The Dangerous War On Supply Chains - Financial Times

24/06/2020 The dangerous war on supply chains | Financial Times
Opinion Supply chains

The dangerous war on supply chains
Protectionism in a crisis only concentrates risk domestically and diminishes
economies of scale
MARTIN WOLF
© James Ferguson
Martin Wolf YESTERDAY
“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 Organization 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. (See charts.)
https://www.ft.com/content/e27b0c0c-1893-479b-9ea3-27a81c2506c9?63bac0e6-3d28-36b1-7417-423982f60790 1/7
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).
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.
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.”
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

Latest Coronavirus might seek to identify potential
news 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.
Follow FT's live coverage and Trade is a vital part of the global response
analysis of the global pandemic
to a pandemic, including the creation and
and the rapidly-evolving
distribution of the vaccine we need. Trade
economic crisis here.
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.
martin.wolf@ft.com
Follow Martin Wolf with myFT and on Twitter
Copyright The Financial Times Limited 2020. All rights reserved.

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24/06/2020 The dangerous war on supply chains | Financial Times

Opinion Supply chains

Martin Wolf YESTERDAY

More relevant, self-sufficiency is not at all a guarantee of greater security. In his

In a pandemic, the latter is probably the more relevant. It is necessary to have

The obvious way to achieve robustness is to diversify suppliers across multiple

Robustness in supply can thus be achieved through a mixture of a multiplicity of

In the course of such an effort, countries

Follow Martin Wolf with myFT and on Twitter

Copyright The Financial Times Limited 2020. All rights reserved.

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