Supply (chains) and demand
Sabine Tyldesley outlines how coronavirus has exposed vulnerabilities in UK supply chains and how the UK Government’s response could have a significant impact on its future trade relationships.
Unless you’ve been living under a rock as a consumer – although haven’t we all in a way during lockdown? – you will have become more aware of your local and perhaps international supply chains than ever before.
It started with empty toilet roll shelves in supermarkets, food deliveries to friends, loved ones and hospital staff, and you may even have noticed some of your favourite stores being unable to take online deliveries. Elsewhere sectors like health and social care , have been facing supply challenges on a massive scale.
With supply chains under severe strain, demand patterns changing and international trading partners all reacting differently to coronavirus, the Government has started changing the way it approaches international trade.
Coronavirus and the global supply chain
The emergence of Covid-19 began a global scramble for Personal Protective Equipment (PPE) and medicines, which exacerbated the effects of already-disrupted medicine supply chains worldwide. The UK’s exit from the EU had already led some businesses to change supply-routes, restructure trading partnerships or relocate manufacturing hubs.
Medical supplies are not just a prime example for supply chain complexity but also illustrate the challenge coronavirus has posed, where shortages have prompted NHS leaders to demand shortening supply chains and ensuring supply is more reliable.
As the crisis went on, several of the UK’s international trading partners, including within the EU’s Single Market, introduced export bans on certain goods deemed to be essential to their domestic response to the pandemic, including medical supplies.
It’s been reported that “89 governments imposed 154 restrictions on exports and 104 governments introduced 154 reforms easing imports”.
This trend of protectionist policies such as hoarding behaviour was also observed in the food sector: Kazakhstan has banned exports of wheat flour, Thailand has stopped exporting eggs, Vietnam has suspended rice exports and Russia is talking about limiting grain exports to protect supplies. This limits supply of those products to global buyers, including the UK which can cause the empty shelves we have seen.
Supplies and China
The UK is strategically dependent on China for 50 per cent of key medical supplies, including ingredients to make vital drugs and PPE.
In March, as the crisis in the UK moved into its peak, China imposed a ban on exports of PPE and medicines which caused constraints on securing UK supplies.
These import challenges prompted the UK Government to publish a PPE plan two weeks later outlining alternative measures to continue supply of PPE by mobilising a National Supply Disruption Response (NSDR) system to respond to emergency PPE requests.
Moreover, the Government increased domestic production and supported UK businesses to step up and fill the gap during the crisis.
Going further, the Prime Minister launched a working group to end UK's reliance on China in light of the coronavirus outbreak; a clear shift considering China was touted as a possible close trading ally just a few months prior, when Chinese President Xi Jinping said China was “open” to a trade deal with the UK and is “ready to work with Britain at any time”.
The desire for the UK to “wean itself off” imports from China is part of a piece of work code-named “Project Defend” to look into Britain's main economic vulnerabilities and possibly “repatriate” key manufacturing capabilities such as pharmaceuticals, which would become part of a new national resilience framework– a step welcomed by some.
Others however have observed that this “reshoring production or moving it closer to home”, taken together with international examples of protectionist policies particularly by the USA, do not necessarily create resilience and indeed can have damaging side effects, such as deteriorating diplomatic relationships originally forged via trade.
Impact on trading relationships
The Government’s goal is therefore to diversify supply lines so that in the future the UK will not be dependent on individual countries on the import side. Put simply, this means making sure key items imported should not come from the same geographical area, in case they run into problems.
Announcing the new UK-Australia FTA negotiations as well as outlining the merits of joining the Progressive Agreement for Trans-Pacific Partnership (CPTPP – which includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), Trade Secretary Liz Truss said last week: “pivoting toward the Asia-Pacific will diversify our trade, increase the resilience of our supply chains and ensure the UK is less vulnerable to political and economic shocks in certain parts of the world.”
A 20% dip in trade volumes is forecast this year, worse than the 2009 recession when volumes fell by 13%. Week-on-week trade in China, the US, and Europe has halved because of the coronavirus crisis.
As the vulnerabilities in our supply chains have been exposed, business has set policy-makers the challenge to both encourage more domestic production and support UK businesses, while simultaneously ensuring the UK’s competitiveness by opening up new markets through FTAs.
With supply chains disrupted by the pandemic, trading relationships with China and others may have deteriorated, but so far this does not look to have hindered the Government from pursuing negotiations on trade with other strategic partners. We shall see if they succeed, but the clock is certainly ticking, not just as we move out of this pandemic but also as the deadline to secure a deal with our closest neighbours draws nearer.