Cheap masks carry a high cost for US manufacturing

In a speech last week about America’s trade relationship with China, the US trade representative, Katherine Tai, said “this bilateral relationship is complex and competitive”. That’s the understatement of the decade. Let me share an illustrative example.

Before Covid-19 began, Donald Trump imposed tariffs on more than $350bn worth of Chinese goods, including supplies of personal protective equipment (PPE) that were subsequently in short supply. Both Trump and current US President Joe Biden later gave tariff extensions for items such as textile face masks, in part because the world’s largest producer, China, hoarded them.

Back in 2019, China supplied over 70 per cent of US mask imports, sold at a fraction of the cost of American ones, which mostly stopped being made after the Chinese accession into the WTO decimated large parts of the US textile industry. Yet in the early months of the crisis, many US textile makers, particularly in the Carolinas, began ramping up their own mask production.

Before the pandemic began, US-made masks cost about 50 cents apiece, according to Luis Arguello Jr, the president of a Florida-based medical equipment company and a member of the American Mask Manufacturer’s Association. During the pandemic, he says, prices dropped to between 15 and 25 cents as raw material costs fell and US producers became more efficient.

That’s no surprise. Manufacturing is an iterative process. Makers get better and more efficient when they do more together in hubs, as several academics have shown, including Dan Breznitz in his recent book Innovation in Real Places.

Incremental innovation has made countries like China and Germany rich. But the US largely gave up on this model in the last half century, and embraced a more fragmented global production system. This is good for multinationals and Asian workers but less good for much of Middle America, which is the starting point of both Trump and Biden’s trade policy.

All of this presents a very tricky challenge for an administration that is, in the words of Tai, trying to create a “worker-centred trade policy” in a country that still operates on University of Chicago school economic principles, in which only share and consumer prices matter.

In a post-neoliberal world, that has led to some rich ironies. While federal government agencies are bound by Covid-19 procurement rules supporting domestic producers, states can — and do — solicit bids from companies charging a penny or two for a mask. Given that the raw materials in each mask cost roughly 4 cents on the open market, I’m left wondering whether such products are woven by tiny hands in Xinjiang, the region where China has been accused of running labour camps with imprisoned Uyghur Muslims, or backed by huge state subsidies. Maybe both.

Either way, a bunch of small American businesses that answered the call to produce more masks in the middle of a pandemic are now in danger of going bust. The AMMA says its members have lost 5000 jobs since federal mask purchasing slowed in recent months, after being undercut by non-US producers.

None of this is China’s problem. It’s America’s. Whether or not you are in favour of “Buy American” on things like masks (I am — although I’d be happy for it to morph into “Buy American and Its Allies”), US legislators failed to force states to source domestically, thanks to a loophole in the American Recovery Plan.

Meanwhile, America’s for-profit hospital system, rapacious in the best of times, is now seeking to save every penny, since they’ve gone without the usual glut of expensive elective procedures amid Covid. The administration delayed plans to raise tariffs on Chinese medical goods till mid-November, because the American Hospital Association lobbied against it, saying that it would raise costs for them.

Whatever the cost, the absurdly distorted system of privatised healthcare in the US means that hospitals will inevitably charge insurance companies or unlucky patients multiples of it. All of which makes me feel a lot more sympathetic towards the textile makers, who just want government to set a price floor under PPE, as promised.

These will be future topics for Tai and others who support the rebuilding of America’s industrial ecosystem. But changing the paradigm isn’t something that the trade department can do alone. “Buy American” makes no sense if you can’t support demand. Demand can’t be supported without government incentives, or a real shift from shareholder to stakeholder capitalism.

The fact that so much supply is controlled by a strategic adversary that doesn’t play by WTO rules makes it especially complicated to transition from an economy based on rewarding consumers in the form of lower prices to one that is trying to grow incomes and create more resilience in crucial industries — including medical equipment, pharmaceuticals, semiconductors and rare earth minerals.

If the US is serious about rebuilding manufacturing, it’s going to need a much bigger, broader public sector commitment that moves beyond “just in time”, and towards “just in case”. It is also going to need to look closely at how one-cent masks get made, and whether they’re really worth the price.

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