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“Globalization is almost dead. Free trade is almost dead”, according to the Taiwanese semiconductor king, Morris Chang. He has a point. Many seem to have concluded that the pandemic revealed how vulnerable global supply chains are, and geopolitical tensions between China and the US leave little space for ideals of an open world economy. As a result, governments from DC and Brussels to New Delhi and Beijing, are turning towards active industrial policy and protectionist trade policies.
It is not an unusual historical phenomenon that a sense of an increasingly dangerous and unpredictable world results in calls for government control and protection, but that does not mean that such actions would help us deal with the crisis. It does not even mean that free trade did indeed fail. On the contrary, when we look at how markets have dealt with recent shocks, it looks more like a success story.
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The popular narrative is that we could not acquire the protective equipment we needed during the pandemic because we had offshored manufacturing capacity. But in fact, it was trade that saved us. Even countries with an abundance of factories suited to the task needed outside supply when demand for medical supplies increased astronomically. China had to import about two billion face masks and 400 million other forms of protective equipment to meet the first outbreak in Wuhan. If not even China is self-sufficient, what kind of excess capacity do critics of offshoring want us to have?
And then, as the virus moved westward, Europeans could buy from the Asian factories that had now started reopening. In March 2020, EU countries’ imports of protective clothing from other EU countries fell by 25 percent – for a period, all European states wanted to seize everything they came across themselves. What saved hospitals from even worse shortages was that imports from countries outside the EU increased by 44 percent.
Putting all your eggs in the same friendly, geographical basket is reckless
In March 2020, major European countries implemented bans on exports of personal protective equipment to other EU countries. There were even examples where such goods sent through their country by third parties were confiscated. Given this situation, it was quite essential that neighbouring countries could instead turn to Asian exporters like China. This was not because China was a better friend and a closer geopolitical ally, but for the simple reason that China is far away and so is less likely to suffer from the same shortage at the same time. Putting all your eggs in the same friendly, geographical basket is reckless.
Other parts of the global economy also adapted remarkably well to the pandemic. When the virus and the lockdowns shut down the world, businesses suddenly lacked workers, intermediary goods and even some old trade routes. But they managed to tweak production and rebuild supply chains in real time to keep food on our shelves and reduce the devastating shortages everyone expected.
Who adapted the quickest? Counter-intuitively, a study of Indian businesses reveals that those with complex supply-chains did. They have more options, are used to looking for alternatives and can always find suppliers from places that are not under lockdown at a particular moment.
Repatriating production in order to manufacture the important things we need ourselves might sound safe, but problems – regardless of whether it is war, natural disasters or epidemics –usually affect a certain geographical area at a particular time. If we have concentrated production to this region, it is game over when we are hit and need it most. Just look at the US which has repatriated the production of infant formula with tariffs and regulations. Then all it took was trouble in a single factory in the spring of 2022 to trigger a national shortage.
Yes, we lacked semiconductors during the pandemic, but that wasn't due to unreliable suppliers – more semiconductors were being produced and exported than ever before. It was instead due to accelerated demand when everyone suddenly had to manage work, education and entertainment from home, and it takes a while to scale up production, which companies feverishly did for purely commercial reasons.
To me, the experience of the pandemic does not look like the failure of globalisation, but more as its triumph
That is why the new active industrial policy is an answer to a question that the world economy has not asked. When governments respond with gigantic subsidies to semiconductor producers, it does not lead to increased supply yesterday, when we needed it, but to overproduction tomorrow.
To me, the experience of the pandemic does not look like the failure of globalisation, but more as its triumph. And this even without considering the vaccine that made it possible to open the world again so soon. The first company to present a safe and reliable Covid-19 vaccine was the US company Pfizer, in cooperation with a German biotech company founded and led by children of Turkish immigrants.
The importance of a global infrastructure was revealed when the air traffic between the continents was banned and research could only continue because Pfizer had corporate jets, in which they could send genetic material across the Atlantic. This vaccine alone is produced with 280 different materials and components, produced by 86 suppliers from 19 different countries.
The American transcendentalist philosopher and poet Henry David Thoreau got it right when he wrote in 1849 that trade and commerce seem to be made of rubber, because they always “manage to bounce over the obstacles which legislators are continually putting in their way”.
During the pandemic, trade and commerce managed, yet again. It is a dark irony that legislators react by putting even more obstacles in their way and make adaptation to the next crisis more difficult.
Access the full book here: The Capitalist Manifesto: Why the Global Free Market Will Save the World
Marx and Engels were right when they observed in The Communist Manifesto that free markets had in a short time created greater prosperity and more technological innovation than all previous generations combined. A century and a half later, all the evidence shows that capitalism has lifted millions from hunger and poverty.
To learn more, check out: Deglobalisation? The reorganisation of global value chains in a changing world
New evidence is presented on the evolution of global value chains (GVCs) since the Great Financial Crisis. Drawing on novel OECD inter-country input-output tables in previous year’s prices, it shows there was no general trend towards deglobalisation in the period up to 2020. The fragmentation of production remained at a historically high level in 2019 and close to the level of 2011, confirming a stabilisation of the depth of global economic integration. Different trends are observed across economies: in the European Union, the import intensity of production grew before the COVID-19 pandemic, while China increasingly relied on domestic inputs.