How Largely Hidden Trends Are Shattering the Global Trade System

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Yves here. We’ve been pointing out since virtually the inception of this website, that for many and perhaps most companies, the case for outsourcing and offshoring was weak, particularly if you took risks seriously, assuming the goal was profit. However, the most important effect of moving important activities to areas where labor is cheaper is to effect a transfer from lower-level workers to middle and senior management. Indeed, the higher-ups can argue for more pay both due to the alleged cost saving plus the fact that they’ve made their jobs more complicated. But as Marshall Auerback and Jan Ritch-Frel point out, both new concerns about the risk of extended supply chains plus technology reducing the cost of changing production locations is making far-flung trade networks less attractive.

By Marshall Auerback, a market analyst and commentator and Jan Ritch-Frel, the executive director of the Independent Media Institute. Produced by Economy for All, a project of the Independent Media Institute

Former U.S. Treasury Secretary Lawrence Summers has recently conceded: “In general, economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency.” Policy across the globe is therefore moving in a more overtly nationalistic direction to rectify this shortcoming.

COVID-19 has accelerated a process that was well underway before it, spreading beyond U.S.-China-EU trade negotiations and into the world’s 50 largest economies. As much as many defenders of the old order lament this trend, it is as significant a shift as the dawn of the World Trade Organization (WTO) global trade era.

Economists, politicians, and leading pundits are often tempted to see new economic patterns through the prisms of the past; we are therefore likely to hear that we’re back in an era of 19th-century mercantilism, or 1970s-style stagflation. But that misses the moment—the motives are different, and so are the outcomes.

What we are experiencing is the realization by state planners of developed countries that new technologies enable a rapid ability to expand or initiate new and profitable production capacity closer to or inside their own markets. The cost savings in transport, packaging and security and benefits to regional neighbors and these countries’ domestic workforces will increasingly compete with the price of goods produced through the current internationalized trade system. U.S. national politicians from President Trump to Senator Elizabeth Warren will be joined by a growing chorus who see the long-term domestic political benefit of supporting this transition.

The combination of high-speed communication, advances in automated manufacturing and computing combined with widespread access to the blueprints and information necessary to kick-start new production capacity increasingly makes the current international network of supply chains resemble a Rube Goldberg contraption, and it lightens the currency outflow challenge that many economies have had to deal with for the past seven decades.

Growing political will to restore manufacturing capacity in the national interest will have a shattering effect on countries that built up their economies through a labor price advantage over the past 40 years. No amount of currency depreciation or product dumping can overcome the reality of a country’s foreign customer base suddenly opting to produce and buy their own goods at competitive prices.

Taken in sum, the transformation underway isn’t just Donald Trump demanding less dependency on China’s production capacity—it’s a global process. It’s also India signaling it’s going to try to strike its own technological path away from China.

New Patterns of Production

There’s a lot of froth in moments like these, where old patterns continue at the same time new ones emerge. Factories are still closing in the United States on the NAFTA continuum—no punishment for leaving and good incentives to leave; in many respects, it’s because the corporations are part of the same old regime.

But look at sectors of the more advanced economy, and the green shoots and stalks of a new era are quite visible.

There is a cascade of new production in the United States—not the familiar announcements of new data centers, warehousing and logistics centers, but rather the production of high-tech goods and essential restoration of hard infrastructure that one might expect of a more self-reliant economy.

The news website Area Development is as good a radar screen for this process as any. There one can find a running spigot of news items like a new “500,000-square-foot research, development and production center [in Texas] to create electric motors for industries as diverse as electric vehicles, robotics, HVAC, and last-mile micromobility,” or a restoration and upgrade of Newport News, Virginia’s dockyards.

The rationales provided by governments to escape the strictures of the existing trade arrangements and into the new era are fairly easy: a mix of opportunism and need tied to the exigencies of the moment, such as the current pandemic, and long-term national security, which of course can ultimately amount to any economic activity of scope. Senator Elizabeth Warren’s introduction in July of her sweeping Pharmaceutical Supply Chain Defense and Enhancement Act demonstrates that the U.S. power establishment is beginning to reach a consensus on this issue—no longer the sole province of Trump-era nationalism. “To defeat the current COVID-19 crisis and better equip the United States against future pandemics, we must boost our country’s manufacturing capacity,” Warren said, recasting the consequences of decades of policy to offshore our economic production as an “overreliance on foreign countries.” Likewise, Senator Tom Cotton has introduced a new bill focusing on domestic production of semiconductors, titled the “American Foundries Act of 2020,” which aims to rebuild the country’s semiconductor capacity. This bill too has significant bipartisan backing.

The government of Japan’s newly defined restrictions on foreign investment as reported by the Financial Timesof around a dozen sectors including “power generation, military equipment, [computer] software [and technology]” in effect prioritize the claims of domestic manufacturers on national security grounds.

Of course, the Japanese authorities have crafted these restrictions on the vague grounds of “national security,”which is likely to take on a substantially different meaning in the wake of the coronavirus pandemic. Hence, the country is unlikely to face any serious challenge from other WTO members. And it is through that rather simple justification that we can expect a general reshaping of international trade relations and the array of supply chains.

The government of Australia has likewise outlined new powers to scrutinize new overseas investment, as well as forcing foreign companies to sell their assets if they pose a national security threat. The proposals come in the wake of an intensifying trade war between the governments of Beijing and Canberra, alongside “a dramatic increase in the number of foreign investment bids probed by Australia’s spy agency ASIO, over fears that China was spying on sensitive health data,” according to This is happening at the same time that there has been an overhaul of thought with regard to manufacturing, something Australia hasn’t typically done much of. The headlines from Australia are beginning to look a lot like the Area Development stories in the United States.

The Canadian government has also announced plans to enhance foreign investment scrutiny “related to public health or critical supply chains during the pandemic, as well as any investment by state-owned companies or by investors with close ties to foreign governments,” according to the Globe and Mail. This attempt to disaggregate beneficial foreign investment flows from those deemed contrary to the national interest used to be a common feature of government policy in the post-World War II period. Canada established the Foreign Investment Review Agency in 1973 as a result of mounting concerns about rising overseas investment, notably the domination of U.S. multinationals, in the Canadian economy. Its provisions were repeatedly downgraded as globalization pressures intensified, but its value is now being reassessed for compatibility with national health policy and resiliency in manufacturing chains. Predictably, pharmaceutical independence is high on the list.

Taiwan, “a net importer of surgical masks before the pandemic, [has] created an onshore mask-manufacturing industry in just a month after registering its first infections in January,” reports the Financial Times. “Taiwan’s President Tsai Ing-wen… said Taipei would repeat that approach to foster other new industries.” And world economists have noted that Taiwan and Vietnam lead the world in growth of global market share in exports, at the expense of larger economies like China.

In Europe, the EU leadership is publicly indicating a policy of subsidy and state investment in companies to prevent Chinese buyouts or “undercutting… prices.” This was supposed to represent a cross-European effort, but the coronavirus policy response is increasingly driven at the national level. Consequently, it is starting to fracture the EU’s single market, which has long been constructed on an intricate network of cross-border supply chains and strict rules preventing state subsidies to national champions.

The French government under President Emmanuel Macron has increasingly invoked the spirit of Charles De Gaulle in lieu of French industrialist Jean Monnet, considered as one of the founding fathers of today’s European Union. Corporate France has taken heed: In response to French Finance Minister Bruno Le Maire’s rallying cry to the nation’s supermarkets this past March to “Stock French products,” according to France 24, “French supermarket chain Carrefour has already moved to source 95 percent of its fruits and vegetables from within” the country, which by the way is a fundamental logic of any serious environmental agenda. According to Coalition for a Prosperous America, “Le Maire [also] cited pharmaceuticals, the automotive sector, and aerospace as three economic sectors where France needs to reassert sovereignty, i.e., make more products in France.”

Going further in a national TV interview, the finance minister said “that it was unacceptable for France to rely on China and South Korea for 80 percent of its electric battery supply, praising a new France-based battery-making facility that would come onstream in 2022. He praised French drugmaker Sanofi for saying recently that it intends to ‘re-localize’ some of its production back to France.” President Macron himself has likewise reaffirmed a goal for France to ensure the nation’s “health sovereignty” after the coronavirus exposed the reliance of his country on imported medical supplies. According to a recent Reuters report, France’s “Agriculture Minister, Didier Guillaume, told political news channel Public Senat that while France could not be self-sufficient in all food products, it would look at being more autonomous in areas such as plant protein.”

Even Germany, with a vibrant export sector that has long made it a beneficiary of globalization, has also signaled a move toward greater economic nationalism. In a recent interview with Der Spiegel (cited in Reuters), the country’s economy minister, Peter Altmaier, “said he wanted to support pharmaceuticals companies that are dependent for key reagents on imports from Asia to rebuild their production sites in Europe.” In broader terms, part of the government’s overall response to the COVID-19 pandemic has featured €400 billion in state guarantees to underwrite the debts of companies affected by the turmoil. A goal of this package is to prevent a “bargain sale of German economic and industrial interests,” Altmaier was quoted in MarketWatch.

Economic nationalist considerations are also driving a shift in Britain’s negotiating stance in the current Brexit trade negotiations with the EU, with the UK clearly prioritizing national sovereignty over frictionless free trade with its former single-market partners, even if that means a so-called “Hard Brexit.” The EU’s single-market rules specifically preclude state aid to specific industries if it undermines the operation of the single market. But the UK’s chief negotiating officer, David Frost, has made it clear that the ability to break free from the EU’s rulebook was essential to the purpose of Brexit, even if that meant reverting to the less favorable WTO trade relationship that exists for other non-EU countries. In the words of columnist James Forsyth of the Spectator, EU laws on the single market “[deny] to member states what one cabinet minister refers to as the ‘geostrategic premium’ of encouraging domestic production of personal protective equipment. In the single market, the NHS cannot buy solely from British suppliers to try to build up a domestic manufacturing base; it has to accept bids from any company based in the EU.”

Economic Nationalism and the New Geopolitics

Over the past 40 years, this kind of overt economic nationalism, especially as it has pertained to domestic manufacturing capabilities, has generally been eschewed by the United States, at least until the ascension of Donald Trump to the White House. In part, this is a product of the fact that as global hegemon, the United States used to be able to dominate global institutions (such as the International Monetary Fund and the WTO) and shape them toward U.S. national interests. But when necessary, national security considerations have intervened.

Sematech, a government-industry consortium, was created in the 1980s to successfully revitalize the American semiconductor industry, after the Pentagon deemed this to be a strategically key industry that should not leave the United States exposed to the vagaries of foreign manufacturers. The Sematech consortium has represented a great success in national industrial planning, as it enabled the United States to re-establish its global dominance in high-end semiconductor production and design.

More recently, national security considerations in the semiconductor industry have again revived in the wake of the Trump administration’s growing dispute with Chinese 5G telecommunications equipment maker Huawei. The U.S. Commerce Department has now mandated that all semiconductor chip manufacturers using U.S. equipment, IP, or design software will require a license before shipping to Huawei. This decision has forced the world’s biggest chipmaker—Taiwan Semiconductor Manufacturing Company (TSMC)—to stop taking fresh orders from Huawei, as it uses U.S. equipment in its own manufacturing processes. Paradoxically, then, the Trump administration has exploited pre-existing global supply linkages in the furtherance of a more robust form of economic nationalism. The same policy attitude is now visible with regard to pharmaceuticals (as it is in other parts of the world, to the likely detriment of China and India).

A shift like this will have a knock-on effect that will reverberate to the other parts of the world that for centuries have been forcibly limited—by arms and finance—to being sources of raw material export, refined if they were lucky. They will watch closely what happens with Australia, which for the majority of the past 150 years has been an exporter of food and minerals, but is now jumping on the project to establish a national manufacturing base.

As dozens of countries build their own manufacturing base—something only a handful of countries controlled for most of modern history—big questions will emerge about geopolitical stabilization and the classical tools of foreign influence. The world today in some respects resembles the 19th century’s balance-of-power politics, even as the majority of countries understand that some minimal level of state collaboration is essential to combat shared challenges. China is party to a growing number of global disputes, as emerging great powers typically experience: the U.S. vs. China, China vs. India, Japan vs. China, China vs. Australia, and the EU vs. China. But hot wars are unlikely to feature as prominently as they did two centuries ago.

Expect to see Cold War-style conflict intensify, however, albeit in new forms. Instead of the old geopolitical arenas including access to vital commodities or stable petroleum markets, the new forms of the competition will put greater weight on access to advanced research and technologies, such as the collection, transfer and storage of data and the quantum computing power to process it.

The speed at which global supply chains can potentially shift to accommodate the rise in economic nationalism is considerable. The success with which we manage the transition will largely settle the debate as to whether it is in fact the better path to greater prosperity and global stability.

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  1. kk

    Interesting, Trump and Brexit not as the crazed scream of a losing class faced with ongoing economic decline, but rather as manifestations of a new economic/political/technological reality? Who would have thought it…..

    1. Anonymous 2

      In this context, distinguishing between Trump and Brexit is important. The US is in a situation where it can seek to be largely self-dependant if it so wishes. It can produce most of what it needs within its shores if price signals (i.e. cheaper goods from elsewhere) are over-ridden.

      The problem for Brexit is that this is not possible for the UK. Lack of sufficient cultivable land and mineral and other resources means it must trade internationally to sustain its current population. Much UK food is imported, principally from other European countries (there is no sensible alternative where fresh food is concerned). An environment in which international trade shrinks would therefore be deleterious to the UK as it would find it more difficult to sell the exports it has to sell to earn the foreign exchange necessary for buying these imports. Doubtless it could try to pinch money from others by increasing its role as a money laundering centre and general place of safety for dirty money but there will probably be a limit sooner or later to the tolerance other countries are likely to extend to this sort of behaviour.

      1. Clive

        There’s a lot of merit in the main point you advance — no way after nearly three hundred years of being a trade-based economy that the U.K. could somehow revert to autarky.

        But some of the wider aspects of deglobalisation which Auerback brings up aren’t going to go away as political (and so by inheritance economic) policy choices. Why should, as the article asks, the U.K. NHS be forced to competitive tender all procurement and potentially to be forced to have U.K. labour undercut by (inevitably) cheaper Eastern European workers in some ridiculous competition for U.K. government spending?

        Similarly, why should my refuse collection not be done by my local authority’s public employees (on public sector terms or employment and wages) because my local government is forced to let Suez “compete” under EU competition rules?

        Of course, without such mandatory globalisation, the EU Single Market would be a paper tiger and national interests would always tend to prevail, thus limiting EU market integration. But without internal fiscal transfers, how do you stop Member States willing force through internal devaluations and cram down labour in their country from pulling off a “beggar thy neighbor”? You can’t. Just ask Greece. Or Italy.

        The EU has never had a satisfactory answer for that one. Now, the EU could (finally…) bring about a system of fiscal union. But that would need support from the voters (and probably a major transformation of the EU’s democratic institutions to make them, well, democratic). But the voters don’t get asked because the entrenched business and capital interests fear the voters might not vote for it.

        So the problems persist. And here we all are.

        1. John Jones

          I fully agree with you – whilst a now hard brexit looks inevitable , with consequent challenges and shortages over the short ( 2-3 year term) the move to a more national centric resilience and home grown manufacturing looks inevitable.

        2. Anonymous 2

          Your questions are all reasonable. I was however writing purely with the UK’s problems in mind. Given that the UK has left the EU and there is no chance whatever of single market rules applying to the UK from 1 January 2021, unless something quite extraordinary happens, they surely are not now relevant from a UK perspective?

          My concern for the UK is that, as it is dependent on international trade, it is badly placed to cope in a world which is ‘deglobalising’.

          1. Clive

            Indeed, and it is that “you can have either A or B but not both A and B that makes a hard Brexit inevitable. If the only deal on offer is going to involve Single Market competition rules, you might as well not have Brexit at all. If the Single Market rules produce unpopular domestic policy demands — demands the voters are, in aggregate, unwilling to live with — Brexit was perhaps inevitable.

            But different European countries will make different choices. However, choices which seemed inconceivable 10 years ago are — and I think this is Auerback’s main point — maybe not quite so inconceivable as they used to seem. But each country’s political — and economic — environment is different. France more likely to become the 51st State of the USA than it is to leave the EU (i.e. a “Hell freezing over” likelihood). But other EU Member States are at different points in this spectrum.

    2. Geoffrey

      Michael Hudson contends that US cannot significantly re-shore manufacturing because of the excessive economic rent extracted across the economy by the FIRE sector: until the debt load imposed by the FIRE sector across the US economy is at least partially lifted/forgiven, US workers cannot compete with foreign workers in manufacturing.

  2. Sound of the Suburbs

    The Berlin Wall had fallen and a uni-polar world was born.
    The US reigned supreme.

    China was insignificant.

    China is now a superpower and a threat to the West.
    How on earth did we get from A to B?

    It was all about profit, and Western leaders didn’t think about how China would be the main beneficiary from this arrangement.
    Maximising profit is all about reducing costs.
    China had coal fired power stations to provide cheap energy.
    China had lax regulations reducing environmental and health and safety costs.
    China had a low cost of living so employers could pay low wages.
    China had low taxes and a minimal welfare state.
    China had all the advantages in an open globalised world.
    It did have, but now China has become more expensive and developed Eastern economies are off-shoring to places like Vietnam, Bangladesh and the Philippines.

    Western companies off-shored to China where they could make higher profits.
    China took full advantage of the situation and got Western companies to sign technology transfer agreements handing over decades of Western design and development knowledge to the Chinese.

    China was a new, fast growing economy compared to the mature, slow growing economies of the West.
    Investors would be able to achieve better returns in the new, fast growing Chinese economy and this is where the money headed.
    US investors found they could get the best returns on their capital in new, fast growing Chinese economy.
    US investors love China and know it’s the best place to make real money.
    George Soros, Bill Gates, Warren Buffett, Elon Musk, Jeff Bezos …..

    George Soros’s old partner in the Quantum Fund, Jim Rogers, is making sure his children learn Mandarin as he sees China as the future.
    He’s scarpered already, and now lives in Singapore.
    It’s closer to where the action is.

    China rose, while the West went into decline.
    This is how we went from A to B.

    If we leave this running it will be China first and the US second.
    Let’s try and shut the stable door after the horse has bolted.

    1. Sound of the Suburbs

      Why didn’t anyone notice what was going on?
      When elites have got their snouts in the trough they can forget all about the bigger picture.
      “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffett, 25 May 2005
      That’s all very well Warren, but how is the US doing against China?
      Who cares, I’m making loads of money.
      Oh dear.

      1. a different chris

        >but how is the US doing against China?

        But you basically pointed it out — the elites don’t care. They aren’t “Americans” in any sense that the rest of us are:

        >He’s scarpered already, and now lives in Singapore.

        1. Sound of the Suburbs

          They are the top rung of the “anywheres” ladder.
          They are global citizens.

          Wait a minute, China isn’t playing ball. They were supposed to be subservient to the US.
          After letting the US get run down for a few decades, it is now important to have a strong US to oppose China.

    2. Pookah Harvey

      The Chinese realized they needed capital and technological expertise to compete in the world opened up to them by the WTO. WTO trade rules, made by neo-liberal international corporations, was concerned only with the maximization of profits. The Chinese realized neo-liberalism was the tool allowing them to get what they needed. They realized the greed of plutocrats far exceeds any patriotism and could easily be exploited. Plutocrats,more than willing to loot their own country, moved capital and technology to where they could maximize their wealth while hiding this new found wealth in tax havens. Thereby economically wringing the population of their own country dry.

      I don’t fault the Chinese for exploiting a corrupt economic system that Americans willingly allowed. The people allowed it because of a propaganda program more sophisticated and extensive than had ever been devised previously. The Powell Memorandum spelled it out. Business successfully took control of education, media, and politics through the power of money.

      Powell knew that by controlling the flow of information you could control a democratic government. The internet has now changed that flow so that it is more difficult to control. I wish I could tell where this new flow will go, hopefully to a increasingly well informed public. As Jefferson said, “wherever the people are well informed they can be trusted with their own government; that whenever things get so far wrong as to attract their notice, they may be relied on to set them to rights.”

      1. JBird4049

        And by misinforming the people, the people doing that misinforming start to believe their own lies or at least can’t tell reality from fantasy.

        “What is really happening? What is the truth?

        Who knows? But we’re making boatloads of money, and that’s what counts!”

      2. Winston

        It is ridiculous to think that American workers will benefit from reshoring when neoliberalism rules. Just look at what is happening in higher ed:
        The Death of an Adjunct Thea Hunter was a promising, brilliant scholar.
        And then she got trapped in academia’s permanent underclass.

        Neoliberalism at its core is about profit for the advantaged and extracting value. This was there from the beginning.It is the East India Company (EIC) ethos baked in the US since its founding and connection revealed in the US flag’s resemblance to the EIC’s flag. This is just US returning to its original form.

      3. Geoffrey

        From my understanding the US actually blocaded China from 1949 till 1972, so actually hindering its ‘natural’ development. It didn’t require a Cold War, China didn’t have the proven economic or war-making capacities of the USSR (only by sheer weight of numbers of soldiers, did it stop the US/UK in Korea). And it built up South Korea and Japan. So China didn’t just take advantage of what was on offer post 1972, it also had a major inhibiting against its development lifted factor lifted.

  3. fresno dan

    Sound of the Suburbs
    July 4, 2020 at 6:27 am
    Good analysis.
    Why didn’t anyone notice what was going on?
    You answer your own question: … making loads of money.
    Or said in a fancier manner: It is difficult to get a man to understand acknowledge something when his salary billions depends upon his not understanding acknowledging it.
    Of course, Americans insist that we have a representative government, when in fact we have an obvious plutocracy. And plutocrats don’t get to be plutocrats by taking care of anyone but themselves…

    1. Off The Street

      Those plutocrats have plenty of enablers in Congress and neighboring agencies and along K Street. The enablers get to hobnob with their bettors while inhaling a whiff of luxury, and finagling some offshore funds, e.g., Panama Papers variety, for their posterity.

      It takes a few village idiots to sell out a village, perhaps “destroying, to save it”.

    2. Sound of the Suburbs

      Democracy doesn’t seem to work as well as it used to.
      Where did it all go wrong?
      James Buchanan came up with Public Choice Theory.

      James Buchanan life’s work was dedicated to putting democracy in chains and this is covered in Nancy MacLean’s book of that name.
      He wanted to take power away from the people and he came up with “Public Choice Theory”.
      As soon as you know what it is, you’ll see what’s wrong with it.
      Who better to explain it than the man himself?
      James Buchanan explains “public choice theory” in a BBC Documentary called “The Trap”.
      At 48.00 min.

      When you know the theory, you can see the problem.
      Politicians are supposed to be for sale, that is the idea.
      Lobbyists would now guide Western politicians rather than the electorate.
      It wasn’t actually democracy anymore.

      You can see Margaret Thatcher signing up to this in the video.

  4. Thuto

    The drive to reestablish local manufacturing capacity is riddled with cross purposes that aren’t going to be easy to resolve. For example, the instinct that drives oligarchs, profit maximization by lowering costs (and labour is always the lowest of low hanging fruits here), works at cross purposes with establishing a viable internal market that can afford goods produced locally because of consumers earning higher wages. Will the oligarchy commit to raising the living standards of newly hired manufacturing workers? Will they even hire any human workers or is their idea of revitalizing local manufacturing setting up mega factories where robots and AI run the production line? If it’s the latter, and it may very well be, there’ll be no beneficial effect on local employment and thus no creation of an internal market for corporations to sell their wares to.

    With protectionism and high tariffs a key component of the new world order, who will buy all these locally (and robot) manufactured products? The service and gig economies have spawned a neoserfdom in their wake so are unlikely to come to the rescue of mega corporations sitting on unsold inventory. Add to this the fact that multinational corporations like Apple aren’t likely to pare their gluttonous need for growth and hyper profits in the name of patriotism, and as Sound of the suburbs says, the juiciest growth markets are still in the developing world. Apple may very well onshore its manufacturing, but the US market alone won’t be big enough to feed their huge appetite for profits. As such they will still want/need to sell their gadgets to a global market and with trade tensions and barriers expected to go only one way, i.e. up, will they co-opt the machinery of the Pentagon to forcibly sell their excess inventory to other countries staring down the barrel of a g#n? The multinational corporation may very well have to become an anachronistic relic for this new world order to fully come into effect.

    1. Paul Whittaker

      like the last empire forcing China to buy Indian grow opium at the barrel of a gun?

    2. Geoffrey

      Jack Rasmus often interjects that capitalism is about ‘class at home and imperialism abroad’ – they are both sides of the same coin. The problem with globalisation is that the ability to extract abroad empowers (both materially and culturally) the dominant class at home. If the extraction was limited to within national boundaries, there would be some ‘natural’ political limits imposed by the need to have a somewhat cohesive and coherent society. Such need for social cohesion is not required across the wider international stage, and the causes of the social and economic problems (of excessive extraction) can be laid at others doors.

  5. John

    Does all this say that Mr. Market and those who worship at his feet is not always correct, that there actually are motives other than profit, that the church of unrestrained capitalism is not the answer to everything? Golly, who woulda thunk it?

  6. The Rev Kev

    Lots to chew over in this latest work by Marshall Auerback. Several points that I would like to bring up. I would be remiss in not saying that I do not think that manufacturing will simply flee back just to individual countries. We use to live in a unipolar worlds but now we are shifting into a multipolar world so I would not be surprised to see manufacturing flee back to blocks of countries rather than individual countries. Still, Russia could teach us a lot about autarky.

    Marshall makes the point of a combination of high-speed communication, advances in automated manufacturing and computing combined with widespread access to the blueprints and information will be necessary to kick-start new production capacity. But there is a bottleneck for a country like the United states and that is the infrastructure, particularly the electrical grid and internet connectivity. The American Society of Civil Engineers does an annual report on American infrastructure and that for America’s electrical grid gets only a D+ so I am not sure it will support what will be needed-

    I don’t know about the others countries but I can talk about Australia as I am currently standing in it. At the end of WW2 Australia made everything for itself but over the decades home production went on a steep down slope. What happened? The same thing that happened elsewhere – neoliberalism, that’s what. That new plan for the Australian manufacturing sector does not tell the full story. The current Coalition government was stated that they want to turn Australia into a major arms manufacturing center because that is just what the world needs – more weapons.

    And last week the government announced that they are going to spend $270 billion on defence over the next decade. As the Australian Defence Force has a strength of just over 85,000 full-time personnel and active reservists, it is obvious that production runs would be very short and not financially viable – unless you were going to keep those lines going for export. And I think that this is going to be the main input for a rebuilding of the Australian manufacturing sector so not as great as it sounds.

  7. David

    Some good thoughts here, but a bit jumbled up.
    The third paragraph is a non-sequitur: mercantilism was a doctrine based on the idea that the amount of wealth in the world was finite, rather than a policy, and stagflation was an economic situation, brought about by a huge hike in oil prices. It’s hard to see why either should come back now. Likewise, the fourth paragraph seems to confuse trade between nations with internationalisation and offshoring of supply chains: the consumer electronics industry in most western countries was destroyed by expensive but high-quality Japanese imports made by workers paid more than in western countries. Rebuilding such industries would require massive investment in technology and training, which doesn’t seem likely. Same goes essentially for computers and smartphones, where manufacturing capability and the technical training of a workforce was deemed too boring. On the other hand, outsourcing cheap garment production to Bangladesh was a cost issue. But it’s unclear why new technology should enable any of this to be reversed, when we were told it was new technology that made it possible in the first place.
    In France, to take an example I’m familiar with, there’s an important distinction between moves to restore economic sovereignty by re-establishing lost manufacturing capability, “re-on-shoring” of production by French companies abroad, and the panic reactions to the virus, and the discovery that the means to deal with it were no longer under national control. The first, and to some extent the second, have been themes in French politics for years, since Arnaud Montebourg launched the “made in France” initiative when he was Minister for the Economy under François Hollande. Mocked by elites, it has seen a lot of success, but not due to the government – indeed when Macron was briefly Montebourg’ successor, and especially since he has been President, the subject didn’t interest him at all, and he happily presided over industrial carnage in the country. I doubt whether what we are seeing now is anything more than a tactical concession to widespread panic.

  8. Sound of the Suburbs

    We stepped onto an old path that still leads to the same place.
    1920s/2000s – neoclassical economics, high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase
    1929/2008 – Wall Street crash
    1930s/2010s – Global recession, currency wars, trade wars, austerity, rising nationalism and extremism
    1940s – World war.
    We forgot we had been down that path before.

    I first made the connection when I saw Golden Dawn rise in Greece.
    How can a Neo-Nazi party rise in Europe, in the 21st century?
    This just shouldn’t happen.
    I have just been adding to this list ever since as we continue down this old path.

    So basically we have been travelling in a great big circle?
    You got it.
    After the 1970s we looped back to the 1920s.
    The arc of a large circle does look like a straight line.
    Neoliberalism was just a wrapper hiding the dodgy, old 1920s neoclassical economics lurking underneath.

    1. Sound of the Suburbs

      I put an early version of this comment in the comments section of the liberal Guardian.
      The liberals insisted it was a one off.
      Now they are worried about the rise of the far right in many countries, they never did see the early warning signs.

    2. flora

      Neoliberalism was just a wrapper hiding the dodgy, old 1920s neoclassical economics lurking underneath.

      Yes. A shiny new philosophy to make the 1920’s economics and power arrangements sound modern and virtuous.

      1. Sound of the Suburbs

        It was very good though.
        Hardly anyone has seen through it.

        Once you start looking you can see the US is repeating 1920s mistakes.

        1929 and 2008 look so similar because they are.
        At 18 mins.
        1929 and 2008 – Minsky Moments, the financial crises where debt has over whelmed the economy.
        They did save the banks this time, which avoided another Great Depression.
        They left the debt in place, which caused a balance sheet recession.

        As a CEO, I can use the company’s money to do share buybacks, to boost the share price; get my bonus and top dollar for my shares.
        Share buybacks were found to be a cause of the 1929 crash and made illegal in the 1930s.

        What lifted US stocks to 1929 levels in 1929?
        Margin lending and share buybacks.
        What lifted US stocks to 1929 levels in 2019?
        Margin lending and share buybacks.
        A former US congressman has been looking at the data.

        “The Great Crash 1929” John Kenneth Galbraith
        “By early 1929, loans from these non-banking sources were approximately equal to those from the banks. Later they became much greater. The Federal Reserve Authorities took it for granted that they had no influence over these funds”
        He’s talking about “shadow banking”.
        They thought leverage was great before 1929; they saw what happened when it worked in reverse after 1929.

        …… etc …..

        1. Sound of the Suburbs

          If neoliberalism had shared more of its rewards with me, I might not have looked so hard.
          Too late now.

          The letters promising a bright, international future only went to our private schools.
          We didn’t get any at the state school I went to.

          1. flora

            And so we at NC benefit from your non-dogmatic study of history. Which is a good thing for us, imo.

            1. flora

              adding: I sometimes wonder if the 1920’s economic hubris resulted from winning ‘The War to End All Wars’ in 1919, and as if the 1990’s hubris resulted from ‘Winning the Cold War’ in 1991. As if the economic system in place at the time was credited with winning a war. Instead of , you know, democratic systems. (Knowing that correlation isn’t causation, of course.)

          2. deplorado

            >>The letters promising a bright, international future

            What are those letters? It would be a nice historical testimony to add, if you are referring to something specific.


  9. Jesper

    I’d have liked to see more written about the ‘Just In Time’ strategy. The cost/benefit of the JIT might have changed in the past decade, the cost of having more inventory might have stayed the same. It might also have changed.

    Finland has not (yet anyway) run out of PPE during the COVID crisis. The reason why is that they were prepared and had plenty of PPE in warehouses. In some cases then it might be more cost-effective to stockpile certain things rather than having over-capacity to handle peak demand or disrupted supply.

    The stockpiling:

    & what can happen when there is global shortage due to demand spike:
    Fortunes can be made during turbulent times. Desperate people might pay too much and there is the risk that what’s bought isn’t of the expected quality/usefulness. Possibly that might have happened in the case linked to above, I do not know the outcome of the investigation.

    1. Ben Oldfield

      I worked in the mining industry in Zambia where all the spares for the mining equipment had to be imported from overseas. We had there folloing saying about supply of spares:-
      Just in time
      just too late
      Far to late
      An example of the consiqunce the engines in the trucks and excavators lasted only 500 hours instead of 9,000.

  10. chuck roast

    I appreciate Marshall keeping his eye on this ball. In the long arc of history, I see the Seattle WTO resistance as the high point of the free-trade libertarians. The shock of that event on the world-wide association of golfers was never lost on any of them. The perfect je ne sais quoi of the NAFTA capitulation by the New Democrats was brought into question and was reflected in its entirety in the long and sweet strangulation of the Doha Round. While we a “new and improved” NAFTA has been agreed to, let us not forget that the Canadians put the shiv into ISDS provisions.

    The tide may be continuing to turn, but a click on the American Foundries Act of 2020 will disabuse anyone of the notion that any appreciable barriers to international trade have been set up. Rather then break anybody’s rice bowl it’s always much easier for the servants of the rulers to print up a quick $25B to beg the usual suspects bring a bit of the largess back home. Heaven forbid that the US applied a few targeted tariffs at strategically important manufacturing. Surely, the entire staff and management of the WTO would head for the fainting couch, and cries of “…Smoot-Hawley, Smoot Hawley…” would rain down from Krugman to The Akron Beacon.

    Progress may be being made in the important area of enhancing and maintaining a robust national manufacturing capability. More significantly, widespread awareness of the resumption of national sovereignty is becoming firmly established. We must always give credit where credit is due. Today I will hoist the Guinness in honor of Dani Rodrik who clarified it all. We cannot simultaneously pursue democracy, national self-determination, and economic globalization. Amen, brother!

    1. OpenthepodbaydoorsHAL

      It’s hilarious to me that probably the main recent driver of “widespread awareness of the resumption of national sovereignty” (one DJT) is roundly demonized for it. Lol the screechers as always have not thought through the reaches of their position. Let’s see, if you’re not for your nation then you are for the forces that eviscerated its basic economic functions and diverted all its treasure into other pockets. How’s that working out for you?

  11. JeffK

    Great article. One thing not mentioned in relation to the semiconductor industry is China’s domination of the world supply of rare earth elements. It’s a huge leveraging position and a bit scary to think how it could be used. With everything now digital, it’s easy to take this for granted, until you can’t.

    1. CanChemist

      Exactly, and this is an understatement too. What this article is discussing is really only about pushing the issues further upstream… important, but not the whole story. When one makes anything, at the beginning, there are raw inputs. And those are generally pulled from the ground kicking and screaming, or cut down in a forest or field somewhere. e.g. it’s fine for France to make it’s own batteries, but the chemicals needed for them are ultimately sourced from only a few places and none of them are particularly friendly. This is true of many, many industries. So it’s possible to localize production, but only to a point…

      1. JeffK

        As long as ‘comparative advantage’ is framed just in terms of production labor markets, the “upstream” push and pull of protectionism vs globalization policy will continue to moderate national economic benefit or pain…until comparative advantage is framed in terms of the one resource that the world economy has come to depend on – more so than oil which is found on many continents. China has more than 90% of the known enriched deposits of rear earths. I guess we will see what happens when countries jump on the band wagon to repatriate industrial production away from China, especially in the semiconductor, photovoltaic, and electronics sectors. Could a threatened trade embargo, or excessive value-added tax on rare earth derived exports moderate the exodus?

          1. rtah100

            Local production capacity and local production capability are not the same thing, except asymptotically, and neither has anything to do with commodity extraction.

            The point about cultivating a national capability to manufacture certain items is, a bit like the argument for nuclear weapons, you don’t have to use it (well, only in tactical amounts…). It’s about human capital. If your nation has the skills to make, for example, PPE, and you have a couple of suitable factories lying about inefficiently and some warehouses to stockpile imported PPE, you’ve done enough. You don’t need to be the number one exporter of PPE. All you need is to be able to turn the capacity on in a hurry – or to threaten to do so in negotiations about import prices.

            There are some complex items where you probably have to keep a minimum output to keep people trained and up to date, rather like surgeons need to do enough procedures of a given type each year or their death rates increase. But you do not have to be a champion, just a contender.

            The above is all about capability, which is human capital and some capital goods and land. The commodities that are the basic inputs of an economy are not necessary. Most commodities are available in plenty of place. Rare earths metals are neither rare nor earth nor metal. China just happens to control a lot of very low cost supply, partly because it is not recognising the negative externalities of pollution in mining and refining them. Oil producers need to sell their oil because it is worthless to them in the ground. Once it is on the global market, it is fungible. The same with rare earths. And the same with food.

            If there is a trend to internal capability, we will see successful countries specialise less, with a corresponding loss of efficiency but a gain in the flexibility of their economies.

            Countries with poor educational systems, low social capital and short-term thinking will do badly. Japan should do well.

  12. Susan the other

    I am so glad to read this info. Thanks for this post Yves and MA. It’s worth a firecracker or two. Three thoughts on global stability and economic nationalism: 1. The neoliberal frenzy to trade for profits will take a breather and so will the environment and the world’s poor. 2. Sovereign money can be spent directly into these industries for the benefit of society/environment. 3. There can be much better science, control and maintenance of economies and ecosystems. And possibly an additional spinoff that a new “trickle down” could begin to occur into rural economies.

  13. kiers

    What happens if supply chains nationalize and the US is no longer the leader in that category? Such a long winded article, completely misses the point. Competition itself is being “nationalized”. It only matters that a product be tops in its category “nationally” not “globally”, Thanks to sanctions and the propaganda-news bubble!

  14. California Bob

    Offshoring has had the desired effect, if indirectly: American workers are now willing to accept much lower pay and benefits, knowing they have competition from China, et al (“If you strike we’ll just close the factory and move it to China”). If the slope of the pay curve had remained the same as it was in 1950 to, oh, say, 1975 or so unskilled labor–esp. if unionized–could command around $50/hr (with commensurate inflation). Now, labor will be satisfied with $20/hr and meager benefits. Maybe manufacturing will now ‘pivot’ to the less-expensive areas of the country?

  15. Schmoe

    I came across this article a few weeks ago: The Economist also had an article with a breakdown by industry and I recall that other than one niche industry (chemicals?) almost nothing is being onshored.
    Perhaps it is too early to say that the US has failed in its effort to onshore manufacturing, but the trends do not appear favorable. Until we get healthcare costs under control (as if), it is hard to envision anything outside niche high-end manufacturing where salaries are a low percentage of costs coming back. And even for those niches, what about Korea and Japan keeping those niches?

    1. Lynne

      I thought part of the impetus for offshoring was the laxity of environmental regulation. Beating down US workers was just a side effect.

      And now that there is chatter that environmental degradation may be a rising concern in China, corporations are losing some of the regulatory incentives for manufacturing there.

  16. sam

    Interesting analysis but I think the author attaches too much importance to product-specific proposals that amount to little more than political grandstanding. Even if sincere, singling out particular products for subsidy will not reconstruct a manufacturing ecosystem or encourage development of the necessary human capital. That would require broad changes in tariff or tax policy which would no doubt attract fierce opposition from the usual corporate suspects, as the Trump administration learned from their early efforts to include on-shoring incentives in the 2017 tax bill and the incessant media attacks on “Trump’s trade war”.

  17. Jeremy Grimm

    Not so very long ago one faction of our Big Money betters brought a very large amount of pressure to bear in pushing through the TPP ‘trade’ deal. It would be nice to believe that TPP and ‘deals’ like it are dead, and will never again threaten. The Corona pandemic has dramatized the fragility of our economy — but it isn’t as if that fragility were only recently discovered. As the 2020 election approaches, the front runner of the moment was Vice President to the President who pushed TPP. His party-coronated successor continued the fight for TPP until political expediency demanded a mealy-mouthed recantation.

    Does this post give evidence of a sea-change or just a momentary shift in the rhetoric of the moment?
    “There is a cascade of new production in the United States—not the familiar announcements of new data centers, warehousing and logistics centers, but rather the production of high-tech goods and essential restoration of hard infrastructure that one might expect of a more self-reliant economy.”
    It would be nice to believe this. The news from Area Development [AD — an interesting acronym] and a few bills introduced to the Senate … do not a “cascade of new production” make.

    “Taiwan, a net importer of surgical masks before the pandemic, [has] created an onshore mask-manufacturing industry in just a month after registering its first infections in January,” Good for Taiwan. Did a similar onshoring of mask production take place in the US? The CARES Act dumped huge amounts of cash onto the US finance sector — the job-creators who invest in new ventures [/s — as if it were necessary]. Lots of small concerns started making cloth masks but what about the critical filtering material? How long did it take before the market for cloth masks was flooded with masks made far far away?

  18. Lynne

    It’s all show. Meanwhile, the supposed champions of national commerce in Congress repeatedly block any country of origin food labeling. And then point to the US controlled international agreements that say they can’t and blame “foreigners.”

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