Jeff Rubin is the former chief economist and chief strategist at CIBC World Markets. His forthcoming book, The Expendables: How the Middle Class Got Screwed by Globalization, will be published in August.
The world has been turned upside down. The COVID-19 pandemic has already radically altered vast swaths of society, from human behaviour to health care, politics and economics. The big question is when or if things will return to normal.
Nothing of our past world is more vulnerable than globalization itself, which has been under attack in recent years, particularly by the protectionist policies of U.S. President Donald Trump’s administration. Mr. Trump is up for reelection in November, and the pandemic couldn’t have arrived at a worse time for the Democrats, who once again closed ranks to keep their own populist, Bernie Sanders, from capturing their party’s nomination. But they are confronted with a much tougher challenge than choosing another “electable” candidate, as they did when the party establishment anointed Hillary Clinton back in 2016.
While Joe Biden’s campaign is effectively grounded by physical distancing rules, Mr. Trump is free to hold White House news conferences every day to describe how his administration is saving millions of Americans from contagion. If that’s not a big enough handicap for Democrats, consider how the United States’ struggle to obtain enough vitally needed medical supplies to contain the pandemic seems to be affirming all of the President’s polemics against globalization.
If globalists thought that a Democratic victory in the coming election would mean a return to the open and free markets they so cherish, they were sadly mistaken. Today’s global supply chains now face a far more lethal opponent than simply the most protectionist president since the Second World War and his populist cohorts. As we’ve tragically learned in recent months, not only do goods, capital and technology move seamlessly through our highly interconnected global economy, so do deadly viruses.
Insofar as the disruption of the global economy is concerned, there was no worse place for the COVID-19 pandemic to take root than in Wuhan. The city lies at the epicentre of the de facto factory of the world: China. As the pandemic’s impact brings more and more economies around the world to a standstill, pointing to a global recession of possibly unprecedented proportions, suddenly the appeal of an interconnected and interdependent world economy seems to belong to some distant, bygone era.
Economic disruptions have been transmitted along global supply chains as easily as the virus itself has been passed on through human contact. Vehicle assembly plants in South Korea had to be shut down when the pandemic disrupted the flow of parts from China. Similarly, German car manufacturers found themselves short of parts that came from suddenly quarantined factories in northern Italy. And American customers have had to wait for unfilled orders for Nintendo’s Switch gaming console because a factory in Vietnam can’t access electronic inputs from China.
We can probably go without new cars and Nintendo games for a while, but we can’t go without critical medical supplies when facing a pandemic. Before the novel coronavirus hit, it didn’t matter to most people where masks and ventilators were produced. The modern architecture of free trade and global supply chains is based on the blueprint of comparative advantage that economist David Ricardo outlined in the early 19th century, and it dictates that items are produced in the countries where they can be made at the lowest cost.
As with most manufactured goods in the world these days, this meant in China. But since the COVID-19 crisis hit, people now care plenty when there are suddenly not enough ventilators and masks to go around.
After a pandemic takes hold, you can throw multilateral trade agreements and the global supply chains they facilitate out the window. It’s every country for itself as governments scramble to secure scarce medical supplies. Long-trusted allies turn their backs on each other when it comes to meeting requests for vital equipment. Even different regions within countries compete with each other for scarce national inventories, as has been the case with U.S. states and Canadian provinces.
In March, Taiwan announced it could spare less than 1 per cent of the seven million masks it produces every week for its vital ally and military protector, the United States. The European Union adopted a similar policy – banning the export of masks and other medical equipment to non-EU countries. Initially, Brussels even refused to send them to member countries in dire need that had been hit hardest by the pandemic, such as Italy. So much for the illusion of EU solidarity.
Will the EU even remain viable after the pandemic subsides, or will it be yet another failed experiment in globalization? Closing the fiscal and economic gaps that the pandemic has created may create a chasm between the community’s northern and southern members that can no longer be bridged.
Of course, the biggest mask producer in the world is China, which accounted for half the world’s supply before the world health crisis broke. Since then, the country has increased production twelvefold. By the end of March, factories in China were pumping out 115 million masks a day.
Many of those Chinese factories are making masks under licence to foreign firms. One of them, Montreal-based Medicom, produces three million masks a day at a Shanghai factory. But few of those masks, if any, will make their way to Canadians. The company doesn’t have any manufacturing capacity in Canada, although it now plans to set up a domestic factory to produce masks – but not until July. Like production from U.S. multinational 3M Co.’s mask plants in Shanghai, the Chinese government, not head office back in North America, will decide where Medicom’s masks will be shipped and where they will not.
That’s hardly what Canadian consumers – or those anywhere around the world – have been led to expect from today’s global supply chains. They’ve been told that efficient markets work best for everyone concerned when there are no impediments to the free movement of goods and capital. But when push comes to shove, as it does during a pandemic, economic theory no longer works in your favour. It doesn’t get you a ventilator when you desperately need one.
Of course, China is not alone in strictly controlling where its medical equipment is being sent.
It didn’t take long before Mr. Trump, using his powers under the recently invoked Defense Production Act, took a page out of China’s game plan and ordered 3M to halt all exports of N95 masks from the U.S., including those to Canada, in favour of supplying the American market. While the company manufactures more than a billion masks a year, like Medicom, it doesn’t make any in Canada.
And it’s not just masks and ventilators that governments around the world are attempting to control. The same goes for antibiotics.
In the 1980s, the United States had a far-ranging emergency-response capability, including antibiotics manufacturing capacity spread across the continent. The U.S. produced 70 per cent of the world’s supply. Now, it is dependent on imports from China. North Americans face the same dependency for a wide variety of health-related products, from vitamin C to chemotherapy drugs.
Outsourcing is how yesterday’s global economy worked. But all of a sudden there is a newfound urgency for local sourcing, particularly when it comes to vital medical equipment such as ventilators and supplies of masks and gloves. No one cares any more which country holds comparative advantage in producing medical equipment. You can rest assured that once the pandemic is over, Canada, along with every other country that can afford to do so, will want to become self-reliant in masks and ventilators no matter how much more it costs to produce them at home instead of importing them from some cheap labour market abroad.
In fact, governments around the world are invoking wartime emergency measures to order companies who have never made these products before to start manufacturing them in great volume.
Just as Ford Motor Co. was ordered to assemble bombers during the Second World War, the White House is now commanding the car manufacturer, along with its competitor, General Motors Co., to produce thousands of ventilators.
Coronaviruses don’t care about international trade, but the COVID-19 pandemic has done exactly what Mr. Trump’s 25-per-cent tariffs on US$250-billion of Chinese goods were intended to achieve. The levies, the likes of which we have not seen since the Smoot-Hawley tariffs of the early 1930s, are forcing U.S. companies to repatriate industrial production – and the jobs that went with it – from China and other cheap labour markets.
Will Washington even need punishing double-digit tariffs to accomplish that goal in the post-pandemic economy that will soon emerge? All of a sudden, it won’t be just a protectionist president calling for jobs to come home. Companies will be under pressure from their own shareholders to scrap their global supply chains in favour of local sourcing. And local sourcing means local production by local workers paid at local wage rates – not the low wages paid overseas.
In the space of a fiscal quarter, the pandemic has changed the world, perhaps irrevocably so. When people now think about globalization, they think about billions of individuals forced into self-isolation, or mounting piles of corpses being stored in makeshift morgues, or empty streets and plazas save for some lone stragglers, most of whom are wearing masks and keeping a safe distance from each other. Most of all, they think about the economy they once knew and worked in. Now, the bulk of it is shut down.
What only yesterday were universally recognized accomplishments of globalization have suddenly become its greatest failures. Booming gains in GDP, soaring stock markets and full employment were the trademarks of a global economy that seemed ever triumphant.
But now the International Monetary Fund forecasts the pandemic will shrink global GDP by 3 per cent this year, the largest yearly decline in world output since the Great Depression of the early 1930s. The pandemic has also pulverized stock markets, and the United Nations’ International Labour Organization warns that almost 200 million workers will lose their jobs as a result of the recessions the outbreak has created.
As the virus migrates from continent to continent, so does its economic impact. It’s not just that more than a third of the world’s population is locked down in some form of self-isolation, but the industries that people once worked in have also shut down. The global economy’s vital signs are plummeting at a pace seldom – if ever – seen before.
In locked-down China, GDP declined by almost 7 per cent in the first quarter compared with the same period a year earlier. That marked the first quarterly contraction on record for the modern Chinese economy. Chinese industrial production, by far the largest in the world, fell by 8.4 per cent.
What happened initially in China is now spreading to our own economies. As Chinese factories began restarting as the country contained its contagion, stores halfway around the world that those factories supply started closing. The pandemic’s epicentre has shifted from China to the United States, and so has its devastating economic impact. Goldman Sachs says U.S. GDP is poised to shrink by 34 per cent in the second quarter. This is a decline of Depression-era magnitude.
Of course, it’s not just GDP that is getting crushed. When factories and stores are shut down, suddenly people don’t have jobs any more. The devastating impact on employment is unprecedented. Losing your job in a recession is nothing new. But having millions of workers applying for employment insurance or some other form of government income support almost overnight has never happened. Job losses that would normally accrue over several quarters during a recession are compressed into a month, as huge swaths of the economy are swiftly shut down under emergency health regulations.
We have suddenly gone from a state of full employment to a record number of unemployment insurance claims. More than 26 million Americans have applied for unemployment insurance since the White House declared a national health emergency. The job losses in the first month of the crisis effectively wiped out the past decade’s job gains.
In Canada, more than a million workers lost their jobs in March, eight times the previous monthly record that was set during the depths of the 2008-09 recession, one of the most devastating on record. The March job losses in Canada nullified the employment gains of the previous three years.
Jobless workers aren’t the only victims of the pandemic. Its impact has also been severe on investors around the world. Just as the contagion has spread from one economy to another, it has hammered the world’s stock markets.
Initially, the world’s bourses largely ignored the outbreak, believing it to be a uniquely Chinese phenomenon. But once the virus made its way to North America, the record 11-year rally of the S&P 500 index came to a screeching halt. All of a sudden, the longest-running bull market in history gave way to one of the fastest corrections ever seen, and there was no place for equity investors to hide.
The S&P 500 posted its worst first quarter ever. The Dow Jones Industrial Average and the once even-hotter Nasdaq Composite Index also plunged. Whereas globalization had been always seen as bullish for investors, the pandemic at one point vaporized as much as US$20-trillion from equity market valuations around the world. That’s left many North Americans to wonder, to repeat a controversial suggestion made by Mr. Trump and his supporters, whether the cure is in fact worse than the disease.
All things pass, including the COVID-19 pandemic. A vaccine will (hopefully) be developed or an effective anti-viral drug will be discovered. But the fear that the pandemic has unleashed will long outlive the contagion.
There are, after all, other zoonotic viruses, some potentially far more lethal that the coronavirus, lurking in the main courses of other exotic meals offered in wild game markets around the world. Protecting our economy from contagions those viruses could unleash will compel a newfound need for self-reliance that, in turn, will dramatically change how our economy is structured and how it functions.
Maybe, in the end, that’s not such a bad thing. It shouldn’t take a bat peeing on a pangolin in a crowded Wuhan wet market to teach us this lesson. Industrial workers in Canada and the United States, and indeed in most OECD countries, have known this for years. For them, globalization has brought immiseration. It was set up at their expense to benefit shareholders.
Therein perhaps lies a silver lining for the millions of expendables who have been victimized by global supply chains that either reduced their wages or stole their jobs. As the much-beleaguered middle class in North America might note, past pandemics from the Black Plague to the Spanish flu all boosted wages in decades that followed.
Of course, in those cases, it was the decimation of the population that made the supply of labour scarce and its price dear. Measured by mortality, the COVID-19 pandemic will be modest compared to the deadly carnage of its predecessors. But its impact on globalization could be just as lethal.
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