A Lesson Learned?

Our pharmaceutical companies have decided to bring back to the US some critical drug production capabilities in view of the People’s Republic of China’s current role in that manufacturing supply chain, the interference the Wuhan virus has caused in the PRC’s ability to produce those critical intermediates, and the separate threat of some ranking PRC officials to cut us off from those intermediates.

The dramatic proliferation of the coronavirus, also termed COVID-19, has US officials on an accelerated mission to bring the production of life-saving medicines back to US shores and away from the control of the Chinese government.
“The US is uncharacteristically over-reliant on drugs from China, and it’s not a sustainable model,” Das Nobel, founder and CEO of the New York-based product-and-supply service MTX Group. “The US government must prioritize its strategic planning to incentive the US Manufacturing organization and assist in bridging the gap in manufacturing cost versus gross profit.”

Such a move would violate the purely economic Ricardian principle of putting production of goods and services where that production can be done most efficiently and cheaply, even if that means some production goes to another nation. Maximizing efficiency, after all, lowers prices—whether to intermediate manufacturers and assemblers or to us consumers—the farthest.

However, national security demands some level of inefficiency in purely economic matters.  What is the value, after all, of those cheapest goods and services if we’re cut off from them altogether, as the present virus situation threatens with badly needed medicinal drugs? What’s the value of those low-costs if we don’t have our own production facilities and human skills with which to begin/ramp up our own production as quickly as needed in a crisis?

So it is, too, with moves to bring at least some aluminum and steel production back home. It’s not that Canada, Germany, or Japan are enemies or potential enemies of ours; of course, they are not. Nor is it that the PRC is an enemy of ours with whom we can get away with trading in peaceful times.

No, it’s that having facilities for a complete production chain, from ore in the ground to all of the industrially critical final products of aluminum and steel is a Critical Item for our national security: with a domestic complete chain, we can rapidly ramp up our own capabilities in the event of a cut-off from overseas, whether from war or natural cause.

So it should be with all of the goods and services critical to our national security (viz., medical equipment, computer chips).

Understand, though, that this does not, and should not, mean the end of international trade or of globalization of our economics. Trade under free trade principles should continue and be expanded: Ricardo remains correct, and following that principle remains—in the main—the soundest move. It just means that for those relatively few national security-level items, a complete chain of production capability needs to be maintained at home even as we continue to trade the bulk of those critical items under Ricardian principles. The cost delta between maximal efficiency of purely Ricardian free trade and the lesser efficiency of maintaining a core domestic production capability is simply part of the necessary cost of national security.

Whether our government should assist in bridging the gap in manufacturing cost versus gross profit or, if so, to what degree, certainly should be debated and worked out. However, as with anything else in a free society, in a free market economy, government’s role should be kept to a bare minimum, and that minimum should rest on a foundation of sunset clause included temporary measures and not on permanent subsidies or credits.

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