The end of the global supply chain

The hidden costs of globalization are becoming apparent.

Workers labor at an assembly line for Dongfeng Passenger Vehicle Company in Wuhan, China. Some industrial production has returned to action since the coronavirus epidemic, including in the crucial auto manufacturing industry, and in businesses that provide critical links in global supply chains.Xiao Yijiu/Associated Press

In addition to making the world sick, the coronavirus pandemic has dramatically illustrated the high costs of the global supply chain.

For 40 years, economists have promoted globalization based on supply chains that rely heavily on cheap nonunion Chinese labor — working without adequate safety or environmental protection — to assemble sophisticated parts from around the world that are made into final products and then reshipped largely to consumers in rich countries. This was said to be an ideal international division of labor that optimized returns to all participants.

Usually unmentioned was the boost this supply chain model gave to corporate profits. As Stewart Paterson, author of “China Trade and Power,” notes: “This was the largest labor arbitrage in the history of economics.” In addition to benefiting from cheap labor, companies such as Apple, General Electric, and Cisco were awarded subsidies and tax breaks by Beijing.

Now, however, the hidden costs of globalization are becoming apparent. One is US dependence on China for critical pharmaceuticals and medical supplies, such as face masks and other personal protective equipment. The New York Times reported that while China makes half the world’s medical masks, it has refused to export them and is buying more on the world markets. China has since signaled to the Trump administration its willingness to provide PPE. India, another major supplier of key pharmaceuticals and PPE, has just imposed a ban on exporting many of them. The hidden cost of this high dependence on the global supply chain for medical items alone is enormous and multiplied by the thousands of other key products and technologies for which the United States is also dependent on China.

Nor did American workers mostly move into equivalent or higher-paying jobs as the result of globalization. Rather, as MIT economist David Autor and his colleagues have noted, most of the 2 million to 2.4 million American workers displaced by globalization either did not get jobs or got lower-paying jobs. Moreover, those workers who kept their jobs did not see their income rise in step with rising overall US productivity. The gap between rich, middle class, and poor widened dramatically, creating large welfare problems.

Also uncounted has been the cost of the supply chain in terms of greenhouse gas emissions. The Environment and Energy Study Institute estimates that air and sea freight account for 4 to 5 percent of greenhouse gas emissions. Moreover, China’s factories emit far more pollution than those of the United States. Thus, China produces half the world’s steel in plants that emit 25 percent more gases than American or European factories. Ironically, the United States, Europe, and Japan are contributing to a net increase in greenhouse gas emissions by sourcing products from China.

Recently, overseas assembly operations have become automated, thereby canceling out most of the original labor cost advantage. With costs being similar worldwide, as well as the environmental cost and the uncertainty of having a single-supply location, there is no longer a strong argument for depending on far-flung centers for supplies.

Indeed, the argument is now swinging in the opposite direction because of the dynamics of innovation, which occurs most often in environments containing a variety of skills and industries. People with widely different skills run into each other and produce more innovation than those isolated in monocultures. Thus, the global supply chain based on China has tended to generate innovation there while retarding it elsewhere.

That the China-centered global supply chain is no longer appropriate (if it ever was) has recently been demonstrated by the multinational toolmaker Stanley Black and Decker. It shifted production of its Craftsman tools from China back to Fort Worth, Texas, a year ago. It reports no increase in costs and much less impact from the coronavirus than would have been the case if it had remained in China. Video editing equipment maker Avid Technologies moved operations from China to Mexico about a year ago and reports a 1 percent boost in profit margins.

As he wrestled with the Great Depression in 1933, economist John Maynard Keynes argued that ideas and arts should be international, but added: “Let the goods be homespun.” Stanley Black and Decker CEO John Loree agrees. “We have a philosophy of ‘make where you sell.’”

Clyde Prestowitz served as vice chairman of President Clinton’s Commission on Trade and Investment in Asia, and as a US trade negotiator with China, Japan, Korea, and the EU. Jeff Ferry is chief economist of the Coalition for a Prosperous America.

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