Breakingviews - 3M fight exposes free trade’s underlying condition

NEW YORK (Reuters Breakingviews) - Globalization has achieved many great things, from creating a middle class in developing markets to keeping prices down in rich ones. But it hasn’t yet weathered a planet-wide pandemic. A ruckus involving 3M over respiratory masks that reduce the spread of the coronavirus exposes some of the limitations of the free-trade system. What emerges at the end of the crisis will need to be more robust.

President Donald Trump has forced the issue by crudely demanding that Minnesota-based 3M supply Americans with masks before Canadians or Latin Americans. The $80 billion company protests, pointing out that if everyone were to behave this way, all would end up worse off. That’s true, in the long run.

The United States runs trade deficits in pharmaceuticals, and vaccines specifically. Already dominoes are falling. India over the weekend turned a curb on exports of hydroxychloroquine, a malaria treatment Trump and others think helps Covid-19, into an outright ban.

Me-first behavior in a health crisis isn’t unprecedented. During the H1N1 outbreak of 2009, Canada and Australia both demanded that domestic producers of vaccine supply their own citizens first. Thirty years before that, Canada got caught short when flu vaccines ordered from the United States failed to arrive. Much as companies are bound to put their shareholders first, governments do the same with voters. When products are a question of life and death, trade can look like a zero-sum game after all.

The problem is there’s lots to lose, especially for American companies. 3M, which makes more than half its revenue internationally, also boasts a return on invested capital close to 20%, significantly above the S&P 500 Index median of around 15%, according to Refinitiv data. The ability to make goods where it’s cheapest and sell them where prices are best only works if customers feel they can rely on foreign supply when times get tough. Trump has upended that calculus.

Globalization can still work fine for products that aren’t life or death, and markets have short memories. Sanctions on the Soviet Union in 1980 that curtailed food exports were roundly criticized as something that would harm the image of U.S. reliability for years. The impact wasn’t long-lasting. Autarky is not an inevitability. But more economic nationalism probably is, and that means lower returns, and painful reallocation of capital, for companies that thought free trade was basically invincible.