Trade and supply chains: pressure points in perspective part three

Parts one and two of this series have considered Australia’s trade profile and assessed how vulnerable our supply chains have been to disruption during COVID-19. As social restrictions are gradually lifted and Australia begins the long road to economic recovery, what can we do to help global supply chains bounce back?

With the debate and daily headlines veering from concerns about disruptions in Chinese manufacturing to the security of medical and other essential supplies, it has been challenging to disentangle what Australia really needs to worry about. The short answer is that there are four critical lessons that we should take out of Australia’s experience:

1. Don’t go changing – remain open to trade and investment
2. Have the right conversation about the future of Australian industries
3. Lock in freight and supply chain improvements
4. Be smart on emergency preparedness and the strategic essentials

If we apply these lessons, there is every chance Australia’s trade and supply chains will emerge fitter and faster on the other side of COVID-19.

Don’t go changing – remain open to trade and investment

As trade tensions heat up, Australia must not retreat on its longstanding support for free trade. This means more than just standing still, whether it is continuing to support critical international institutions, negotiating new trade agreements or sending clear signals to global investors.

Australia could start with anti-dumping. As the Productivity Commission (PC) highlighted in its Trade and Assistance review released last month, Australia is one of the most prolific users of anti-dumping measures in the world. Like many other major economies, we impose these measures on a range of goods, including Chinese aluminium and steel. Such measures may be allowed under World Trade Organisation rules, but there are no economic grounds and they erode prosperity.

Parts one and two also showed that the biggest disruption to Australian trade was in services based on restrictions in people movement. It will be important that people movement is facilitated through special arrangements and ultimately restored when it is safe to do so.

The other side of the trade coin is investment. The Treasurer amended the foreign investment framework at the end of March to screen all foreign investment proposals. The practical impact is the timeframe for screening investments has blown out from 30 days to six months.

This temporary measure is designed to protect the national interest, as COVID-19 places the Australian economy and businesses under intense pressure vulnerable to takeovers. The measure was justified given the state Australia found itself in two months ago, but it is unclear that it should prevail indefinitely for the long and enduring economic crisis that is likely to follow.

The government could consider signalling that it will review the current arrangements at a future date or narrow the criteria for full screening so as not to delay routine investments or positive investments that pose a low risk to Australia’s national interest.

Have the right conversation about the future of Australian industries

A narrow conversation about what products Australia makes onshore is a dead-end, denying the tech driven reality of intense global competition.

However, Australia also cannot have a conversation that sees technology and innovation as abstract concepts that can be dialled up through a policy statement. Instead they must permeate every aspect of our economy – redefining the boundaries of traditional industry classifications and how we create value.

This does mean a serious conversation about manufacturing (the advanced kind) and the potential to add a few more strings to Australia’s economic bow. With so much value now generated outside of the production process in areas like design and after sales service, it is about more than simply what we make. It’s also about more than manufacturing – it’s clean and efficient energy, smart infrastructure, transport, construction and services.

Embedding greater knowledge and technology into Australian industry will require a major uplift in research and development, application of software and embracing new global supply chains. Government and business will both need to do a much better job leveraging their investments in technology and innovation.

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On the government side, there is a lot of fragmentation of programs and resources. A few years back the OECD recommended consolidating 150 innovation programmes, with 74 of them accounting for just two per cent of the Commonwealth Government’s $10 billion expenditure at the time.

As part of Australia’s economic recovery, it will be more important than ever that businesses invest in innovation – the large and small firms that do this outperform the rest. Work undertaken for Innovation and Science Australia by AlphaBeta found that ASX200 firms in the top quartile of intangible asset investment grew their revenue 1.3 percentage points per year faster than the average ASX200 revenue growth and were more likely to survive over a ten-year period.

Getting all this right could see more Australian firms playing in global value chains where they are currently under-represented, while giving them greater resilience through the crisis and better growth prospects on the other side.

Lock-in freight and supply chain improvements

One silver lining of recent disruptions is that it has elevated attention on supply chains at the most senior levels of companies and their boards. Almost three decades of continuous growth and strong demand for product have provided a greater incentive for just-in-time, with limited redundancy in many supply chains.

Many businesses understood and supported the intention of the recently introduced Modern Slavery Act to report on the risks of modern slavery in their supply chains but felt that understanding their supply chains in the required depth was likely to prove challenging, costly and complex. Recent disruptions may mean that the work that went into examining and reassessing supply chains to meet those requirements has also provided some commercial benefit in this crisis.  

Understanding supply chains better also requires more data, which is not easy when global trade practices so often rely on paper. Overcoming this will require greater digitisation to enable sharing of data, and applying technologies like blockchain to ensure that data sharing permissions are effectively managed to avoid inadvertent sharing of commercially sensitive data along supply chains.

Governments have also made the freight task a little easier by relaxing restrictions like heavy vehicle and delivery curfews. While these issues can sometimes prove highly contentious in local areas, they create an economic cost by putting more freight on roads during peak periods and increasing traffic congestion.

Many of these exemptions will remain in place for some time yet, providing a useful experiment to test whether they negatively affect local communities and whether curfews and other restrictions should be re-evaluated after the crisis to reduce the economic costs of congestion and make the freight task a little easier. Reassessing whether Australia has the freight balance right across road, rail, shipping and air could also unlock further efficiencies.

Be smart on emergency preparedness and the strategic essentials

Australia confronts choices about how much and what kind of insurance we want to take out as a nation to prepare for pandemics and other national emergencies.

COVID-19 has placed ventilators, hand sanitiser and personal protective equipment into the spotlight, with the rapid ramp-up of local production, sourcing from alternative supply lines overseas and drawing down on stockpiles. There is a risk of recency bias in how Australia better prepares for future national emergencies. The reality is that Australian Governments must be better prepared for a range of adverse events – evident in this past summer’s bushfire season.

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The extent to which governments procure goods and introduce policies to bolster the preparedness of Australia’s supply chains to deal with future crises should be based on science, logic and economics. That is, account of the probability of certain events; their threat to supply chains; demands on specific types of goods; what are ‘strategic’ and ‘essential’ goods for these purposes; how the goods are procured and of course the cost to the taxpayer of enhanced preparedness. Approaching the task on this basis will give Australia the best chance of managing whatever is thrown at us in the future.

Conclusion

It has quickly become an international pastime to reflect on the silver linings of COVID-19. Yet it is difficult to see the silver linings when large traded industries that employ thousands of Australians are suffering. Australia’s trade and supply chains can recover, but it will require very deliberative action in these four areas.
 

Coming back better recovery series: Trade and supply chains

CEDA is examining the implications for Australia’s security of supply for goods now and into the future and outlining how Australia should respond to emerging trends, including implications for trade and industry policy following the COVID-19 pandemic. Catch the full analysis including an information paper and podcasts here.