How the middle class got screwed by globalisation

The COVID-19 crisis has exposed how Western countries have abandoned self-sufficiency in embracing globalisation.

A seamstress sews face masks at a Carrum Downs factory in Melbourne. The company, Australian Face Masks, was making curtains and blinds up until April when it reinvented itself. Picture: AAP

You could see the pandemic coming. It wasn’t as though there was no warning. The virus emerged in China but arrived in North America before we were ready, and it landed with the destructive force of a tsunami. Record-setting consumer spending hit a brick wall as shoppers stayed home.

New car sales went over a cliff. And following just like clockwork, unemployment went through the roof as shops and factories shut down. An unprecedented bull run on the stockmarket quickly turned into panic selling, and the Dow cratered, seemingly overnight. The S&P 500 dropped over 20 per cent into bear market territory, and the result was a global recession that seemed to come out of nowhere. More than 116,000 people died in the United States.

Elvis Presley appeared on the Ed Sullivan Show that year, the frisbee was invented, Ford introduced the Edsel with great fanfare, Canada unveiled the Avro Arrow jet fighter, the USSR launched Sputnik, and Dwight D. Eisenhower was sworn in as president of the US. It was 1957.

By the way, the world recovered almost immediately from the Asian flu, as that pandemic was known. After a staggering 10 per cent decline in gross domestic product (GDP) in the first quarter of 1958, by the third quarter growth had spiked to 10 per cent — a 20 percentage-point swing. So, no big deal, right?

The economy got the flu, it took some time off, and it went right back to churning out jobs and profits. In fact, when economists and historians talk about the “Eisenhower Recession,” they seldom even mention the Asian flu as a cause.

An employee packs respiratory protective face masks on an assembly line at a protective mask manufacturing plant in Mably, central France. Picture: AFP

It would seem to follow, then, that we have a model to help us predict what the recovery from COVID-19 will look like. Just look at 1958, and then wait for the jobs and the markets to return to form and the good times to resume — not quite the catastrophe we feared.

But if you’re thinking that what was true in 1958 is true today, this book is for you. Because while consumer spending, consistent GDP growth and a record-breaking bull run on the stock market may make it feel as though we’ve wandered into the Eisenhower era, that is a dangerous illusion, especially if you’re a member of the rapidly shrinking middle class. Because consumer spending, GDP growth and stocks have almost nothing to do with your economic health.

In fact, as you will see, those things measure only rich people’s economic health. And of late, these folk haven’t been getting rich by making more Edsels or engineering more Arrows.

Those cars and planes belong to a different world, a world in which factory jobs paid a middle-class wage and products on the shelves came from factories down the road. A world in which local labour was so essential that their jobs were secure. And a world where taxes were so progressive that the rich actually paid their freight. That was a long time ago.

Looking backward in politics is usually considered poor form. It’s much safer to be considered progressive and look ahead. But the fact is that the late 1950s and early 1960s may

have marked the greatest economic equality in history. And that economic health was like immunological health. The economy got better quickly because it was already healthy.

 

But two other things happened in 1957 that give us some sense of why the recovery from the COVID-19 recession might be a lot harder than shaking off the Asian flu.

First, the Treaty of Rome was signed in March of that year, establishing the precursor of the European Union (the European Economic Community). Though the tight political and economic integration of a “United States of Europe” was still just a dream, the Treaty of Rome was an important step in creating a common market. Up until that point, each country had the ability to impose tariffs to protect key industries and the associated jobs. From that moment on, France, West Germany, Belgium, the Netherlands and Luxembourg would give up that ability in exchange for the right to sell in each other’s markets without facing tariffs.

In other words, it was a form of free trade and a precursor of what was to follow. Free trade was an idea that was sweeping the world. The General Agreement on Tariffs

and Trade (GATT), a treaty designed to increase international trade by removing protections for industry and labour, had been signed into law in 1947, and went through several rounds

of updates, each slashing more tariffs. In 1956, the so-called Geneva Round (because it was negotiated in Geneva), eliminated $2.5 billion of protections between twenty-six countries.

So, globalisation was swirling in the air as the Asian flu was making its way across the Pacific. The Asian flu could have cratered the global economy, but it didn’t.

If a worker from 1957 could see Detroit today, what would he think? The shuttered factories across North America, the boarded-up main streets, the empty union halls — the physical

toll of globalisation would be inescapable.

Which brings us back to the flu.

Early on in the COVID-19 crisis, the scale of the required government response was often compared to that needed during the Second World War. It was time for our ingenuity and

industrial might to be put to good use and mobilised, much in the way it had been a couple of generations ago. The US built more than twenty-seven hundred Liberty-class freighters between 1941 and 1945. That’s two fourteen-thousand-tonne ships every three days (or more than thirty-nine million tonnes of ship.) Surely, the world’s biggest economy could make some N95 PPE masks.

Well, not really. On March 19, 2020, Taiwan announced it could spare 100,000 masks per week for the US (their sole military ally, which has been protecting them from Communist China for generations at immense cost). That’s out of a weekly output of 7 million masks. So the Taiwanese were willing to set aside 1.4 per cent of their mask capacity for their much larger ally.

Masked employees at work on an assembly line at an auto plant of Dongfeng Honda in Wuhan, in China’s Hubei province. Picture: AFP

The EU also adopted a policy of “every man for himself.” In March, Brussels banned the export of medical equipment, even to other European countries, before eventually relenting in the face of pleas from member countries like Italy which were hit particularly hard by the pandemic. Exasperated Serbian president Aleksandar Vucic stood in front of television cameras and said, “European solidarity doesn’t exist. That was a fairy tale on paper.” Shortly thereafter, Serbia shut its borders. The only foreigners allowed to enter the country? Chinese doctors. Vucic called China “the only ones who can help.”

He did have a point (though Russia also sent several transport planes full of equipment and medical personnel). Before the crisis broke, half of the world’s masks were made in China.

Since then, the country has increased production twelve-fold.

By the end of March, factories in China were pumping out 115 million a day (which puts the Taiwanese gift in perspective). But there’s more to the story than Chinese manufacturing output.

Many of those Chinese factories are making masks for international companies. On paper, Canadian company Medicom was making 3 million masks a day at its Shanghai factory. But rather than being shipped to Canada, they were all claimed by the Chinese government. American chemical giant 3M also has mask plants in Shanghai, but according to American trade officials, the factories had effectively been “nationalised.” They may have been under contract to the American company, but when push came to shove, the Chinese government had priority.

So sure, our companies still make things. It’s just that the factories are somewhere else. And the jobs are somewhere else. And, when we need them, the masks are somewhere else too.

What the COVID-19 crisis has shown us is that questions of economic theory aren’t just about economic health. They’re about health. Period. Because it’s not just masks and protective gowns the Chinese government effectively control. For years, lax regulatory control and low wages have made China a major source for the majority of component chemicals that go into generic drugs — that is, nearly all of the drugs Canadians and Americans are prescribed.

The same goes for antibiotics. In the 1980s, the United States had far-ranging emergency-response readiness, including antibiotic manufacturing capacity spread across the continent. The US produced 70 per cent of the world’s supply. Now it is dependent on imports from China.

In a world frequently described as “globalised,” that’s not supposed to matter. The magic of just-in-time-delivery, combined with efficient labour markets and economies of scale, is supposed to provide us with whatever we need, in abundance and at the best prices. That may work for flip-flops and lawn furniture, but, as it turns out, it doesn’t work in an emergency.

It doesn’t work when you absolutely need it to work.

It shouldn’t have taken a bat peeing on a pangolin in Wuhan to teach us this lesson. The evidence has been piling up around us for years. But tragedy has a way of focusing one’s attention.

Global deregulation was always a bad idea. It was always set up to benefit a small number of people at immense cost to everyone else. Exactly what that cost is becomes clear when we compare today’s economy with 1957’s.

This is an edited extract of The Expendables: How the middle class got screwed by globalisation by Jeff Rubin published by Scribe. Out Tuesday.