A Productivity Commission (PC) interim report (released 26 March) has found only a small percentage of Australia’s imports are vulnerable to serious supply disruption.
The PC’s report looks at potential disruptions to the local supply chain and targeted policy responses to them.
“Modern supply chains are increasingly complex – often relying on inputs from across the globe and sometimes consisting of hundreds of firms,” Commissioner Jonathan Coppel says. “Individual firms have sophisticated and effective ways to manage the risk of disruptions, and Australia’s supply chains were generally very resilient during the COVID-19 pandemic.”
The PC identified imports used in essential industries that come largely from a single source country dominating global supply.
“Some supply chains are more vulnerable – if they rely on a single, concentrated source of supply where few alternatives exist,” Jonathan says.
Commissioner Catherine de Fontenay says that the PC’s analysis puts the percentage in this category at roughly two per cent of imports.
“This is likely to be an overestimate, given the possible availability of substitutes. Consultation with industry experts will be an important complement to the data driven approach,” Catherine says.
The report found that most risks are best managed by individual firms but that government could play a role where the whole market for an essential product is at risk. In such cases, the PC says policy responses should be tailored to the particular circumstances.
Essential products include PPE equipment, chemicals to treat drinking water, and pharmaceuticals.
The report highlights circumstances where government intervention might be necessary, but states there must be a cost-benefit analysis to ensure negative consequences of government action don’t outweigh the positives.
“Government could consider options ranging from providing information about risks that they are best informed about, to taking more direct ownership of risk management (such as maintaining government stockpiles, mandating or subsidising private stockpiles, or maintaining domestic production capacity),” the report says. “That said, government intervention may crowd out private investment in risk management, imposing higher costs on the community.”
The PC says that efforts should be focused on securing a stable regulatory environment so that firms can flexibly adapt to changing supply circumstances.
“One area where governments could focus their efforts is on ensuring firms do not face unnecessary constraints on how they plan and respond to disruptions,” the report says. “A stable and rules-based trading environment, for example, facilitates firms’ ability to diversify their suppliers in preparation for, and their ability to find alternative suppliers in response to, a supply chain disruption.”
A policy of replacing imports with domestic production is a high cost option, says Jonathan. “Subsidising domestic manufacturing could not achieve efficient scale in many of the products we are talking about. And it could crowd out actions that firms would otherwise take to manage their own risks,” he says.
The final report will add material relating to exports, including on how firms manage and respond to disruptions in export market conditions and access, and the impact disruptions can have, including in regional areas.