Beware of Efforts to Repatriate Supply Chains

(Don Boudreaux)

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In my latest column for AIER I discuss a small handful of the very many problems with efforts to repatriate so-called “supply chains.” A slice:

Looking at national security, consider the fact that there are more than 3,500 different grades of steel. Whatever grade of steel is now used by, say, the private producer, BAE Systems, to construct the outer shell of M1A2 Abrams battle tanks has that distinction in part because of its availability. But another term for “its availability” is “its cost.” If this grade of steel were less available – that is, if it were more costly – chances are high that some other grade of steel would instead now be in common use for this purpose and, thus, be identified as a type of steel that is ‘critically important’ for national defense.

So if tariffs are used to restrict the importation of the types of steel currently used in tank construction, the availability of such steel types in the U.S. will shrink – that is, their costs will rise. Tank producers will thus, at least in some cases, switch to substitutes that are less costly than are the newly tariff-ladened ‘critically important’ types of steel. Tariffs on critically important grades of steel might well result in such steel being proven to be not so critically important after all. Some other types of steel – formerly not identified as critically important – will instead be used.

In short, whether or not some good is ‘critical’ to national defense (or to health care, or to food security, or to infrastructure, or to you-name-the-desired-state-of-affairs) is not exclusively a question of that good’s physical properties. Nor is it a question exclusively of the extent of its current use for national-defense purposes. Whether or not some good is ‘critical’ to national defense is also a question of economics, not the least of which is this: What is the current cost of using that good compared to the cost of using one or more different goods that can achieve similar outcomes? And in all cases this cost will be higher or lower depending on how scant or abundant are available supplies of that good relative to available supplies of other goods.

A tempting ‘solution’ to the problem of identifying which goods are ‘critical’ to national defense is to include in the classification of ‘critical’ all obvious substitutes of the goods currently used for purposes of national defense. In the case of steel, for example, simply declare all steel to be strategically important.

But steel itself has substitutes, such as aluminum and, potentially, carbon fiber. So the ‘critical’ classification can logically be extended to include all metals and other substances that can potentially substitute for steel.

Again, there is no engineering answer to the question of which goods are ‘critical’ to national defense. And once the inescapable economic properties of this question are taken into account, there are, in most cases, no obvious and objective criteria that allow some goods and services to be classified as ‘critical’ while others are not so classified.

The challenge of devising some practical means of distinguishing ‘critical’ from not-critical goods and services looms large. First, the imprecision – the ‘non-objectiveness’ – of the criteria for making such distinctions means that all such distinctions will require judgment calls on the part of government officials. But government officials, being incessantly under pressure from special-interest groups, will be tempted to make such distinctions in an overly inclusive manner. Goods and services with no real claim to being critical for national defense will be wrongly classified as critical.

Several years ago I encountered a small piece of evidence in support of the claim that politicians are shameless in using national security as an excuse for special-interest privileges. I was present at a speech in which Sen. Marco Rubio – who represents Florida – defended sugar and other crop subsidies with the assertion that these subsidies are essential if America is to enjoy “food security.” And “food security” is essential, so the Senator assured his audience, to America’s ability to resist foreign military threats.

The audience applauded.

…..

Here’s why above I preface “supply chains” with “so-called.”