Supply chains not so vulnerable
Productivity Commission report underlines adaptability of supply chains
Trade liberalisation has delivered several economic benefits to Australia, principally through increased access to export markets and competitively-priced imports.
In July, for example, Australia exported almost $46 billion in goods and services while importing $33.8 billion of goods and services.
Around the world, nations rely on supply chains that keep their economies functioning.
During times of crisis – such as the Covid-19 pandemic – supply chains are severely tested, if not disrupted, for months.
In February this year, Federal Treasurer Josh Frydenberg sought to address the issue, by charging the Government’s economic adviser, the Productivity Commission, to investigate the stability of supply chains. He noted that in 2019-20, the total value of Australian trade of goods and services was $873 billion.
Six months later, the Productivity Commission has responded with a study report, effectively challenging the perceived level of vulnerability of supply chains in and out of Australia.
Significantly, the PC looked at supply chains for both import and export industries.
It found that in 2016-17, Australia imported almost 6000 different products of a total value of A$272 billion, mostly from China, the United States, Japan, Thailand and Germany.
The import list was dominated by: motor vehicles; parts; electrical, optical and specialised equipment; fuel; pharmaceuticals; and chemicals.
While many of the imports were deemed to be critical, only five per cent of imported products were assessed as vulnerable, in that they were derived from concentrated sources, with no immediate alternative supplier.
Two-thirds of the list of vulnerable products came from China.
During the onset of the Covid-19 pandemic, for example, personal protective equipment (e.g. face masks) were in short supply, as well as chemicals. One of the biggest shortages was in face masks (principally from China), or rather, one of the key inputs into their manufacturing, non-woven polypropylene.
In the export market, only one product – iron ore – was nominated as vulnerable, given that China was overwhelmingly the main export destination. According to the PC report, iron ore accounted for almost 95 per cent of the value of all vulnerable exports in 2019.
Another major export services industry – education and tourism – was excluded from the ‘vulnerable’ category, as the PC found that the main importer comprised less than 40 per cent of the market.
Furthermore, the PC did not deem food products as vulnerable, despite the approach of submissions by Australian farm industry groups such as the National Farmers Federation and GrainGrowers.
In its study report, the PC felt that disruptions to global supply chains were unlikely to affect Australians’ access to the food required for survival within a six-month time frame.
It also found that the importation of agricultural inputs from China, such as fertilisers and pesticides, could be sourced elsewhere in the event of disruption.
Presenting its report to the Federal Government, the Productivity Commission noted that the onset of Covid-19 saw an immediate impact on transport and logistics, with some panic buying of essential goods.
But it warned against a heavy-handed reaction from government, noting that government intervention may crowd out investment in risk management, imposing higher costs on the public.
Gavin Clancy is a Senior Consultant with Lunik