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What impact Covid-19 will have on the global economy no one now knows, but at least two things seem clear and will have consequences, both of which have been instrumental in keeping inflation at bay. First, the benefits of globalization and, second, the process of “just-in-time” inventory. Both bear risks.
The concept of free trade is a search for an ideal, not unlike King Arthur’s Knights’ quest for the Holy Grail. However, the reality of free trade can never be. Yet the closer we get the better all are served. Free trade is based on the concept of division of labor, popularized by Adam Smith, of labor costs, and by the availability of natural resources and of the means of shipping resources and finished goods. Theoretically, each nation should manufacture for consumption and export that which it can produce most cost-efficiently – whether the product is soybeans, oil or electronics – and import what it needs.
Easier said than done. Every country has arable land. Every country has workers skilled in multiple areas, not just in those for which they are best known. No country wants to be totally dependent on another. Exploitation and subservience are, though, unfortunately, natural conditions of man. As well, intellectual property is protected in some countries, but not in others. Rule of law does not apply evenly. Nevertheless, the goal of global trade is worthy. For one, it takes advantage of efficiencies, resources availability and labor costs. But, most important, trade requires that countries communicate and come together, and gathering is better than isolating.
Trade has reduced inflationary pressures on the price of consumables, by outsourcing manufacturing and assembly to countries with low labor costs. Medicines produced by American companies in India or China would have been more expensive if produced in New Jersey or Illinois. The same could be said of automotive parts and consumer electronic gadgets. While low prices for finished products have benefitted consumers, the losers include factory workers and lab technicians – and perhaps consumers if and when supply disruptions come. In July 2019, the U.S.–China Economic Security Review Commission invoked a Department of Commerce study that found that 97% of all antibiotics come from China. The Corona Virus, originating in Wuhan, has highlighted the disadvantage of dependency on China for something as vital as antibiotics.