April 16, 2020

Your Crash Course on Supply Chains, Globalization, and COVID-19

Things we learned in school: 1) always guess C and 2) never underestimate the importance of highly intricate supply chain economics and their trickle down effects on business.

Things we learned in school: 1) always guess C and 2) never underestimate the importance of highly intricate supply chain economics and their trickle down effects on business. 

This week on Morning Brew’s Business Casual podcast, Geoffrey Garrett, dean of UPenn’s prestigious Wharton School, explains what’s at stake for our globalized economy in the wake of COVID-19. We called in the best in the Ivy League for this one, since there are a lot of moving parts:

  • First, we were concerned about supply as China’s countless manufacturing facilities went offline to observe social distancing and slow COVID’s spread.
  • Then, we got worried about demand as Western countries shuttered entire economies and consumer spending hit a wall.

So...now what should we furrow our brows over? Dean Garrett has all the answers. It’s like getting a degree from Wharton, but without the rich mahogany smell.

Listen now and let us know what you think.


Transcript

Kinsey Grant, Morning Brew business editor and podcast host [00:00:08] Hey, everyone, and welcome to Business Casual, the podcast for Morning Brew, answering your biggest questions in business. I'm your host and Brew business editor, Kinsey Grant. 

 

Kinsey [00:00:17] And now let's get into it. Today, we're getting into the nitty-gritty of one of the most impactful phases of the business fallout in the COVID-19 world. It's hard to pin down what implications are most threatening when we're in the midst of a pandemic. But, I'd say this one is up there. Global supply chains, because the final products that you and I buy and consume don't just magically appear. They come from somewhere. And by the time they reach us, they've traversed an often complicated network of activities and entities, information and raw resources. And throughout that process, they often come in contact with scores of machines and people. But in case you didn't [chuckles] get the memo, coming into contact with people isn't exactly possible right now. In our efforts to slow down the spread of the coronavirus, we've had to shut down entire supply chains. That means manufacturing plants shuttering, shipping routes being rerouted for use of only essentials and storefronts boarding up for who knows how long, and disproportionately those supply chains are rooted in Asia. So let's take a personal protective medical equipment, for example, a hot topic today. According to some estimates, the U.S. imports almost half of those products from China. And with China still grappling with its own COVID devastation, our reliance on that country for imports has been brought to light. And as everybody knows, sometimes we look worse in the light. So today I want to spend some time understanding how supply chains have shifted or even suffered in the COVID era. And what do those changes mean for businesses and for the economy? How did things change? And will globalization survive this? To talk about all of that, I'm very excited to welcome to Business Casual Geoffrey Garrett, the Dean of U. Penn's prestigious Wharton School. Thank you for coming on the show. 

 

Geoffrey Garrett, Dean of Wharton School of the University of Pennsylvania [00:01:58] It's my pleasure to be with you today. 

 

Kinsey [00:02:00] I'm very excited to chat. I know that you are busy as we're speaking today, a couple days before this is going live. You are getting ready for another presentation tomorrow in a really exciting class you guys are doing at Wharton. It's a course titled Epidemics, Natural Disasters, and Geopolitics: Managing Global Business and Financial Uncertainty, which I'm sure there are countless case studies [laughs] to use right now. But you are teaching one of the lectures as a six-week course and you're just chatting before the biggest in Wharton's history. 

 

Geoffrey [00:02:31] Yeah, it's quite amazing. You know, we put the class together at warp speed time. I think that'll be a record. It took us three days to put this class together, but it's also now a record in terms of student enrollments. We have, roughly speaking, in the Wharton School, we have about 5,000 students—degree students—and 2,000 of them, 2,000-plus of them, are enrolled in this class. It's the biggest-ever class in the history of the Wharton School, which goes back to 1881. And of course, the reason, partly, it's the biggest because demand is so high. But hey, this is a remote world and we have no capacity constraints. We don't have to constrain the number of students to our largest auditorium in the in the remote world. We can teach almost anybody. So bring them on, we're saying. 

 

Kinsey [00:03:17] Why, now, are we so focused on supply chains, especially as it relates to the globalization and how much we rely on Asian countries for so much of what we consume here in the United States? 

 

Geoffrey [00:03:28] I think that you're exactly right, that supply chains have gone from being something that's really nerdy and only people with operations background, you know, operations engineers, are interested in something that's really, really important for the global economy. So, I'd actually take that in two parts. The first one is that contemporary globalization—and I'm gonna count that, let's say, beginning in about 1985, has actually mostly been about globalization of the supply chain. 

 

Geoffrey [00:03:59] When you listen to President Trump talk about trade, he talks as if things are made in America and sold in China or made in China and sold in the U.S. That's just not the way the contemporary global economy has worked. It's worked where we have sourced products from all over the world. You get the best products at the lowest price. You can use things like containerization and more recently, the internet, to put things together from anywhere in the world. And that's way more efficient than doing it at home, quote unquote, at home. So that's why I think we should—if you're gonna have a more sophisticated rendering of what globalization has looked like, you'd say that supply chains, the globalization of the supply chains, has been absolutely essential. Then part two of that story is that it became obvious that that was mostly, not exclusively, but the biggest player there was China. If you think about a company like Apple, for example, every Apple device—the final assembly is in China from parts that come from Germany, Korea, Japan, some from the U.S., and then they get shipped to the U.S. 

 

Geoffrey [00:05:12] So in the trade war, that shows up as an export from China. Apple iPhones show up as an export from China to the United States, adding to the U.S.' trade deficit. But that's just misleading, because the company that's taking advantage of that is Apple. And Tim Cook, Apple's CEO, has been a real defender of having the Apple supply chain based in China, because he would say it's not only a cost matter, it's a quality issue, and we could talk more about that. So that was globalization. Think about globalization of supply chains. When you think supply chain, think China. And now we're living in a world, the COVID-19 world, where the U.S. is feeling very vulnerable in the ways that you articulated to any global supply chain—and above all, when it's coming from China. And not only because China has its own needs, because the coronavirus started, but also because it plays into geopolitics; the worry always has been, gee, if we're not nationally independent when some bad things happen internationally, maybe the supply chain's cut off and we're really badly adversely affected. 

 

Geoffrey [00:06:23] So all of this stuff, the positive stuff about globalization of the supply chain, which has been about efficiency and cost, has basically now been wiped out and global supply chain is viewed as a bad thing. It's a vulnerability. And that's a remarkable change in a very short period of time. I'd call it five years, five or six years. No one knew about supply chain. Then if you understood it, you thought, boy, this is smart. And now we think, oh, my God, it's an incredible vulnerability that we have in the U.S. 

 

Kinsey [00:06:56] So I want to talk more about some of these negative impacts. But before we get into that, I think it might be useful to understand a little bit more why China. You mentioned Tim Cook thinks about this is not only a cost factor but also a quality factor. Explain to me how China became the lowest-cost, highest-quality place for all these supply chains to be so focused. 

 

Geoffrey [00:07:15] Well, so let's go back to the beginning. And the beginning really is the birth of modern China—what they in China call the four decades of reform that began in 1978. And what happened then was that China went from being a profoundly rural kind of subsistence agriculture economy very quickly into becoming a manufacturer. And the Chinese move originally was all about cost. If something was done somewhere else in the world, China could mimic it and do it do it at lower cost. And China very quickly became great at infrastructure, including ports, railways, airports, everything like that. So you had a rising manufacturing economy with brand-new physical plant, low labor cost, and really high-quality infrastructure. And firms all around the world said, hey, we can take advantage of that. We can leverage the China supply chain where where it wasn't final Chinese products. 

 

Geoffrey [00:08:20] It was Western products that just happened to be either assembled or manufactured or relied on parts from China. And this is not only in high-tech sectors. Originally it was things like textiles and toys and bicycles—all that kind of stuff was really China in the '80s and '90s. And then in the last 10 or 15 years, it's gone much more high tech. And so now we have very complicated issues in high technology that that entail not only supply chain in the economic sense, but national security. And here I'm thinking about a company like Huawei, which we could talk about, the really large Chinese telecom and phone maker. But the rise of China was this one-two punch. Sure. One-two-three punch. China had brand-new equipment. They were building new stuff. They had fantastic infrastructure and their labor costs were low. And so the U.S. And the Western world took advantage of that. 

 

Geoffrey [00:09:16] And in American politics, of course, that's why Donald Trump, Bernie Sanders, Elizabeth Warren are so critical of China. This is why they say China, quote unquote, stole jobs. You know that's a little bit glib, because what actually happened was American firms decided that it was better for their bottom line and for their customers to have the products sourced externally, where China played this leading role. 

 

Kinsey [00:09:42] So when we think about these China hawks, like you were mentioning, who are so quick to say that these jobs are now in China that used to be in the United States, if you were saying that there are three factors, it's three one-two-three punch. Could another country recreate that one-two-three punch with the same factors that China brought to the table? Woould we have had the U.S.—insert any country here—trade war if it had not been China? 

 

Geoffrey [00:10:07] If it had not been China, probably not. Because, of course, what's distinctive about China is its scale. It's four times the U.S. population. It's the second largest economy in the world. It's the largest trading nation in the world. But it also happens to be run by a communist government. So you put those together and China posed—was always going to pose—close to a unique challenge. You asked this question as a counterfactual. Could somebody else be China? That's actually being answered in real-time right now because Western firms led by American firms are trying to diversify away from China in terms of their supply chain. And if you look at the biggest beneficiaries of that, the two biggest are Vietnam. Why? Because it's next to China. 

 

Geoffrey [00:10:56] And a lot of the advantages in China can now be reproduced in Vietnam. And second, Mexico. And why Mexico? Because Mexico is next to the U.S. economy. So we're seeing a radical and rapid de-Chinafication of the U.S. supply chain right now that, by the way, that started because of the trade war. And I think it just might get accelerated now, accentuated because of COVID-19. 

 

Kinsey [00:11:23] The whole idea that this was something that was already started—this was a process that had already begun. It's certainly not new. But I do think that this pandemic has brought to light so many issues with how much other countries rely on—I mean, maybe we could argue they're not issues—but has really brought to the fore how much other countries rely on their supply chains in China. Explain to me exactly how the virus is accelerating this process. Is it just because so many of these manufacturing plants and facilities and factories in China closed for several weeks earlier in the year, or are there other extenuating circumstances, other factors that are really bringing this forward faster than the trade war did? 

 

Geoffrey [00:12:08] There are lots of factors and they're all coming together. So you're exactly right that because the virus hit first in China and it hit at the slowest time of the Chinese economy—that is Chinese New Year in January and February—just meant that there wasn't enough production coming out of China to feed the needs of the U.S. and the rest of the Western world. That's true. But now it's much—I think it's more about a sort of a gut feeling that, oh, my God, we can't rely on another country for the health of our nation. So I actually think this is the the biggest story, the one that potentially has the largest and longest impact, is the whole ethos that said, hey, leveraging the rest of the world is really good for us, is now going to be reversed. 

 

Geoffrey [00:12:59] And instead of leveraging, taking advantage of global, it'll be, oh my God, global creates vulnerabilities. And that's a profound difference in mindset. And again, you know, I'm old enough to remember when this globalization stuff really started. And it was a story of the—began in the late '80s, but it really took off in the 1990s. 

 

Geoffrey [00:13:21] And what was the big—what was happening in the 1990s? That was the decade in which the U.S. had won. The U.S. had won the Cold War. The Soviet Union collapsed. Countries were becoming democratic. China was emerging as a market economy. Everything that we'd read in our American textbooks was coming true. And so the business ethos right then was, wow, this globalization is just something we can take incredible advantage of. The limits are only gonna be our creativity.  

 

Geoffrey [00:13:53] So now you fast-forward two decades, let's say, and then we had the kind of Bernie Sanders/ Donald Trump pushback, which was well, actually, you forgot that there was a downside to all this globalization, which was the so-called off-shoring of jobs. And now part three of that is—but there's vulnerability, there's real vulnerability. And what embodies vulnerability more than our health? Nothing. And that's why I think this sentiment that we can't be vulnerable, we need to be independent—it's just gonna be profoundly more powerful because of health, because our health is involved. 

 

Kinsey [00:14:27] Interesting. We talk about vulnerabilities a lot in this conversation. We have already. What exactly are the vulnerabilities? Is it simply that Apple won't be able to complete its projects, it won't be able to make phones in China, or is it just that it's going to cost them more? 

 

Geoffrey [00:14:42] Yeah. You know, I don't like the vulnerability language because you probably know, I'm a big pro-global person. I think we should be maximizing all the advantages of an incredible global world while also understanding that there are some limitations and trying to manage the limitations. 

 

Geoffrey [00:15:00] I think we are at the beginning of a period. It's no longer just anti-globalization sentiment. We're living in a world that's begun to de-globalize. And I think the speed of de-globalization is just going to increase as a result of the coronavirus. 

 

Kinsey [00:15:19] Does that de-globalization increase costs, though? We've spent several minutes at the top of this episode talking about how it's cheaper to create things in China, or to at least have some of your supply chain in that country. Are we going to feel the brunt of that as consumers? Will those costs increase and then be passed on to the people buying goods from manufacturers or from retailers? 

 

Geoffrey [00:15:43] No question. And just go back now to the debate in the U.S. about the trade war, the U.S.-China trade war. And everybody talks about the costs of China and the costs of China [indistinct] lost jobs. That there aren't steel jobs in the United States. The steel jobs went to China. Now, it's actually a more complicated story. Or automobile jobs. Donald Trump likes to beat up on GM for producing a lot of vehicles in China rather than in Detroit. What we never say, and what a politician won't say, is, by the way, if we produce it at home, it's gonna be more expensive for consumers. But that is the bottom line. So why would it be that broad consumer benefits from a political standpoint? Broad consumer benefits would be trumped by much more focused job losses in specific industries. 

 

Geoffrey [00:16:38] I think it's because if you lose your job in economic terms, that's a life and death move, right? If your iPhone costs 5% more, 10% more, it's an inconvenience, but it's not economically life and death. So that's the political economy of trade—that doing things at home, being more protectionist. You can say, it boosts jobs in America. And again, this is not only Donald Trump. Everyone now in the American political discourse must say that. What no one says is that's going to make products more expensive for all Americans. But that just happens to be true. 

 

Kinsey [00:17:16] Right. And America first sounds a lot better than America first, but it might cost you 5% more. [chuckles]

 

Geoffrey [00:17:22] Provided it doesn't fit on the [indistinct] so easily now. 

 

Kinsey [00:17:25] No, it doesn't. [laughs] OK. We are going to talk more about the trade war and what COVID-19 means for the future of trade between the U.S. and China in just a second, but really quickly, let's take a short break to hear from our partner. —

 

Kinsey [00:17:39] And now back to the conversation with the Wharton School's Dean Garrett. Dean Garrett, we were talking before about how this has become, you know, obviously trade is a geopolitical issue that we talk about almost all the time on this podcast. I would say that we've been talking about it a lot less in recent months after we got this Phase 1 trade deal between the U.S. and China. That was a positive headline for markets, for investors. People took that as good news—or at least the start of what could be good news. What are we supposed to think about that Phase 1 trade deal now? Has anything changed in this era of pandemic in terms of reaching and or negotiating a trade deal between the two countries? 

 

Geoffrey [00:18:23] Yeah. So lots to say there. But let me start with the the key deliverable of the Phase 1 trade deal. 

 

Geoffrey [00:18:31] And I heard President Trump just yesterday was talking about it in his daily briefing. China agreed over a 24-month period to increase purchases of American products by $200 billion. I think that is literally impossible for China to do in the next two years because the Chinese economy is slowing down so dramatically. So if the U.S. holds China to the letter of the trade deal—of the Phase 1 deal—I don't see how China will be able to meet that deal. But on the other hand, if the issue that the U.S. was really worried about was the size of the trade deficit—and President Trump talks about that a lot—the trade deficit actually has come down dramatically in the last 12 months and will continue to come down, not because China is buying more American products, but because China is exporting less to the U.S. 

 

Geoffrey [00:19:32] And if we now have a COVID-led downturn in the U.S., American demand for everything, including Chinese products, will also go down. So the trade deficit, if that was the headline issue, will be much improved, quote unquote, much improved from an American standpoint. But, the thing that Donald Trump now wants—which is new sales in China of American products, and I think above all, agricultural products—as I said, I think that's close to impossible because Chinese demand is going down. 2020 is going to be an incredible year of global slowdown. Who knows what the growth rate that the Chinese government will report will be, but it will clearly be the slowest growth in China in 40 years, in more than 40 years. 

 

Geoffrey [00:20:19] And in the U.S., 2020 is looking like one of the worst years in history for the American economy. That is going to have the consequence of lowering the trade deficit. But China just won't be in a position to buy all these new American products the way phase one deal envisaged. 

 

Kinsey [00:20:35] So does that make the deal null and void? If you're right and it is impossible for China to buy this $200 billion worth, are we done? Is it moot? 

 

Geoffrey [00:20:47] It could go one of two ways. And I think it's a really big—it's a really big issue. The deal, by the way, China doesn't have to deliver this $200 billion until the end of 2021, so it's going to be in the next presidential term, either, we think, for President Trump or President Biden. The president of the U.S. at that time could say either China didn't meet the terms of the Phase 1 deal. We're going to re-impose tariffs. Or, the president could say, listen, because of COVID-19, it was impossible for China to satisfy the trade deal. Let's renegotiate something else that's more realistic. 

 

Geoffrey [00:21:30] I certainly hope that the latter path is the one that's followed. And I hope it for two reasons. One, it's actually realistic. Just asking China to do something when their economy is collapsing faster than at any time in 40-plus years—that's unrealistic. And the second thing is, I want the U.S. and China to keep talking, to keep engaging. A big term that's come up in the last 18 months or so is decoupling this notion that the China and U.S. economy would decouple. I think the costs of decoupling are not only economic. 

 

Geoffrey [00:22:07] I think that geopolitical—you know, people often ask the question, is China-U.S. like a new Cold War? Is it like the U.S.-Soviet Union? And my answer to that question has always been no, for one reason—that China and the U.S. were so economically entangled, how could it be another Cold War? Because the Soviet economy and the American economy were completely decoupled. So I think we will learn a lot, actually, in 2021, post the presidential election in the U.S., probably post the sort of harshest parts of the COVID-19 crisis. We'll learn a lot about the future trajectory of U.S.-China relations, probably in the second half of 2021. 

 

Kinsey [00:22:51] So recently on this podcast, Ian Bremmer, from Eurasia Group, came on and he was one of those people who said that this possible Cold War is a factor that needs to be considered, that we could enter into a cold war with China. And eventually, per his view, China would emerge as the quote unquote, leader of this world, that the U.S. would cede its leadership position to China because China will effectively win in what's going on right now. I would love to hear your take on China becoming this new world order leader in what might be a less globalized world economy. 

 

Geoffrey [00:23:29] Yeah. This is a big one. And of course, I don't want to get distracted, but you may not know that not only do I know Ian Bremmer, but I taught Ian Bremmer. 

 

Kinsey [00:23:37] Ah [chuckles]. 

 

Geoffrey [00:23:38] So I always love seeing what Ian's  doing in the world, and Eurasia Group is just incredible. On this question of is China going to rule the world going forward, I think, again, I think we'll learn a lot in the next couple of years about that on both sides, so I think it is fair to say, and Ian and others point out all the time, Council on Foreign Relations—Richard Haass, the President of the Council on Foreign Relations—has said this as well, that the U.S. has been withdrawing from the world anyway from 2016, certainly the election of Donald Trump. And it's likely that the U.S.' reaction to the COVID-19 crisis will be to withdraw even further. I mean, that's obviously evident right now. President Trump is talking about borders as the most important thing for the country. So if the U.S. was gradually withdrawing from the world, I think that process is likely to speed up. 

 

Kinsey [00:24:43] OK. I want to focus more on some of the business impacts and the implications more specifically in just a second. But quickly, let's take a short break to hear from our sponsor. —

 

Kinsey [00:24:55] And now back to the conversation with Wharton's Dean Garrett. Dean Garrett, what is the learning from all of this from a business perspective? How can we make supply chains better able to be resilient to shocks like this in the future? Is there a lesson to be learned from all of this? 

 

Geoffrey [00:25:14] Well, I think if you're a responsible business leader today, you've [indistinct] on the one hand, on the other hand, to evaluate. You know that there are these big benefits to having a global supply chain. It just increases efficiency. But you also know that now, we're acutely aware that you run the risk of production disruptions, as we observed in China earlier this year. And you also see that geopolitics can really get in the way. 

 

Geoffrey [00:25:47] So I remember vividly being in an American factory outside Shenzhen in Guangdong Province in China last summer, when the trade war was really intensely going on. And I'll never forget this. The CEO of the company was so proud of this unbelievably automated, robot-driven state-of-the-art battery technology, a manufacturing facility in Guangdong, China's richest province. And then in exactly the same breath, the CEO said to me, "But I've got to build a redundant factory in Vietnam because I don't know whether I'm gonna be able to source products from China in the in the longer term." 

 

Geoffrey [00:26:29] And that just to my mind, that encapsulated, again, pre-COVID, that was a CEO saying, "Even if economically global supply chain just makes immense sense to me, I have to I have to acknowledge that the politics and geopolitics could get in the way." So anyone who is prudent is going to have to have more localized supply chains. But you're just going to take a hit. You're going to take a hit in efficiency, which at the end of the day means it's either a hit on costs for consumers or lower profits for the companies. That's just unavoidable. 

 

Kinsey [00:27:07] What do you think we can learn, and when we're talking about these supply side disruptions, as this started to become a story earlier in 2020 COVID-19. We saw that some of the early headlines I remember reading and writing about for Morning Brew were that they were all supply side, that the factories in China were shutting down and people couldn't get what they wanted here. The demand wasn't an issue because we didn't, frankly, weren't experiencing the same issues that they were in China. But now that China, at least in part, is starting to recover as best it can, those supply lines are getting back online. These factories are getting back online, but the demand isn't there for, say, the end user in the United States. Is there a lesson to be learned from watching what's going on in China? Can we expect the same sort of ripple effect in other countries? 

 

Geoffrey [00:27:57] I think the one-word answer is yes. But let's talk now about why, in many sectors, people are already saying that the COVID-19 economic shock will be bigger than the financial crisis plus 9/11, just to give order of magnitude. Why do you think that? It's because you first had this supply shock and now you're having a profound demand shock. If you look back at the crises we've had, they've typically been on one side—global crises that've typically been on one side or the other. This one's on both sides. And that's why 2020 is going to be such an incredibly challenging year. But I do think the biggest question for everybody economically is how V-shaped will a recovery be? And so looking at China in the next few months, this is going to be a really interesting leading indicator of that. 

 

Geoffrey [00:28:52] And the China first quarter growth numbers haven't come out yet. They're bound to be really bad, unprecedentedly bad. But in China, a lot of people look at the PMI, the Purchasing Managers' Index, and it absolutely collapsed in February, but rebounded above where it was in January by March. So that's about as V-shaped as you could possibly get. Whether the Chinese economy will be back at 6, 7, 8% growth in the second half of 2020, that would be an incredible thing if China comes back to that. But what I would say to everybody who's not sort of a Chinaophile or not dependent on what happens in the Chinese economy is, look at what happens in China as a leading indicator of what's possible for the rest of the world. 

 

Geoffrey [00:29:41] And again, for me, it's what can we do to ensure that the recovery is as V-shaped as possible. Now, of course, the the key point there with respect to China was that you've got to establish the floor, and the floor is a public health floor and not an economics one. It's got to be when, basically, there's no more transmission of the disease, a place that China got to now a month ago or so, at least in the reported statistics. So we need to establish the public health law and then do all that we can to ensure that the economic recovery side is as V-shaped as possible. 

 

Kinsey [00:30:21] I know that many experts have said that the second quarter will be the worst quarter, for at least in recent memory for a lot of young [chuckles] podcasters like myself. But at what point can we decide that this is a V-shaped recovery, if it is? Is there any timestamp to put on that? 

 

Geoffrey [00:30:38] Well, as I said, if you have a V, you've got to establish the floor. And the floor is a public health floor. So let's assume that in the U.S. that happens sometime early summer, mid-summer. That makes the fourth quarter in the U.S., I think, very, very important. So, yeah, the second quarter is gonna be unprecedented because we literally turned off much of the economy and you're getting a number like minus 30% on the U.S. economy year on year and one quarter. That was unimaginable six months ago. But that's going to happen. The third quarter looks like it, you know, as we gradually get stuff back. 

 

Geoffrey [00:31:21] It can't happen overnight because, in addition to the material challenges to ramping things back up, there'll be the psychological ones. Are people going to want to travel? Are they going to want to be in the same place? How are firms going to think about the future? 

 

Geoffrey [00:31:35] Are they going to start doing business travel? Can they afford nonessential things like that? That's the third quarter. But if all those questions start getting answered, you'd expect this big recovery in the fourth quarter. And, you know, some of the—I think I was looking at the conference board that's predicting something like 20% growth in the fourth quarter for the U.S. economy. And that's a massive number. But if you've just gone minus 30%, that's even bigger. And then you come back 20, you're not going to get back to where you were before the crisis hit, but that's still pretty V-shaped. So I think the remainder of 2020 is going to be obviously really, really important. But I think it will go in phases—establish the public health floor, think about what a return to normalcy will look like, and then see how quickly behavior changes to what's now going to be partly the old normal, but partly a new normal too. 

 

Kinsey [00:32:33] So in this sort of forward-looking attitude here, we've talked a lot about more tangible products, soybeans, cell phones, things like that. What about the more intangible things that we trade with other countries, these globalized ideas like innovation and foreign investment? Will these continue to suffer like this? You know, we can put a dollar amount on $200 billion worth of imports or exports or what have you. But, can we understand or comprehend the impact on these intangible things? 

 

Geoffrey [00:33:04] Yeah, well, investment [laughs] is pretty tangible, right? [Kinsey laughs, plus indistinct chatter] People are spending money. And I think the investment point is an incredibly important one. 

 

Geoffrey [00:33:15] And, you know, I said at the outset that we should think about globalization in the last 35 years or so as being really about globalization of supply chains. What's going hand-in-hand with that is lots of global foreign direct investment in all directions. Because it's American firms operating in China and then sending products back to the U.S. that's a global supply chain. But it also required a lot of foreign investment. Just as trade has declined in the last three or four years, and again, I'm talking pre-COVID-19, investment declined even faster. 

 

Geoffrey [00:33:51] Certainly in the case of U.S.-China, investment really peaked. Cross-border investment peaked in 2016 and it's been in freefall since. That's going to continue. I think, again, if supply chains get more local, the need to do international investment is going to go down. So it'll be all facets of globalization. So we talked trade. We're just talking investment. The third one is immigration. 

 

Geoffrey [00:34:17] And we already had lots of pressures on immigration in the U.S. and in most of the rest of the Western world. Those pressures are only going to be much stronger post-COVID-19. So that's why, you know, I hate to say this, but I really think we're going to be entering a period of de-globalization, and it's going to be de-globalization across the board. I think the economic costs of that are going to be incredibly high. I think the political costs are really going to be very high. But you'd have to be a really courageous leader to stand up against this tide and say, no, global is good. You know, I want all the benefits of global. I understand the negatives. 

 

Geoffrey [00:34:55] I'm going to manage the negatives and accentuate the positives. I think that's what we need. But just looking at the political landscape today, I don't see anybody who's willing to make that statement, maybe with the exception of Xi Jinping. And people don't really believe Xi because because they believe that the Chinese government has so much control over what happens in China, they don't face the normal kind of open-to-the-rest-of-the-world challenges that other countries do. 

 

Kinsey [00:35:23] Would it be a political nightmare for a candidate at any level in the system to say something like, global is good? That just doesn't seem like a realistic future, that anybody would actually say that, like you're saying. I just find that hard to imagine. 

 

Geoffrey [00:35:41] Yeah, I find it hard to imagine, too. And as I said, nothing could be more distressing to me. But let's go back a couple of—maybe only a couple of months we'd have to go back. I also can't imagine a politician in a western country, maybe [indistinct] country—we'll just say Western countries—stand up and say imports are good. But imports are good. They give us a greater choice of goods and services and they tend to do it at a lower price and a higher quality. And that's a fact. But I would challenge you to find a politician who stood on a stump and said imports are good. I just don't think they exist. 

 

Kinsey [00:36:25] If anybody knows one, my email is Kinsey@morningbrew.com. [laughs] 

 

Geoffrey [00:36:29] That's a great tease, and I'd love to, if somebody can find out, find a politician who said something like that. Maybe not in those three words, but something else. I'd love to hear from you on that too. 

 

Kinsey [00:36:39] OK. Dean Garrett, before we go into our final portion of this conversation, I'm interested to hear, like we're talking about at the beginning of this episode, this class that Wharton is doing is pretty unprecedented in terms of size, but also, like you were talking about, in terms of speed to launch. I'm interested what you think the biggest lesson will be for your students? The biggest actionable takeaway from taking this class about this very unprecedented piece of news and something that, frankly, will probably never happen in their lifetimes again. What do you think is going to be their biggest takeaway? 

 

Geoffrey [00:37:14] I certainly hope the biggest takeaway will be that Wharton was there for them and that the expertise of the school in all areas, from public health to finance and everything in between, was just a one-stop shop where we could literally cover the waterfront. And then I think the second thing that they'll take away—I hope they'll take away—is just how big an event we are living through. You know, in a leadership lecture I did for the course, I used Angela Merkel, the German chancellor, as an example of leadership in crisis, where this was the famous speech where she said that two-thirds of the German population was probably going to get COVID-19. She also said this is the biggest thing in Germany since German unification in 1989. An enormous event for them. And then she said, "No, no, no. That's wrong. It's the biggest event in Germany since World War II." 

 

Geoffrey [00:38:11] And that puts it in perspective for me—just how momentous the events we're living through right now are. And again, I hope our Wharton students and other people who have access to Wharton content on the crisis can see that the school is there for them. We're not only there in terms of this breadth from public health to finance, it's also the relevance. It shows the relevance of a leading business school. People tend to scratch their heads and ask the question, what do these professors who do research do? Well, now we're answering that. And it's expertise that, you know, I've been thinking about supply chains for a very long time. 

 

Geoffrey [00:38:50] I thought they were absolutely central to globalization. In the last couple of years, they've now become really relevant to U.S.-China. And right now, they're relevant to global pandemics. So supply chain, as we started, supply chain was really a pretty geeky thing and no one was particularly interested in it. Today, you've got to understand supply chain and what it means because it's affecting the world around us in real-time. 

 

Kinsey [00:39:14] Yeah, that's true. And I hope that in listening to this, that our Business Casual listeners can understand that. And it cannot be understated just how important it is and how impactful these changes are. And I find it really interesting—your point that you make about this was sort of happening. Now it's just happening a lot more rapidly, that this virus has, in so many facets of the business and economics world, has shown us new things that maybe had been hiding for some time or that had been happening slowly, evolving slowly, and are now not happening slowly. [laughs]

 

Kinsey [00:39:47] They are coming to light quickly. Dean Garrett, we are going to now go into our famous wheel [sound of a ding] and play a quick game before I let you go. So we have this wheel here. We're recording this remotely, so I'll take it for a spin for you. [sound of wheel spinning] And, [sound of a ding] alright, call me crazy. 

 

Kinsey [00:40:05] So Rapidfire here in this last section. But what's a time you feel like you had a really, really hot take and people called you crazy? It could either be you ended up being right or it's something you believe now that you feel like you're in the minority. 

 

Geoffrey [00:40:18] I think keeping the U.S.-China supply chain going is essential to peace in the world. That's a hard take that a lot of people think is crazy. 

 

Kinsey [00:40:29] OK, we'll take it. All right. We'll do two more spins. [sound of wheel spinning] Landed on [sound of a ding] follow or follow? 

 

Kinsey [00:40:38] Do you have a favorite person to follow on social media or a favorite account? 

 

Geoffrey [00:40:43] I'm a big fan of The Weeds. So [indistinct] and Matt Yglesias, I listen to a lot. 

 

Kinsey [00:40:50] OK. Those are some good ones. I like it. All right. One last spin. [sound of wheel spinning] [sound of a ding]

 

Kinsey [00:40:58] All right. Day in the life. So what is a typical day in the life like for you as we're all adjusting to this new normal, like I mentioned, we're doing this remotely. What's your quarantine day in the life? 

 

Geoffrey [00:41:09] So my days are both longer and earlier than they normally are. Longer because meetings that used to happen weekly, bi-weekly, are now happening twice a week or daily just because the pace of change is incredible. 

 

Geoffrey [00:41:23] You know, we've put an entire university online in less than a month. And the reason they're earlier is because I'm running a business school in Philadelphia from Los Angeles, where I was stuck before I could get back to Philadelphia. So my days start early. They tend to be long. But fortunately, because I'm in California, the sun tends to be shining at the end of the day, which is incredibly helpful to me because I want to go outside breathing the air, work out, and then sit down, maybe have a nice dinner with my wife and do some binge watching. That's a day today. A day these days. They just start a little earlier. 

 

Kinsey [00:42:03] What are you binge watching? 

 

Geoffrey [00:42:05] So I'm  gonna give you two binge-watch recommendations. And I doubt there's a large overlapping audience for these two shows. But one is "Joe Exotic and the Tiger King." And the second one is a show about a young Orthodox Jewish woman from Brooklyn escaping out of her orthodoxy by spending a bunch of time in Berlin. So "Unorthodox" and "Tiger King." As I said, I'm not sure the overlap is high, but on IMDb, they're both highly rated. 

 

Kinsey [00:42:37] I like that you run the gamut here. And I have one final question before I let you go. Probably the most pressing question you'll be asked this entire podcast. Do you think Carol Baskin killed her husband? 

 

Geoffrey [00:42:50]  I don't know, but I'm waiting for Season 2 because I want to dig a little more into that Jeff character. 

 

Kinsey [00:42:59] Right—me too! 

 

Geoffrey [00:42:59] And was Jeffrey, in fact, the puppet master behind all of this stuff. 

 

Kinsey [00:43:04] I know. Netflix has really struck gold with [indistinct]. Dean Garrett, thank you so much for coming on Business Casual. This was a fantastic conversation and I learned a ton. And I wish you the best of luck with the class and hope you get some sun out there in L.A. 

 

Geoffrey [00:43:17] Pleasure was mine. 

 

Kinsey [00:43:22] Thank you so much for listening to this episode of Business Casual. 

 

Kinsey [00:43:25] Dean Garrett is very busy teaching Wharton's biggest-ever class, but he's certainly not alone in taking advantage of what has become a boom in online coursework. I want to know, are you taking any of the many free classes, some of them even Ivy League? If so, let me know what you're learning about by tweeting at me @kinseygrant. That's @ k i n s e y g r a n t. And I'll see you next time!