firm. Overriding the diversity of production decisions of thousands of businesses with different risk tolerances by compelling the repatriation of supply chains through legislation or executive fiat would be enormously shortsighted and costly.

The COVID-19 pandemic has highlighted some of the risks that Americans face in an interdependent global economy. Longtime critics of globalization and trade have exploited these risks and fears to recycle their arguments against the world trading system. But their arguments are no more compelling now than they were before.

Despite current threats of a protectionist overreaction, prospects for a deeper and broader form of globalization look strong. The pandemic has actually facilitated globalization by encouraging us to find new reasons and ways to stay in touch. Cooperating in the development of procedures and techniques; sharing research, insights, and technology; and collaborating with people in other countries who are working on the same problems are intuitively preferable to working on these matters in isolation. The proven dependability of broadband connectivity and communications technologies means that face-to-face contact may not be as important as it once was, which is likely to translate into reduced demand for domestic and international travel, public transportation, office buildings, schools, other structures meant to accommodate large gatherings, and many other traditional activities that entail close personal contact. But that means that the time may be now for a dramatic shift in the supply and demand for international trade in services that can be delivered over the internet. Services in high demand that can be performed remotely and are ripe for competition, such as education and medicine, are likely to become much more popular.