Economist Dr. Donald Boudreaux joins us for a discussion on how trade impacts our health. As the coronavirus outbreak creates hostility toward globalization, Dr. Boudreaux warns that protectionist policies would ultimately be more detrimental to our health than the virus itself.
Dr. Boudreaux is a professor of economics at George Mason University and holds the Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center. He is a TFAS senior scholar and professor of economics for our D.C. Summer Programs. He is the author of “Globalization” and blogs at Café Hayek. You can listen to our conversation above or read a transcription below.
This episode was recorded on Friday, April 24. Some examples may become outdated as the COVID-19 response evolves. The transcript below is lightly edited for clarity.
I want to dive right into today’s topic on the relationship between globalization and health. Some people might say that the COVID-19 pandemic is a good reason to substantially isolate Americans from the rest of the world. That pulling back on trade and keeping our resources at home is a good way to protect ourselves from future health crises. What do you say to that kind of reaction?
Dr. Boudreaux: Look at the data. The data shows pretty clearly that not only is material welfare generally and positively associated with the openness of the global economy – the freer the trade, the more materially wealthy people are. When people have looked at the specific connection between trade, openness and health, it shows a positive connection between health outcomes and openness to trade. The freer people are to trade the healthier they are. Of course, that doesn’t mean that there aren’t specific instances when bad things happen when you get a particular negative health outcome, but the data is overwhelming in their conclusion that the freer our trade, the more healthy we will be. That’s the data. The theory behind it also makes sense because free trade makes us richer. Richer people are better fit, they’re better housed, they have access to more advanced medications and medical techniques, then do poorer people.
By cutting ourselves off from trade – in America, we’re well fed, we’re well housed and clothed – but we would over time have a lower supply of advanced medical products and that would risk our health in the long run. So I have no doubt that a really bad response to the current crisis, this COVID-19 crisis, would be for us to shut ourselves off from the global economy simply because this virus may have originated in China and might not have gotten here had there been less trade. I think that last part, by the way, is questionable. But even if that were true, cutting ourselves off from trade is not the right response.
Can you dig a bit more in for us on what it would look like if the United States responded to this outbreak by implementing more protectionist policies? What would the ripple effect be on our health?
Dr. Boudreaux: The first thing that would happen, if we raised tariff barriers even higher than they are now – President Trump, of course, began to raise those tariff barriers long before anyone ever heard of COVID-19 – but, if we raise the tariff barriers further, other countries will do the same. That’s going to build walls of even higher trade barriers between countries. We Americans then will get fewer imports for our exports. We’ll export less, we’ll get fewer imports in response. That means for us to produce more of the things or with the same amount of things that we once imported, we’re going to have to use more of our own resources to produce those goods here at home. Taking those resources to produce those goods here at home means that we produce fewer of other things.
Because open trade allows us to specialize in producing those goods and services that we are most efficient at producing, we buy goods that we are relatively inefficient at producing from foreigners. If we raise our trade barriers, we’re going to shift resources, including workers in the United States from producing outputs that we produce really, really well with great efficiency into producing outputs that we don’t produce so efficiently. When inputs including workers are moved from uses that are very efficient into uses that are less efficient, the wage rates paid to workers in those industries fall. So over time, we will have wages lower than otherwise in the United States. We’ll have a less abundant supply of goods and services in the United States. And as I said before, over time this will even show up in health statistics, the rate of improvement in Americans’ health will decline. I’m not saying it will go negative, but it will be less than it would otherwise be. Your and my health, 20 years from now, our children’s health, our grandchildren’s health would be less in the future to the extent that we raised trade barriers then health would be if we don’t raise trade barriers.
You recently wrote a piece for the Pittsburgh Tribune Review where you highlight medical and public health advances that were initiated outside of the United States. I’m hoping you can share with us what are some of the historical healthcare wins of globalization that are kind of being forgotten about right now?
Dr. Boudreaux: Oh my gosh. Probably the single most important healthcare advance, maybe in human history, besides clean water and regular nutrition, is antibiotics and it is certainly right up there in the top five. Antibiotics were invented by a Scotsman working in England. They weren’t invented by an American. And so in the extreme case, if we were cut off from the rest of the world, we would not have antibiotics or we would have had to invent antibiotics on our own. Maybe we would have done that, but we would have waited longer to get antibiotics. I don’t recall all the precise detailed products that I went through in that column that you mentioned. But when I researched that column, I was astonished to find a number of medical advances, like antibiotics and organ transplants, are largely non-American inventions. I was astonished to find how many things – contact lenses, for example – were invented by foreigners. And so we have access to those only because we trade with foreigners.
Also, keep this in mind – it’s a little bit more indirect, but when American pharmaceutical companies are pondering whether or not to invest in the research and development necessary to make some new drugs and hopefully some new blockbuster drug, there’s a huge upfront cost. I think you’ll find the upfront cost is now approaching $3 billion in large part because the Food and Drug Administration imposes ridiculous barriers. But nevertheless, there are large upfront costs. And so a pharmaceutical company in America like Merck or Pfizer will not incur those costs unless that company has reason to believe that it will be able to recover those costs by selling enough units of the pharmaceutical products should the tests prove successful. And so free trade makes the market for American pharmaceuticals bigger. Pfizer and Merck, they don’t only have to sell to Americans, they can sell all over the world in a regime of free trade. When the United States obstructs free trade, that reduces the market for American producers of pharmaceutical products. It reduces the profitability of American producers of pharmaceutical products. It reduces the discovery and development of new drugs that will save lives and reduce pain. Those are just some of the health consequences that would happen if we restrict our trade.
Are there healthcare wins from trade that are helping Americans right now in the middle of the pandemic that we’re not even thinking about?
Dr. Boudreaux: Yes, we import a lot from abroad including from China in times of crisis. We get these things in and they help us. Unfortunately, some countries unwisely have imposed their own export bans. So we, Americans are not receiving exports from those countries. But go back to what I said just a moment ago. So far the United States has largely avoided export bans. There’s been some talk about them, but we haven’t gone whole hog like some other countries have done. The United States is the second-largest exporter of medical products in the world, second only to Germany. Our ability to sell goods, to sell pharmaceutical products abroad that bring in revenue to American producers of pharmaceuticals and medical devices – that revenue enables those companies to ramp up production. That revenue gives them profit incentives to develop drugs for future crises. There are many different ways in which we benefit from keeping our trade open. By restricting our imports that cause other countries to restrict theirs, by restricting our exports – should we go down that route – that will only incite even more countries to restrict their exports.
You touched on this a little bit, but the White House has invoked the Defense Production Act to order some American businesses like 3M and General Motors to produce medical supplies and then also to prevent exporting of some PPE. What do you say to that response? Should there be exceptions made during something like a pandemic?
Dr. Boudreaux: I think the burden of proof or burden of persuasion should be very heavy on those who would invoke something like emergency powers of the government to order private companies to produce certain things. Because when those powers are invoked, that’s basically a taking of the private property of those companies. And that reduces the profitability of those companies that makes it less profitable to invest in those companies. You might get more output from those companies today, by the invocation of such an emergency command, but invoking that command sets a precedent. That makes the profitability going forward for these companies less. It makes it more likely that the government will invoke those kinds of commands in the future. And so that reduces the incentives of companies to expand their production and engage in research and development of new products. These consequences will never be seen because we don’t know what’s not produced.
A far better way to achieve the same end, it still involves government intervention, but rather than the government ordering companies to build certain things, the government – if it insists on getting a certain amount of output, say of, ventilators from General Motors or some such thing – it should agree to use taxpayer money to pay the companies enough to ramp up their production very suddenly, and in many cases, to change entirely what they’re producing. General Motors doesn’t normally produce ventilators, they produce automobiles and engines. And so, I would prefer to see the government pay companies to ramp up their production. There are lots of problems with that too, but I think that’s better than simply ordering companies to ramp up production. I think that’s the worst way of achieving the same goal. They’re both very costly. They both have downsides, but the top-down command and control is worse in my view.
Do you have any final thoughts for our listeners or perhaps for those who are looking at this current situation and want the U.S. to pull back on trade?
Dr. Boudreaux: Yes, it’s this. Here in America, we speak of “America buys this amount of stuff from China and we sell that amount of stuff to Germany.” But in fact, America, as such, doesn’t buy anything from China or sell anything to Germany. It’s many, many different American companies who buy these things and sell these things. Each of these companies, as a buyer and as a seller, each of them has strong incentives to make sure that their supply lines are resilient and as reliable as possible. They might not always get it right. I’m not saying the outcomes will always be perfect, but I would trust the profit motive to prompt individual companies and entrepreneurs to choose how to arrange their supplies rather than having those supply decisions overridden by politicians and bureaucrats in Washington. Politicians in Washington don’t know the details of how best to get whatever is needed in order to produce some particular pharmaceutical.
They don’t know the ins and outs of getting medical supplies to a medical wholesaler in the United States such as McKesson. They don’t know the options for each of the countless different medical suppliers nor do these politicians have the incentives that the individual managers and entrepreneurs and owners of the firms have. And so, I get very worried and discouraged when I see so much enthusiasm for politicizing supply chain decisions. I don’t like the term supply chain, it is more like a network, but I get very worried when I hear this kind of talk about turning these decisions over to politicians and bureaucrats. The intention may be very good in doing so, but the question has to be asked, what knowledge does someone like Marco Rubio or someone at the Food and Drug Administration or in the Pentagon or at the CDC – what knowledge do these people have of all of the many details of the supply lines of each of the many different kinds of things that we buy, each of the many different kinds of things that we sell having to do with medicines? They don’t have that kind of knowledge. And so, when we politicize it, we have this one size fits all, so-called solution, being imposed on an incredibly complex and ever-changing web of commerce that works pretty well. And yes, this web is not going to work as well in times of crisis, but it’s not going to work as well in times of crisis even if we turn it over to politicians and bureaucrats. I would rather the web and the decisions made within it to remain with the private individuals who know what’s going on and with incentives to get it right than to politicize those decisions by turning them over to politicians.