The coronavirus outbreak is all the rage right now. Across the globe, people are concerned over the spread and potential threat of this virus. China, where the virus originated, has been hit hard by this epidemic, but that did not stop the Chinese government from rattling political sabers. A recent article in Xinhua, the state-run media agency, suggested that China could impose strict controls on pharmaceutical exports essentially denying Americans access to drugs to fight the coronavirus and perhaps other diseases. This threat exposes how dangerously dependent the United States has become on China to supply the nation with certain goods. It also exposes a pertinent problem with free trade theory.
Since at least the days of Adam Smith, protectionism (where governments interfere with the economy and trade to protect local businesses and manufacturing from international competition) has been chided as economically harmful. Prices of goods go up due to import taxes and local production, or people are denied access to those goods if those goods are not even allowed to come to market. Goods made locally could even be inferior to those made internationally. Further, political tensions are inflamed as nations are forced out of markets and lose business selling their goods. Far better, it is said, that markets be free in the trading, selling, and production of goods and services.
One of the principle ideas behind this viewpoint is comparative advantage. The idea is credited to David Ricardo in his book On the Principles of Political Economy and Taxation. Comparative advantage argues that the production of certain goods should be accomplished by those with the lowest cost margins. If a business or nation produces goods at a higher price, then they will have a harder time selling those goods. Further, other economic opportunities will be lost because of resources spent making these unsellable goods. It is better for businesses and nations to specialize in producing what they are good at and trade for the goods that they are bad at producing.
For example, Apple is good at producing computer technology but bad at growing apples (pun intended). Apple, therefore, should concentrate on producing computer technology and trade for the apples, which the farmers should concentrate on making and trading for other goods. This advantage can also be environmental. France is good at producing wine due to it’s climate and soil. The UK is not as good at producing wine due to its climate and soil. The UK should not waste resources on making wine and should trade with France instead. By following this path, Ricardo argues, both businesses and nations are made better economically. What does one do, however, when faced with the offshoring of production by business due to more favorable labor markets overseas? If one nation has lower labor costs for goods, should we not seek to have those goods produced overseas rather than in our own country so as to reap the advantage of lower cost? Ricardo argues that most business people will be satisfied with a low rate of profit in their own country rather than seeking to increase their profits by moving their industries overseas. He also contends that capital is functionally immobile. One, therefore, should not worry about offshoring because it either will not occur or will only occur to a small degree.
Obviously, Ricardo is wrong on the last point. The offshoring of goods overseas has been ever increasing since the arrival of the digital age, something Ricardo could not have anticipated. A prime example is a company like Apple who has moved production and capital overseas in order to take advantage of lower labor costs in other countries, like China. This offshoring has led to a decrease in goods manufactured in the United States and an increase in reliance on a nation like China to manufacture goods for us. According to comparative advantage, this situation should be a good, advantageous thing, but is it?
Suppose that Nation A either is not good at growing food or simply does not have the environmental resources to grow food well. Nation B, however, has both the skill and the environmental resources to grow food well. According to comparative advantage, Nation A should not waste resources trying to grow food and should import its food from Nation B making both nations better off. The problem is that now Nation A is effectually a slave to Nation B. If Nation A does not do as Nation B bids, then the food stops coming and Nation A starves. The same example can be applied to military items and energy production. By depending on other countries to supply these goods, a nation is placed at a disadvantage. Further, our fallen world implies that nations will happily seize upon such disadvantages.
We are seeing this problem played out when it comes to the coronavirus and the goods needed to fight the pandemic. By relying on China to produce these medical goods, the United States has been placed in a position of disadvantage, which China has made abundantly clear and is apparently willing to exploit. As a result, we are led to question free market dogma. Might the doctrine of comparative advantage be wrong in at least some cases? Might protectionism be correct for at least some “important” industries?
Of course, these questions force us to determine what industries are “important,” and soon everyone is claiming that their particular industry is “important” and in need of protection. Even so, it seems that some industries need to be maintained within a nation in order to preserve that nation’s sovereignty. Perhaps the free market will work this problem out. Perhaps the market will direct the production of goods away from threatening countries to more amenable ones assuming there are ones. Maybe, however, our fallen world should lead us to reconsider protectionism in some industries for the safety and stability of our nation.
https://www.foxnews.com/world/chinese-deny-americans-coronavirus-drugs, accessed March 13,2020.