COVID-19 has shown us that an affluent society does not have enough masks or ventilators to serve its own people. Even months after the pandemic began, we continue to struggle to manufacture sufficient life-saving equipment. The problem is chronic.
Even as countries embark on programs to onshore production and otherwise diversify supply chains, there is a surprising lack of curiosity about why we are in this position. And if we don't figure out why we ended up in this position in the first place, we are at risk of ending up in this position again.
If we examine the shortages of masks and ventilators, we see a common denominator: anticompetitive behavior. It is anticompetitive behavior by firms, but it is also anticompetitive behavior by foreign governments.
Firms are motivated to maximize profits. Domestic producers, seeking to eliminate rivals, consolidate production, which takes capacity offline. That's the anticompetitive behavior by firms that contributes to the overall shortage of supply.
Governments, aware of this profit-maximizing priority, deploy a range of cost suppression strategies to make themselves the low cost producer. These strategies include repressing labor and environmental rights; creating tax havens; manipulating currency; and providing subsidies of such scope and magnitude as to drive out competition.
This anticompetitive alliance is the product of modern-day laissez-faire economic policy. Under a laissez-faire approach, the government's purpose is to protect capital, not competition. The market is trusted to resolve itself. Domestic laissez-faire policy means the government does not intervene when companies merge and eliminate capacity; global laissez-faire policy means the government does not intervene when companies offshore what's left.
New Dealers understood the risks associated with a laissez-faire model and rejected it in favor of government intervention to protect competition itself. They even sought to embed this approach – free enterprise – in the multilateral trading regime they devised after World War II. Today, we are taught that the founders of the system believed that tariff cuts alone would produce peace and prosperity, but this is a flawed take on history. The visionaries who designed the system created a suite of rules designed to establish fair competition among nations. These rules became the Havana Charter, signed in 1948 by over 50 countries. When famous British economist John Maynard Keynes saw the American proposal, he hailed it as providing a blueprint to end the "disastrous consequences of a laissez-faire system."
But the Havana Charter failed. Here again we have a flawed take on history: we are taught that the Charter failed because Congress was in an isolationist mood. It's not true. The Charter failed because American monopolists killed it. As a result, we defaulted to a laissez-faire global trading system – just the opposite of what the founders believed we needed.
Despite the failure of the Charter, the New Deal philosophy survived domestically for decades, as the government enforced antitrust and antimonopoly laws at home. But laissez-faire proponents lurked, eventually reviving the approach in more modern times in the form of neoliberalism. Once again, the view emerged that government's role was to get out of business' way. This attitude enjoyed full expression in trade policy in the 1990s, including the rules of the World Trade Organization. The WTO is almost exclusively about trade liberalization: it does not protect against anticompetitive inducements to offshore.
The trade community, fossilized in its view that liberalization is the answer to every trade problem, is arguing that the response to COVID-19 should be tariff cuts and the removal of export restraints. This line of thinking betrays the trade community's own lack of understanding of what drives global sourcing. We don't have concentration of supply chains because of tariffs, or export constraints. We have concentration of supply chains because the system itself tolerates anticompetitive behavior.
It even tolerates slavery. China is using forced Uighur laborers to make personal protective equipment for export. The WTO is mum about that, but raps countries on the knuckle for using export restraints to save their own people. Even as the WTO chooses a new leader, the discussion focuses on administrative navel-gazing, like how to force its own judges to follow the rules of the institution. Most of the 7 billion people on the planet do not care about the administrative details of the WTO. They care that they don't have access to life-saving equipment. They care that they are forced to work in buildings that collapse on them. They care that they have to drink water poisoned from industrial pollution.
Yes, the COVID-19 supply shortages are a reflection of a failed global trading system. But not because countries have tariffs and export restraints. It is a failed global trading system because it does not serve the people.
Keynes warned of the disastrous consequences of this kind of system. We're living those consequences now.
Beth Baltzan is a fellow at the Open Markets Institute, recent U.S. WTO litigator under President Obama, former staff member on the Democratic House Ways and Means trade counsel, and author of the recent paper "COVID-19 and the end of laissez-faire globalization."
The views expressed in this article are the author's own.
Uncommon Knowledge
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