Does Import Dependence Make Us More Vulnerable?
By David Henderson
An increasing reliance on imports, combined with the fraying of the nation’s power grid, highways and rail lines, leaves the United States more vulnerable to the damage of natural disasters and terrorist attacks, according to a report to be released Wednesday by former homeland security secretary Tom Ridge.
This is from Peter Whoriskey, “Reliance on imports leaves U.S. vulnerable to disasters, report says,” Washington Post, July 24, 2012.
I see why the fraying of U.S. infrastructure makes us more vulnerable. But why should increasing reliance on imports make us more vulnerable? It probably doesn’t. Tom Ridge is just spouting bad economics. Here’s what economist Ben Zycher has to say about this in his article, “Defense,” in The Concise Encyclopedia of Economics:
Modern military forces combine many kinds of manpower and physical matériel. Inevitably, some of these inputs, such as rare metals and electronic components, are purchased from foreigners because they are cheaper abroad than at home. Some worry that foreign procurement makes the United States vulnerable to a cutoff of foreign-supplied items; they fear that cuts in foreign supplies may exceed in both number and variety the potential supply reductions from domestic firms.
This view is misguided. Suppose that some defense good is purchased from foreign suppliers and that this arrangement is subject to easy but unpredictable cutoffs. Suppose, also, that such interruptions are easy to insure against, with stockpiles, alternative suppliers in other parts of the world, or excess production capacity in the United States. If so, foreign dependence does not yield vulnerability. The central question, therefore, is not the source of the defense goods but the ease with which interruptions in supply–whether foreign or domestic–can be insured against or hedged. If domestic dependence is more difficult to insure against than foreign dependence, then, ironically, domestic dependence may yield greater vulnerability.
What could make insurance more difficult for domestic purchases than for foreign ones? One possibility is the expectation of price controls during future conflicts. Producers of defense-related goods know that the prices of such goods can rise dramatically when a government at war or preparing for war increases its purchases of those goods. These price increases serve an important function: they reward domestic producers for stockpiling goods in advance, for maintaining excess production capacity, and for increasing production quickly. But domestic producers also know that governments attempting to constrain budget increases and reacting to political pressures on “war profiteering” and the like often impose explicit or implicit price controls on just such goods. The imposition of price controls on petroleum products during some past wars is but one example. Taking anticipated price controls into account, domestic producers would not invest as much in stockpiles or excess production capacity as is optimal for society. Nor are they likely to increase production as much when price controls are imposed. But governments for the most part cannot impose price controls on foreign producers. On net, therefore, foreign producers actually may have stronger incentives to stockpile and to maintain excess production capacity. The “vulnerability” issue is thus far more complex than the common foreign/domestic dependence view suggests.
Zycher’s reasoning applies not only to times of war but also to the natural disasters mentioned in the news story. During such natural disasters, governments sometimes succumb to the temptation to impose price controls also.