• The Ricardian theory of comparative advantage, neoliberalism and location economics encouraged the outsourcing model and the pursuit of profit at the expense of attention to risk
  • Possible shortages in vital commodities, such as medicine, during the coronavirus pandemic call these policies into question
A staff member arranges masks at a medical equipment company in Suining, in southwest China’s Sichuan province, on March 6. China has stepped up the production of masks amid a global shortage. Photo: Xinhua

When the coronavirus pandemic is all done and dusted, one of the lessons learned will be the fragility of our global trading system. As the pandemic unfolds, nations will have to seriously reflect on their adopted economic models. Our current economic orthodoxy has encouraged a dispersed trading system that is built on an excess of opportunism at the expense of attention to risk.

The validity of these models, which are currently showing signs of system failure, should be reassessed. While what's unfolding will not be the death of the global trading order, the butterfly effect can now be considered a defect.

The coronavirus, which was first reported in Wuhan, China, has now spread to over 170 countries due to the mass movement of people across borders. The ensuing panic has led to the spread of misinformation and, in some case, the beginnings of a breakdown in social order, with the weaknesses of Western countries clear for all to see.

For the governments of countries in which populations are susceptible to misinformation and panic, and which may face shortages, the threat to national stability is very real. Though the virus is discriminatory in nature, effecting mainly the very sick and elderly, it has put the world on notice. We have to acknowledge our system is fragile and too prone to risk.

Our global trading order is predicated on the Ricardian theory of comparative advantage, whereby countries should specialise in producing goods that they have a comparative advantage in; neoliberalism, which emphasises the value of free-market competition and minimal state intervention; and location economics, which answers questions of which economic activities are located where and why.

Additionally, the fetishisation of total shareholder returns, along with a multitude of other economic theories, have promoted the offshoring model, which excessively prioritised opportunism over risk in the pursuit of resource efficiency and profit.

Post-Covid-19, globalisation and supply chains will be changed forever

In some ways, we are lucky the coronavirus and not something akin to Ebola, which has a 50 per cent fatality rate as opposed to the 3.4 per cent rate for Covid-19 (as of March 3), exposed the fragility of this global trading system. Given the socio-economic consequences of the coronavirus so far, if an Ebola pandemic were to take place, the impact would be unimaginable.

Due to the coronavirus pandemic, intricate supply chains are showing signs of instability. While the proponents of excessive globalisation marketed it over decades as a way to spread wealth and enrich the globe, this has been a fallacy. The cogs in our global trading system move in unison when well lubricated. Now that the lubricant has begun to dry up and friction between the cogs has started to increase, we are seeing a slowdown, much like a watch that loses time.

Many countries that allowed outsourcing in vital industries, which seemed to make good economic sense at the time, will now have to add these to their risk registers. One such example is the production of medicine and other crucial ancillaries in the supply chain. With much of the production sent to either low-cost labour countries or specialised manufacturers, any disconnect in the system can disrupt the overall flow.

India, a major global producer of generic drugs, has restricted the export of some important drug ingredients. However, India is also reliant on China for a significant amount of other active pharmaceutical ingredients. This is not a unique situation.

An employee at Cadila Pharmaceuticals packs strips of Risorine capsules at their manufacturing facility in Dholka in the western Indian state of Gujarat in March 2015. Photo: AFP

Nations that produce and supply vital commodities will naturally favour themselves and their allies first in times of crisis. The consequence is a domino effect of force majeure. As the supply chain of more vital commodities is affected, the picture becomes increasingly bleak and will compound hysteria over a potential shortage of necessities.

Once the dust settles on the coronavirus pandemic, the postmortem examination will reveal the flaws in the economic theories which for decades have encouraged nations to specialise and establish comparative advantages and urged organisations to undermine risk in the pursuit of profit.

We can now see, and will have to come to terms with, the law of unintended consequences. While the decoupling of the established trading system won't and shouldn't fundamentally change, risk should also be a primary factor attended to going forward. But if we don't heed this lesson after the crisis abates, the next pandemic will hit us with even greater force.

S. George Marano holds a PhD from the School of Management at RMIT University, Australia, and has an MBA and Master of Commerce from RMIT University

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