Here is something U.S. Trade Rep. Katherine Tai said at a World Economic Forum event last week:
So I think that whether it's in the world of goods trade, or services trade, or digital trade, part of what we are struggling with right now at this inflection point is trust. Whether or not you trust your partners, whether or not you trust your actors in terms of what they're going to do with the data, whether you trust each other, whether you trust that we are making the kinds of gains with respect to the climate crisis that will allow for a sustainable future for all of us.
In that context, we are struggling against this paradigm of efficiency. And I think this gets to your point on fragmentation also. From the business side, I can completely understand an anxiety around -- we're looking at a less efficient world. And the world that we have been through has been really about maximizing efficiency.
But I think that is part of the point, which is this. You know what's really inefficient is health insurance. I've got to pay $50 every two weeks, even though I'm healthy. But the logic is that when I do have that crisis, when I inevitably need more, and run into a health issue, I have paid into a system that will take care of me. Right? And so I think that the way we need to think about it is, a less efficient world economic system will necessarily mean that we can't just be pursuing the lowest cost, the maximum cost efficiency, but that premium that is going to come with that extra work that we have to do is really an insurance policy to make sure that when we run into problems, whether it's an earthquake, whether it's a tornado, whether it's another epidemic that turns into a pandemic, whether it is non-economically based decision making that erupts in military incursion, that we're not all there to suffer for it, but that we've thought ahead and then we have systems that can help us bounce back.
Here are several points in reaction.
First, there is no doubt that efficiency has played an important role in many production decisions over the past few decades, as companies in industrialized countries looked to produce for global markets in a way that lowered costs, and governments negotiated international economic agreements to facilitate that. But empirically speaking, I wonder how much efficiency has been achieved in practice over that time, especially in relation to government policies. Obviously, efficiency is what free market economists are pushing for, but how well has that translated into the trade policies of the U.S. or other countries? Governments often talk a good game, but actual policy, even long before Trump came on the scene, has been full of inefficiency-generating policies such as the Jones Act, anti-dumping abuse, a wide range of subsidies, and excessive intellectual property protection, as well as bilateral and regional trade agreements that may distort trade more than they create it. With all that in mind, how far has policy moved along the continuum of efficiency from, say, 1993 to 2023? It may not be as far as people think, but it's a difficult thing to measure, so it's hard to say for sure.
Second, Tai makes reference to insurance here, but is efficiency or inefficiency a better hedge against risk? The recent baby formula shortage in the U.S. is a good example of how an inefficient set of policies designed in part to favor domestic producers and exclude imports led to product shortages, so inefficiency in the form of greater self-sufficiency is not necessarily the best way to avoid risks. At the same time, I do agree that there are some instances where an overemphasis on efficiency can lead to risks, and trust is a real concern. However, the real world examples of this may be more limited than some commentators have been suggesting recently. It sometimes seems that there are people in the U.S. who don't trust any trading partner, even close allies, and want to shift towards a very high degree of self-sufficiency. In my view, that approach will mostly increase risks for Americans, as efficiency and relying on others a bit can actually be pretty good insurance against disasters, whereas inefficiency can be risky here. If there's an earthquake or a tornado in your country, you want to have quick access to alternative sources of supply, and if your goal has been self-sufficiency, getting access to supplies in these situations could be difficult. As with everything, the choice between efficiency and inefficiency is about achieving a sensible balance. At this point, I'm more worried about inefficiency than efficiency.
Finally, in addition to the issue of risk, there are overall economic consequences to think about when deciding how much efficiency we should aim for, as well as distributional consequences. With regard to the general economic impact, when we shift away from efficiency and towards a more inefficient approach that emphasizes self-sufficiency, we tend to lower overall economic welfare. Among other things, competition decreases, production costs increase, and prices go up. And as to the distributional consequences, policies that protect domestic markets from foreign competition help certain (well-connected) companies, including both their owners and employees, but everyone else pays a price. For the most part, that's going to help those who are better off economically and hurt those who are worse off.
