Trade and supply chains: pressure points in perspective part two

In the previous blog post in this series, we looked at a snapshot of Australia’s major exports and trading partners, observing that Australia’s iron ore juggernaut has continued to hold up the goods side while services exports like tourism and education take a hammering.

Where are Australia’s import vulnerabilities?

The goods and services dichotomy is also apparent in the latest ABS data for imports, which showed imports down four per cent in March. The decline was driven by an almost one-fifth reduction in services imports but this was offset by increased imports of consumer electronic goods like smart phones.

This is not to underplay the disruptions on the goods side, which are likely to materialise in future trade data releases.

Firms in Australia, like in many other advanced economies, often base their inventory ordering on a just-in-time basis, allowing for flexibility in ordering to respond to changes in demand and minimising excess stockpiling. Any number of COVID-19 impacts can disrupt these supply chains including reduced labour or closures in factories and distribution centres, reduced transport and logistics capacity due to travel restrictions, and more stringent biosecurity and customs controls.

Combining existing industry data from the ABS with some of the special release COVID-19 data on expected adverse impacts for business shows the biggest vulnerabilities and impacts to be in the wholesale trade, retail trade, manufacturing and construction sectors.

 

Concerns about an acute shortage of medical goods and equipment have dominated headlines. Despite their critical importance, in pure dollar terms they pale in comparison to Australia’s biggest import disruption – personal overseas travel, which represents 11 per cent of total imports. Ongoing travel restrictions matter not just because of our penchant for overseas holidays but for our ability to nurture trusted trade and investment links, which is likely to prove more difficult in the virtual world.

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China and other economies are re-opening for business

In the early days of the COVID-19 outbreak, shutdowns in Wuhan, a major distribution hub, and in manufacturing plants across China generated considerable angst from Australian importers. There were calls for greater diversification of supply lines, largely to smaller South East Asian countries with comparable labour costs. In fact, some companies had already been implementing such strategies before the outbreak in response to simmering US-China trade tensions.

While domestic health restrictions in Australia are being gradually relaxed, China has already been cautiously transitioning into its recovery phase, with most manufacturers coming back online, albeit at reduced capacity.

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Approximately 18 per cent of Australia’s imports are sourced from China. Telecommunications equipment, like computers and smart phones, accounts for over a fifth of the value of imports. A substantial amount of these imports are everyday consumer goods like clothing, footwear, furniture, recreational goods and plastics, as well as refined petroleum used by businesses and households to power vehicles and machinery.

Given China is starting to emerge from three months of reduced production, it is possible that we may see some shortfalls but these are likely to be short-lived or may go unnoticed as households increasingly tighten their belts and spend less on discretionary goods. Emerging trade tensions between Australia and China have overshadowed these concerns more recently, and this is a bigger worry in the long-term.  

Another 18 per cent of Australia’s imports come from South Korea, Japan and Germany. By far the largest component of these imports is passenger and goods vehicles, along with refined petroleum.  New cars are something that many Australians will do without in the current environment and the publicised challenges of car dealerships is testament to this.

But these countries also play key roles in exporting highly specialised machinery components integral to other supply chains around the world so it is very likely we will see secondary impacts of factory closures. In a recent conversation on the Economists’ Corner with Dr Hubertus Bardt from the German Economic Institute, he suggested that manufacturers there will also be disrupted by inputs to their supply chains from France and Italy. 
 

Essential goods disruptions

So what about the essential goods underlining recent concerns about Australia’s dependency on global supply chains and calls for increasing domestic capabilities, including medical supplies and equipment, oil reserves and even water treatment chemicals?

According to the World Trade Organisation, global trade of medical products described as critical and in severe shortage during COVID-19 totalled about $597 billion, or 1.7 per cent of total world trade. Germany, the United States and Switzerland supply about 35 per cent of medical products worldwide, while China, Germany and the US are responsible for 40 per cent of personal protective products.

The problem during a global pandemic of course is that pervasive skyrocketing demand for medical equipment leaves countries with the difficult choice to redirect exports for domestic use. The US and other countries have done exactly this during the pandemic, leaving countries like Australia in the lurch. In 2018, Australia imported about $3.3 billion of medicines and equipment from the US.

All indications are that Australia has managed these pressures well. For starters, flattening the curve has suppressed the virus and demand for these goods. In addition, groups like the Advanced Manufacturing Growth Centre assisted the government in coordinating local manufacturers to both ramp-up and redirect their production facilities, and to source goods from alternative international supply lines. Special freight flights organised to get Australia’s exports back into market have in many cases returned from their destination with critical medical goods on-board.

Australia also does not face an impending fuel security issue. Australia imports refined petroleum from a variety of sources including Korea and Japan, but most of its petrol imports are sourced from Singapore.
In February, Australia had about a month’s worth of reserve fuel against the International Energy Agency requirement of 90 days. The Australian Government last month took advantage of plunging oil prices to purchase crude oil from the United States' Strategic Petroleum Reserve (SPR).

Purchasing oil in this way is a cost-effective way to increase emergency reserves, but some are questioning whether Australia has enough oil onshore, given the time it takes to ship from the US. Historically, government reviews have suggested that the cost of increasing onshore reserves exceeds the benefits and our global supply chains are robust enough to withstand disruption. Whether current circumstances with lower oil prices and heightened risk perceptions dramatically change that equation for policymakers is unclear. But we shouldn’t forget that those lower prices reflect a universal drop in demand and plenty of available supply as global economic activity plunges.

Where to now for Team Australia?

In an age of radical uncertainty, decisions like this come down in large part to judgement. How Australia responds to heightened global supply chain risks really comes down to how much insurance we want to take out as a nation, in response to a once in 100-year event.

The evidence does not seem to suggest that we need a wholesale reshoring of capabilities or to turn our backs on global supply chains. But this doesn’t mean Australia can be complacent about our supply chains. In the short-term, there is an argument to be made for easing back away from extremely lean, just-in-time inventory management and investing in some strategic buffers for major shocks. There will also be questions for governments about enhanced stockpiling of emergency goods and for companies on how well they understand and monitor their supply chains.

Beyond the initial phases of COVID-19, we need to understand what aspects of international freight and logistics will and won’t go back to normal. The National COVID-19 Coordination Commission has also given renewed impetus to the conversation about what Australia’s advanced manufacturing sector should look like in the future and the opportunities presented by global supply chain disruption.
Part 3 of this blog series will look in further detail at these opportunities and the options for how Australia might enhance its global trade and supply chain resilience.

The author would like to thank former CEDA Senior Economist Meg Cuddihy for her work on this blog and CEDA's trade and supply chain work.

CEDA is hosting a livestream event on global supply chains on May 28 featuring Jarrod Ball, Deputy Chief Executive Officer of Austrade, Tim Beresford; NSW Ports Chief Executive, Marika Calfas; and Managing Partner, Global Business Services, IBM Australia & New Zealand. You can register for the event here.

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