With Vijay Mohan
We rarely think about supply chains – those immensely complex networks of production and logistics that structure the economy.
That has changed. Early in the COVID-19 crisis, we learned that Australia imports much of its basic medical equipment like facemasks and other protective gear. As borders were being closed importing this high-demand equipment got suddenly very hard.
Now there is an unsurprising clamour for the government to take more of an interest in how our supply chains actually work, and to use the traditional tools of protectionism to encourage domestic production of medical equipment and pharmaceuticals.
Prime Minister Scott Morrison said in April that “we need to look very carefully at our domestic economic sovereignty”.
But neo-protectionism to secure Australia’s supply chains would be a grave mistake – and it fundamentally gets the supply chain challenge wrong.
First, the obvious but necessary point. We actually had a protectionist economy for most of the twentieth century. And we didn’t build facemasks. We built cars. We built cars because cars had a certain romance in the twentieth century and Labor and the union movement wanted to lock in prestigious manufacturing jobs for their supporters.
This has always been one of the central planks of the case against protectionism. The choice of what industries to protect is not made by all-knowing and benevolent leaders, but by self-interested politicians. They get to the top of their profession not because they are skilled production managers or supply chain coordinators, but because they’re great at navigating political factions and going on television.
Of course, our national leaders will come out of this crisis more focused on the risk of future pandemics, and more motivated to prepare our economy for this now-known risk. But as they say in the military, generals too often prepare for the last war, not the next one. We don’t need an economic system that is prepared for a crisis that looks exactly like COVID-19. We need an economic system that is prepared for an unexpected crisis – which, definitionally, could be anything.
Indeed, it is the fact that the pandemic was unexpected to most in government that makes the strongest case for free trade. The crisis has caused a lot of market disruption. But global supply chains have adjusted remarkably well to new demands and routed around new constraints. For example, airlines have been doing temporary conversions of passenger planes to cargo planes – particularly important because medical equipment, which in normal times would be leisurely transported by ship, needs to get to new COVID-19 hot spots urgently.
Protectionism invariably makes the industries it protects brittle and highly politicised, not agile and adaptable to sudden economic shocks. And it is a fantasy to suggest that a small, wealthy, highly-educated nation like Australia could or should ever be self-reliant in the production of all low-value goods that might be needed in unexpected crises.
There are things the government can do to be prepared for the next crisis. Rather than making essential products, we can buy them and store them. This requires no more foresight than full-blown protectionism and is a lot cheaper. The idea of keeping extensive national stockpiles of equipment for emergencies is uncontroversial. By all accounts, the National Medical Stockpile has been an immensely valuable asset during COVID-19.
With our RMIT colleague Marta Poblet, we have been looking at the problems consumers had getting reliable information on supply chain security in the first weeks of the crisis.
Before the pandemic, Australian industry was interested in using new technologies (such as blockchain, 5G communication, and smart devices) to better combat food fraud in export markets or to how to prove to their customers that their products were organic or fair trade certified.
But the pandemic revealed a more basic problem with about supply chain information. Consumers were not worried about quality or fraud. They were worried there were not enough goods available to meet demand at all – hence the panic buying of toilet paper, hand sanitizer, and dried pasta.
This panic buying looked a lot like the sort of panic withdrawals you see in a bank run. If depositors aren’t convinced their bank is solvent, they rush to be the first to get their money out. And as we saw, Scott Morrison was no better able to convince shoppers that there were adequate domestic supplies of toilet paper in March 2020 than South Australian premier Don Dunstan was able to convince the customers of the Hindmarsh Building Society that there were adequate funds to cover deposits October 1974 — despite standing in the street outside its headquarters with a megaphone.
In moments of high-stress consumers just don’t trust the political assurances they are given. Do we really blame them?
Ultimately within a few weeks supply chains adjusted. Coles and Woolworths lifted their toilet paper sale limits.
But the toilet paper panic symbolises the choice we now face when it comes to supply chain resilience. To go protectionist would be to trust our supply chains to the same political class that we simultaneously accuse of being underprepared for COVID-19. Or we could lean into free trade and open markets. We should encourage entrepreneurs to adapt rapidly to new circumstances, to experiment with new technology, and let them figure out how to operate in a disrupted global economy.
Australia has a long history of protectionism. Let’s try to remember what we learned.