MIKE SCRAFTON. Regulation, tariffs and reform of supply chains.

Apr 30, 2020

The political leaders that brought us global supply chains, hollowed out public services, and dwindling administrative capacity, are potentially about to find themselves in a series of contradictions.

Reducing reliance on overseas supply chains seems to have become an imperative. For the moment, this appears to be a big lesson out of the pandemic. Global supply chains for crucial medical equipment and pharmaceutical supplies, and components for industrial production, no longer seem to make as much political sense as they had economic sense. However, it’s not clear this has been fully thought through.

The reluctance to regulate corporate and commercial activity has been a hallmark of governments across the world. ‘Cut the red tape’, has been the battle cry of politicians and reformers. Only the tax cuts and the promotion of free trade have been as hyped as loudly.

However, to reshape the supply chain situation will require governments to revisit these neo-liberal verities. Overturning the prevailing entrenched aversion to big government, and deserting the faith in the ‘market’ to provide optimally efficient public good outcomes, would be revolutionary. But that is what it would take.

Free trade and internationalisation of finance and investment have had major benefits. Shifting production to states with low labour costs has raised the living standards for hundreds of millions of people in low-income countries and has provided consumers in high income states with affordable goods. In addition, wealthy states have been able to re-export high value-added products at competitive prices because of the cost efficiencies built into the global supply chains. Facilitating this arrangement has in turn been a major driver of free trade agreements.

To dismantle the supply chains and pull them back into the nation state would require governments to interfere in the affairs of corporations and businesses in a way not seen for many generations. The initial challenge would be to decide which industries and which products should be regarded as so essential that they cannot be allowed to source important components off-shore, and therefore should be regulated. Alternatively, or perhaps as well, governments could erect tariff walls to keep higher cost domestic production competitive with imported products. Businesses won’t seek higher cost production options without government regulation or incentives.

To regulate or impose tariffs in order to keep production of essential components in-country would have a number of associated challenges. The increased cost of the relevant products would be accompanied by a higher cost-of-living and a reduction in domestic living standards. Medicines and household goods would become more expensive. As a result, governments will come under pressure to improve welfare arrangements, and the economy would face serious wage pressure.

Past experience and economic theory would indicate that innovation and productivity would decline. Trade would suffer as other states responded with their own tariffs. Existing free trade agreements would become redundant, requiring to either be renegotiated or abandoned. International trade would become complicated as each state determines the particular mix of its own industries and services to protect.

Less obvious initially, but no less real, would be the impact on international relations and global stability. The economic consequences would be devastating both for major nuclear armed states like India and China, but also for smaller economies that have become dependent of being part of the global supply chains, like Bangladesh and Vietnam. High levels of domestic political turmoil would likely follow renewed pauperisation. In an environment where critical components and raw materials were no longer as freely available through trade arrangements, the world could see increased instability and heightened levels of tension and conflict.

At the same time governments would need to seek a very different fiscal model as budgets are placed under enormous stress. The past trend of constantly reducing taxes and reducing outlays to balance budgets would have to be reversed. Not only to fund the reform of industry and provide increased benefits to those worse affected, but to ensure key infrastructure and public services, like defence, health and education, are adequately funded. To better manage budgets and debt, government might need to bring back in house many of the services they have previously outsourced.

Austerity and small government would need to be abandoned. Reforming and redirecting industry would require regulation, monitoring, and enforcement, and governments would need increased revenue and bigger bureaucracies. Small government would need to give way to a big taxing, big administrative, state. Once government takes it on itself to replace ‘market forces’ there is no other outcome.

Are neo-liberal governments capable of reversing the direction they have been taking for three or four decades? Could they set up tariff walls and regulate businesses? It would certainly require some cognitive dissonance in ministries, rhetorical backflips, and leave a bad ideological aftertaste. Just the economic and political costs of the disruption might make tackling supply chains impractical.

Massive outsourcing and privatisation programs have seen public services shrink and their capacity to implement major policy initiatives has diminished. Alongside the stuttering approaches to the pandemic, the UK’s Brexit preparations come to mind as an outstanding example. A first step would be a re-educating, re-energising, re-orientation and major expansion of public service organisations.

Not only has the size and roles of public administrative organisations been aligned with neo-liberal notions, the mix of skills has changed. There is little evidence that the political and administrative levels of government could effectively and efficiently handle the regulatory and fiscal reforms that are implied in public rhetoric about supply chains.

Reforming industry, fiscal policies and administration would require a revolutionary shift. A political upheaval. A reversal of political values. Still, this would not be a bad thing as we pass from a health crisis to the even more demanding climate crisis. Were governments to reject neoliberalism, a rebuilt and expanded public service would have the additional benefits of providing the foundations for the major transformation that will be necessary to blunt global warming.

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