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.

Comments

Thanks for the cosmopolitan take, but I want my countrymen to survive. It is a war and we will.

The point is that your countrymen will struggle because not every country produces everything they need. The US for example doesn't make enough masks or ventilators domestically. It had to import the first and coerce a public company through wartime powers for the latter.

@James - the first take away is that your response is human nature, another is that in war time, you need allies, and supply chains to arm the troops. A third, and this one my own, is that it's team Earth homes. These borders were fought for by our forefathers and now owned by a select few capitalists - I want the global economy and our collective improvements on major items to continue - see Factfulness.

Also - it seems the basics needed here are either:
a. largely borderless - vaccines / epidemiology best practice
b. ventilators and PPE -- readily scaled with legacy infrastructure, highly portable, technically (by modern standards) rather straight forward.
c. I agree tis rather cosmopolitan - but this is also human, as we are so favored to have the time and wherewithal to debate such matters while others suffer so greatly.
$.02
Zo

We're facing a a pandemic transmitted around the world by globalization. The resulting economic damage is exposing the risks of global supply chains. It should be obvious to all by now that 1st world dependency on widgets produced by 3rd world dictators is a bad plan.

Your average plumber / roofer / farmer in Iowa / Montana / Colorado may not know who Ricardo was, but he does know that his mother's continued breathing is dependent on ventilator parts made halfway around the world, and he doesn't understand how that was allowed to happen. And yet, there are still "citizen of the world" types who can't wrap their heads around the idea that protectionism, nationalism, and industrial policy really do have their place.

I hate to use this quote here, but it's true. "There are some ideas to stupid only intellectuals believe them." -- George Orwell.

Are there benefits to globalization and open borders? Absolutely! Huge! But let's not pretend that there aren't costs too. The costs may take longer to materialize, but when they do, they're high. Especially if it's your mother on that ventilator.

"It should be obvious to all by now that 1st world dependency on widgets produced by 3rd world dictators is a bad plan."

Is that what's happening here? It sounds like EU members are restricting exports to others. These are not "3rd world dictators".

I am worried - and your comment solidifies that worry - that people will take away from this that global supply chains are the problem, not ham-fisted attempts at controlling supply chains by people in power who do not fully understand them. I'm not denying they have costs but they are not as fragile as they seem absent (non-3rd-world-dictator)
human interferece.

This reasoning would be true if industrial production was evenly distributed in the world. In fact, a few countries produce most equipment and medication.

The world is at Total War against this virus. We must focus on two goals: 1. Isolate the Illness, and 2. Fortify the Health System. Isolating the illness will slow down the border crossings so we need to double down on the production of everything in the supply chain used to Fortify the Health System, not just for ourselves, but for the needs of the world.

The parts come from all over the world, including from Turkey

People from all over the world, including Turks, have had a literal hand in the manufacture and distribution of products needed to combat the Covid-19 virus. How do we know that those very products don't carry the virus? A significant amount of infected workers in an expedited situation could spread the virus across the world.

The virus spreads primarily by respiratory droplets. Good hand hygiene is key. Wash your hands before touching your face. Work the problem.

Clean the cases of intermediate goods before they are unpacked. Disinfect the warehouse twice a week.

Isolating The Illness will require an enormous increase of people performing tasks like Contact Tracing. These jobs can be done at home. We need to think about Blitzscaling these things which also involves scaling the training based on a doubling period of about 7 days for new cases.

>Smoot-Hawley tariff, lengthened the Great Depression

You're thinking of the New Deal.

Don't worry, it was a long time ago. Even Joe Biden forgets things.

Do you think Trump's Easy Trade War or Trump's New Bailouts will lengthen the current depression?

'If someone decides to disrupt them, there will no longer be any ventilators, for anyone.'

There won't be any additional ventilators - the existing ones are not going away in the next few weeks.

Those of us in well-connected big cities may be thinking this way, that it is the two or three week supply that matters. But it may take longer to reach less traveled places, and less traveled places may face a real shortage.

And of course in the pessimistic case, we in the well-traveled cities may need more ventilators for our second or third wave.

Common refrain now in Thailand, which is on near national shutdown, including Bangkok:

"We are not going to die of COVID-19. We are going to die of hunger."

Even in the US, a shutdown is dubious but probably people will not go hungry. But certainly policy-makers and academics are removed from those losing their jobs.

in Thailand, which mimicking other more-developed nations, there are real consequences of shutting down an economy.

The globalists are rhapsodizing about free trade. My takeaway is that like the food and defense industries, the medical industry needs to be domestic, for now-obvious reasons.

A globalized economy necessarily means occasional global viruses and pandemics.

Everyone will need the same types of medical equipment and drugs at the same time.

That places any nation at the mercy of another nation, also in a pandemic, with dying citizens. I don't think people sing Kumbaya during [andemics.

"Everyone will need the same types of medical equipment and drugs at the same time."

No they don't. Just use herd immunity. Think different. Be different. Act different.

I actually agree with you. We should have tried for herd immunity, though also trying to suppress peak load on hospitals.

We probably could have sequestered elderly smokers for a penny on the dollar, compared to the current lockdown strategy.

“ the medical industry needs to be domestic, for now-obvious reasons”

This is not obvious at all. This pandemic is an entirely expected event, the outcome and consequences of which have been regularly predicted in journal articles and emergency preparedness simulations. Countries can easily create strategic reserves of non perishable supplies _that are in line with the needs projected by simulations_. The most efficient producers can keep producing them. Countries just need to take emergency preparedness seriously. Reuter’s reported factional blowouts in the Whitehouse back in January about expanding our reserves for PPE and ventilators and they decided not to.

AT: 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.

I think this clearly depends on whether you're talking about something truly naturally limited - likely number of brilliant scientific geniuses per capita for example - or something in which response to migration chains can lead to up-skilling - number of physicists for example. The latter can respond to "export demand" by increased specialization, with spillover benefits, while the former can't.

If you believe that we are doing the former brain drain, you still have a case againt brain drain. Aka, that brilliant Yoruba men who is just a bank clerk here would a first-class administrator back home, which they really can't substitute for, etc.

If you have some balance of the two, you'd support high skilled migration, but in such low numbers that you don't run the risk of completely "cream skimming" poorer economies.

If you believe that these countries have huge reserves of natural talent that aren't harmed by our "cream skimming", more likely the latter.

In any case, this actually strengthens the case for "Skilled migration only, limited numbers, no open borders".

Providing incentives to develop skills as an international passport has benefits to both the discriminating country, and the country whose emigrants are subject to this discrimination. Open borders instead reduces incentives to invest in skills in the home country, because large premiums of income can be made from simply hopping and skipping over to the developed world and working in an unskilled role. (This is the classic thing of where Mexico many frequently reduced investment in education, as the "plan" instead became to get to the US to do low skilled manual labour.)

Showing my naiveté - but could we not drop this entire consideration if we we went 'Team Earth' ? Who has run those models? What would it look like if we could evolve a global society - the UN? WHO? would we get there by breaking into quadrants first? Halvsies? What will it take to get us to tip towards larger concepts of 'Tribe'? We see this empathy kick in on a male/male or female/female bonding -- enter a new culture and see if the same sex doesn't come with built-in signals of togetherness...I'm ranting, apologies.

Sometimes naïveté is best,cuts to the heart of the matter, no need to apologies for ranting, everyone does

'Providing incentives to develop skills as an international passport'

Which is interesting considering that one of the groups of people the UK most urgently wants are those that work in the fields.

As if skilled pickers and packers of fruit and vegetables possess skills as important as any nurse or doctor, at least in aggregate. Which would almost prove Prof. Tabarrok's point, in this case by demonstrating how some countries cannot rely on their own people to harvest their own food.

The "UK" does not want fruit pickers, prior, you dummy, whatever fruit picking companies may say, and will not need them and in fact will not get them, in this situation.

And should this ever happen against my expectations, the UK will not, in fact, allow this to be a permanent migration. Perhaps you find yourself defending the German decision to import an gastarbeiter underclass, but the smart thing would be to give up on defending it.

The NHS got a lot of volunteers in the last few days. Do you think that as many people in the UK will volunteer to pick apples? Fruit pickers are seasonal, they most certainly do not live year round in the country where they harvest. They cannot afford to. Do not confuse plumbers with people who only work for a couple of weeks in any particular location, starting in the north and working their way south.

And this problem is cropping up already in Spain, Italy and France - a lot of the foreign workers required are not showing up this year, regardless of whether they are permitted to or not.

Wages go up enough, you will get pickers.

Cheap food is good but slightly more expensive food without a pandemic is better.

Even by Alex's standards, it's pretty ridiculous to argue that the world's largest economy, run by 330 million people in a nation spanning 3.8 million square miles through just about every major biome and natural resource around, can't manufacture a ventilator on their own without employing the help of the third world, thus being forced to abide every attendant consequence therein (such as suffering a pandemic originating from either their trading partners eating bats recreationally or bio-engineering a virus designed to take down our economy, either prospect being equally disconcerting).

Then again, these tend to be the same people who argue that we need to import millions of people from the same third world (abiding the same consequences above) on the basis that there exist jobs that 330 million people Just Won't Do™, so it seems our cultural overlords' belief in American exceptionalism only applies where the opportunity exists to manipulate foreigners for profit.

I am very sure that America can do anything.

I am not so sure that America can do anything in two weeks. Or even a month.

You're not sure that America needs to do anything in two weeks or a month, either.

The news has stories every day of some engineer here or some research group there developing a cheap respirator model, 3-D printing one, repurposing existing equipment, etc. If it gets to the point where we need to figure it out, we'll figure it out.

Again, it's unfortunate that the faux-patriots among us like to carry on their affected can-do attitude until it's time to carry the water for the globalist agenda. Then we're a bunch of morons who need the third world to provide for us.

So NY as one-off, again?

(I have a 3d printer and know what they can and can't do. Hobby models produce irregular parts. Commercial machines are great, but themselves in short supply.)

New York is the quintessential example of where we would be in this pandemic if the globalists are unchecked. A melting pot, or tossed salad or whatever the term is now, crowded into high-rise tenements, importing the necessities of life and exporting "financial products" that help the rich get richer, and imposing their unwanted culture on the rest of the nation.

I wanted to build a wall around it before this mess, we ought now to not only do that but thereafter cede it to the UN and let them fix the problem they have caused, right in their own backyard.

The problem here is not that it's a "one-off" but that the nation's media empires are all headquartered in it. New York has over half the cases in the nation, which is why (in addition to profit and Orange-Man-Baditis) this is being treated as a major crisis when most people can count on one hand the number of cases they have within a tank of gas around them. We're once again subjecting the whole nation to the high school drama of the Acela corridor.

And re: the 3D printers, you're letting perfect be the enemy of good, again because it suits your worldview. You're not the only person who has one. Vanderbilt was able to run a bag off a sheet of plywood and a windshield wiper motor, it's not rocket surgery.

Sending doctors and nurses to the ER with homemade PPE is equivalent to sending troops to Iraq with unarmored vehicles.

You may do it because you have to, but it is not even good, no.

Are they wearing PPE now? Last I heard, it was thought to incite unnecessary fear and panic in patients.

(I also didn't think we have to send troops to Iraq with unarmored vehicles; in fact, I'm pretty sure we didn't have to send them at all. More of that Beltway attitude popping up, but then there aren't too many people there who have kids in the military. But I digress.)

On Twitter there was a call and a claim at a local hospital wanted hobbyists to 3D print 6000 air filter masks.

That's really incredible. Because home printed masks are going to be pretty bad. If 6,000 of them are actually needed, the system really came up short.

Let's hope that the people working on the machines that turn these things out 7x24 are working hard. In the next weeks we don't really want 3D printed masks, we want more mask machines running flat out.

(I haven't looked at the actual print time, but I would guess that the average home 3d printer could turn out two masks per day. They are reusable, but must be washed (despite an irregular surface) and filter material replaced for each use.)

A call on Twitter for? Seriously? Any actual indication this has any truth to it?

Sigh, Boomers. This shit was funny before but it’s time you Olds learned to internet. Stop spreading garbage misinformation.

Seems like the olds forgot to teach the winners of the participation trophies to internet, since this article is dated March 23 - "Hospitals and medical facilities around the United States are reporting critical shortages of the protective equipment they need to keep their workers and patients safe, so some DIYers are coming up with homemade solutions to help fill the void.

In Billings, Montana, some healthcare professionals are using 3D printers to make reusable plastic face masks. The masks are then fitted with pieces of surgical masks which can be swapped out as needed. .... The surgical masks are cut into smaller squares that can be clipped into the plastic mask to serve as a filter, Dusty Richardson, a neurosurgeon at the Billings Clinic told CNN.

"The filter can be used for a day and you can change it out the next day, but I do wash my mask out frequently," Richardson said.
The plastic can be cleaned with soap and water, bleach and other disinfecting products. Richardson estimates healthcare workers can get six to 10 uses out of a single surgical mask.

Richardson came up with a sketch of the mask last week and worked with dentist Spencer Zaugg and Zaugg's son Colton to come up with the design. They're all really into 3D printing and Colton Zaugg has design experience and was able to adapt a pattern he found online."

Some people are far too skeptical of America's ability to improvise and innovate in the face of a looming disaster. Or at least people in Montana - "The Zauggs have four 3D printers, Richardson said, and have cranked out at least 15 masks so far. Billings Public Schools are closed because of the coronavirus, but some teachers went back into their classrooms on Monday to start printing out masks on their schools' machines.

It takes a few hours to print each mask.

Libraries across the state will also print the masks along with Montana State University Billings and Rocky Mountain College.
Richardson said the files and instructions are posted online so anyone can make the masks on their own 3D printer."

You are the laziest troll ever. The project is on GitHub if you want to find it.

Frame this one. An obituary for a world view.

What you need to do now to keep things moving is to get a whole bunch of important people in a room somewhere so they can discuss all the details and hammer out solutions. Maybe in New York.

Or better, make sure the system is so fragile, so interdependent that anyone who doesn't export their small part of whatever causes the whole thing to collapse so dramatically with such obvious and terrible consequences for everyone that no one dares. Something like the MAD doctrine with nuclear weaponry.

"An obituary for a world view."

Exactly. Globalism is the biggest casualty of the virus.

Funny, I thought in circumstances like this prohibition would dictate that a black market would arise such that all of this demand would be met regardless of the laws on the books.

Are we now saying that prohibitionary laws will actually effect net consumption?

Manufacturing does not work at the snap of a finger, there are various constraints involved in the best of times. A machine can only produce parts 24 hours a day (leaving aside downtime, which you cannot do over the longer term).

To use a famous example from the Mythical Man Month, there is no way to get a baby in one month by using 9 pregnant women to speed up the schedule.

But we are not talking about manufacturing new product. We are talking about circumventing a border interdiction on product in stock and under current production.

Surely if we cannot stop the flow of bulk cocaine from crossing a border, we cannot stop tubing, sensors, or aught else from crossing a border.

Either border controls can "work" and we can see an actual decline in both ventilator and illicit drug consumption in response to border policies or in both cases we will see official policy undermined in such a manner that the effect on consumption is marginal at best.

The alternative, of course, is that human behavior during times of active crisis changes dramatically. But that would then suggest that many of Alex's critiques of things like the Defense Production Act are invalid as the standard behavioral responses should also be expected to be different than under normal economic times.

Again, I am not a robust libertarian nor am I market absolutist, yet it is quite interesting to see how libertarians will tell us that borders cannot block demand and yet in this case such laws will block demand fulfillment and doom us all.

We are most certainly talking about trying to ramp up production of ventilators.

Seriously, look at what Alex actually says:

"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."

Maybe he is correct and this happen. People will not invest because the legal environment bans the sale of their product across borders.

Great, then we should expect similar efficacy for bans on recreational drugs. People will not invest capital in recreational drug production because the will not be able to sell their product abroad.

We either live in a world where high demand goods will flow irrespective of boundaries and laws (e.g. the cocaine will flow, shipments of masks and pressure sensors will be "stolen" and miraculously show up in regions with higher profit margins) or we live in ones where borders and laws create frictions (e.g. less cocaine crosses borders, fewer pressure sensors are delivered through black market channels).

If we live in the latter world, then we need to ask ourselves how big the frictions are. If the current export bans are actually worrying, then implicitly we should believe that drug bans can be effective.

Alex is making rather strong claims that we will have less immediate production as components get trapped behind interdiction and that people will not invest for the future (i.e. businesses will not anticipate a thriving black market to arise over even the course of months). Those are both remarkedly strong things to hold given his past takes on drug interdiction and its presumed futility.

He also quoted this - 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.

One can be fairly confident there is no black market in the parts Hamilton was sourcing for Romania. And if Hamilton wants to increase production, then the Romania source not only needs to return to its previous level, it needs to increase production too.

Why would we have that confidence at all of no black market trade?

After all, Hamilton in this period of shortage may well be willing to pay double or treble the previous market clearing price. Even if they keep their hands clean, some other supplier should jump at the chance to smuggle out components, claim to have purchased surplus inventory in some country that does not have export controls, and then make a giant profit. If you think prohibition is impossible with high profit margins, ventilator parts should follow this precise model.

I am completely willing to believe that the profit motive is not sufficient to overcome the legal barriers. But this too means that the black market for drugs is being overblown. If we cannot move goods illicitly through an interdicted border when the stakes are life and death and when the importing government is attempting to facilitate this movement ... then I have a real hard time buying that we could not manage erecting a similar barrier to recreational drugs.

Of course maybe the behavior of people in life threatening epidemics is different. Maybe a border interdiction is enforceable now because people are more irrational and the (black) market cannot clear. Okay fine, but then spare me the paeans to hoarders and gougers because the theory for their utility is based on much less irrational behavior.

I can buy either that drugs are non-interdictable xor Hamilton would be unable to source parts (now and in the future) via the grey/black market. I cannot buy both at the same time. And this is my quarrel, Alex appears to hold that governments are powerful at interdicting medical components at the border, but not drugs. Utterly nonsensical.

'Why would we have that confidence at all of no black market trade?'

What does that even mean in the context of an industrial supply chain? Hamilton is free to source the parts it wants from anywhere - but there is no snap your finger solution in that case. And the supplier in Romania has (most likely) exactly one customer for the parts it produces for Hamilton - which is Hamilton, obviously.

''After all, Hamilton in this period of shortage may well be willing to pay double or treble the previous market clearing price."

Again, there is no snap your finger solution - or did the example of the nine pregnant women not actually being the best way to get a baby in a month escape your notice? And market clearing price is not really a concept when talking about the components/assemblies for a piece of machinery that is more complicated than nuts and bolts (and even them, you may find that the nuts and bolts cannot be made from steel, but have to be nylon, or ceramic, etc.)

Reading the rest, it appears you have little experience in manufacturing.

The snap your fingers solution is to load up a container with parts in Romania and bribe your way to Hamilton's production plant.

Alex has previously told us that this is what will happen with border interdiction. Demand will lead to creative middlemen moving things past border controls.

Maybe he's right and Hamilton will shortly receive an offer for just the parts that it currently lacks selling for 150% of their old cost as long as no questions are asked.

Maybe your right and loading up a container and bribing through is difficult and far harder than snap your fingers. In which case, this should be a temporary setback until black marketeering gets involved. In this case, the supplier should be anticipating that whatever they make today will get sold to Hamilton later, once illicit supply chains form. Yet Alex thinks this is impossible too as he believes that border interdiction will deter future oriented investment.

You may be completely correct. These border interdictions may create impossible barriers to ventilator production. Yet you being correct necessarily implies that all the talk about the impossibility of interdicting illicit drugs is overblown to some degree.

I don't understand you argument. Drugs are more expensive, therefore less available than they would be if they were legal. It seems that the demand is rather inelastic, so there you get it.

If the hospitals are willing to pay 10x the price from the black market (or more, depending on the risk premium), you will get it. Do they? I don't think they can, the people running them are not going to jail and their customers are mostly insurance company, they're not intersted either.

Now if people theselves were to administer the ventilator treatment to their loved ones, I think you might get a black ventilator market (including amateur production) rather quickly. I don't think people are going to do that.

I don't see any inconsistency here.

Last I heard, we were currently paying around quadruple to octuple for N-95s from grey market suppliers. And we are not one of the hard up hospital systems with a current shortfall.

Current orders for ventilators, again last I heard, were running at around 2.5 - 3x pre-Covid prices.

Now let's be massively generous and say that $5,000 out of every $20,000 in pre-Covid price was profit and due to black market costs you could only sell them for $50,000. This means that the profit margin on a black market ventilator has just dectupled.

How does this compare to cocaine? Well back around a decade ago (before heroin really disrupted the market), cocaine leaving production countries would see for around $5,000 per kilo. Once across the US border it would be worth around $25,000. Smuggling cocaine through multiple jurisdictions resulted in 400% profits exclusive of smuggling costs. Of course this is likely an overestimate as the border differential for a kilo of cocaine was only $16,000/$24,000 (a 150% profit for going over a border, excluding the actual costs of smuggling).

How about ventilators? Well off the cuff we would have a 150% profit margin (i.e. literally the best estimate for the raw profit margin for smuggling cocaine over the US border). But that is wildly low.

After all, we are not talking about smuggling the entire machine, just whichever inputs are currently not available to Hamilton. Suppose that half the resources are already on hand (either produced locally or there is sufficient inventory). Okay so we need $10,000 worth of inputs to generate $40,000 worth of profit. Now we are talking about a rough 300% profit margin.

Suppose we only need $5,000 worth of inputs from foreign suppliers. Now we are talking about 600% mark-ups being possible.

And all of that assumes that there will be no further mark-up in ventilator prices as this pandemic continues to grow. If you are an aspiring black marketeer, forget the drugs, medical goods can handily exceed the historical profit margins.

And lest we forget, marijuana had a significantly lower profit margin for smuggling, yet somehow managed to create a giant black market.

Oh, and remember these components are not worth all that much right now in their second-best use. If nobody assembles them into ventilators the value of individual components tumbles dramatically. For some of these orphaned components, their value is basically zero given storage costs if they are not consumed to make ventilators.

Again, I fail to see how you can make all this fit. Maybe black marketeering is hard and border interdiction can dramatically reduce the flow of contraband. Okay great that would indeed lead to less consumption of ventilators, but it should also lead to less drug consumption. Maybe profit margins north of 100% make borders porous and regulatory schema unworkable. Okay great that would make drugs uninterdictable and the components would just happen to move over borders as the black marketeers moved in. Maybe there is something wonky during pandemics and the normal laws of supply and demand that govern the behavior of black markets are not valid, okay fine then why is it so crazy to invoke the Defense Production Act? Why does Alex extol price gougers using arguments wholly grounded in those same laws?

The point is that the elasticities are different (they are definitely different in the long run), so depending on the feasibility of smuggling it may not be financially profitable (500% profit is nice, but you have some limits to demand and fixed costs).

That said: yes, illegal drugs - at least at the beginning - do lead to less drug consumption; however drugs are substitutes, you will get some people opting for harder drugs instead of no drugs, then you get more people hooked to harder drugs and you get a change in demand; the result is rather unknown.

If you close borders, a black market may form that would supply less of the goods for higher price. We know this does happens for drugs, and it may well happen for medical supplies as well (I'd gues north korea would be likely an example of that), if it makes financial sense. Where is the inconsistency?

Drug elasticities are not stable though. For instance, demand for actual heroin has been plummeting or per weight basis. The rise of fentanyl have made it vastly easier to substitute away from heroin.

And neither is drug policy. After all, there is always a chance that your competition corrupts part of the interdiction apparatus and suddenly can move massively more product than you at cheaper cost.

If black marketeers are so worried about the long term that they will not invest in something as lucrative as medical supplies in a crisis that will last months ... then they should have exited the heroin market long ago. After all, the street price of heroin dropped 90% from the 80s until the mid-2000s (adjusted for inflation and at constant purity, all before fentanyl destroyed the market further) and cocaine dropped 80% over the same span. Nor was this just market flooding, in both cases the number of active users fell significantly (though heroin started to rebound by the end of the period).

Uncertain future, dramatic changes in price of goods sold, high policy volatility ... all of these are characteristics of the illicit drug trade.

Which goes back to my point, we have been told repeatedly that border interdiction of drugs is utterly non-feasible. Alex has previously stated that in spite of spending $100 billion per annum on enforcement the US is unable to make a dent in drug supply.

Yet he would have us believe that mere policy of non-exportation, one with no established enforcement mechanism, one with no budget for such an enforcement mechanisms, and one that can be circumvented with ease is going to hold.

Is there a black market for hospital supplies? Of course. We literally have cases of PPE being stolen in bulk, getting sold back into the distribution chain, and then ending up back at the point of theft (we track lot numbers). Right now we are taking active measures to prevent people from stealing PPE, and it is a royal pain in the ass. Some of this is to prevent personal hoarding, but we do see criminals stealing in bulk and selling to the black market domestically.

If Alex is to be believed, interdicted borders, particularly with high profit potential, are easily surmountable. Why exactly will the current black marketeers, who are already dealing in stolen PPE, be unable to circumvent boarders?

Again, all the fancy models aside at the end of the day you have something on one side of a border that brings a huge payoff to move across an interdicted border. All of the impediments for medical supplies exist for the drug trade.

You keep talking about how drugs are so different. Yet I fail to see it. The price differentials are currently at least as high and we are not forecasting price drops anytime soon. The policy uncertainty is far higher for drugs, and lest we forget that makes the incentive to move now greater for medical supplies. And the elasticity? Well, right now the demand for ventilators and PPE is pretty close to inelastic.

I know both of these markets much better than average person (I currently am a consumer in the medical one and I treat massive numbers of folks in the illicit drug one), and they just do not look that different from here. The places where they are (i.e. fewer men with guns trying to kill you), should make it even easier to start smuggling medical supplies.

Sorry, I still don't see what point are you trying to make. Where is the inconsitency?

"Alex has previously stated that in spite of spending $100 billion per annum on enforcement the US is unable to make a dent in drug supply."

I don't think Alex is claiming that if drugs were fully legalized, the supply wouldn't increase. It seems this would be the claim you base the inconsitency on, however that claim seems to me false?

The idea is that in _both_ drug and medical supplies market such orders cause higher price, lower supply, which can break existing supply chains; the resulting shortage/price spikes can be mitigated by the black market, depending on the circumastances.

Sorry, I still fail to see what exactly is the inconsistency in Alex's thinking?

Actually Alex has gone pretty far towards those claims. He has specifically said that we have had minimal impact on drug demand with the War on Drugs. He also posited that black market drugs were cheaper by dint of not following the FDA and paying social security taxes.

More interesting to me is the claim that "at knows that it cannot export will be less willing to invest in building new plant and infrastructure, for example". Which seems pretty fallacious. An export ban is just an increase in costs to ship via black market channels. And Alex has famously held that such taxes on border crossings simply get passed on to the consumer (i.e. the incidence of tariffs falls to US consumers).

So I fail to see his worry's given the totality of his views. Yes, the price of components will go up. Maybe there will be an adjustment period. But investing in the future should still happen. A rational firm should expect the rise of a black market, they should expect that if they double their output prices to cover the smuggling costs that the the increase will be incident only on the final consumers.

Maybe there will be some marginal decrease in consumption. Should that not mirror pretty heavily any drop in drug consumption. After all, current costs to the system per drug user are over a million dollars in a lifetime. If just slapping an export ban on something effectively drops supply by 10% then would should be able to save billions by negotiating in export bans on drugs from places like Mexico or China.

My suspicion is that there are two forces Alex tends to underrate. Some people will not export because they are "law abiding", just as there are many people who will not do drugs just because they are illegal. Maintaining the "War on Drugs" pro forma would save many lives, but that goes against Alex's ideology. Secondly, interdiction requires spending real resources and I do not think merely banning export to let parts rot in a warehouse is going to prevent movement. Maybe the method for moving components out will be lobbying for export exemption. Maybe it will be frank bribery. Absent a large investment by the state in enforcement, which I frankly do not see, we should expect these components to make their way to the end assemblers.

Both of these are consistent with my long held view about the drug trade. That the major driver is culture and the next one down the line is enforcement derived. I do hold that such efforts, while expensive, have historically worked (e.g. hepatic pathology tanked after prohibition and it took literally generations for AUD levels to return to pre-prohibition levels). The net benefit for society as a whole is actually not that bad for drug interdiction and prohibition, but the benefits are highly concentrated among the poor and the psychic costs are most concentrated among the rich and powerful.

As is, Alex is giving the state dramatic effectiveness at preventing components from crossing borders, but has historically given it exceedingly little effectiveness at preventing the same for drugs. Either the state is an effective interdicter or it is not. Even if there is a compromise position, it should be the same for any good with the same profit potential (and if anything it should be easier to escape interdiction for pro-social production).

It seems to me you are comparing apples and oranges.

Suppose drugs were legal in the US, but for price reasons were imported from the south. Now the latin america will institute the export ban. What happens?

a) black market
b) local producers will ramp up production, it will end up being more expensive with less quantity produced

I think it's totally reasonable that b) will happen, because it will still be cheaper to produce it locally than risk problems importing it from abroad.

It seems to me this is perfectly consistent with what Alex has written. Both drugs and medical supplies would behave the same under similar situation.

You seem to be trying to compare completely different situations with different elasticities for both supply and demand - which obviously leads to different conclusions.

"hepatic pathology tanked after prohibition and it took literally generations for AUD levels to return to pre-prohibition levels"

As far as I know that was the case for countries without prohibition as well (UK)... which didn't kill their own people by using poison to denaturize ethanol.

Perhaps you are right, but then the policy Alex is deriding is merely moving the site of investment from international locales to domestic ones. Which seems to be far less worrisome than a dramatic decrease in component availability.

In any event, we have hundreds of years of experience with export controls, smuggling has been quite common and lucrative. For instance, the English had very substantial controls on wool export back in the 13th and 14th centuries. You could only sell in one of a dozen odd official ports and then export out of the realm occurred at the Staple Port. Now we are talking about sheep, so the consumers in the Low Countries could easily have grown their own or imported from elsewhere. Instead a bustling trade grew extremely quickly in Kent to beat the export controls.

In 1808 we tried to halt export of various commodities to the belligerents in the Napoleonic Wars. Yet smuggling abounded. We literally had tons of ashes being smuggled north to Canada via Vermont in defiance of export bans.

In reality, government diktat is weak. What stymies export is enforcement and culture. Britain, for instance, had a massive temperance movement. The biggest impact of Prohibition was not raising the price of alcohol, but in making it unacceptable to drink or be drunk. To a large degree this did happen, even in Britain, and in Britain was furthered along by the WWI legislation that increased the tax on alcohol and mandated watering the beer (and also nationalizing pubs near defense production facilities).

Romania banning exports will accomplish little. People will do what they did when it was tried with wool, ashes, drugs, and microchips - make a hefty profit. Romania enforcing this interdiction or there being a groundswell within Romania in favor of the policy? Those would again make a real dent.

Again it seems highly suspect to assume that merely passing a regulation will have massive impacts while massive attempts at social engineering and heavy enforcement are thought to have little impact.

From the perspective of the state, it should be vastly easier to stop drugs at the border than plastic tubing. Yet Alex is worried that the government will be successful at the latter while holding it to be an abject failure at the former.

Government was definitely successful in increasing the price of the drugs. But Alexes argument is that:

- restricting exports may easily break supply chains short-term; which may be quite a problem right now
- long-term it may lead to diverted investment, less effectivity, less product, higher prices; but that's not something 'massively bad'

I see this as quite plausible... It seems to me that you are trying to argue that Alex claims that it would be a massive problem long-term. But I don't see that claim.

re- black market
it was reported last week mebbe in Houston that a hospital administrator
gotta secret phone number to call for surgical masks at an inflated price

The big question is whether the world (whatever the trading environment) could have prepared for this without significant loss of value and productivity. Most of the items most-needed require storage, maintenance; have expiry dates and periodic training; and require a re-tooling that would overwhelm or handicap several industries. Worth it? I am not sure if this is considered a 1-in-100 years' disaster or not, but if we include all the other 1-in-100 disasters that we would need to consider - how much quicker would we have responded, how many fewer casualties - by spending 0.5% GDP (for example) or more on 'quick disaster prep'? As an engineer which considers 1-in-10 year, 1-in-50, 1-in-100 year designs, i see the shocking increases in cost to move 'up' to the next level - many orders of magnitude - and that's just one-time capital - not maintaining 'readiness'. The world is fraught with stories of previous SARS 'prep' inventories being useless due to age, etc. I think the world has responded better than expected, based still on maintaining a certain degree of 'business as usual' and having reasonable expectations of continued future growth without a total 'panic shutdown'. The losses are sad, the return to growth will be slow, but efficient preparation knowledge will have been gained - hopefully with an understanding of what is reasonable and what is wishful thinking. The Point being: that ‘better trading’ would not have helped and international emergency response could be tightened up - possibly with putting international emergency resources in 'trust' - before total resource segregation needs to happen - since as a bottom line: better a rich, risky world; than a poor, (100% safe) world.

Strengthening the case for freer trade, easier immigration, and reforming occupational licensing should be some the silver linings of the pandemic

Immigration and free trade are going to be restricted, not expanded, because of this.

For one thing, the US/Red China Cold War II is going to get deeper and more bitter. It was a huge mistake to allow Red China into the world economic system without insisting on a change in government.

Why would they be restricted? On China, why wouldn't it lead to more transparency and cooperation? Are you suggesting the virus was a weapon?

Largely because they are not doing so thus far. Xi has disappeared folks who report deficiency's with China's response. The party organs are trying to place blame on the US. And of course there is the fact that China has been sending defective equipment throughout the world.

China is autocracy. Survival of the regime is an existential requirement of all policy. When the folks in China who manage epidemics were faced with a choice between stopping an epidemic or preserving the social face of the regime, they chose the latter.

This dynamic is not going to change. Either we make it painful for China to make the same choice again or we just wait for another pandemic.

Like the US government and media don't blame the Chinese and Putin for all the world's problems? Survival of the regime is an existential requirement of all policy. That's the number one concern of every government, the US included.

At most, the US goes eight years before a new executive. China scrapped any such term limits.

In the US if the parties become sufficiently non-responsive, it is quite possible for new ones to arise; we have had two major parties completely die out and we have had a lot of third parties arise until co-opted (e.g. Free Silver, Dixiecrats, Populists, Know Nothing, Reform). In China if you don't like the CCP's vision you can either get in line or get squelched.

Similarly people who have major policy disagreements with Trump lose their jobs and bad things are said about them, right before they get book deals and commentating jobs on the networks. In China, people who post Winnie the Pooh get jailed.

And then, of course, there is the fact that people have done many things which have not furthered the regime's survival. Sessions recused himself from Trump's probe. Nixon's DOJ resigned rather than protect the regime. And of course a huge number of people have left administrations rather than prop up the current regime when they oppose tactics, goals, or policies.

Because, ultimately, if you lose an election in the US you typically come back within 8 years. And it has been ages since anyone has had unified power for more than 2 years. In China, should the CCP go down, most if not all the party hacks will be gone for good. There will be no new administration for a John Bolton to join. There will be no second act for their Dick Cheney. In the US there is always the hope that the next election will return your side to power and lift your personal fortunes. In China under Xi, if some other party takes over, you can kiss your career goodbye.

At the end of the day, Trump was impeached for trying to limit bad things being said about him and his administration. In China, those behaviors are utterly routine. So we can either tolerate a place where the officials responsible for stopping epidemics place a higher value on maintaining the image of the leadership than on actually stopping epidemics, or we can attempt to induce change.

Exactly how many dead people would make the latter a compelling choice?

It would be interesting to know how an AI (read: increased computational capacity) or whatever the current state of economics (theories with access to higher computing resources)
could have optimized every source, step, path, and need. Of course, half is having the idealized solution and half is having the country/ company buy-in to follow the recommendation. Could each country have a strategic reserve of 'not made here' parts?

We see exactly this phenomenON

Once price increases are off the table, hoarding is a rational response. Export restrictions are a form of hoarding. You will see bartering next.

10 deaths on the Diamond Princess now.
CFR is now at 1.4%

The level of this post is not up to Alex's usual good standard. Typically all of Alex's posts are good, except where he is arguing for unlimited immigration.

Anyway, export ban vs. no export ban is a very blunt, binary view.

Fortunately the business world has has instruments to deal with such a situation:

https://en.wikipedia.org/wiki/Right_of_first_refusal

It doesn't have to be no exports or total freedom to sell to the highest bidder, although that total freedom is probably best for maximizing utility.

A government is still duty bound to value the lives of its citizens higher than that of foreigners, although modern politicians are often not up to that responsibility.

Don't you see that our super wise government planners understand everything? They are GOD's or at least they believe they are. For them reality is optional and they have no skin in the game.

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