Why Strategic sovereignty is a bad idea

Spoiler: A lot of people cried wolf at the outbreak of the Corona crisis. Media reports of shortages of medical goods led to demands for increased production inside the EU of such goods. These demands came at the same time as some countries closed their borders and prevented exports of medical goods to other countries.

But these demands have been proven wrong. Most medical goods were produced within the EU, and trade with medical goods increased dramatically during the crisis eliminating the shortages. This and earlier experience from trading with the rest of the world show that decreased globalisation and specialisation will give us fewer resources and make us less resilient when future pandemics occur.

The export restrictions were counterproductive. The correct policies for combatting pandemics are trade-facilitating. Lowering tariffs and reducing the number of Non-Tariff Trade Barriers are obvious policies. In fact, decision makers across the world have realised this and have now introduced trade-facilitating measures for covid-19 goods that cover more trade than the trade-restrictive measures that were initially introduced. The correct policies within the EU is of course to make sure that the functioning of the Single Market is not harmed by trigger-happy politicians.

During the first months of the outbreak of the Corona crisis, some politicians raised the voices and argued that globalisation had gone too far. They claimed that the EU should strive for “strategic sovereignty” and reduce its dependence on global value chains. Many of these calls came from politicians in countries that had imposed export restrictions on medical goods and border controls which not only delayed the flows of goods but also prevented people who crossed borders back and forth to their workplaces. But these calls for protectionism and self-sufficiency are wrong.

They are wrong for at least three reasons. Firstly, most of the “Covid-19” goods are produced with the EU. Secondly, the non-EU countries that supply the medical goods EU want, are importing medical goods from the EU. The parts and the components are produced in many different countries according to the comparative advantages of the locations.  Therefore, thirdly, production of all medical goods within a country or the EU would be so inefficient and costly that we would not afford other goods and services we need as shown in this article.

Most of the medical goods that were demanded during Corona are produced within the EU.

In 2019, more than 60% of the Covid-19 goods that EU countries imported were imported from other EU countries, i.e. intra-EU imports. As shown by Guinea and Forsthuber , for most of the products, EU firms supply most of the demand:   

“there were only 112 products, making just 1.2% of the value of EU total imports, for which the four largest suppliers were non-EU countries as compared to more than two thousand products for which the four largest suppliers were from EU member states. And while not every product is equally important in the face of a global pandemic, there is not a single Covid-19 related good for which all EU imports only came from non-EU countries.”

In fact, EU countries were the most important suppliers of goods within the EU as they occupy more than 50 % of the EU’s imports market share in 74 % of all the imported goods. Furthermore, EU suppliers occupied 80% and more for 35 % of the covid-19 goods, c.f. Figure 1.

Figure 1. Number of imported products in the EU by share of intra- and extra-EU imports in 2019.

Source: Guinea & Forsthuber (2020). https://ecipe.org/publications/globalization-makes-us-more-resilient/

More than two thousand products for which the four largest suppliers were from EU member states.

All countries are dependent on each other

Proponents of an EU “strategic sovereignty” seem to think that that facing a crisis like covid-19, a country, or group of countries, i.e. the EU, with all the production facilities on its national soil would have done better. Maybe they believe  that the EU is more dependent on the rest of the world than the other way around. But thinking like this is wrong.  There is a high degree of interdependence between producers of medical goods in different countries. The surge in demand for medical goods was such, that no country had a large enough production capacity to satisfy its demand. Also China had to import a large number of face masks. The OECD has put some numbers of the interdependence between countries. For every euro of German exports of Covid-19 goods, Germany imports EUR 0.72 of Covid-19 goods; in the United States, for every dollar of Covid-19 good imports, the US exports USD 0.75 of Covid-19 goods.

And as shown by the WTO, the US and Germany are the biggest bilateral trade partners for medical products; and both the US and Germany are the main suppliers to China”, c.f. Table 1.

Table 1. Top 5 partners of the top 3 importers of medical goods.

Source: WTOhttps://www.wto.org/english/news_e/news20_e/rese_03apr20_e.pdf

So, contrary to popular belief, China, who is often considered to be a dominant supplier of goods, is heavily dependent on German and US firms both for its consumption but also for its production of medical goods further down the value chain. An obvious example of how countries depend on each other is the ventilator. A ventilator consists of more than 600 parts and components. It would be awfully expensive if countries were to produce their own ventilators.

Trade with Covid-19 goods has increased

Even though the Covid-19 crisis caused total trade to decrease, trade in Covid-19 goods has increased according to the WTO:

 “Strong trade performance in June and July have brought some signs of optimism for overall trade growth in 2020. Trade growth in COVID-19 related products was particularly strong in these months, showing trade's ability to help governments obtain needed supplies.”

Which was facilitated when countries began to remove trade-restrictive measures and instead implement trade-facilitating measures. A WTO report finds that the G20 countries implemented a numerous trade -facilitating and support measures an economic recovery. These included covid-19 measures. Even though governments in some countries were stupid enough to implement measures that hampered trade in covid-19 goods, 63% of the covid-19 measures were trade-facilitating.

Strategic sovereignty and more trade barriers will make us less resilient. Lower trade barriers make it easier to cope with future pandemics

The decisions that bureaucrats and politicians made in the beginning of the crisis were counterproductive. The export restrictions and border controls made the initial shortages worse. Arguments that the EU in the future need to be more self-reliant and have more “domestic” production for future pandemics is also false which the Finnish example proved. Finland had large supplies of medical goods which were maintained on a regular basis. This did not prevent the Finnish economy from participating in the globalisation.

Aiming for strategic sovereignty or self-sufficiency is wrong. (That can't' be said too often) It would make us poorer and less able to cope with future shocks like covid-19. As shown above, the production of goods inside the EU is made with the aid of intermediate goods from outside the EU. The ventilator made by Philips, is made up of more than 600 components which are designed, produced, and assembled in different locations all over the world. It would be expensive and inefficient to build factories inside the EU to make all the components. Also, the production of simple products like hand sanitizers are made of ingredients from outside the EU.

The production of different final goods and intermediate goods are located all around the world according to the comparative advantages of these location. So even if a country managed to produce a good that it was not producing before, the cost would be much higher than importing it from abroad. The OECD shows that a world where local production substitutes global value chains would be poorer and more vulnerable to shocks.

And it is not the higher cost of domestic production that matters most. It is the opportunity costs. These can be thought of the income foregone as would be engaged in inefficient production instead of using our comparative advantages to produce goods that other countries need.Strategic sovereignty, self-sufficiency or less globalisation would make us poorer, c.f. Figure2.

Figure 2. Economic globalisation vs GDP per capita relative USA 2017.

Source: GDP per capita. "The Next Generation of the Penn World Table" American Economic Review, 105(10), 3150-3182. www.ggdc.net/pwt. Economic Globalisation Index. KOF Swiss Economic Institute. https://kof.ethz.ch/en/forecasts-and-indicators/indicators/kof-globalisation-index.html. Note: Both variables refer to 2017.  

Also, within the EU (and elsewhere), the number of firms producing medical goods has increased. The increasing supply has been produced both by existing firms and new firms. Many existing firms changed their production to meet the increased demand for medical goods while they faced reduced demand for their traditional goods. New firms supplying new and improved medical goods were alsot established. This means that also the number of medical goods produced has increased and shows that free markets function well in crisis. The Corona crisis has demonstrated how flexibility and ability to adapt to new conditions are crucial to cope with the demand for medical goods. The decisions are made on firm level in response to changing relative prices and a free flow of information. It also shows that co-operation between the private and public sectors worked well.

Globalisation speeds up vaccine developments

And the last points are the most important feature of globalisation. Globalisation is not only about facilitating flows of goods, services, capital, and labour. Globalisation increases the amount and speed of information and technology across borders. Globalisation is also about co-operation.

After the Chinese reported the outbreak of the corona virus, it took a week for German researchers to identify its gen, then another week to develop tests to diagnose people. Laboratories in Germany, Israel and South Korea very early began to develop vaccines ready to be clinically tested. And in mid-March had Dutch researchers in Rotterdam found an antibody which can be used to develop drugs against the corona virus. As I write this post, vaccines are developed faster than ever before. This is the result of exchanges of information and between millions of people around the world who one way or another are participating in combatting covid-19.  

As I wrote here globalisation’s flows of information and knowledge across the Internet saves lives. And it will save lives again, c.f. Figure 3.

Figure 3. Under 5 year’s death rates from malnutrition falls with increased globalisation.

Source: Death rates: Global Health Data Exchange, http://ghdx.healthdata.org/ Informational Globalisation, https://kof.ethz.ch/en/forecasts-and-indicators/indicators/kof-globalisation-index.html Note: Global under 5 child deaths from nutritional deficiencies. Death rates per 100 000 people. Informational globalisation gauges the extent of trade with high-technology products, international patents and use of Internet bandwidth.

More globalisation is the correct policy

The obvious thing to do is to lower tariffs and reduce or eliminate Non-Tariff Trade Barriers. Also, movements of people need to be facilitated so that both the ordinary labour force and expertise can engage in production of medical goods without delay. Within the EU, the Single Market must be allowed to operate smoothly.

Read more:

Baldwin, R. E. & Evenett, S., J. (2020). “Covid-19 and Trade Policy: Why Turning Inward Won’t Work”. A VoxEU.org Book. CEPR Press. https://voxeu.org/content/covid-19-and-trade-policy-why-turning-inward-won-t-work

Bamber, P. et.al. (2020). “Why global value chains remain essential for COVID-19 supplies” https://voxeu.org/content/why-global-value-chains-remain-essential-covid-19-supplies

European Commission (2020). HS/CN8 classification reference list for dataset ‘EU trade since 2015 of COVID-19 medical supplies’  https://ec.europa.eu/eurostat/documents/6842948/11003521/Corona+related+products+by+categories.pdf

Guinea, O. & Forsthuber, F. (2020). Globalization Comes to the Rescue: How Dependency Makes us More Resilient https://ecipe.org/publications/globalization-makes-us-more-resilient/

National Board of Trade Sweden (2020). “Improving Economic Resilience Through Trade – should we rely on our own supply?”

OECD (2020). “Trade Interdependencies in covid-19 goods”. https://www.oecd.org/coronavirus/policy-responses/trade-interdependencies-in-covid-19-goods-79aaa1d6/

World Trade Organisation (2020). Report G20 Trade Measures. (Mid-May to Mid-October 2020). https://www.wto.org/english/news_e/news20_e/trdev_18nov20_e.htm