February 05, 2020

New Op-ed: Coronavirus, the ‘Phase One’ China Deal, and Globalization

Originally Published by American Greatness.

The owners of capital and their McKinsey consultants would do well to follow the teachings of David Ricardo—all of them.

It is said truth is the first casualty of war. That would make globalization, and specifically the “Phase One” trade deal with China, the second casualty in the war against the coronavirus.

The first casualty—truth—occurred in December, when the Chinese Communist Party hid the outbreak just as it continues to hide the true number of infections and deaths.

Let’s look at the China trade deal before examining why the coronavirus should sound the death knell for the current model of globalization.

Anyone trying to sell anything to China will feel the impact as that country’s economy slows. GDP estimates for China have been downgraded. Prices for global commodities from energy to agricultural goods have plummeted as traders expect weaker demand.

The “Phase One” trade deal with the United States commits China to increase its purchases of American energy, agricultural, and manufactured goods by $200 billion over the next two years.

Since purchases are pegged to a dollar amount, lower commodity prices require China to buy a higher volume of goods. But analysts doubted China could fulfill its obligations even when prices were higher.

It’s another provision in the agreement, however, that calls the entire deal into question.

Article 7.6 states: “In the event that a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations under this Agreement, the Parties shall consult with each other.”

Consider: Beijing certainly knew it had a coronavirus problem on January 15 when it signed the deal with this custom-built escape clause tacked on.

The question is not if but when Beijing invokes the pandemic to get out. It may already be heading for the exit.

As the full dimensions of pandemic become known, the frailty of global supply chains and the fallacy of the management theory calling for intercontinental supply chains and just-in-time inventory management has been exposed for all to see.

While quarantining more than 50 million people in China in over a dozen cities, the Chinese government has closed thousands of factories as a public health measure.

Problems extend far from Wuhan, the cradle of the coronavirus.

Hangzhou, a city next to Shanghai announced it is closing down “all non-essential public places and locking down residential communities,” the Communist Party propaganda organ Global Times reports.

The local government limits the hours of “farm markets, supermarkets and pharmacies,” orders families to assign “one person every two days to go out to buy daily necessities,” and requires shoppers to wear masks and receive temperature checks.

Expect this to put a crimp in sales at the local Starbucks (it’s closed more than half its stores in China).

“In addition, all villages, residential communities and companies must adopt closed management, people from other places should show their ID cards, get registered and receive temperature checks. People holding or participating in crowd activities shall be seriously punished, and weddings are forbidden,” the Global Times informs readers.

Macao, the world’s richest gambling market with five times more revenue than Las Vegas, closed its casinos to keep the contagion from spreading. MGM, Las Vegas Sands, and Wynn Resorts are taking a hit.

Apple is closing all its stores in China, one of the company’s largest markets. More significantly, it’s reducing iPhone shipments by 10 percent this quarter because of disruptions in its China-dependent supply chain. This affects Apple’s sales beyond China.

And the impact goes far beyond Apple’s sales.

Corporate mouthpieces in the financial media never cease telling us how business likes certainty (who doesn’t?).

Yet these same businesses have entrusted the wellbeing and future of their enterprises to a totalitarian regime that, it is certain, will lie and violate basic governance and public health standards we take for granted in the United States. What could possibly go wrong?

Blame a selective reading—or misreading—of the economic text management gurus have used to justify outsourcing entire industries to communist China.

They point to the seminal treatise from 1817 by David Ricardo laying out the theory of comparative advantage in international trade, On the Principles of Political Economy and Taxation.

Ricardo calls for a national division of labor, with countries focusing on products they are best at producing and trading with other countries doing the same rather than trying to produce everything at home. His oft-cited example has Portugal trading Madeira for the textiles that were a British monopoly at the time.

But in his theorizing, Ricardo includes an important caveat, one overlooked by the free-trade-über-alles lobby: capital stays in its place of birth.

“The fancied or real insecurity of capital,” Ricardo explains, “when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital.”

In plain English, he’s saying the reasonable man wouldn’t invest his capital in a foreign country with “a strange government and new laws” for the same reason he wouldn’t leave his country of birth to live in a foreign country away from his family, friends, and ancestral culture.

If the Chinese Communist techno-totalitarian state weren’t enough to dissuade C-suite executives from entrusting their capital to “a strange government and new laws,” the coronavirus pandemic and the social, market, and industrial chaos resulting from the communist party’s botched handling of the crisis should be a wake-up call.

The father of comparative advantage wrote that he would “be sorry to see weakened” feelings of affinity to one’s place of birth. (So much for the unicorn dream of “global citizenship.”)

Ricardo counseled “men of property to be satisfied with a low rate of profits in their own country, rather than seek” higher profits “in foreign nations.”

The owners of capital and their McKinsey consultants would do well to follow the teachings of David Ricardo—all of them.

We may never know what the final death toll from the coronavirus is, but it has already claimed cherished nostrums of corporate globalization.

-Curtis Ellis is the Senior Policy Advisor for America First Policies.

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