Sicken Thy Neighbor Trade Policy
A number of countries have imposed export bans on medical equipment. This is a natural, knee-jerk, reaction but a mistake for two reasons. First, no country in the world produces everything it needs. An export ban imposed by one country benefits that country but when all countries ban exports, it’s likely that no country is better off and all are worse off. A prisoner’s dilemma.
The prisoner’s dilemma is even worse than the basic analysis indicates because supply chains are globalized so it’s not even that one country produces ventilators and another produces masks and they are better off trading. Rather, it’s that both ventilator and mask production rely on inputs from other countries. What this means is that export bans make it more difficult for anyone to produce anything. Reuters gives an example:
Swissinfo has reported that production in Hamilton Medical, a major Swiss manufacturer of hospital ventilators, has slowed because Romania banned exports of a critical input that Hamilton was sourcing. The lesson is that any EU export restriction puts at risk other EU imports also needed to fight COVID-19. If the product definitions covered by the EU policy are so broad that they also restrict exports of parts and components, the EU may end up losing access to other supplies of equipment it seeks to import.
And here is Stefan Dräger, head of German ventilator manufacturer Drägerwerk:
DER SPIEGEL: When will a shortage begin developing for filters, tubes and other components for the ventilators?
Dräger: It already has….The parts come from all over the world, including from Turkey. I very much hope that the supply chains remain intact despite the protectionism. If someone decides to disrupt them, there will no longer be any ventilators, for anyone.
Disrupting sophisticated global supply chains is likely to create dis-coordination.
For want of a nail the shoe was lost;
For want of a shoe the horse was lost;
For want of a horse the battle was lost;
For the failure of battle the kingdom was lost—
All for the want of a horse-shoe nail.
For want of a ventilator part the life was lost.
The second reason why export bans are a mistake is that when there are economies of scale banning exports can decrease local consumption. A company that knows that it cannot export will be less willing to invest in building new plant and infrastructure, for example. We see exactly this phenomena in the brain drain “paradox”. Brain drain proponents argue that developing countries need to ban exports of human capital (i.e. don’t let people leave) to keep skilled workers at home. But in fact places like the Philippines, which export a lot of nurses, also have more domestic nurses. As Clemens and McKenzie write:
Enormous numbers of skilled workers from developing countries have been induced to acquire their skills by the opportunity of high earnings abroad. This is why the Philippines, which sends more nurses abroad than any other developing country, still has more nurses per capita at home than Britain does. Recent research has also shown that a sudden, large increase in skilled emigration from a developing country to a skill-selective destination can cause a corresponding sudden increase in skill acquisition in the source country.
The premise of export bans–in this time of need, we need to keep our resources at home–is natural but the virus is a worldwide challenge that needs a worldwide response. We is everyone in the world. We have a lot to gain by cooperation, especially as some countries are being hit at different points in time. Germany, for example, sold ventilators to China as the crisis hit China and China can (re)sell to Germany as China recovers. Our best strategy is a united front where we learn from other countries and reallocate resources around the world.
Beggar thy neighbor trade policy, such as the infamous Smoot-Hawley tariff, lengthened the Great Depression. We don’t want sicken thy neighbor trade policy to length the great pandemic.
Hat tip: anonymous.