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Supply chains, trade, and lessons from COVID-19

Introduction by Croakey: Global interconnectedness has been brought into sharp relief by this year’s novel coronavirus pandemic, highlighting the many risks but also immense capacity of a globalised world.

In some parts of the world, the pandemic has fueled nationalist agendas and rhetoric, but it has also seen countries come together against a common threat in unprecedented ways.

It’s also highlighted how vulnerable, in a capitalist world order, supply chains are when borders have to close and countries turn protectionist around essential supplies including medicines, medical technology, and personal protective equipment.

Concerns around the impact of and lessons from the COVID-19 pandemic on Australia prompted a parliamentary inquiry into its implications for defence, foreign affairs and trade.

The inquiry tabled its report last week, warning that a “key lesson from COVID-19 is that returning to ‘business as usual’ is not an option if Australia is to be resilient, remaining secure and prosperous in the face of future crises”:

COVID-19 has seen Australia respond effectively, including with novel approaches to governance—such as National Cabinet—and partnerships with industry that have placed strategic outcome over rigid adherence to established process.

Responding to the lessons of COVID-19 identified in this report will require a similar commitment to whole-of-government, outcomes-focused assessment and timely, funded implementation of novel solutions which will challenge the status quo.”

In this piece for Croakey, Anna Leavy examines the report and its recommendations, explaining it is not just supply chains but the fundamental principles underpinning the global order that have been shaken by COVID-19.


Anna Leavy writes:

In the early days of the pandemic reports emerged of the unseemly and desperate international scramble for PPE and ventilators.

This scramble deteriorated into supplies being ‘diverted’, a euphemism for literally hijacked, from airport tarmacs by nations including the US.

This may have been surprising to many but not so much to watchers in the fields of health and security. Long global supply chains and a reliance on just-in-time supplies had left global cupboards looking bare.

Global interconnectedness has become not just a feature, but many argue, the embedded nature of our world going forward. It has enormous benefits for manufacturing and trade and has resulted in the availability of cheaper goods on the shelves.

However, concerns over the vulnerabilities of this system have been rumbling for years.

Doctors have become familiar with hospital pharmacy emails detailing critical medicine shortages and substitutions. Patients may have experienced the need to change medications when the one on which they are comfortable and stable is no longer able to be sourced.

Pharmaceutical supply chains are complex and opaque and the provision of key active pharmaceutical ingredients (APIs) and manufacturing is heavily concentrated in countries like India and China.

Concern that those supplies could be adversely impacted through pandemic workforce disruption was real.

Much larger questions at play

During the pandemic the TGA established a Medicine Shortages Working Party to model the supply requirements for critical medications such as opiates, anaesthetic and sedation agents, and muscle relaxants which would be required in high volumes by ICUs if COVID became widespread in Australia.

The state and federal governments moved to encourage local manufacturers to produce other supplies in high demand including masks, ventilators and hand sanitiser. Companies like Detmold in South Australia stepped into the breach.

However, moving critical manufacturing onshore comes with an additional set of costs and challenges. While government grants can offset some of the set up costs to change equipment and staffing, what companies need going forward is a certainty of demand including through the provision of government procurement contracts.

Detmold also discovered that Australia lacks a capacity to test products, including masks, which must meet an industry standard before they can be utilised in the domestic market.

This applies to both domestically manufactured products, but also items being sourced from non-traditional international suppliers to ensure they are fit for purpose.

However, what the pandemic highlighted was not just short term concerns with supply chains. There were much larger questions at play that affect health, the economy, trade, manufacturing and diplomacy, and indeed go to the very heart of the principles which underpin global interconnectedness.

It was faith in the very foundations of this global rules-based order that was shaken.

To see the US, along with other countries, engage in supply diversion was a cause of particular dismay given the United States’ leading role in establishing contemporary global rules beginning with the Bretton Woods agreements.

Threats to the rules-based order

It is against this backdrop that the Joint Standing Committee on Foreign Affairs, Defence and Trade launched an inquiry into the implications of the COVID pandemic, which delivered its report last week.

As part of its inquiry, the committee considered not just the criticality of supply chain integrity, its vulnerability and ensuring resilience for the future, but also pondered the maintenance of supply when the rules-based order itself is challenged by a pandemic or other threats to national security.

As much of the world’s trade travels by sea, these threats include piracy and conflict impacting the maintenance of open sea lanes. It also includes the potential supply disruption from cyber threats and ‘grey zone’ activities: the use of non military means to coerce or influence nations, for example, through the use of paramilitary groups or the utilisation of trade and economic levers.

As the Committee Chair states:

Many of these vulnerabilities are caused by supply chains that rely on just-in-time supply from the global market. In some cases, this is exacerbated by supply coming — in whole or substantial part  — from companies that are subject to extrajudicial or coercive direction from some foreign government.”

This kind of deliberate disruption, which can occur when countries seek to gain a national advantage, has been seen in recent trade disputes between China and Australia.

It is not a problem readily solved by a sole focus on building some sovereign manufacturing capabilities.

There is little doubt that the pandemic has highlighted the pressure points in health and social systems. Strengthening those has been crucial to Australia’s domestic response to COVID-19, from the need to increasing ICU and ventilator capacity, to maintenance of crucial PPE and medication supplies, as well as the way in which we manage aged care and provide social supports.

The global economy has also faced enormous challenges, with a fall in global GDP and investment flow and a reduction in capital supply. The direct flow-on effects will impact UN global development and food programs in developing countries.

The real threat of world hunger is a frightening prospect to follow the COVID pandemic.

It has also brought international pressures into focus. The rise in nationalism and protectionism predated the pandemic, but COVID-19 provided fuel to the those fires while also providing cover to nations that adopted increasingly authoritarian mechanisms to manage their populace during the crisis.

Critical sovereign capability

There are numerous recommendations in the Joint Committee’s report. These include ongoing proposals to define Australia’s critical national systems over the next 12 months and the development of a national resilience framework to identify which of those systems are vulnerable to high-consequence supply chain disruptions.

Further recommendations seek to identify supply chain elements at high risk for coercive interference from foreign governments and develop plans and a timeframe to move at-risk elements to sovereign Australian suppliers or companies in other trusted nations with a record of adherence to the rule of law. Further, the committee includes a provision that there is an assurance of reciprocal supply to our partners’ critical national systems.

The committee also seeks to address the concerns of companies shifting to onshore manufacturing with a six-month deadline to identify areas of Australia’s strength in resource supply, and any barriers to scaling up and maintaining commercial sustainability that would enable Australia to be a trusted supply partner to like-minded nations. Similarly, Australia will conduct a cross-portfolio review to generate competitive processes and support for Australian sectors to become trusted suppliers of resources, manufacturing and services.

Amongst the recommendations, the committee seeks to address an area where closure of Australia’s international and domestic borders due to the pandemic meant we were not meeting our own international obligations.

The committee heard submissions on a specific problem relating to the maritime ‘crew change crisis’ which left ship crews without shore leave but also inhibited crew change outs. The Queensland model of allowing crew to be flown in, when they could get a seat on a flight, and taken on a sanitised bus directly to the ship was highlighted as unique and successful model to address the problem.

The committee recommendation was that National Cabinet develop processes for ensuring all Australian jurisdictions remain compliant with national obligations during future crises where responses fall under sub-national governments

An important recommendation for companies like Detmold, is that within 24 months Australia should regenerate onshore test and certification capacity to ensure local and imported supplies meet relevant ANZ and international standards. While this goes some way to addressing the concerns Detmold expressed, the timeline sounds lengthy.

Local manufacturers shifting to support national critical systems will also be interested in the final recommendations which suggest moving away from a grants-based system to the use of procurement strategies to sustain sovereign industry. This includes procurement authorities considering how to facilitate demand across government departments and the phasing of procurement to meet operational requirements.

Importantly, the committee suggests adding a new subparagraph to the Commonwealth Procurement Rules such that when officials are considering value for money they should give priority weighting to the contribution a project or procurement is making in generating or sustaining a critical Australian sovereign capability.

This is currently not something for which there is any provision under the CPR, and may address the issue that during the COVID crisis large amounts of money were spent paying well above pre-pandemic prices for supplies, offsetting any marginal cost savings made over the years from using imported products.

A vital opportunity

Ensuring onshore manufacture and supply of critical products does not in itself address the substantial issue of maintaining a rules-based order in an interconnected world. Australia ranks 34th on the DHL Global Connectedness Index, a weighted aggregate of our global connectedness based upon factors within the broader categories of trade, capital, information and people.

Connectedness is important to Australia as a nation and our leaders are committed to supporting a rules-based order.

A number of the committee’s recommendations revolve around working with allies and regional partners to strengthen and support the global rules-based order and restore confidence in multilateral institutions.

This is seen as crucial to protecting this nation against ongoing threats in a globally interconnected world, but also to protect developing nations who will be disproportionately affected by flow-on effects of global economic downturns generated by those threats.

There is a genuine concern that the lessons of this pandemic will be squandered by a return to business as usual in a post-pandemic world.

This would be a waste, not only of the money and effort expended to bolster and extend Australia’s health and manufacturing sectors, but would leave the nation vulnerable to the next threat.

A global rules-based order works well when resources are abundant, but in times of crisis there is an individual and national tendency to act exclusively in one’s best interest; be it stripping supermarket shelves of toilet paper or diverting PPE and ventilators from tarmacs.

While countries like Australia and the US have in the past openly stated their commitment to a rules-based order, in reality it has always been a self-interested commitment and — in the case of the US — often only a verbal one. For example, they are not signatories to key international agreements including the UN Convention on the Law of the Sea and the Rome Statute for the International Criminal Court.

Global crises will not end with the pandemic: world hunger and climate change urgently need addressing.

We are an interconnected world and the Committee is correct, we need to work towards greater cooperation, not just with stated commitments but substantive action.

Dr Anna Leavy holds a BSc Psychol. (Hons) and an MBBS (Hons). She served with the Royal Australian Navy before completing her ANZCA Fellowship, and has worked as a lecturer and in curriculum development for both ANU and UOW Schools of Medicine.

Anna has an ongoing interest in the military, security and emergency management.

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