Trade, Specialisation and Coronavirus

The biggest issue in the current economic crisis is globalisation. Internet communication and container shipping have allowed the business world to massively increase specialisation in production.

In a traditional society, people often lived by subsistence. They did not depend on any other people for survival, because they grew or produced everything that they consumed. If they could not grow or make it themselves, they did not have it. Living on subsistence allowed the people to be self-sufficient, but this was quite limiting, because they spent so much of their lives producing food and shelter, they did not have time to develop and make other products that they may want.

The development of trade changes everything, because it allows people to specialise. Each one does what they are most skilled in doing. By focusing on one task, each person could increase their skills and find ways to do a task more efficiently. The person who specialises can produce more than they need to survive. They can trade their surplus production with others to get all the things they want. Trade improves the situation of almost everyone.

The industrial revolution gave the world new technology, but many of its benefits came from specialisation that made the production of goods and services more efficient. Over the last fifty years, a massive increase in specialisation and trade has occurred. This trade and specialisation makes most people better off, it has linked different parts of the world much closer together.

The production of goods has been split up into its different tasks and shifted to countries that can do them most efficiently. Engineering design for a product might be done by a services company in the United States. The marketing might be organised from France. Manufacturing tasks have been shifted to countries in Asia, where labour is much cheaper. This specialisation often produces greater efficiency, which results in cheaper good.

The components that are used in a product will be manufactured by different companies in different countries. By specialising in one type of component and supplying them to numerous producers for various similar products, they can become more efficient in what they do. The companies that assemble products have specialised in developing efficient production lines.

This division of labour enhances life in cities. Without the benefits of specialisation and trade and specialisation, life in a modern city would be impossible, even for those who live simply. No modern city or country has the capital equipment and the range of skills needed to manufacture the full range of products that people need and want. The only way that it can maintain modern lifestyles is to specialise in a limited range of activities, sell the surplus produced, and use the income to pay for the other goods and services that are needed. These will often be imported from other countries, so some of the surplus production will have to be exported to pay for it.

Risk
The risk of specialisation is that it makes people and business dependent on other people and businesses. That is a good thing.

With the highly globalised specialisation of the modern economy, this dependency extends across the world to many other nations. The supply chains of many large producers extend to businesses in countries all over the world. This specialisation has allowed increased efficiency and reduced costs, but the risk of dependency has also been vastly increased.

The risk has been exposed by the emergence of coronavirus in China and Europe and government actions to slow its spread. The quarantining and closure of businesses in China has disrupted the supply chains of businesses all over the world, contributing to the current economic downturn. Quarantines in other countries will exacerbate this situation.

This risk of depending on producers on producers on other sides of the world was always obvious, but it was probably downplayed for the sake of profits.

Many businesses are now saying that they want to pull back from globalisation and rely only on local suppliers. People are saying that they want to be self-sufficient. Reducing the risks of globalisation may be sensible, but we need to be careful how far we take this.

A significant reduction in specialisation and trade will reduce the efficiency of production, which will contribute to a sharp increase in costs and the prices that consumers have to pay. No business or nation has the capacity to produce everything needed to sustain the modern lifestyle. This makes full specialisation impossible. If a phone manufacturer tried to make all the components needed, the cost of production would be much greater. Most businesses would not be capable of efficiently producing all the components need.

Even the United States does not have sufficient capital and skills to produce the full range of goods and services needed to sustain life in an American city. If America attempted to be self-sufficient, living standards would suffer as the benefits of the division of labour and specialisation disappeared.

Moving all production back to the United States is probably not practical. The much smaller market would not support the level of specialisation that has produced the cheap consumer goods that we now take for granted. If businesses had to produce all components of their products internally, they would be much less efficient. Skilled people will have to engage in a broader range of activities, so they will become less efficient at doing some of them.

The other problem is that the skills needed for making some components of consumer goods no longer exist in the United States. Even if people could be trained up to do them, US employees will not do these for the wage rates for which they are done in Asia and Africa.

Global specialisation is beneficial, but it is also risky, because it is vulnerable to epidemic diseases, wars and political interference. However, full self-sufficiency is not practical either, because it would be too costly. We need a balance between the risks and benefits.

In the short term, government efforts to slow the spread of coronavirus will cause a massive contraction of the globalised activities, causing shortages of components needed for production and some consumer goods. Efforts to short circuit specialisation and globalisation will push up the cost of production.

In the longer term, following the coronavirus experience, that balance might shift toward more self-sufficiency, but some degree of specialisation and dependence on global trade will always be unavoidable.