Shortages in essential goods: Are global value chains part of the problem or the solution?
Abstract
Supply chain disruptions did not cause the shortages of personal protective equipment (PPE) and other essential goods that the world experienced in the early months of the COVID-19 pandemic. Rather, the cause was manufacturers’ inability to step up production of PPEs to meet the demands of the crisis. The accepted wisdom that the pandemic exposed serious structural problems in international supply chains, such as an over-dependence on China, and that it would be better for countries to source supplies domestically, is inaccurate.
The companies that produced PPEs and other essential goods were experienced when it came to developing risk-management strategies. Manufacturers have understood the risks related to international supply chain shocks at least since 2008’s global recession and have long since responded by diversifying supplier bases, increasing manufacturing capacity and creating stockpiles. Many firms also relied on the China Plus One strategy as a buffer, which entailed duplicating production in China and at least one other country to protect against supply chain disruption and currency fluctuation.
Far from exposing a weakness in global value chains, the pandemic instead revealed their resilience. So well did the face-mask industry rebound from its initial shortage in fact, that industry revenues grew by 450 per cent from 2019 to 2021. Rather, the shortages arose because of limited stockpiles, governments’ lack of preparedness and constrained production, such as the difficulty in accelerating the melt-blowing process that creates the masks’ non-woven fabric. Exacerbating the situation – but only temporarily – were export bans of the type the Trump administration imposed on manufacturers, which required them to obtain federal approval before exporting PPE.
COVID-19 will not be the last pandemic the world experiences. Governments can prepare for the next one by establishing stress tests that assess a country’s ability to deal with demand spikes and other disruptions. The tests should consider the government’s level of stockpiling, the speed with which domestic and foreign production can be ramped up, the diversification of import sources and the limitations created by foreign export restrictions. If the market fails to pass these stress tests, then government must design policy tools to deal with the shortcomings the tests reveal. Limiting export restrictions to strengthen resilience, conducting joint procurement and drafting agreements to share essential goods are ways countries can work together to promote resilience.
Self-sufficiency, which looked to be the solution in the early days of pandemic shortages, only increases vulnerability to local disasters that can curtail domestic production. It also creates higher production costs and reduces the ability to ramp up production. Self-sufficiency forces countries to absorb the shocks themselves, resulting in large price swings and production changes.
It is now up to governments to learn the hard lessons that COVID-19 taught and improve preparedness for future pandemics.
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