The COVID-19 pandemic and international trade Contents

6Ensuring future supply-chain resilience

Addressing supply-chain vulnerabilities

73.As is apparent from preceding chapters, an issue that has arisen globally, across a wide range of sectors, during the pandemic is that of perceived vulnerabilities in supply chains. Dr Roscoe, of Sussex University, told us that:

What the pandemic has made very clear is we have these hugely complex, globally dispersed supply chains that have a number of points of failure within. A supply chain is only as strong as its weakest link. When one area or one geographical location stops manufacturing, such as when China shut down its manufacturing, the rest of the global supply chain suffers.244

Companies had prioritised “cost and efficiency over flexibility and responsiveness”. Redressing that balance would tend to mean “localisation of supply chains, being closer to the market and being more responsive”. A “fundamental shift” towards localisation of supply chains would now be seen across sectors. Dr Roscoe thought this was “not anything to do with protectionism”; it was “just good business sense”, given that “The longer your supply chain is, the more irresponsive your supply chain will be.”245

74.By contrast, Professor Evenett, of Global Trade Alert, warned against “gut reactions” and “reflexive thinking” taking the place of “evidence-driven policymaking” in arguments about the purported need for onshoring.246 He said that “the UK imports 151 different types of medical goods and in only six cases do more than half of the UK’s imports come from China”. He thought that vulnerability due to such overreliance on particular sources of goods was “a problem that has been grossly exaggerated” and warned against changing “a generation of trade policy” on the basis of “emotional responses”.247

75.Courtney Fingar, of the New Statesman Media Group, told us the pandemic had “accelerated and heightened” an existing “trend of reassessing supply chains and looking for ways to make them both shorter and stronger”. This trend had been driven partly by “concern for carbon footprint”; and by the impact of automation, which made it potentially more economical to manufacture closer to home.248 Dr López-Gómez, of Cambridge University’s Institute for Manufacturing, told us that several countries, such as Singapore, South Korea, China and the US, were looking at future supply-chain resilience. Risks being examined included dependence on single sources or single regions of the world for particular products. There were “very different answers for different sectors”.249

76.Ms Schneider-Petsinger, of Chatham House, told us that a number of policy instruments were being discussed in the US as possible means of bringing about reshoring. These included: payment of government subsidies; tax incentives; a shift by the US International Development Finance Corporation to promoting inward investment; and incorporating into government procurement strategies a “buy American” policy and requirements regarding domestic production. She thought onshoring was likely in practice to occur “only in certain sectors and only for certain companies”. Scope for government intervention would be constrained by the state of government finances in the aftermath of the pandemic; support for onshoring would be “limited to strategic sectors” and of limited duration.250 Increasing diversity of supply and “redundancy” (spare capacity) in supply chains would be “much more driven by market forces than Government intervention”; and “Governments should pursue other policies, such as looking at stockpiling and creating trusted partnerships.”251 Ms Schneider-Petsinger also drew attention to: the likely impact of onshoring on the prices, variety and quality of goods available;252 the role of “Consumer preferences for more locally produced goods”, with concerns about “greening supply chains”;253 and the case for regionalisation of supply chains (concentrating them within several nearby countries).254 Soumaya Keynes, of the Economist magazine, thought that onshoring would be unwise, since “We can have a shutdown at home and there is just as much risk from that as there is from being reliant on imports.” Supply-chain vulnerabilities could be addressed instead by “a healthy stockpile of equipment and supplies, and then a diverse set of suppliers”.255

77.Professor Jun Du, Director of the Lloyds Banking Group Centre for Business Prosperity at Aston University, told us that, while globalisation was certainly not at an end, “limited decoupling may happen and reconfiguration of global value chains is inevitable”. Global value chains were driven by efficiency and would persist while that remained the organising principle of business. As in any recession, global value chains would facilitate “weeding out” the less productive enterprises. And China could not be “swapped out” of supply chains, given its “advantages over all its competitors (even low-cost economies)”, including “its unrivalled density of production networks which can’t simply be ‘shipped’ elsewhere”. Worries about supply-chain security were only justified in respect of goods relating to national security. Since nobody could predict the characteristics of a future crisis, it would be difficult to compile a list of those commodities which required supply chains to be guaranteed. What was required was “tight international collaboration” to “build a strong international safety net”. Therefore, the UK needed to “play a more active role in leading international collaboration and coordination in building and shaping the future global supply chains of priority goods”.256 Dr James X Zhan, Director of the Investment and Enterprise Division at UNCTAD, however, thought the pandemic was catalysing developments that would “mark the end point for globalisation”. He envisaged “a restructuring of the global value chain from global to regional”, with the emergence of three regional production systems: “the EU-centred European system, the US-centred American system and the China/Japan-centred east Asia system”.257

78.The UK Trade Policy Observatory (UKTPO) told us that any action to bolster supply-chain resilience should not be at the expense of “maintaining the well documented advantages from closer integration” (including specialisation, technology transfer and innovation). Policy-makers needed to determine in which sectors it was “socially optimal” to improve resilience and identify where government intervention was needed to achieve this. UKTPO thought that improved supply-chain security was likely to entail some combination of:

79.Mr Phipson, of Make UK, said there had been “a wakeup call” about reliance on single-source supply. Solutions potentially included dual-sourcing, on-shoring and shortening routes of supply.259 Just-in-time manufacturing would “probably change substantially from this point onwards”.260 However, Mr Phipson acknowledged there were limits to what could be onshored. He thought there was “minimal” chance of onshoring production of, for instance, “white goods and consumer electronics”. UK manufacturing would remain focused on high-value production, making innovative products and, as in the case of the automotive industry, integrating components made elsewhere. Building resilience would be “about making sure that is sustainable, reliable and is not impacted by things like pandemics”.261

80.In the medical supplies sector (which is concerned with equipment and consumables, including PPE), Mr Ellingworth, of the ABHI, warned that any onshoring of supply chains would entail costs that businesses would have to pass on. And the reality of the global market meant that “you cannot re-shore everything”. The challenge was to “build on the existing life sciences strategy for the UK” to develop innovative production in the UK.262

81.Regarding agri-food supply chains, Professor Smith told us that “Trade rules—the WTO rules and maybe regional trade agreements—are not going to stop the UK” going down the route of greater self-sufficiency if it chose to do so; and leaving the EU gave greater flexibility in that regard. To have “a completely local food chain” would “probably be challenging”, but there were good reasons for doing so.263 Professor Doherty, however, wished to “strike a cautionary note”, given that the UK had long imported much of its food and there was much the UK could not produce for itself. There needed to be a “proper strategy” to extend the UK growing season for some crops; and we would still need to import food to meet demand from consumers.264 Mr Wright, of the Food and Drink Association, was sceptical about the public’s appetite for greater self-sufficiency in food when it realised how much of the UK’s food was imported.265

82.Mr Hawes, of the SMMT, said that roughly half of the parts used by the UK automotive industry were sourced in the UK. Lack of UK suppliers meant that this proportion could not rise beyond 60%—and the shift towards electric vehicles would make it less possible to source parts in the UK. The industry would always look for the best suppliers in terms of “costs, quality, innovation, reliability”.266 He thought that “no one can be resilient to a pandemic”.267 If the industry had localised production, it could have ended up in a worse position, with the UK still in lockdown while competitors in other countries were “accelerating away”. Globalisation could not be reversed, although it might be “changed at the edges” regarding some of its riskier elements, “within the bounds of what is feasible and viable”.268

83.Regarding the plastics industry, Mr Law said it “would dearly love to have much more on-shoring”, but this could only happen if there were more UK-based original equipment manufacturers to buy its products.269 Mr Alger, of the UKFT, said that “near-shoring and on-shoring has been going on at a steady pace over the last 10 years” in the fashion and textile industry.270

Conclusions

84.Any proposed measures to bring about onshoring of production in the UK need to be approached with caution. Onshoring may not be easy to achieve; it may have unintended consequences in respect of factors such as the price of goods and tit-for-tat actions by other countries; and it may replace one form of vulnerability with another. In addition, it may have implications regarding the terms of international agreements (multilateral / plurilateral and bilateral).

Proposed “parallel supply chain” for medicines

85.Dr Roscoe told us that pharmaceutical supply chains, like those of other industries, had been shown by the pandemic to have “some inherent issues”271 that made them “fragile”.272 Dr Torbett, of the ABPI, said that he fundamentally disagreed with such a characterisation, at least in respect of prescription medicines, the supply chain for which had proved to be resilient. He did, however, indicate that there could be issues in respect of supply chains for over-the-counter medicines.273 Dr Torbett thought it would make no sense for every country to try and be self-sufficient in the 12,000 prescription medicines currently in use by the NHS, given the requirements regarding “quality, scale, resilience and price”. There was, though, a debate to be had about growing the life-sciences industry in the UK; and it might be possible to seize opportunities to manufacture some essential medicines as well.274 Regarding future supply-chain resilience, Dr Torbett thought the answer was a diversity of options, including some stockpiling.275

86.Dr Roscoe pointed out that, while buffer stock had thus far helped to maintain supplies during the pandemic, it would eventually run out, if this, or some other, crisis continued long enough.276 He agreed with the idea of a global diversity of suppliers—”having a portfolio of suppliers in geographical locations […] and not having all our eggs in one or two baskets, such as India and China.”277 He was “not calling for all drugs to be made in the UK by any means”.278 Rather, he proposed ensuring “the manufacturing capacity to make critical drugs in the UK” (encompassing “APIs, excipients [substances used in medicines alongside APIs] and packaging”) when necessary, by means of a “parallel supply chain”.279 This would be accomplished by having:

companies within the UK that are maybe manufacturing 20% or 30% [of required supplies] and, when a crisis hits, those companies have the ability to flex their capacity and bring it up to 80% or 90% to meet the needs of the UK public.

87.During the few months that it would take these providers to “ramp up their production”, buffer stock could be used to ensure continued supplies of the drugs concerned.280 Given the costs involved, the Government would have to play a major role in establishing such a system.281 Dr Torbett thought that Dr Roscoe’s ideas were “absolutely worth exploring” as part of “a sophisticated conversation around resilience”.282

Recommendations

88.We agree that the proposed creation of “parallel supply chains” for some medicines, which would involve building a degree of “surge capacity” into UK-based production, seems to have merit as a workable alternative to onshoring and we recommend that the Government conduct a rigorous evaluation of it as soon as possible. It should also, as a matter of urgency, look into the possibility of applying this approach across other essential-goods sectors.

Project Defend

89.Press reports in May and June stated that the Government was, in light of the pandemic, investigating vulnerabilities in UK supply chains for essential goods (particularly in relation to alleged overreliance on China), under the title “Project Defend”. One of the options under consideration was reported to be the onshoring of some aspects of production.283 The Secretary of State told us that Project Defend was “about understanding our supply chains” and had been launched after the “immediate crisis” around the pandemic after it became apparent how dependent the UK was on certain countries for supplies of specific essential products (as in the case of India and paracetamol).

90.The answer was not “autarky” and “onshoring all our industry”, since this would just create a new vulnerability to any shock to production in the UK. Resilience, in respect of imports and exports, would come from “having more trade with a greater diversity of trade partners”.284 Ms Truss said industry was already reviewing supply chains and looking at multiple sourcing. Supply chains had “worked pretty well” during the pandemic, but the Government and the private sector could do more to prepare for a future crisis by means of supply-chain “transparency and diversification”. Other countries were also looking at this issue and the Government wanted to work with allies to “jointly secure critical supplies”.285 She emphasised that the UK would continue to trade with China, which was “our fifth-largest trading partner”—subject to international rules on matters such as dumping.286 Ms Truss accepted that there was “certainly an issue” around the security of pharmaceutical supplies, particularly generic drugs, and the Government was working on the matter. However, she could not “go into the details of Project Defend, for obvious security reasons”.287

Recommendations

91.We welcome the Secretary of State going on the record about Project Defend, making her seemingly the first, and so far only, member of the Government to do so. We note her comments that onshoring is not on the table and her reference to diversifying trade partners as a solution to supply-chain vulnerabilities. We welcome the fact that the Government is giving consideration to this issue and we would welcome further details on this. The Government must be as open as possible about how it is identifying issues of supply-chain resilience arising from the pandemic and what measures it is considering as possible solutions. It must set out clearly how it will balance national security with its ambition to be a global champion of free trade.


246 “Onshoring” refers to moving to one’s home country an aspect of production that has hitherto been carried out abroad. The related term “reshoring” refers to the repatriation of domestic production that has been previously sent overseas – or “offshored”. The term “near-shoring” (transferring overseas production to a less distant foreign location) is also widely used.

250 Q233. Ms Schneider-Petsinger said that “strategic sectors” had traditionally only been defined as those relating to national defence, as well as energy and transport; but the definition was being expanded to encompass “anything that is related to public health and the healthcare sector” – Q234.

256 Professor Jun Du (CVT0021)

258 UK Trade Policy Observatory (CVT0026)

263 Q80; see also Q91

264 Q80; see also Q91

272 Q22; see also Q12

284 Oral evidence taken on 24 June 2020, HC (2019–21) 534, Q62

285 Oral evidence taken on 24 June 2020, HC (2019–21) 534, Q63. The newspaper article that Ms Truss co-authored with trade ministers from several other countries stated: “While there can be good reasons for targeted reshoring of truly essential capabilities, we should not let those who would undo decades of progress take advantage of the crisis” – “Enemies of free trade must not be allowed to use coronavirus to bring back protectionism”, Telegraph, 28 April 2020.

286 Oral evidence taken on 24 June 2020, HC (2019–21) 534, Q64

287 Oral evidence taken on 24 June 2020, HC (2019–21) 534, Q65




Published: 29 July 2020