Flaws in the "Just In Case," Self-Sufficiency Case for Protectionism

On X today, someone responded to a critique of Donald Trump’s tariffs with this common argument for protectionism:

It sounds so sensible: why not use protection and industrial policy to preserve manufacturing capacity “just in case” of, say, a war or a pandemic? And, to be sure, this is a better argument for some limited government intervention on trade and investment flows than wanting to tax imported bananas or revive manufacturing.

But even then it’s not the slam dunk some people imagine. Below is my chapter on this issue from Economics In One Virus, published in 2021. It’s just as true and relevant today.

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Does the Pandemic Show That We Need More U.S.-Based Manufacturing?

How efficiently do you think you could make your own sandwich? I’m not asking “How quickly could you slap some mayonnaise, meat, salad, cheese, and a pickle between two slices of bread?” but rather, “If you had to produce a sandwich completely from scratch, how cost-effectively do you think you could do it?”

At the time of writing, the Subway closest to where I live sells a six-inch oven-roasted chicken sub for $5.09. That seems a reasonable (perhaps generous) pricing benchmark to which we can compare a solo effort, given that the restaurant service brings with it the option of an array of toppings, somewhere to eat the sandwich, and a markup for profit.

Back in 2015, Andy George, the creator of the YouTube series How to Make Everything, decided to try to answer my question. He endeavored to produce a chicken sandwich using all homemade ingredients. He soon found out that using the labor of just one man for this task was quite an undertaking. George had to build a garden patch before planting, growing, and tending to vegetables. He traveled to the ocean to collect seawater, undertaking thermal distillation at home to extract the salt. Using the vegetables he had grown and the salt he’d extracted, he set about to jar some homemade pickles.

His toil didn’t stop there. A farm visit was necessary to milk a cow to home-produce cheese. He harvested wheat, separated it from the chaff, and ground it into flour to produce his own bread. He collected honey from a beehive, built a press to extract oil from sunflower seeds to make mayonnaise, and killed, plucked, and cooked a chicken. Then, after all that, he assembled the sandwich in his kitchen. The whole pursuit ended up costing him a massive $1,500.

Did he value the eventual sandwich highly? “It’s not bad,” he said on his YouTube video as he tucked into the finished product, clearly disappointed given the huge amount of time and money he’d ploughed in. Even with his efforts over the period of half a year, he’d still been reliant on the input of others. He didn’t rear the chickens from hatching, for example. Nor did he extract his own iron ore to produce the steel for the knives that cut his vegetables. Producing a sandwich by yourself, he realized, is hard.

The Limits of Self-Sufficiency

There’s an important lesson from this story about the desirability of self-sufficiency. It turns out to be extremely inefficient to try to produce everything by yourself. George remarked he could have bought an expensive artisan sandwich for just $15 nearby, but his efforts had cost 100 times that, at a massive opportunity cost of lost time. As we’ve mentioned, economists describe opportunity cost as the value of the best use that we forgo when we use any resource—including the value of the best alternative use of the time that George had put in over six months.

It’s for this reason that most of us don’t try to be self-sufficient in producing what we consume. We might grow some of our own herbs or produce some personal arts and crafts. But there’s no way any one person would ordinarily go about producing his daily sandwich from scratch, let alone building himself a computer or a television. Mercifully, a market economy where we can trade freely allows us instead to specialize in activities that we are relatively efficient at, earn money from this activity, and then purchase things that others produce relatively more efficiently than us.

In fact, this sort of specialization occurs even within your workplace or when deciding to divvy up tasks at home. I study economic policy; my colleagues are expert editors, fundraisers, and event hosts. I do more cooking of meats and cleaning when I am at home with my fiancée; she usually undertakes more day-to-day tidying and preparation of desserts. Economists refer to this as the division of labor. By focusing on a few tasks that we can become more proficient at, collectively we can get more done at lower costs of time or money.

But a similar story occurs across the economy too. Companies tend to focus on the production of a small range of products they can produce well. Trade then allows them to sell their products in markets, with the earnings distributed over time to workers and investors such that they all can buy things other businesses or traders are relatively more efficient at producing or providing. I use my income from studying policy to purchase haircuts, smartphones, and, yes, ingredients for sandwiches—goods and services that other individuals or businesses specialize in.

The magic ingredient that facilitates specialization is therefore trade or exchange. Markets where trade can occur as freely as possible help create opportunities for richer and deeper specialization. That allows us to produce more at lower cost, making us wealthier and ultimately granting us more resources to then consume other products.

As my Cato colleague Dan Ikenson never tires of telling people, “The purpose of trade is to enable us to specialize; the purpose of specialization is to enable us to produce more; the purpose of producing more is to enable us to consume more.”

As 18th-century Scottish economist Adam Smith recognized, trade is crucial to achieving a high standard of living. Without it, we’d all end up farming the land just to stay alive. Being free to trade goods and services presents us with more opportunities for specialization that ultimately make us more productive. It’s the ability to trade that allows the evolution of professional salt processors, chicken farmers, pickle manufacturers, and beekeepers, who find ways to produce their products at scale, allowing us, the consumers, to make sandwiches quickly and cheaply.

These benefits of trade do not just come in the form of sandwiches,however. Trade is even more important to facilitating the specialization of companies building high-tech components of computer equipment than it is your favorite sub. The same logic works when discussing millions of consumers and producers in a complex economy as thinking about buying ingredients for lunch, albeit with a wider array of people at work.

Perhaps most contentiously, the advantages of free trade that make us wealthier remain just as true when discussing trade that crosses national borders as when discussing your purchase of a sandwich from your local deli. Enforced or mandated self-sufficiency is costly, whether that be at the individual, local, or even national level.

Just as free trade for goods or services within the United States allows domestic specialization, free international trade represents the expansion of free markets across political borders, encouraging countries in aggregate to produce goods and services that they have a relative efficiency in producing, a situation known as comparative advantage.

A lot of noneconomists find this concept difficult to grasp. “What if one country produces everything more efficiently than others?,” they ask. Wouldn’t that single country end up producing everything in a world of free trade? The answer is no. And the reason why is embedded in why I said relative efficiency rather than just efficiency.

It may be that Country A is most efficient at producing both, say, coffee cups and mattresses. In that case, it would be said to have an absolute advantage in the production of each. But it cannot have a comparative advantage in both. Suppose the opportunity cost for Country A of producing more coffee cups is higher than the opportunity cost for Country B, meaning that the number of mattresses that Country A would have to give up from diverting workers and capital to coffee cup production was higher than it would be for Country B. By allowing Country B to produce coffee cups, with its relative efficiency advantage, and Country A to produce mattresses, with its relative efficiency advantage, we could produce much more overall, making both parties richer.

For a simpler example: it might be that one member of your household is simply more efficient at all cooking, cleaning, and other domestic chores than you—holding absolute advantages in each. But this absolute advantage doesn’t mean they can and should do all the work when you are preparing the house for guests. If you have a set amount of time and that person is much, much better at cooking than you but only a tiny bit better at cleaning, then it makes sense for that person to focus on their comparative advantage (cooking) while you clean.

Reducing barriers to international commerce, such as the removal of tariffs, quotas, subsidies to domestic producers, or regulatory barriers, allows the possibility for a more extensive specialization, then, because it allows resources across deeper markets to be diverted toward countries’ comparative advantages through finding companies’—and ultimately countries’—relative efficiencies. This raises the capacity for us to produce yet more goods overall, making us richer still.

Now that doesn’t mean the gains are instantaneous or seamless when we make trade freer. Insulating American businesses in specific industries from competition from foreign products through tariffs, subsidies, or industrial privileges can bring acute localized pain when those barriers are removed. Although it may grow the economic pie, freeing trade has distributional consequences—not everybody wins.

These job losses and industry failures can create interest groups opposed to free trade. But freer trade enriches the economy more broadly in less discernible ways. Yes, consumers do indeed benefit from cheaper goods as trade is freed up among countries—that is the most obvious effect. But we become broadly richer, too, through the less visible process of that specialization—of resources being shifted into sectors where U.S. companies are relatively efficient at producing goods and services, given the economic realities that face them.

There is good evidence, for example, that China’s integration into the global trading system accelerated this process in the United States, with net job losses in manufacturing more than offset by massive job gains in services, which the United States is relatively more efficient at providing.

A debate has been bubbling in recent years over just how great the enriching impacts of international trade are, and a similar debate exists about the size of the economic costs of disruption associated with the freeing of trade. But economists still overwhelmingly agree that freer trade makes a country richer, and they tend to be the biggest supporters of removing trade barriers.

A survey of leading economists in 2012, for example, found a weighted average of 96 percent of them agreed or strongly agreed with the statement “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.” Economists have also overwhelmingly opposed Trump’s trade war with China and new tariffs he imposed on goods imported from other countries.

The Pandemic-Induced Critique of Free Trade

This pandemic, however, has led to a very different critique of free trade policies. Rather than challenge the free trade consensus of economists on distributional or efficiency grounds, critics now claim the pandemic itself proves that the efficiency free trade brings creates a different tradeoff than we usually consider—that the specialization free trade encourages itself sacrifices the resilience of the United States as a country.

Open markets might encourage the most cost-efficient supply chains for goods and countries operating according to their comparative advantages, Florida Senator Marco Rubio has argued, but that often means Americans importing lots of medical supplies, including facemasks, personal protective equipment, and respirators from abroad. When emergencies such as the pandemic hit, Rubio believes this puts Americans at the mercy of trade disruptions and foreign governments, who in this pandemic moved to ban exports of medical products to ensure a supply for their own citizens. The result, Rubio wagers, is a shortage of essential medical products and more pain from COVID-19 for Americans.

Too little self-sufficiency in the production of medical goods or manufacturing capacity, in Rubio’s view, has therefore undermined the public health effort, with devastating economic consequences. U.S. Trade Representative Robert Lighthizer has similarly condemned U.S. supply chains for their “lemming-like” desire for efficiency that has left them exposed to unacceptable levels of risk from things such as business interruptions and pandemics. He believes this crisis has proven the case for repatriating extensive manufacturing capacity more broadly.

The policy conclusion of both Rubio and Lighthizer is that the federal government should use trade and industrial policy to encourage the re-shoring of important medical and manufacturing capacity. Contrary to the traditional case for free trade, they argue that more national self-sufficiency in these areas would raise Americans’ economic welfare, despite it harming efficiency.

Some people even want to mandate local content requirements to require that certain goods or supply chains must be produced or based in the United States. Not only would that supposedly free us from being beholden to countries such as China for facemasks or respirators, but it would encourage the manufacturing capacity that would make us self-reliant and resilient to other shocks. Crises, in short, are believed to prove that a higher degree of self-sufficiency, or national economic independence, is more desirable than free traders suggest.

Throughout history, pandemics have tended to be followed by a reversal of economic integration, so such calls are perhaps unsurprising. Restrictions on the ability to trade or travel because of pandemic-induced disruption is always going to reduce opportunities for (or the profitability of) international trade, thus encouraging domestic production. These changes then tend to stick somewhat. What’s more, it’s perfectly rational for merchants and businesses to reassess their sourcing and production decisions after a shock like this.

If the particular unexpected disruptions from this pandemic cause them to sit up and reassess risks, from business interruptions in their supply chain through to foreign government interference with their product, they may decide to re-shore some activity closer to the U.S. market irrespective of any change in government policy.

Already we hear talk of less emphasis on just-in-time supply chains and more emphasis on just-in-case supply chains as profit-seeking companies adjust to this new world. The pandemic will naturally cause businesses to revise what they believe to be efficient practice for them in the long term, which might suggest they were over-optimized in the short term.

But Rubio clearly wants to go beyond what private businesses will choose to do voluntarily. What’s more, he will likely find receptive ears for going further than businesses decide. Government-led protectionism was already on the rise in the United States before this virus, exhibited by Trump’s trade war with China. Think tanks pushing for manufacturing re-shoring and industrial policies have been founded.

Politicians will use the pandemic to make the case for policy to target greater domestic self-reliance. The virus penetrating the United States from overseas will only add to this feeling that dependence on suppliers in foreign nations threatens American prosperity.

The Flaws in the Resilience Argument

There are big problems with Rubio’s assumption of such a clear tradeoff between efficiency and national resilience, and conservatives such as him shouldn’t be so quick to dismiss what they used to know about free trade.

A high degree of interconnectivity of people and goods may well spread viruses more rapidly during a pandemic and lead to some disruption of supply chains that cross national boundaries. But that same process of specialization that comes from the free movement of goods and services also makes us richer because of improved efficiency.

This greater prosperity gives us more resources to invest in health care and other relief efforts when crises do actually hit. In that sense, free trade improves a country’s resilience.

Indeed, efficiency is not some small-fry second-order issue to be scoffed at. Re-shoring a large chunk of industrial production back to the United States just in case another pandemic hits would be an extraordinarily expensive and wasteful endeavor in normal times (not to mention incredibly complex.) The Healthcare Supply Chain Association estimated in April that health care providers alone would use 500 million N-95 respiratory masks in 2020, compared with just 25 million in 2019. A survey of American hospitals found “17 times the typical burn rate for N-95 respirators, 8.6 times for face shields, 6 times for swabs, 5 times for isolation gowns and 3.3 times for surgical masks.”

Deliberately using policy to create the domestic production capacity to meet all this emergency demand on a permanent basis would either result in a whole load of excess unused capacity in normal times, or else create a complete glut of unneeded products if such high production levels were maintained.

Investment in that sort of unneeded capacity has real economic costs, removing workers and capital from other possibly more productive endeavors. And for what? There’s no guarantee it will be effective for the next crisis, especially because we have scant knowledge of what future pandemics or crises will look like.

Building more facemask manufacturing factories might not help much if we are faced with a very different threat next time—say, the prospect of nuclear war, a bacterial pathogen in the water supply, a massive West Coast earthquake, or a nonrespiratory virus. So is the logic here that we’d preserve domestic capacity to produce goods to meet the needs of any possible threat?

It would be extraordinarily inefficient to be startled into preparing for every single improbable risk, however minor. As the Financial Times’s Martin Sandbu has written, “being self-sufficient for every eventuality is prohibitively expensive.”

“Self-sufficiency” is also dangerous. One benefit of open trade is diversification. Freeing up trade allows businesses and consumers more options on where to source their supplies or sell their goods. The old adage of not putting all your eggs in one basket applies to trade as much as anything else.

It’s all very well, then, to say that we should produce what we might need domestically—a national economic independence that economists usually dub autarky. But what happens if a pathogen or some other unexpected shock hits the United States first, necessitating widespread business closures here? How would local content requirements help then?

We’ve seen in this crisis how COVID-19 disrupted the domestic meat supply following outbreaks in meatpacking plants. In a scenario where we became self-dependent on producing a medical good, and a shock shut down most domestic factories, we would quickly find severe shortages.

In that sense, we’d clearly be less resilient as a country, not more. Indeed, one analysis by economists Barthélémy Bonadio, Zhen Huo, Andrei A. Levchenko, and Nitya Pandalai-Nayar examined whether renationalization of global supply chains would have improved the resilience of U.S. GDP during the pandemic. They found that the downturn would have been almost exactly the same in magnitude under that hypothetical scenario.

Isn’t this obvious? Becoming less reliant on foreign inputs means becoming fully reliant on domestic inputs. Yet lockdowns, business closures, and sick workers have affected domestic businesses too, and would have done so no matter what industrial policies the United States had in place. Economists have found in normal times that trade diversification actually tends to reduce the volatility of GDP because “it reduces exposure to domestic shocks and allows countries to diversify the sources of demand and supply across countries.”

Some of the East Asian economies that dealt better with the virus were able to restart clothing production quickly, for example. It was the lack of demand from importing countries that took longer to contain the virus, such as the United States and the UK, which prolonged a depression of activity in those industries. If all that manufacturing activity had been re-shored through policy efforts or mandates, taking resources outside of service industries where people can work more easily from home, the downturn here may well have been sharper than the already massive contraction we actually saw in Q2 2020.

A great example of how protectionism makes us less resilient was seen in early May 2020, with widespread reports of U.S. auto dealers worrying about a shortage of pickup trucks due to SARS-CoV-2 induced plant closures. At that time German and East Asian car manufacturers had already restarted production. But because of long-term protectionism in the form of a 25 percent tariff on imported trucks, these would-be suppliers were not oriented for selling in the U.S. market after finding themselves being priced out it for years.

Compare that to Apple and other high-tech firms, which have been rolling out new products produced overseas even during the pandemic, and it’s obvious that re-shoring encouraged through government policy is neither necessary nor sufficient for resilience. [Editor’s note: since then, we’ve had two better examples of “self-sufficiency” undermining resilience: America’s baby formula crisis and recent egg shortages].

The idea that re-shoring critical supply chains within national borders somehow makes them safe from interdiction or disruption is therefore a complete illusion. Future shocks are uncertain and could well affect the domestic economy more than international supply chains. Consider the scalability of the logic: Did the SARS-CoV- 2–induced disruption in meat packing plants prove that it would be better for your personal resilience to source your own sandwich fillers at home, as Andy George did? No? So why do Marco Rubio and others assume that disruption to ventilator availability necessitates repatriating ventilator production to the United States?

In fact, there’s little evidence from the protectionist policies that the United States already adopts that policies designed to improve resilience achieve their goals. Insulating industries from foreign competition in the past has instead tended to make them inefficient, expensive, lazy, and less likely to adopt innovative new procedures and technologies, rather than being on the cutting edge and adaptive to unexpected shocks.

We see this with the U.S. steel industry and the shipping industry, which is protected by the Jones Act. So why would we expect different results in the medical or manufacturing sectors? If this whole episode has shown us anything, it has surely emphasized the limits of the idea of having experts manage complex systems to improve outcomes, particularly in conditions of uncertainty.

And that’s important: a recent McKinsey report showed how incredibly complicated modern supply chains are. The room for error in politicians seeking to rebuild them domestically is therefore incredibly high. Interestingly, that report concluded that industries such as medical devices and pharmaceuticals would be relatively unaffected by disruptions such as pandemics and other external shocks. It claimed politicians’ trade policies posed a much bigger risk to those industries.

A Better Way?

Yet if policy-led re-shoring or trade protectionism would likely undermine economic efficiency with no guarantee of improving resilience to future shocks, then is there anything government policy could change for the better?

We shouldn’t pretend the status quo is perfect. Rubio and others exaggerate how much free and open trade has been a problem in this pandemic, not least because they exaggerate both how dependent the United States is on imports of medical supplies and how disrupted the global pharmaceutical supply chains have actually been.

But there clearly have been difficulties, not least in how governments have responded. Even where there have been pinch-points, however, there are alternative, more cost-effective solutions than re-shoring industries.

One more-efficient approach to better resilience to public health might, in some cases, be to have private companies and public health authorities buy up and stockpile the needed goods in advance when they are cheap.

Switzerland famously has a national stockpile for essential foods and medicines in case of crises. The United States already has a Strategic National Stockpile of “antibiotics, medical supplies, equipment, antidotes, antitoxins, antivirals, vaccines, and other pharmaceuticals that are strategically located throughout the United States and its territories.”

If it is so obvious that these stockpiles were inadequate, then the U.S. government could simply build up and broaden the composition of stockpiles to prepare for possible future shocks. If it were not obvious what would be needed in the future, in contrast, then it’s difficult to see why we should gamble on a vast re-shoring of activity that purports to second-guess what we will need.

Free trade and specialization, of course, makes it cheaper to purchase these stockpiles, which could be stored relatively inexpensively in normal times. Combined with our insights from chapter 7, high uncertainty about what precisely we might need should instead mean that we desire a flexible economy that adapts quickly when stockpiles or international supplies prove inadequate, rather than betting the house that the government can plan our industrial needs.

One way to achieve this is to actually broaden our free trade horizons. If the United States had expansive trade agreements with, or lower trade barriers on, other countries with producers of facemasks, personal protective equipment, and other medical products, then Americans could import these important goods more cheaply from a wide array of sources when other governments decide to close off supplies from being exported.

A lighter-touch regulatory system could also facilitate swifter adaptation of existing production capacity to producing emergency supplies too. We shouldn’t underestimate just how much American-consumed medical supplies are produced domestically already. But, on the margins, we can acquire more resilience through adaptation. For example, the regulatory relaxations that allowed distilleries to produce hand sanitizer could be a model for reorienting production capabilities elsewhere.

We already read in chapter 10 about pizza and car heat film suppliers repurposing to provide personal protective equipment during this crisis, showing the capacity for businesses to adjust, particularly when the regulatory burdens are light and prices are freely set. Perhaps a better way than having stockpiles to deal with unexpected future shocks and the needs they might create could be the use of options. These are contracts that are very prevalent in commodity and asset markets, where the buyer pays an ongoing sum to a seller (called a premium) for the right to buy a certain amount of products, such as facemasks or medical supplies, at any given time.

Under this type of arrangement, governments or coalitions of private groups, such as insurers or hospitals, could buy an option for facemasks or other medical products from domestic or foreign producers. This would, as with insurance, give the producers ongoing premium income, which could be used to maintain some surplus capacity. And it would give governments and private groups the opportunity (but not the obligation) to purchase a given amount of what they require when the next crisis hits.

If there were still shortages during crises, ramping up production at home can be encouraged further by having the federal government make purchasing guarantees at high fixed prices in order to give companies a clear profit incentive to shift production to much-needed medical and personal protective equipment. As we learned in chapter 10, price signals matter, and high prices would encourage production. This, again, will be much more efficient than maintaining excess capacity in a whole range of goods forever.

Finally, we must acknowledge that the problem of what economist Alex Tabarrok calls “sicken-thy-neighbor” trade policy has been real in this crisis. Lots of countries did institute export controls on medical products such as ventilators as a knee-jerk reaction to the pandemic, making health care more difficult and leading to needless deaths worldwide. India restricted exports of paracetamol, for example. Romania banned the export of a critical input to ventilator production. A French requisition order prevented a company fulfilling a facemask contract with the UK health service.

The U.S. Federal Emergency Management Agency banned the export of certain facemasks, respirators, respirator parts, and gloves. Now, there should be obvious incentives that deter countries from going down this path again. If other countries respond to your export bans with their own, we’ve found out that not only are you likely to not get access to some products you don’t produce, but you may also struggle to source inputs for the products you want to produce more of at home. As Tabarrok argues, denying companies the ability to export also disincentivizes them from making big investments to ramp up production at home because there’s less profit opportunity that comes from serving a smaller market.

Governments do daft things when the fog of war descends, however. Avoiding a repeat of this sorry episode, though, will not be achieved by trade wars or by declaring that it should be every country for itself, producing for itself. No, the only way this problem can be avoided in the future is through multilateral cooperation on medical supplies and commitments not to use these sorts of export controls, perhaps mediated through a body such as the World Trade Organization or through clauses in trade deals. A protectionist arms race through local content requirements or punitive tariffs on foreign medical imports will make achieving such cooperation more difficult.

It turns out, then, that any tradeoff between national resilience and the efficiency that free trade produces is much, much weaker in theory and practice than Rubio alleges. While it may seem common sense to strive for self-sufficiency after encountering a foreign-born crisis, diverting policy to achieve that will be extremely costly, maybe even undermining our resilience in a number of ways.