Trade and COVID-19: The Weakness of Comparative Advantage Amid Coronavirus?
COVID-19 appears to still be ongoing. The latest update puts us at 686 cases. As testing increases, cases will rise even faster. Even with the current situation, our healthcare workers are struggling with a shortage of Personal Protective Equipment (PPE) such as hazmat suits and masks.
Noah Smith in his latest Bloomberg column says that the United States (US) is also short on PPE and swabs. The main reason? The US doesn’t make these items domestically, relying instead on supply from the People’s Republic of China (PRC).
In his article, Noah points the finger at comparative advantage theory. Comparative advantage is a standard theory in international economics, first proposed by David Ricardo. The theory essentially says that the economy is more efficient when a country concentrates on producing the goods and services it’s best at, selling them worldwide. Everything else can be imported (since other countries are better at making those goods, comparatively speaking). In this case, the PRC is a fairly efficient PPE producer compared to the US. Rather than spending labor and capital making masks, the US economy is better off concentrating on healthcare services, where the US is indeed one of the world’s pioneers in health innovation. Masks can simply be imported from other countries.
According to Noah, in a crisis like this, global demand shifts dramatically. Suddenly, PPE demand has surged everywhere. Some countries (including Indonesia) have even imposed PPE export bans to prioritize domestic needs. When this happens, the US isn’t prepared to make its own PPE because it has been relying on the PRC. If the US had been making PPE all along, scaling up production to meet this sudden demand spike wouldn’t be as difficult.
Speaking of which, what about Indonesia? Indonesia has issued Ministry of Trade Regulation No. 23/2020 on the Temporary Export Ban of Antiseptics, Mask Raw Materials, PPE, and Masks (download here) to secure domestic supplies. But even with this ban, healthcare workers still face PPE shortages. Indonesia even imported 12 tons of PPE from the PRC. Good thing the PRC didn’t ban PPE exports.
So it seems Indonesia too must depend on other countries to fight COVID-19, and the PRC appears to be the most prepared to rapidly scale up production.
Back to comparative advantage – what is our comparative advantage in medical equipment? I tried illustrating this in Table 1. Table 1 contains products temporarily banned from export under Permendag 23/2020. I’ve added export and import statistics from trademap.org. To properly analyze comparative advantage, we’d need export and import data for all product types. For simplicity, I just use exports and imports. High exports indicate we’re good at producing these goods. PRC imports are added to reflect dependence on the PRC.
Table 1. Export ban items by HS code and their 2018 exports and imports, USD
| No | Item | HS | Total Exports | Total Imports | Imports from PRC | PRC Import Share (%) |
|---|---|---|---|---|---|---|
| A1 | Alcohol-based antiseptic *handrub* | Ex.3004.90.30 | 2,697 | 2,085 | 144 | 6.91 |
| A2 | Antiseptic *handrub* with coal tar and alkali | Ex.3808.94.10 | - | 146 | 0 | 0 |
| A3 | Antiseptic *handrub* in aerosol form | Ex.3808.94.20 | 0 | 154 | 29 | 18.83 |
| A4 | Other antiseptic *handrub* | Ex.3808.94.90 | 13 | 6,831 | 190 | 2.78 |
| B1 | Mask raw material with man-made filaments | Ex.5603.11.00 | 36,159 | 90,458 | 27,262 | 30.14 |
| B2 | Mask raw material without man-made filaments | Ex.5603.91.00 | 4,557 | 10,400 | 3,880 | 37.31 |
| C1 | Medical PPE | Ex.6210.10.19 | 259 | 45 | 7 | 15.55 |
| C2 | Surgical PPE | 6211.43.10 | 9,965 | 107 | 61 | 57 |
| D1 | Surgical masks | 6307.90.40 | 506 | 1,636 | 1,416 | 86.55 |
| D2 | Other masks (*nonwoven*) | Ex.6307.90.90 | 13,3274 | 19,066 | 11,306 | 59.3 |
Looking at 2018 statistics, the temporary export ban seems justified. Our garment workers are skilled. For PPE, we clearly export far more than we import. The export ban should help hospitals and other healthcare facilities obtain PPE.
However, for other items, this conclusion is harder to draw. For raw materials, we clearly import more than we export. For surgical masks, imports are not only larger – most come from the PRC. What’s ironic is that the export ban was enacted because Indonesian mask exports had suddenly spiked. Yet as we can see, surgical masks (HS 6307.90.40) had more imports from the PRC than exports, at least in 2018 per the data in Table 1.
Did mask factories in Indonesia suddenly multiply and become super productive in 2019 and 2020? Possibly. But several other explanations seem more plausible: the price surge. News reports only reported increases in USD value. As we know, Indonesia was a latecomer to the COVID-19 outbreak compared to the PRC, Hong Kong, Singapore, Japan, and South Korea. It’s natural that prices offered by these countries would spike first. Additionally, the rupiah has been weakening. In other words, the USD export value may have risen significantly because of per-unit price increases, not because production suddenly surged. Another possibility is that exporters sold their warehouse stock.
Another problem making this analysis difficult is the many “Ex.” annotations in the regulation. “Ex.” means not all goods in that HS category are banned – they’re screened further by item description. Indeed, the descriptions in Table 1 don’t exactly match the HS definitions. We could be exporting and importing goods with different descriptions but within the same HS group.
Unfortunately, I can’t confirm all this with limited data. But regarding comparative advantage, what I can say is that I don’t agree comparative advantage is the cause. True, crises will cause dramatic changes in the marginal valuation of all goods. But when the entire world experiences a shift in consumption patterns like this (where mask demand suddenly surges while demand for non-essential goods plummets), what matters is probably how flexibly an economy can adjust.
Global demand, not just the US, has surged. The world’s main supplier, the PRC, is struggling to increase production. The US itself has asked non-PPE factories like car manufacturers to repurpose as mask factories, and it appears feasible. I think this is fundamentally a pandemic preparedness problem. The US is certainly the world’s superpower in military equipment production, but it simply never planned for a pandemic this large. Pandemics weren’t considered as important as military crises, for which the US is extremely prepared, even maintaining military bases worldwide.
In my other writing, I discuss how factories are beginning to repurpose as antiseptic and mask producers. The key is how authorities can expedite permits like distribution licenses or reduce import barriers on raw materials during this crisis. If markets can adapt quickly, the government must facilitate that change. A country could even develop plans or protocols for factory repurposing to meet medical equipment needs during crises, similar to how the military plans for highways to serve as emergency aircraft runways in wartime.
Right now, international cooperation is essential to save lives and, of course, the economy. This is the difficulty with epidemics. As long as one country remains infected, it can still spread to its neighbors. Global health is important for all of us, especially exporters and users of foreign products. Our health is in the PRC’s and the US’s interest, and vice versa. I’ve seen on social media an enormous number of efforts to increase PPE and mask production from civil society, but the PRC is among the fastest to scale up production of healthcare goods.
For now, we need to rely on them, and there’s nothing wrong with that.
