Contagion turns conventional economic logic on its head

Everyone in the world wants the same products, and the world’s factory is looking after its own.

China has for most of the past decade been described, quite loosely, as “the world’s factory” — and not without reason.

To coin a phrase, China has become the “supplier of last resort”.

The Covid-19 pandemic has thrown a spanner in the works of global production, distribution and consumption chains — but not in the way you may imagine.

The pandemic has tested people, governments industries and supply chains unlike any crisis since World War 2.

Manufacturers and suppliers of personal protective equipment (PPE) have been working around the clock to increase production in response.

One of the problems is that everyone wants the same thing (PPE), and when one country runs out of stock, or simply does not have enough to deal with new cases, it is not uncommon to look abroad, and invariably to the world’s main producers and exporters.

Except, the countries that manufacture the PPE may give their own citizens and medical institutions priority.

We have seen how China has had to look inward to produce PPE, and extend assistance or trade to its neighbour in South Korea.

For at least two or three decades Chinese trade has expanded at an unprecedented rate.

In 1995, the value of China’s imports and exports of goods totalled $280.9bn (about R5.285-trillion), or 3% of global trade.

By 2018, its total trade in goods had jumped to $4.6-trillion (R86.5-trillion), or 12.4% of global trade.

China became the world’s largest trader, followed by the US (11.5%), then Germany at 7.7%.

Along with the volume of trade, China expanded its range of products.

Today, China produces almost everything from heavy industrial equipment to, well, face masks and other PPE.

So, for the sake of this discussion, if any country, such as SA, or Sudan for that matter, ran out of PPE, local suppliers could order them from the US, Germany, Italy or the “supplier of last resort” — China.

Except, there’s a problem. China may indeed be “the world’s factory,” (of say PPE), followed by the US, Germany or Italy,  but those countries now need the PPEs for their own use.

It’s hardly conceivable that the US will ramp up the export of PPE with the rate of infections rising daily in that country.

Germany is the economic anchor of the EU, and with Italy and Spain’s infection-levels, there is probably a greater incentive to provide PPE to Germany’s neighbours first.

In short, everyone in the world needs the same things — PPE and ventilators — and the countries that manufacture these products may need them at home as a priority.

Though masks can be produced quite easily, ventilators require a high level technology.

As things stand, the main manufacturers of ventilators are in Europe and the US.

Becton Dickinson is the largest producer of ventilators in the US, followed by  Dutch company Phillips’ Hamilton Medical (a Swiss subsidiary of US biotech company Hamilton); Fisher & Paykel Healthcare (New Zealand); Draeger (Germany); Medtronic (US company headquartered in Ireland) and GE Healthcare.

Last month, US car manufacturer Ford announced plans to collaborate with GE Healthcare to increase production of ventilators, and other critical supplies needed to fight against the coronavirus.

So the main manufacturers of PPE are in Europe, North America, and in Asia and the Pacific.

This is consistent with the manufacture of ventilators on which, it is safe to assume, China has started focusing.

The problem for African countries, which have so far not been blighted to the same degree by the Covid-19 virus as Italy, Spain, the US and China, is that when the disease really  does take hold on the continent, medical expertise and technology  may be in short supply because the main producers need them for their own people first.

If, the Covid-19 pandemic has tested people, governments industries and supply chains unlike any crisis since World War 2, it has also revealed the flaws in conventional economic logic, rooted in the idea of comparative advantage.

That argument basically works as follows: SA is great at tourism, so should focus on promoting that industry, and the US or Germany are better at producing ventilators — so they should focus on doing that.

China is the “world’s factory” so countries are relocating most of their production facilities there — because it makes economic sense.

But what happens when when the main producers (the US, Germany or China), urgently need the same products that the poorest, consumer countries need, and don’t have the capacity to produce themselves?

We can only pray that the poorest of the poor countries remain relatively unaffected by the virus.