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Is Pandemic the Death Warrant for Globalism?

It's given populist nationalism a boost

For decades the decided world order has been a liberal internationalism of cooperative relations between countries and free markets in which multinational companies flourished. Emerging market countries

attained a prosperity never before seen, and poverty around the world was dramatically reduced.

But developed countries such as the United States saw manufacturing plant closures, millions of jobs moved offshore, the soaring wealth of the multinational ownership class, and working class wages that, dollar-adjusted, have stagnated for decades.

New leaders riding a wave of populism have traded on the growing discontent of the left-behind and have championed nationalism as the answer. In the U.S., Donald Trump won the presidency on an "America First" platform of building walls to stem immigration and tariffs to curtail imports. What could have played into their hands better than a pandemic? The world shut down and closed its borders. "It is a true gift for them", said the head of a Paris think tank. Is globalization finished?

As Covid-19 spread, countries looked to their own needs. Nationalist leaders saw in the steps to be taken to confront the pandemic the opportunity to extend their grip as they issued orders to shut down unessential businesses, dictated what others are to produce, and imposed quarantine on their people. Once assumed, those powers are unlikely to be relinquished.

The process has pit country against country, threatening in an instant the web of collaboration that had become the norm for most of the world. At least 75 governments banned the export of personal protective gear leaving poor nations who don't manufacture this matériel exposed to the virus. The scramble to find medical equipment led to spats between allies. Outraged Germany called it “modern piracy” and “Wild West tactics” when the U.S. commandeered shipments of face masks headed for Europe. Switzerland upbraided the German ambassador for that country blocking a shipment of 240,000 masks. The French government requisitioned all medical supplies, blocking Valmy SAS of France from honoring an order for a million masks intended for the British health service. America's 3M Company was caught between sides when the Trump administration ordered American companies producing protective wares overseas for overseas customers to ship them instead to the U.S. while China, with the stranglehold it had developed over personal protective gear, had blocked 3M and other American factories from exporting back to the U.S. Even anti-malarial hydroxychloroquine was locked down; Britain banned its export, Hungary banned export of the raw material that makes it and medicines that contain it. A poll had it that 70% of Italians think Germany was trying to “strangle” their country. In another poll, Italian support for leaving the European Union (EU) has almost doubled from 29% late last year to 49% today.

The squabbles must be delighting Vladimir Putin, fitting in nicely with his strategy to sow division between the European Union and NATO allies. Serbia’s president Aleksandar Vucic declared that European solidarity “does not exist”.

dependency

Long opposed to America's trade policies and bearing a particular animus toward China, Mr. Trump has all along wanted to create jobs by bringing manufacturing back to these shores. Along came the pandemic to add to his buy-American message by showing how vulnerable we are in our reliance on other countries for essential supplies. “If we learn anything from this crisis, [it is that] never again should we have to depend on the rest of the world for our essential medicines and counter-measures”, Peter Navarro, one of the president's trade advisers, stridently urged at the beginning of April. His mission is to get American companies to abandon China and he has proposed rules to force the American health care field to buy protective gear and medicines only from U.S. suppliers.

It's not just China that America depends on medically. Robert Zoellick, a former World Bank president, U.S. trade representative, and deputy secretary of state, made the point in a Wall Street Journal op-ed that our primary foreign source for CT systems, hand sanitizer, patient monitors, pulse oximeters, X-ray machines, and even breathing masks are the European Union countries.

But it is China's factories that make 80% percent of the world’s antibiotics. We also depend on China for generic medicines such as penicillin and the active ingredients for a huge number of drugs. Generics account for 90% of all U.S. prescriptions. Most come from India, but India gets 70% of its active ingredients from China.

The percentages could be even higher. The U.S. Court of Appeals for the Federal Circuit ruled in February that compressing foreign ingredients into tablets in the U.S. is all that is needed to satisfy the FDA's country-of-origin requirement as made in the U.S. So these are not counted in the import totals.

Our medical essentials are hooked to the Chinese lifelines, yet at the same time White House relations with the Middle Kingdom have capsized. The hostility has reached the point of a cold war that is becoming hot, with the Trump administration suddenly challenging Chinese usurpation of South China Sea islands and outcrops as "entirely illegal". Imagine China blocking all shipments of antibiotics as retaliation. The pharmaceutical industry has been permitted to put our health and even our medical survival at risk by single-sourcing from an authoritarian country that can turn off vital supplies with the ease of flicking a light switch.

Moreover, China, where profit takes precedence over ethics, has a shoddy record. Are your drugs full strength, or were ingredients adulterated with filler? Are the expensive brand name drugs you take possibly counterfeit, perhaps with the same adulteration? The FDA conducts each year some 3,500 inspections of foreign plants that produce generics but China and India require that almost all visits be announced beforehand, and incredibly we meekly go along with that.

Florida Republican Senator Marco Rubio has been well out in front of the issue. A year ago February he issued a report on China supply chain vulnerability, warning…

“There comes a point where, as a nation, we have to ask ourselves what are the critical goods that you must retain the ability to make even if it’s not the most efficient outcome. I think that’s now right before us.”

Nothing came of it. It took a pandemic to shake sense into the heads of our major corporations that they had better diversify their sources.

Ricardo run amok

David Ricardo was the 18th Century British economist whose theory of "comparative advantage" said that efficiency lies in countries exporting what they do best and importing what others do best. The world has taken that to an extreme. An article in The Economist tells us that

"Even simple products rely on elaborate supply chains. A humble cup of coffee requires 29 firms to collaborate across 18 countries, according to one estimate".

The focus, given the health crisis, has of course been on the medical supply chain. But vulnerability pertains to an endless list of essential products and raw materials. Bloomberg Businessweek cites the example of French automaker PSA. Its 173,000 employees need parts from 6,000 suppliers around the globe to assemble its Citroëns, Peugeots, and Opels, each typically an agglomeration of 4,000 components delivered "just-in-time", which is the Japanese innovation to deliver those components only at the moment they are needed to keep inventory costs at a minimum. But if the chain breaks for any one of those — Covid-19 flare-up shuts down a plant in China, say — the assembly lines halt and a scramble ensues to come up with a substitute. Such is the vulnerability of hyper-efficiency.

Even our military has allowed itself to become exposed. At least an October 2018 report made them aware. Ellen Lord, the Pentagon’s acquisition chief, said in a Journal report that…

"[T]he department had burrowed four or five levels down into the supply chain to uncover weaknesses…There is a large focus on dependency on foreign countries for supply, and China figures very prominently there. I am very concerned that we have secondary sourcing in all of our critical components.”

In all this time the U.S. military has relied on China as the only source for the so-called rare earth minerals needed in its high-tech kit despite knowing that China leverages this vulnerability against the West. Their implicit threat in trade negotiations to choke off supplies has caused the Defense Department to help pay to resuscitate a mine that had been bought out of bankruptcy by the only U.S. company in the rare earth business.

It is not just the West that has seen the light. Japan has set aside $2.2 billion to help its companies move production out of China. The two-year trade war with the U.S. has made it clear even to China that it must accelerate its program to produce everything it needs at home so as not to be dependent on U.S. technology. Its universities disgorge thousands of engineers annually and China has launched a crash program to develop the electronic chips for which it has no substitutes. The Trump administration has promoted "decoupling" by American business to end its reliance on China.

So, is globalization dead?

There will be a closer look at made-in-America but globalization will continue. Some companies — Apple, for example — have moved certain operations to the U.S. But for the most part the reaction has mostly been to look to Vietnam, Malaysia, Myanmar, and other low-cost countries for alternate suppliers. For pharmaceuticals that's not easy. New sources must obtain FDA approval, which can take a couple of years. And those are not likely to be wholesale substitutions that replace China altogether. Companies will seek protective redundancy, but are not eager to abandon trillions in global investments, nor quit the relationships they have developed with trusted foreign producers over the last two decades, nor scuttle their complex supply chains.

This is not to say that a restoration of amicability is likely to break out. A major test will come when the first country devises a successful vaccine. China is on a mission to be the first, eager to display that its technical prowess now leads the world. It has a thousand scientists at work on a vaccine with nine candidates being rushed into trials. The U.S. is doing the same, with trials underway, and has just detected the Russian hacking unit Cozy Bear with trying to steal the research work of ours and other countries.

The World Health Organization (WHO) worries about protectionism, that the lead country will keep it to itself until all its citizens are vaccinated while sickness continues to plague the rest of the world. The New York Times quotes Simon Evenett, an international trade expert, as saying…

“The parties with the deepest pockets will secure these vaccines and medicines, and essentially, much of the developing world will be entirely out of the picture. We will have rationing by price. It will be brutal.”

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