Seldom does a day go by lately without politicians and pundits in countries all over the world calling for re-establishing their manufacturing base to avoid the vulnerabilities exposed in the wake of Covid-19.
But the process of moving essential supplies back (or closer) to home is easier said than done: Reassessing capacity-planning strategies on the grounds of national security, re-domiciling supply lines or reviving home-grown industry all entails significant geopolitical ruptures with the patterns that have formed for the past 50 years.
The process requires a fusion of old ideas projected into new technological capacities, such as automation and quantum computing, and a design that promotes a continuum of stability and cooperation from the old order. And while every nation will certainly think of itself first, it would be suicidal not to think outside of one’s borders, starting with regionalization.
So where is a nation-state in 2020 going to start with this transition? Where is the multilateral red tape?
Regarding the World Trade Organization specifically, Trade-Related Investment Measures, or TRIMs for short, must be abrogated if countries are serious about re-establishing domestic manufacturing capability.
These are regulations that explicitly prohibit local-content requirements, prioritization of domestic firms for public-works procurement, foreign-exchange restrictions (which are particularly important for emerging economies now totally reliant on dollar funding access by the US Federal Reserve), and export restrictions.
As TRIMs are annexes to the main WTO accord, they can be abrogated without stepping outside the bounds of the main agreement itself, which means that their elimination doesn’t necessarily presage a return to some kind unregulated law of the jungle with respect to global trade.
During the current pandemic, virtually all of these provisions, especially the export restrictions, are routinely broken, as every nation scrambles for vitally needed medical supplies. Yet the world’s global trading system has not collapsed into a total free-for-all.
It’s also clear that today’s trade and manufacturing disruptions are not unique to the Covid-19 crisis.
As Harvard Business School professor Willy Shih has argued, “the current pandemic is not the only black-swan event of the last 15 years. Arguably there have been several – including the 2008 financial crisis, the 2011 Tohoku East Japan earthquake and tsunami, the flooding in Thailand, and the US-China trade war” – they may be forgotten now, but in the midst of each of those crises were many reports about critical supply shortages.
What these disruptions do illustrate is that a country that has a deeply embedded manufacturing sector can promptly shift production priorities to alleviate shortages better than a country whose limited manufacturing capability is held hostage to the provision of offshore specialists.
Regionalization or re-domiciling would likely go some ways toward mitigating this problem, as would the creation of strategic stockpiles, as we have today in the oil markets (even though the challenges in crude today are ones of oversupply and collapsing demand, rather than critical shortages).
By the same token, countries such as Japan and Germany have demonstrated that a modern, well-developed economy needn’t foist an exploitative manufacturing process on the developing world on the grounds of low-cost labor alone.
Even the US has learned this lesson in the past: just look at Sematech, a government-industry consortium successfully created in the 1980s to revitalize the American semiconductor industry (where the United States has now re-established its global dominance). An example even more germane to the current pandemic is a new ventilator 100% developed in New York in less than a month.
Even assuming a new trade framework that facilitates local-content requirements and other measures to enhance the revitalization of manufacturing in developed economies, these countries will also have to embrace a higher degree of increased automation in the workforce, Mark Cuban is the latest business leader to argue. Automation, however, need not be antithetical to allocating wealth to workers and the larger public.
Machines can either replace labor totally (for example, washing machines replacing domestic labor), or they can complement labor, allowing one worker to be more productive (partly robotic, partly human assembly lines). Jobs (or unpaid household labor) are lost in both cases, but the mechanisms are different. One is pure labor substitution; the other is productivity and labor enhancing.
In order to maximize the benefits of automation, a key consideration is re-establishing the linkage between real wages and labor productivity, which has been largely severed in the past 40 years, as business’ attacks on labor and unionization intensified. If productivity-lowered prices give consumers more discretionary income and they spend it on labor-consuming services, there will be new jobs in labor-intensive sectors (or household activities) that can’t be automated.
The other policy solution lies with local content provisions in which countries would be allowed local-content requirements (LCRs) for the industries it wants ranging from zero to 100% (100 representing the highest military or economic importance). The rest of the world can compete for the remaining share of the national/bloc market.
Free-trade theologians will no doubt rebel, but the virtue of this idea is that it reduces the incentive for mercantilism precisely because LCRs make it impossible to drive your trading partner out of a desired industry by dumping.
How would this all look in practice? Consider a Japanese-style model, with suppliers clustered in a tight geographical area to supply chains connected by dependable geographically proximate and predictable logistics links. That is vastly superior to a “just-in-time” inventory system featuring multinational firms that squeeze inventory out of geographically remote supply chains that are today proving more unpredictable from a geopolitical standpoint.
At a minimum, let’s stop the pretense that globalization in and of itself constitutes some kind of panacea for enhanced global cooperation. That was not true in 1914 (when we reached the last high-water mark in globalization), nor is it true today.
We should consider the alternative: namely, some degree of national self-sufficiency, strategic stockpiles, and regionalization, all of which might do better to diminish international tensions if it means less scrambling around and fighting one another for ventilators or surgical masks.
This article was produced by Economy for All, a project of the Independent Media Institute, which provided it to Asia Times.