Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
Some new problems have afflicted the economy in the last year. Two examples come from the US: blockages in supply chain logistics and a critical shortage in infant milk formula. One problem applies to the EU even more than to the US: energy scarcity due to sanctions against Russian fossil fuel exports. And one now applies almost everywhere: inflation.
Some have associated these four problems with what is said to be excessive dependence on international trade, that is, with globalization. Deglobalization, fragmentation, reshoring, friend-shoring, decoupling, and resilience have become familiar buzzwords. The feeling is that individual countries would not have been so exposed to shocks if they had been more self-sufficient.
The argument goes beyond observing that private firms have discovered diminishing returns to ever-lengthening supply chains. Protectionist government policies have gained political support — beginning, notably, with Donald Trump’s trade war in 2018. The impression is that trade barriers could help insulate us all from external shocks.
Each of the four problems listed above can in fact be cited as examples where particular trade barriers erected by governments have reduced resilience and where liberalization could partially help remedy the problem. Let us go through them.
- Problem: Bottlenecks in US shipping. Remedy: Repeal the Jones Act, which requires that all shipping between US ports use American carriers and employ crews who are at least 75% American. This legislation was originally passed in 1920, with the intent of enhancing self-sufficiency and national security. But the US maritime industry has not been able to cope with sudden surges like the heightened demand for merchandise imports over the last year, contributing to supply chain delays. Without the Jones Act, American firms could hire foreign-owned vessels to handle the surge (for example, to carry imports from large US hub ports to smaller ports). Logistics would be more resilient.As to bottlenecks in US overland transport, a shortage of truck chassis has been part of the snafu. Imports of chassis from abroad could have helped fill the gap – except that they are impeded by a US tariff (one of the Section 301 tariffs imposed by the Trump Administration, in September 2018). Remedy: roll back the tariff.
- Problem: US infant formula shortage. Remedy: Remove tariffs, “Buy America” rules, and unnecessary administrative barriers that impede imports of baby formula.
Abbott Nutrition, one of only four major US producers of baby formula, recalled its product in February, due to the discovery of traces of bacteria in a factory. Recalls are common. But the resulting acute shortage illustrates how international trade could have helped, if it had been allowed to. There was no shortage of infant formula on international markets. If the US had been open to imports, foreign producers could have made up most of the shortfall. But the US (like some other countries), has serious protectionist barriers against importing dairy products. The barriers include tariffs as well as unnecessarily restrictive administrative hurdles and “buy American” policies that constrain the federal Special Supplemental Program for Women, Infants, and Children (WIC), which distributes half of infant formula consumed in the US. Donald Trump even raised barriers on imports of infant formula from Canada when he renegotiated NAFTA.
The FDA responded to the recent crisis by cutting some red tape, such as labeling requirements, to let in imports temporarily. But these barriers should not be in place in the first place.
One can draw a general conclusion. It is true that exposure to international trade can sometimes be a source of volatility when the shocks arise abroad. For example, Germany’s willful increase in dependence on Russian natural gas over the past ten years, made it highly vulnerable when Russia invaded Ukraine in February. But freedom to trade can also mitigate volatility, when the shock originates domestically, such as the recall of baby formula in February.
- Problem: the EU and US want to substitute renewable energy sources in place of fossil fuels, especially those bought from Russia. Remedy: One policy that could help to bring down further the cost of solar and wind power is to liberalize barriers against the import of solar panels and wind turbines.
On June 6, the Biden Administration announced a 2-year pause on pending new tariffs on solar panel imports. That’s good… for the environment as well as for coping with higher global energy prices. But the US still has the old tariffs.
And so does the EU, where cutting the demand for Russian fossil fuels will be much harder. European imports of components that facilitate renewable energy have apparently been the target of more than half of the “trade defense instruments” in force in the EU. Rolling back tariffs and other barriers against imports of renewable energy equipment would be a step in the right direction.
- Problem: Inflation. Remedy: cut import barriers generally. What is true of truck chassis, infant formula and solar panels is also true of tradable goods in general. Examples include commodities as well as manufactured goods. Tariffs on US imports of softwood lumber from Canada have worsened the rising price of housing construction. Trump’s tariffs on steel and aluminum have raised the prices paid by US firms, which in turn has contributed to the rise in retail prices of nails, automobiles, and the many other industries that use the two metals. A March study from the Peterson Institute estimated that “a feasible package of liberalization could deliver a one-time reduction in consumer price index (CPI) inflation of around 1.3 percentage points, amounting to $797 per US household.”
The Biden administration is reportedly now considering rolling back some of the Trump tariffs, with respect to imports from China in particular, one of the few concrete steps it can take that would immediately help alleviate inflation. The effect on inflation will turn out to be less than the 1.3 % estimate, because the full package will not be adopted. But it would be a step in the right direction.
To be sure, trade liberalization would not be nearly enough to eliminate inflation. But the lesson remains: openness to trade need not imply an increase in economic volatility but can itself be a source of resilience.
This post written by Jeffrey Frankel.
“Each of the four problems listed above can in fact be cited as examples where particular trade barriers erected by governments have reduced resilience and where liberalization could partially help remedy the problem.”
This is certainly true for the baby formula issue. Of course letting the Big Four supply almost all of US baby formula should have also been a clarion call for anti-trust action.
I don’t like disagreeing with Dr. Frankel because I think he’s an exceptionally good person. But I do feel he kind of failed us not discussing the anti-trust issue more. He also says at one point, “Recalls are common.” and then moves on like he’s shrugging his shoulders. I thought it was guys of Dr. Frankel’s age that are always getting crotchety and saying “America can’t do anything correct anymore” or “Back n my day we got it right the first time”. “Recalls are common” here in the way Dr. Frankel seems to use it is “Recalls are acceptable, and nothing we need to be concerned about”. If W. Edwards Deming was alive, he’d take Dr. Frankel behind the wood shed.
Again, if you chopped off the 5% of Abbot Labs that is in the baby formula/food business, and broke it up into 2-3 companies, this bullsh*t with the recalls would be solved overnight. Because why?? Because they’d know if they didn’t get their shit together they’d be looking for new jobs, not waiting on Abbot Labs friends in the government to bail them out like Hank Paulson and Nancy Pelosi bailed out the TBTF banks.
It’s soft treatment of corporations that got us into the sh*t we are now. New York state treating donald trump like their state mascot for 30+ years. Kind of disappointed in Dr. Frankel on this one.
“Problem: the EU and US want to substitute renewable energy sources in place of fossil fuels, especially those bought from Russia. Remedy: One policy that could help to bring down further the cost of solar and wind power is to liberalize barriers against the import of solar panels and wind turbines.”
An excellent point. Of course this kind of forward looking reasoning is likely to get serious blow back from our barking dogs – CoRev and Bruce Hall. But remember – both are bought and paid for by the Koch Brothers.
Frankel: “The Biden administration is reportedly now considering rolling back some of the Trump tariffs, with respect to imports from China in particular, one of the few concrete steps it can take that would immediately help alleviate inflation.”
We all know the reason this wasn’t done, as it should have, on the first day of the administration — the hard core China hawks in the Biden administration. And backed up by the feckless politicos in the administration who are terrified of the Republican backlash. Perhaps at some point their fear of the inflationistas will exceed their fear of the China hawks, but more likely just continued decision paralysis.
I’m listening to this McKinsey podcast on Supply-Chain Resilience:
https://www.mckinsey.com/business-functions/operations/our-insights/supply-chain-resilience-is-there-a-holy-grail
Catch this headline:
Supply-chain disruptions cost the average organization 45 percent of one year’s profits over the course of a decade. How can businesses manage risk and plan for a more resilient future?
OK even if that is true, isn’t this more like 4.5% per year? I guess 45% just sounds like a BIGGER number. Whoever wrote this has a future in politics!
If you’re to believe many who worked in/at McKinsey and then left (I believe James Kwak is an “alumnus”) McKinsey is jam packed with liars and people who really don’t know much, and McKinsey has some predatory operations to feed off their own clients. Of course I would never say such a impolite thing. I’m sure just like Joel Osteen [ switches to my whisper voice for adult toddlers ] McKinsey does it for Jesus!!!!
When I finished the podcast, I felt like I learned absolutely nothing. The link Jeff Frankel provided on this issue was much more useful.
I was re-reading that comment (which strangely I often do after I hit reply), and I wanted to make clear I am not implicating James Kwak as “a typical McKinsey guy”. James Kwak is anything but a “McKinsey guy”.. James Kwak is probably one of my two favorite bloggers of all time and a stand up human being. But what I wanted to say was, in an early portion of Professor Kwak’s life he was there at McKinsey with first hand experiences there. And some of his thoughts on McKinsey were less than flattering as I recall. I trust 98% of anything James Kwak says about anything (the other 2% would be rare disagreements on subjective/opinion matters). So…… I feel Kwak’s thoughts about McKinsey I would pretty much take to the bank.
Problem with “problem 1”: The problems in the ports could have been solved by not importing so many products from other countries, right? Containers ships would not have been backed up for days to weeks waiting for their turn to unload. The idea that we could take containers from one American city to another via ship would just make the problem worse. The cranes would have to be used to load back containers to (smaller) ships going to other cities, rather than unload those ocean going ships waiting in line to be unloaded. The problems that locked down harbors and factories in China could not deliver products, would seem solved if those products had been made in a country (US) where we determine lock downs. Same goes for solar panels and windmills.
Problem with “problem 2”: The problem was again a lack of backup production facilities in US and could be solved by ensuring that no producer was big enough that if their facilities had to be shut down, we could not find alternative sources. The solution is not to permanently accept less safe and uncontrolled foreign products, but to allow their temporary import for a few months if the distributed supplier network in US brakes down anyway.
Problem with “problem 3”: The short term exhaustion of domestic supply doesn’t happen if there is a robust supply of domestic production. Allowing free imports of government subsidized products goes in the exact opposite direction. It ensures that there is no domestic supply and that you are just as vulnerable to foreign governments politics as they were to Russia.
Problem with “problem 4”: Inflation is not about the absolute long-term price of products, its about the change in prices. If all prices were doubled one year and then remained completely the same for the next 10 years, we would have 100% inflation the first year and then no inflation for the next 10 years. The cost of sourcing from more expensive domestic suppliers is inflationary in the short term – but have a lot of much more important positive effects on economic growth. The consumer class who keeps this economy growing (70% of GDP) need robust and growing incomes – cheep imported shit doesn’t provide that in the long run.
It seem that your contorted “solutions” have the one common denominator that they screw the hard working people of this country, while at the same time pumping shitloads of money into the pockets of the rich.
“Problem with “problem 2”: The problem was again a lack of backup production facilities in US and could be solved by ensuring that no producer was big enough that if their facilities had to be shut down, we could not find alternative sources.” Agree – which is my anti-trust point.
‘The solution is not to permanently accept less safe and uncontrolled foreign products’
I’m sorry but the European producers are very safe – maybe safer than their American counterparts.
“Problem with “problem 4”: Inflation is not about the absolute long-term price of products, its about the change in prices. If all prices were doubled one year and then remained completely the same for the next 10 years, we would have 100% inflation the first year and then no inflation for the next 10 years.”
Now this is a great point – one which JohnH needs to read over and over.
“It seem that your contorted “solutions” have the one common denominator that they screw the hard working people of this country, while at the same time pumping shitloads of money into the pockets of the rich.”
Agree we disagree again. But I’ll let Dr. Frankel reply to this standard defense of US oligopolies.
GLOBALIZATION AND RESILIENCE by PRACHI MISHRA, ANTONIO SPILIMBERGO
https://www.imf.org/en/Publications/fandd/issues/2022/analytical-series/Globalization-Resilience-Mishra-Spilimbergo?utm_medium=email&utm_source=govdelivery
One of Dr. Frankel’s links. A must read!
There is another problem in the infant formula market due to government policy. States generally identity a single infant formula provider for WIC programs. Stores pretty much always stock that brand, so that the public sees it more than any other. Big marketing advantage to a single manufacturer. To make matters worse, a bunch of states have banded together to order formula – 21 states, if memory serves – so that one manufacturer has a marketing advantage across much of the country. This is one of the factors which has driven concentration in U.S. production of formula. It’s an example of putting cost saving over resilience and over anti-trust concerns.
“Remedy: One policy that could help to bring down further the cost of solar and wind power is to liberalize barriers against the import of solar panels and wind turbines.”
In case of windpower you have actually the situation that both, the USA and Europe, have large domestic producers, China does not play an role in these two markets and the trade with wind turbines between the USA and Europe is not hampered very much. Here scale effects as a result of a secure investment environment are more important IMHO. E.g. stupid inactivity of the German government in 2019 did hurt the German green economy more than some international trade issues.
The PV situation is more interesting as many modules are actually produced in China. However, covid did a lot of damage and you may get as customer modules but not inverters. As the production runs mostly on German machinery, the alternative would be to get the production back, when I am interested in resilence.
The next issue is of course red tape in the USA. With the same Chinese modules you get cheaper electricity in Europe than in the USA despite better insolation in the USA.