Offshoring Left the U.S. Unprepared for Coronavirus

(Bloomberg Opinion) -- The U.S. is still not doing enough coronavirus testing. South Korea, famous for its success in containing the virus, does about 10,000 to 18,000 tests a day, which is 200 to 350 tests per million people. Despite recent increases, the U.S. is only at the lower range of that level in per capita terms:

At first, the failure to ramp up testing came from federal agencies. The Food and Drug Administration failed to approve most tests, allowing only a single product developed by the Centers for Disease Control and Prevention. When the CDC bungled the rollout of that test, the U.S. lost crucial weeks in the fight. Eventually, the FDA approved a broad range of tests, including from private companies, alleviating the shortage. As a result, testing rose from insignificant levels two weeks ago to the mediocre level they’re at now.

But a new problem threatens to reverse even this tepid progress: a shortage of personal protection equipment. Medical workers who do coronavirus testing need to wear masks, gowns and other items to prevent them from being infected after dealing with large numbers of infected patients. Another problem is a shortage of the cotton swabs used to carry out the tests.

It seems almost unthinkable that shortages of these simple materials could hamstring the medical system of the country with the biggest economy on the planet. Economist and long-time policy adviser Larry Summers wondered how this could happen:

The reason is offshoring. Over the years, the U.S. has outsourced the production of items such as masks, mostly to China -- which is now reluctant to allocate any of its production capacity to the U.S., given its own needs and the deteriorating relations between the two countries. Making these objects is technologically somewhat challenging, but it’s also a low-margin, commoditized business -- there’s little in the way of network effects or brand value or patents to yield big profits. So it made sense for the U.S. to focus on higher-value things at the beginning and end of the supply chain -- medical services that make use of masks, marketing and distribution, and innovation of technologies used to create better masks.

This was an example of thinking on the margin. Economics predicts that businesses decide what to produce based on what makes a little bit more profit. The siren song of marginal profit drew the U.S. relentlessly away from mask production.

The problem is that when the economy suffers a huge shock such as a war or a pandemic, the margin vanishes. The U.S. economy is projected to shrink by 30% or more in the second quarter as a result of the coronavirus, and the necessity of doing mass testing has created an abrupt shift in the demand for protective equipment and swabs. What made economic sense yesterday doesn’t make sense today.

Eventually the U.S. will reconfigure its economy in response to these shocks. Domestic mask and swab factories will open, or existing facilities will be repurposed to make them. But that will take time, and the U.S. needs more testing now. Lockdowns can suppress the virus, but only at great economic cost; as soon as restrictions end and people go back to their jobs, coronavirus will come roaring back unless the country has a strict regime of widespread testing and contact tracing in place. Thus, every day that the economy fails to provide enough masks and swabs is another day that it has to remain in shutdown.

If businesses will always make decisions on the margin, then it’s government’s job to insure the country against big shocks such as pandemics and wars. The U.S. could have used trade barriers and government support to make sure that the entire supply chain for medical equipment stayed in the country. But government action against offshoring has long been stigmatized, including by Summers himself, who in 2012 lambasted offshoring skeptics as “Luddites.”

The coronavirus crisis should cause advocates of unrestricted free trade to rethink their blanket opposition to protectionism. An economy based entirely on far-flung supply chains is more profitable in normal times, but when a crisis hits, it can quickly become a liability. Items such as masks and swabs are too crucial to be left to the whims of international markets.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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