Sabine Weyand, EU director-general for trade:
[Economic] Self-sufficiency is not an option for any country. It's not an option even for any continent.
Bloomberg, "Supply Lines," April 13, 2020:
Regarding "ventilators, the breathing-assistance machines in short supply across the world [because of COVID-19]... Depending on the model, they can contain as many as 900 pieces sourced from all over the world."
We can argue manufacturing interdependence is unconscionably risky, but we can also acknowledge it's sensible for lower wage countries to take a higher share of more routine work. Yet, regardless of your beliefs on international trade, you probably don't know the historical basis for globalization, or even that a globalized economy does not have to be similar to the status quo.
To better understand our current post-globalization era, think of the worldwide economy as two landlords in charge of two growing buildings. Until 1945, there were many landlords but most of them were inefficient or corrupt because they lacked a central office and/or the knowhow to attract and develop talent. Most landlords also had difficulty borrowing money and attracting investors on their own, hurting their chances of not only expansion but also basic maintenance. After 1945, only two landlords--the ones with the most sturdy manufacturing designs and access to oil--were able and willing to lease space to interested parties. All other landlords preferred local tenants, were bankrupted, or were indebted to one of the two remaining landlords.
As a duopoly, the two landlords initially agreed not to compete with each other. One landlord--ASU Corp--indirectly created non-competes within its own building by assigning its partners to lead production. As the most knowledgeable entity within the building, ASU used office leases as a launchpad for mutually beneficial long-term relationships. To minimize conflicts, ASU tenants would specialize in certain services and not compete with each other directly--at least not until tenants were able to master the basics of production and consumption. Under ASU's watchful eye, all tenants, as much as possible, would do business only with the landlord and with each other--and only under the landlord's protection, funding, legal principles, and guidance.
The other landlord-- RSSU Cooperative--showed its strength by designing the most useful structures and facilities possible. It required its tenants to focus on farming/agriculture and infrastructure. In addition, each tenant had to sign a lease allowing the landlord an easement for technological/scientific testing. Like the other landlord, everyone would trade only with each other, but all the transactions in this building would be handled by the landlord, who would station one employee in each tenant's office to monitor trade and also to help facilitate transport and security.
Over time, ASU's willingness to provide debt allowed its tenants to take more risks and to expand their own businesses--as long as they stayed current on interest and rent payments to ASU each month. ASU's status as creditor to its tenants meant it could dictate not just business strategy, but financial terms. Under ASU's leadership and advertising, transactions substantially increased between all tenants and also with the landlord. ASU's generous debt terms meant each transaction in its building benefitted from a multiplier effect, where the more tenants traded with each other, the better the chances that debts would be paid and values and prices would increase--for everyone. ASU aimed to master production and consumption, not just production.
RSSU, on the other hand, envisioned each tenant providing each other--as well as itself--with tangible and necessary items. It did not trust each tenant to set prices fairly or sustainably. As a result, while its consumers could satisfy all of their basic needs--except for food when harvests failed--each tenant lacked incentives to cater to consumers or to innovate in ways different from the landlord's expressly stated needs.
I could continue, but you get the point. The multiplier effect of debt allowed one country to expand its influence at the expense of the other while also stealing much of the other's talent. Such economic expansion required continual fine-tuning of products, advertising, and supply chains so allies would not compete excessively with each other and would maximize the velocity of money. This system gave a single country the power to issue trillions of dollars of debt and to use its financial system--backed by tangible oil and intangible digital technology--as the backbone of the world's economy. Over time, as the United States ran deficits to sustain control over an economic system where it could make the rules, it began to lose influence because some savvy tenants were not in its building or refused to play by its rules. (Note: wherever there is a rule, someone subject to it is determining how to circumvent it in order to gain an advantage.)
Using the prior example, if a new landlord appears--we'll call this third landlord "ANIC"--and sells similar products cheaper than ASU's tenants, at some point conflicts are inevitable if ASU's deficits and its allies' debts assume ever-increasing values and prices. Moreover, the idea of agreed-upon specialization--whether in software, semiconductors, oil, or gas--looks naive if supply chains can be disrupted by a single tenant. (The USA's Middle Eastern military adventurism after 1973's OPEC embargo attempted to resolve this gap.) To summarize, if 900 pieces are needed to make a ventilator, a wise and trusted negotiator can create 900 friends and allies; however, if the primary negotiator's financial or security skills are deemed unreliable or capricious, opportunities to inspire 900 direct competitors becomes more likely.
Once we realize trustworthiness is the true underlying foundation of a world economy spread out over multiple and distant countries, we know why the United States succeeded spectacularly from 1945 to 2001. In 1945, General George Marshall and General Dwight Eisenhower represented the best of the United States and used their strength to promote compassion, resolve, honor, and fairness. We need not cite any of their personal statements to prove the latter because the two countries they helped rebuild--Germany and Japan--are two of the most successful countries in the world today, with Tokyo the world's most advanced city in terms of infrastructure. In other words, while the Soviet Union--with its flag's hammer--desired the title of infrastructure expert, it was the United States under Eisenhower and Marshall that actually deserved it. Under these men, the world benefited from America converting its wartime manufacturing capacity to facilitate trade and movement within nations and between them. None of this trade, a version of sharing resources with debt tethering everyone together, would have been possible without trust.
Fast-forward to 2020. Today's America, after the debacle of the Vietnam war, represents the visions of George Bush Sr., former CIA director, and Donald Trump, real estate developer. These two men view illegal tactics as necessary costs to weaken competitors while creating preferences for their own multi-national ambitions: malls, media, and majestic buildings plus a military designed to maintain currency stability by controlling the world's oil supply. We don't need a crystal ball to see that America in 2020 and in the near future is less likely to attract tenants/allies than America in 1945.
In the meantime, more "tenants" will move to China's "building," though most will try to lease space with both China and the United States. Others, such as the EU, will try to become Landlord #3. Best case, this straddling will generate bridges between the "ANIC" and "ASU" buildings using a new industry of go-betweens; worst case, currency and legal complications (e.g., money laundering) will force tenants to choose a single lease.
[Economic] Self-sufficiency is not an option for any country. It's not an option even for any continent.
Bloomberg, "Supply Lines," April 13, 2020:
Regarding "ventilators, the breathing-assistance machines in short supply across the world [because of COVID-19]... Depending on the model, they can contain as many as 900 pieces sourced from all over the world."
We can argue manufacturing interdependence is unconscionably risky, but we can also acknowledge it's sensible for lower wage countries to take a higher share of more routine work. Yet, regardless of your beliefs on international trade, you probably don't know the historical basis for globalization, or even that a globalized economy does not have to be similar to the status quo.
To better understand our current post-globalization era, think of the worldwide economy as two landlords in charge of two growing buildings. Until 1945, there were many landlords but most of them were inefficient or corrupt because they lacked a central office and/or the knowhow to attract and develop talent. Most landlords also had difficulty borrowing money and attracting investors on their own, hurting their chances of not only expansion but also basic maintenance. After 1945, only two landlords--the ones with the most sturdy manufacturing designs and access to oil--were able and willing to lease space to interested parties. All other landlords preferred local tenants, were bankrupted, or were indebted to one of the two remaining landlords.
As a duopoly, the two landlords initially agreed not to compete with each other. One landlord--ASU Corp--indirectly created non-competes within its own building by assigning its partners to lead production. As the most knowledgeable entity within the building, ASU used office leases as a launchpad for mutually beneficial long-term relationships. To minimize conflicts, ASU tenants would specialize in certain services and not compete with each other directly--at least not until tenants were able to master the basics of production and consumption. Under ASU's watchful eye, all tenants, as much as possible, would do business only with the landlord and with each other--and only under the landlord's protection, funding, legal principles, and guidance.
The other landlord-- RSSU Cooperative--showed its strength by designing the most useful structures and facilities possible. It required its tenants to focus on farming/agriculture and infrastructure. In addition, each tenant had to sign a lease allowing the landlord an easement for technological/scientific testing. Like the other landlord, everyone would trade only with each other, but all the transactions in this building would be handled by the landlord, who would station one employee in each tenant's office to monitor trade and also to help facilitate transport and security.
Over time, ASU's willingness to provide debt allowed its tenants to take more risks and to expand their own businesses--as long as they stayed current on interest and rent payments to ASU each month. ASU's status as creditor to its tenants meant it could dictate not just business strategy, but financial terms. Under ASU's leadership and advertising, transactions substantially increased between all tenants and also with the landlord. ASU's generous debt terms meant each transaction in its building benefitted from a multiplier effect, where the more tenants traded with each other, the better the chances that debts would be paid and values and prices would increase--for everyone. ASU aimed to master production and consumption, not just production.
RSSU, on the other hand, envisioned each tenant providing each other--as well as itself--with tangible and necessary items. It did not trust each tenant to set prices fairly or sustainably. As a result, while its consumers could satisfy all of their basic needs--except for food when harvests failed--each tenant lacked incentives to cater to consumers or to innovate in ways different from the landlord's expressly stated needs.
I could continue, but you get the point. The multiplier effect of debt allowed one country to expand its influence at the expense of the other while also stealing much of the other's talent. Such economic expansion required continual fine-tuning of products, advertising, and supply chains so allies would not compete excessively with each other and would maximize the velocity of money. This system gave a single country the power to issue trillions of dollars of debt and to use its financial system--backed by tangible oil and intangible digital technology--as the backbone of the world's economy. Over time, as the United States ran deficits to sustain control over an economic system where it could make the rules, it began to lose influence because some savvy tenants were not in its building or refused to play by its rules. (Note: wherever there is a rule, someone subject to it is determining how to circumvent it in order to gain an advantage.)
Using the prior example, if a new landlord appears--we'll call this third landlord "ANIC"--and sells similar products cheaper than ASU's tenants, at some point conflicts are inevitable if ASU's deficits and its allies' debts assume ever-increasing values and prices. Moreover, the idea of agreed-upon specialization--whether in software, semiconductors, oil, or gas--looks naive if supply chains can be disrupted by a single tenant. (The USA's Middle Eastern military adventurism after 1973's OPEC embargo attempted to resolve this gap.) To summarize, if 900 pieces are needed to make a ventilator, a wise and trusted negotiator can create 900 friends and allies; however, if the primary negotiator's financial or security skills are deemed unreliable or capricious, opportunities to inspire 900 direct competitors becomes more likely.
Once we realize trustworthiness is the true underlying foundation of a world economy spread out over multiple and distant countries, we know why the United States succeeded spectacularly from 1945 to 2001. In 1945, General George Marshall and General Dwight Eisenhower represented the best of the United States and used their strength to promote compassion, resolve, honor, and fairness. We need not cite any of their personal statements to prove the latter because the two countries they helped rebuild--Germany and Japan--are two of the most successful countries in the world today, with Tokyo the world's most advanced city in terms of infrastructure. In other words, while the Soviet Union--with its flag's hammer--desired the title of infrastructure expert, it was the United States under Eisenhower and Marshall that actually deserved it. Under these men, the world benefited from America converting its wartime manufacturing capacity to facilitate trade and movement within nations and between them. None of this trade, a version of sharing resources with debt tethering everyone together, would have been possible without trust.
Fast-forward to 2020. Today's America, after the debacle of the Vietnam war, represents the visions of George Bush Sr., former CIA director, and Donald Trump, real estate developer. These two men view illegal tactics as necessary costs to weaken competitors while creating preferences for their own multi-national ambitions: malls, media, and majestic buildings plus a military designed to maintain currency stability by controlling the world's oil supply. We don't need a crystal ball to see that America in 2020 and in the near future is less likely to attract tenants/allies than America in 1945.
In the meantime, more "tenants" will move to China's "building," though most will try to lease space with both China and the United States. Others, such as the EU, will try to become Landlord #3. Best case, this straddling will generate bridges between the "ANIC" and "ASU" buildings using a new industry of go-betweens; worst case, currency and legal complications (e.g., money laundering) will force tenants to choose a single lease.
A "single lease" scenario would lead to a new 1945, where China and the U.S. carve out economic zones similar to the post-WWII East-West divide. (Think Checkpoint Charlie, but with tariffs, laws, and sanctions limiting movement rather than physical walls.)
The straightforwardness of the "single lease" scenario is appealing but would render the future dependent on the integrity and reasonableness of Chinese and American leadership. (Though I wonder: if we get a do-over, why does it feel like the U.S. is the old Soviet Union, and Iraq/Yemen its Afghanistan?)
I predict most countries will improve domestic supply chains to ensure supplies of essential items, with adequate capacity judged based on emergency needs. Wise politicians will see food and water security as equally important as nuclear and digital technology. How such internal reliance will mesh with existing trade agreements is anyone's guess, but one thing is certain: the post-WWII framework of economic and financial interdependence as the foundations of peace is finished--at least until we see another Eisenhower and Marshall.
© Matthew Mehdi Rafat (2020)
I predict most countries will improve domestic supply chains to ensure supplies of essential items, with adequate capacity judged based on emergency needs. Wise politicians will see food and water security as equally important as nuclear and digital technology. How such internal reliance will mesh with existing trade agreements is anyone's guess, but one thing is certain: the post-WWII framework of economic and financial interdependence as the foundations of peace is finished--at least until we see another Eisenhower and Marshall.
© Matthew Mehdi Rafat (2020)
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