Summary
The outbreak of the COVID-19 pandemic caused an immediate and severe impact on international economic output, trade and investment; and this has been reflected in the UK, across both manufacturing and services sectors.
The pharmaceutical industry has been affected by significant and distinctive shocks to both supply and demand, compounded by trade policy interventions in some countries. While UK supply chains for medicines have proved to be resilient, they can only be stretched so far. The Government must ensure that buffer stock of medicines (which typically only lasts up to six months) is being replenished in case of a further pandemic wave. The Government should also evaluate the case for enabling compulsory licensing of therapeutic drugs or vaccines in respect of COVID-19 to make them available as quickly, widely and cheaply as possible.
The medical supplies (equipment and consumables) sector has been affected in a similar way to the pharmaceuticals sector; and UK supply chains for these products have likewise thus far remained resilient. The Government has undertaken overseas procurements for Protective Personal Equipment (PPE) on behalf of the whole of the UK, involving staff in overseas posts. We recognise that there have been different experiences with PPE procurement across the UK.
Despite some initial shortages caused by panic buying, UK agri-food supply chains have withstood the challenges posed by major global shocks to supply and are likely to remain resilient. However, this is dependent on their ability to engage logistics and respond to rapid changes in consumer behaviour.
UK manufacturing industries have suffered significant adverse effects from the disruption of international trade caused by the pandemic, with the flow of raw materials, parts and sub-assemblies seriously impeded, and the ability to sell finished products greatly curtailed. Different sectors of manufacturing have been affected in different ways, and this is illustrated by our case-studies of the automotive, plastics, and fashion and textile industries.
UK services trade has also been adversely affected. The type and degree of harm varies considerably between sectors, according to the extent to which they are dependent on their customers, or those delivering services, being able to travel, as well as their ability to provide services digitally. We heard evidence from the financial services and higher education sectors as case-studies of the impact of the pandemic on UK trade in services.
British businesses face trade finance challenges, due to: goods being delayed in transit, tying up cash flow; customers requesting extended payment terms; and borrowing costs increasing, due to a lack of market liquidity. We welcome the steps that UK Export Finance has taken to support businesses trading overseas and the announcement of “bounce-back” schemes for certain sectors, including specific support for SMEs.
We received evidence that export promotion “will matter as much as trade policy” in the recovery from the pandemic for businesses trading internationally. However, for businesses to benefit, they need to know what support is available to them. We recommend that the Department for International Trade (DIT) improve the quality of its communication by ensuring it is adapted on a sector-specific basis and prioritising face-to-face engagement over self-service digital offerings.
The global response on trade during the pandemic has been led by the G20 and the World Trade Organization (WTO). However, we heard there has been “a lack of leadership” to date compared with the 2008–09 financial crisis. Some governments have imposed unilateral export controls on medical goods, pharmaceuticals and agri-food products; at the same time, some states have implemented import reforms, such as reduced tariffs on essential goods. While these measures are temporary, the introduction of new subsidy schemes could cause longer-term distortion to the global trading system. The Government must act at the international level to try and ensure that any trade-disrupting measures put in place during the pandemic do not become permanent. We also recommend that the Government seek to work with WTO partners and the WTO’s General Council on reform initiatives to be taken forward once a new Director-General is in place.
The emergence of several proposals for initiatives to support trade in medical goods, including plurilateral and multilateral agreements, is an encouraging development. The Government must set out a clear policy position on these proposals and use its influence to be a leading voice in seeking international support for them.
An issue that has arisen globally, across a wide range of sectors, during the pandemic is that of perceived vulnerabilities in supply chains, including in relation to alleged overreliance on certain suppliers. We heard the argument that, for this reason, there would now have to be a “fundamental shift” toward “localisation of supply chains”. On the other hand, we were told that, of the 151 types of medical goods that the UK imports, in only six cases did the majority of UK supplies come from China. The Secretary of State for International Trade told us that Project Defend is looking at vulnerabilities in supply chains for essential goods but indicated that “onshoring” is not being proposed as part of this.
There are a number of alternatives to onshoring, including: increasing diversity of supply; building in “redundancy” (overcapacity); stockpiling; creating trusted partnerships; sourcing from nearby countries; international collaboration; and less reliance on “just-in-time” production. Any proposed measures to bring about onshoring of production in the UK need to be approached with caution. The proposed creation of “parallel supply chains” for some medicines (building “surge capacity” into UK-based production) should be evaluated by the Government, as should the application of this approach across other essential-goods sectors.
DIT has a responsibility to provide inward investors with advice, support and assistance to help them deal with current circumstances. The Department should build on its hard work in this area and do more to communicate proactively to investors what help and information is available to them. The Government is reforming its Investment Strategy and we welcome the Secretary of State’s indication that we will be consulted over this.
The Government should set out its policy on updating existing UK Bilateral Investment Treaties, and on the terms of future International Investment Agreements, in light of the challenges and issues that the pandemic has highlighted. We welcome the Secretary of State’s commitment to scrutinise closely investment chapters in future Free Trade Agreements with a view to preserving the Government’s right to regulate.
Some countries have put in place new screening procedures for inward Foreign Direct Investment, because of the reduction in asset prices brought about by the pandemic, and fears of losing “strategic assets”. Investment screening entails balancing national security against the need for inward investment. The Government must set out clearly the basis on which it will strike that balance in the planned National Security and Investment Bill; and it must clarify what role, if any, is envisaged for DIT in the proposed new screening regime.
Published: 29 July 2020