Global Virus, Global Trade—Global Impact

economist and author Stephen King. But first we felt we should spend a few minutes on the big story of the week, which is the global march of the coronavirus. At times like this, markets get nervous, epidemiologists get a lot of calls from the media, and economists attempt to estimate what the impact on the global economy will be, usually without very much to go on. Tyler Cowen is a professor of economics at George Mason University and co

author of the very popular Marginal Revolution blog. He's also a regular columnist for Bloomberg. I don't think he's an epidemiologist in his spare time, but he has written some wise columns on the coronavirus since the outbreak first hit the news. He's on the line now, Tyler, thanks very

much for joining us. Thank you Now, you haven't been coming up with guestimates for the impact economic impact of the virus, but you've had something to say about the kinds of institutions and cooperation you need to respond to these kind of outbreaks. I guess one question is do you think America's health system is up to the task of dealing with this if it continues to spread? Well, if any pandemic comes along, it's very important. How good

is your local public health infrastructure? Do your emergency rooms have surge capacity? Two? People trust the messages they're receiving from public health authorities rather than overreacting. Do you have the ability over longer stretches of time to gear up

vaccine production once you have a vaccine? So the best way to approach remedying the costs of a pandemic it's not to quarantine everyone, which is usually not going to work, but to think about response and trust within your system and just the robust, decentralized properties of how you're going to deal with all of the various small issues. And

if you just we're just thinking domestically here. I mean, there's obviously is a big international anguera, but within America, you know, we tend to think that faith in government institutions, investment in um public infrastructure has got worse over the last few years. Is that something that will then sort of feel feel, particularly the impact of with the spread of this kind of virus, or do you think actually

was still in a fairly good shape. Well, we did some pandemic planning around two thousand six when there was a possibility that a v and fluid spread, and it turns out that was not a major emergency. But in some ways we're in a better position than we were I say, twenty years ago. Keep in mind, a lot of the planning is not just public sector, it's also private employers. So say, for instance, at schools are shut down and children stay at home, a lot of parents

can't get to work. Are there robust workforce plans in place? For instance? And you were asked before you know, how ready are we for this? No one is ever quite ready for a major pandemic if that turns out to be the case. And again we still don't know, but I think there's a lot of improvisation along the way, and I'm cautiously optimistic that the United States at least is in a better position than many other countries. Well,

it's interesting you to say that. I mean in China, obviously there is there's often been concerned, and we had we saw it with Stars that local officials don't have the right incentives to get ahead of crisis and certainly to be open about something when it's first starting. It seems to have have been a bit more transparent in response to this virus, but the levels of social trust and the sort of local institutions and not is not necessarily as high as it is in the U S. Where

do you think China stands on that. Well, they're doing some things quite effectively at the national level. They're trying to be transparent. You've probably read the stories about them trying to erect a hospital in six days in Wuhan, and that sounds good, but they don't have the doctors to staff the hospital. Health Care has been one of

China's weakest points for a long time. So I think mostly they're very badly prepared compared to how well they do certain other things, like say putting up buildings quickly or doing high speed rail. If I think from an economic standpoint, you know, the state of international economic cooperation, it feels like it's worse than it was. I mean, the levels of kind of mutual trust between leaders as worse than it was a few years ago. How's the

international health cooperation? I mean, is that something? Obviously it's very important at times like this for countries to work together. I think a lot of the recent international problems will go away in light of an emergency. If this turns out to be one. In some ways, it could bring the United States and China closer together again. So within

the United States, pandemics typically have been bipartisan issues. So there's so much talk about how we're polarized, but the response so far in this country has been quite transparent and not a political issue per se. I'm heartened by your optimism. I mean, it's qualified arguments. Some chance, you know, quite a few more people will die. We don't know what that chance is, and much of that we can't

stop no matter what we do. And of course we should remember how many many people die of influenza every year um and become part of our system. I mean, I guess finally, just we when we again, when we worry about maybe the changes that have happened in the US and other places in the last few years. You know, social media we now worry, you know, takes a particular political trend and then makes it worse, tends to magnify it. Could it also magnify the downsides of this epidemic, for

by spreading fear misinformation? Is that something we can worry about. We should worry about it. But I am hopeful so far that social media will do more good than harm and does give people accurate information if you know where to find it. I would just suggest to listeners not to jump at scare stories, not to panic. Make sure anything you're reading or passing along actually is true. If there's anything that makes a response to a public health

problem worse, it is false information and panic. And the same thing applies to the many remedies that are already coming online as well. Tyler Cohen, thank you very much for joining us. Thank you m h. Now let's turn to that special project I mentioned for once. We wanted to get past those breathless headlines about trade wars and trade flows to see the nuts and bolts of the global trading system up close. So on a single day, December fourth, last year, reporters around the world went to

a particular place in the global trading system. Watch, listen and learn who went to the banks of the Mississippi in a French vineyard in the Rhone Valley, the Nigeria Benin border, and the Panama Canal, the West Bank, a shopping mall in downtown Tokyo, and a favorite meeting point for Chinese tourists in Sydney Harbor, all on the same day. And we learned a lot more than I can describe right now. But here's a taste from our chief Asian

Economy reporter and the current in Hong Kong. Oh, thank that noise you hear is the sound of global commerce in action. The Port of Hong Kong is one of the biggest shipping junctions in the world. On this morning in December, it's a buzz as hundreds of employees pour in for their shift, crane's load and unload containers onto trucks and chips. Overall, there are six thousand direct employees at the port and in estimated one hundred and eighty

thousand in related roads. On this day, there are a few obvious signs of the trade war between the US and China. It might look like business as usual, but Hong Kong has been caught in the middle of trade and political tensions between the world's two largest economies. And that is not all volumes in Hong Kong have been on the decline to the last several years, so it's hard to pinpoint everything on the trade war. There are other issues here. Peter Levesque is the CEO of Modern Terminals,

one of the companies that runs Hong Kong's port. When I talked with him, he was about to return to the US in a different role, but as twenty five years in Asia and makes his perspective valuable. Levesque was noting that not all of the decline and volumes reflects the barrage of higher turiffs. There's also stiffer rivalry from person Asia slowing global demand, as well as their rise

of Chinese and regional competition. The uncertainty pieces is something that businesses don't really like to deal with, and and you want to do a three and a five year strategic plan. We're trying to do, you know, plans that last one or two weeks depending on you know, which tweet comes out, and it's very difficult to try to get a handle on on you know, what to expect and what we're trying to do is just deal with

what's in our control. While Hong Kong may no longer be the merchandise trade conjured for China that it once was, it remains a vital source of capital and know how, trading and logistics accounted for around twenty one of the territories economy in two thousand and eighteen. On the ports key side, I climbed a crane to watch the operators doing their jobs. Perched in their cockpits about twelve stories off the ground. They are pulling and prodding levers to

maneuver containers onto and off of the ships. The guys in the cranes they can see for themselves whether there's a ship underneath or not. And the fewer ships, you know, they certainly talk about that they know that the state of the market is. Of course, Hong Kong's economic relationship with China is about more than just a shipment of goods.

Months of political protests have raised questions about the degree of autonomy that Hong Kong is supposed to have and what the political relationship with Beijing will be like the common US. Ben Bland is a research fellow with the Lower Institute, a think tank in Australia. He's also a former journalist in China. I asked him why Hong Kong

still retains a key economic role for China. Where it is really important is as a connector for the financial markets between China and the rest of the world, and particularly given that we've seen these efforts, initial efforts to open up China's capital account to open up the R and B kind of stall in the last five years. R and B stands for M, M and B, the name of China's currency. The nation has been trying to promote the use of it globally, but the currency remains

under tighter control than the US dollar. Hong Kong really retains its importance as that key valve, if you like, for flows of capital both out of and into mainland China. Yeah. I also recently visited the Hong Kong Toy and Baby Fair, the world's second larger show of its kind. Hong Kong

continues to be a vital cog in that industry. Even though the territory has long ceased to be the world's toy factory, much of the production has merely shifted next door to the province of Gongong in mainland China, while Hong Kong remains the region's banking captain. The message from organizers was upbeat. Trade officials expect the recent Phase one accord to boost export of toys from Hong Kong, and they say the holiday shopping season was good, but you

can still sense the competition the port is facing. Chipping cost from shan Jen is chipped in Hong Kong. Ken Quok is the chief operating officer of three zero, a Hong Kong based company that specializes in action figures from popular shows such as Transformers and Game of Thrones. Like so many it makes its goods in mainland China. Now instead of Hong Kong. More of his customers are choosing to have their goods shipped out of Shenzen, which is

just across the border in the mainland. Secondary is because most of the our manufacturer shoot out their products in China so that they they can consolidate the groods in China's warehouse and China warehouse off cause there's lower price than Hong Kong. In one way, the toymakers at the trade show have dodged a bullet. The recent deal took tarts from toys off the table, but the exhibitors are still aware of their risk of tariffs may come back

later and they are planning accordingly. That means considering where to move their supply chains. I dropped by the booth of good Baby International, a maker of strollers, car seats and other baby products. Amy Goo, the company's general manager for Asia Pacific, says the company has manufacturing in both China and the US, but she has been pitched by

officials from Saudi Arabia. The company has also looked at manufacturing options in Southeast Asia light and we are consideringly because it's not an easy move that the change the manufacturing facility to another country, but we are investigating this so it could be a potential area for the new manufacturing base. That theme of the difficulty in shifting supply chains is a recurring one. I actually met an international

yo yo superstar at the toy fair. His name is Hans Van dan Elson, and he's also president of a yo yo maker called yo Yo Factory. They're high end yoyo's can fetch up to three dollars. I travel the world. I teach children how to play yoyo. I'm a professional Yoyo instructor. I've been in the Guinness Book three times. Van dam Elson creates and designs his products in Arizona, but the yo Yo factory itself is actually in Shenzhen. I asked him if he's considering moving his manufacturing base

somewhere else. I want you to imagine a scenario where you're making a product and you constantly have to you oversee the production and make sure that everything is being made correctly, and you're very concerned about that. But imagine a scenario where the factory is actually selling the product and helping you distribute it. And in my case, I

make yo yos. So if the children in China are directly communicating back to the factory and they're complaining, hey, there's a problem, the factory is already on top of any problems that are happening, and so I get the benefit of of that scenario where the quality control is happening right there in China um and there the factory is actually telling me when there's problems, rather than me chasing the factory. And of course I couldn't help but

ask him to demo a yo yo. So this is like a very professional Yelio sales for twenty five dollars per hand. And when I say per hand, we actually play with Yoyo's two yeos, you know, one in each hand. Sometimes the yoos actually spin off the string. Okay, so you can play on string a string, you can play the two yalios. You could say that yo yo is a metaphor for what these manufacturers have been through into past two years, swinging repeatedly between the tower of threats

and hopes of trade peace. On top of that, the protests in Hong Kong show a little sign of fading. It all adds up to a less certain future for Hong Kong's unique status as a critical economical link between China and the rest of the world. Here's the lower Institute spend bland again. People are less confident about investing in the future because the political relationship is so important

to Hong Kong's future. Has long been this bridge, as I was saying, between China and the outside world, and in a different, happier time, that was a great advantage. But now, partly because of the domestic tensions and partly because of the outside environment, the US China tensions. Being stuck between the US and China between the rest of the world, and China doesn't necessarily look that advantageous for Bloomberg News. I am end the current the economics of

the Yo Yo there from ender current. I wonder how many of you saw that metaphor coming down the track a mile off now. I mentioned at the start that enders peace from the Hong Kong Docks was part of a special project we did for Bloomberg Markets magazine, chronicling a single day in the life of global trade, and it's well worth a read, and so is the guest essay we also have in that special issue on trade by HSBC senior advisor and former Chief Global economist Stephen King.

Some of you might remember Stephen spoke on our panel at the New Economy Forum in Beijing a few months ago. I wanted to talk here in our last episode of the series of Stephanomics about your essay, Stephen, because it raises I think some some really profound questions about the future of the global economy. Thanks for writing it for us,

Thanks for being here. We asked a lot of people in the same issue whether they thought we were at peak globalization and lots of important things You're not engaging with that directly in this piece, But you do have somber things to say about the direction that globalization might be heading in. Do you want to give us a very quick summary and then we can get into some of the what lies underneath it. Yes, of course. So globalization is something which I think ten fifteen years ago

people thought we're just naturally advanced. Through technological change of one sort from another, we've become ever more integrated over periods of time. But history suggests there are different kinds of globalization. The kind we've been living through over the last few decades is all about building global supply chains, about connecting countries and industries more closely around the world.

That might have been the case in the past. If you go back to the nineteenth century, you find a very different version of globalization, which was really associated with it's a horrible word to use, but the agglomeration of activity, so factory has all been built in say the UK, or in parts of Germany or France, and the economies are scale that these factories gained was such that it put industry out of business in countries like India and China.

So what you saw in the nineteenth century was a story of some countries posting significant industrial advance and other countries posting exactly the reverse. They became poorer and poorer, they kind of de industrialized, they went back to rural poverty in many cases. So in India had completely de

industrialized in this period. Absolutely. So you go back to the eighteenth century, India was one of the dominant producers of textiles around the world, and by around that nine hundred had lost that position completely, largely because of the impact of steam and factory technologies being used, particularly i

would say, in England. So the consequence was that even as Europe industrialized, China and India de industrialized, and in fact, you go back to the data, late eighteenth century, China and India together accounted for almost sixty of global manufacturing output, and by was down to about five percent or so.

And look, the key to this, I mean, I guess now we want to know because as you point out, there was that model of globalization which kind of increased the gaps between the successful and the unsuccessful parts of the world. And then the more recent period of globalization where actually you had it was more more equalizing, it was more you were dispersing income across across the world.

And of course, you know, people might think that sounds odd because we always talk about rising inequality, But the gap between rich and poor countries has got narrowed, has got smaller, even the gap between the rich and poor within countries has tended to get bigger. Yes, it's one of the paradoxes of globalization that the gap between nations has definitely narrowed. It's what happens when you've got China growing it for a while per year, Indo growing at

maybe six or seven percent a year. When you've got those kinds of growth rates coming through inevitable, you're going to see some kind of convergence of economic activity. But it equally is true that within countries you've seen this big growth of inequality. And part of that within country story I think might eventually apply across countries too. And the reason for that is that within countries, it's not just about the impact of globalization shutting down factories and so,

and it's also about the impact of technology. The technology through robotics and artificial intelligence and sold has led to a huge reduction the number of people employed in a variety of different industries in manufacturing most obviously, but also increasingly in clerical jobs and so on. Um and what happens with these people lose their jobs in those particular industries and then find new jobs, but often the lower

rate of pay. So you end up with maybe a limited number of people who are you know, the Facebook founders or the WhatsApp founders or whatever, who do incredibly well. But at the same time there's large numbers of people

have been in Once it's left behind. I think what is true within countries may begin to also apply across countries too, because of the impact of robotics in reversing global supplied So we might now go to a point where there's more it's winners and losers across the global economy rather than I mean, the great justification and the case for globalization in the last twenty years has been

the kind of convergence we were talking about. The good story, you know, the ex million people who've been lifted out of poverty is always the sort of number one part of the justification or that, yes, the pros of of globalization if we are if if the technology we're seeing now is going to shift us more back to that nineteenth century pattern that you were talking about where that success is sort of concentrated in different parts of the world,

because the winners, the winning places are not necessarily going to be the same as they were in the nineteenth century. Quite possibly not. I mean, you'd certainly argue perhaps that parts of North America and Europe would still emerge as winners in the story. It also adds I think countries like China that would emerge as winners from the story.

But there are countries and regions around the world that have not really properly engaged with global supply chains as yet kind of ing up to get to be part of that story. But arguably they're not going to get there, because if you're a company thinking of investing internationally, might choose to invest in the country that itself is quite risky. We might instead decide that you can do the same thing at home using robots and AI rather than cheap

workers abroad. And if you think about late twenties century globalization was very much a story of capital going in search of that nice combination of relatively cheap but productive workers, and that kind of tied the world together more than have been the case previously. But if it turns out that there are even cheaper robots with nothing in the way of political risk to employ them. Then under those circumstances, it may be that the global supply chains go into reverse.

They shrink, they become narrower, and moreover, if countries begin to believe that they can it, one says, break away from globalization, it may be that the kind of rules of the game that we've thought of as being so important over the last few decades, the enthusiasm for those rules begins to break down. Yeah, I was going to ask you about that, because what does happen to the flow of trade in the scenario? I mean, we're not we started we were thinking about this kind of sense

of peak globalization. But I guess what you're describing is it's sort of the endpoint of globalization. Has that we all come home, or that we are a lot of the production comes home. Does that make these you know, we're we're handringing over the future of the World trade organization and the weakening effect of things like the US China trade war? Does does technology make those things less

important or more important? Well? I think technology potentially is a way of hastening the reversal of globalization that if you happen to be a rich country endowed with large amounts of domestic savings that you can use to invest in robots and AI at home, then those circumstances you could do that without having to worry about building those

global supply chains. But I guess the flip side is if you have and as I suppose also did happen in the eighteen hundreds and early nineteen hundreds, if you have a slower flow of goods and services in this environment, you might once again have greater flows of labor. And it is the subtitle of your essay is the Rise of the Robot the March of the migrants. Do you think that is the other side of this time? I

think it's quite possible. So one of the huge challenges really for the global economy indefer global governance in the next few decades is the extraordinary demographic change that are taking place. Is not just about aging populations and shrinking populations in parts of developed Asia and parts of Europe

and Song. It is also about the enormous growth through baby boomer effects of populations in sub Saharan Africa and also in the Middle East, Now if it turns out that global supply chains go into reverse and people born in these areas feel that somehow they just can't get the economic opportunities within their own countries that they perhaps would previously have hoped for, and I think they will

go marching. They will look for opportunities elsewhere. And why shouldn't they, Because if life is tough in the particular area they happened to be living in, they probably will

go on the march. And one interesting feature of gain of the nineteenth century is that in the middle of the nineteenth century you had huge flows of people from particularly England and Germany to the US, often because they had very high levels of skills in certain areas, much much larger was a share of the population than what

we've seen reason absolutely um. And at the same time that you had a huge number of people going from Ireland to the US for totally different reasons than these were effectively victims of the potato famine who went in

very desperate circumstances. And a little later with the nineteenth century, as transportation costs came down dramatically, you had a lot more migrants coming through from southern Europe, from Eastern Europe, who typically were poorer than the people living at that stage in the U S, who in many cases were accused of undercutting the wages of those who who were already there. And so like, the type of migrant changed from being highly skilled in many ways to being people

who often came from poorer, less educated backgrounds. Um and of course that created its own separate set of pressures within the countries to which they were heading. UM So when we look at what's happening currently in terms of the flow of people, that's say, across the Mediterranean to Europe, from Africa or from the Middle East, you begin to think the same kind of theme might begin to emerge in the much bigger way in decades to come. One

thing I've always liked about you, Stephen. In a world of economists who are constantly being asked to look ahead and make forecast, you are unapologetic and often looking backwards and looking back into history for insight, which I think is quite a good place to look. Stephen King, thank you very much, Thank you, thanks for listening to Stephanomics.

This is the end of the current series. I'm sorry to say, but promised we'll be back in early April, and if I do anything really exciting, you may find a few bonus episodes popping up on the Stephonomics feed. Before there, you can always see the latest news and analysis from Bloomberg Economics on the Bloomberg News website or we're following at Economics on Twitter. You should especially check out our stories for that special issue of Bloomberg Markets

Magazine on trade. The Hong Kong story in this episode was reported and written by Ender Current. It was produced by Magnus Hendrickson and edited by Lucy Meekin and Scott Lamman, who is also the executive producer of Stephonomics Special Thanks to Stephen King, Tyler Cowen, and Carter Woolley. Francesco Leady is the head of Bloomberg Podcast