Vulnerable Supply Chains Study Report

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Vulnerable Supply Chains Study Report Productivity Commission Vulnerable Supply Chains Study Report July 2021 © Commonwealth of Australia 2021 ISBN 978-1-74037-727-0 (online) ISBN 978-1-74037-726-3 (print) Except for the Commonwealth Coat of Arms and content supplied by third parties, this copyright work is licensed under a Creative Commons Attribution 3.0 Australia licence. To view a copy of this licence, visit http://creativecommons.org/licenses/by/3.0/au. In essence, you are free to copy, communicate and adapt the work, as long as you attribute the work to the Productivity Commission (but not in any way that suggests the Commission endorses you or your use) and abide by the other licence terms. Use of the Commonwealth Coat of Arms Terms of use for the Coat of Arms are available from the Department of the Prime Minister and Cabinet’s website: https://www.pmc.gov.au/government/commonwealth-coat-arms Third party copyright Wherever a third party holds copyright in this material, the copyright remains with that party. Their permission may be required to use the material, please contact them directly. Attribution This work should be attributed as follows, Source: Productivity Commission, Vulnerable Supply Chains, Study Report. If you have adapted, modified or transformed this work in anyway, please use the following, Source: based on Productivity Commission data, Vulnerable Supply Chains, Study Report. An appropriate reference for this publication is: Productivity Commission 2021, Vulnerable Supply Chains, Study Report, July. Publications enquiries Media, Publications and Web, phone: (03) 9653 2244 or email: [email protected] The Productivity Commission The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed most simply, is to help governments make better policies, in the long term interest of the Australian community. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Further information on the Productivity Commission can be obtained from the Commission’s website (www.pc.gov.au). Foreword Resilient supply chains are a vital part of a well-functioning economy. They support the efficient production, and distribution of goods and services that are the basis for Australians’ wellbeing. Typically, they are taken for granted, but the onset of COVID-19 brought into the spotlight the workings of supply chains. There were immediate impacts on logistics and transport, as well as panic buying and a few economies placing export restrictions on some essential goods. While our supply chains proved generally resilient, these experiences highlighted concerns about our ability to supply Australia’s basic needs and about our preparedness as a nation to respond and recover from major disruptions to supply chains. Against this background, the Commission was asked to examine the nature and source of risks to the effective functioning of the Australian economy and Australian’s wellbeing associated with disruptions to global supply chains. The report considers the factors that make supply chains vulnerable, with a focus on the international linkages and dependencies from trade. Significantly, we have developed and piloted a ‘data-with-experts’ approach for identifying those supply chains and products that are vulnerable to disruptions and whose absence would jeopardise our economy and wellbeing. We have found that few imports — one in twenty — are vulnerable to concentrated sources of supply. And many of these products are clearly not essential or critical to the wellbeing of Australians — for example, festive decorations, toys or swimwear. Other vulnerable imports require further investigation to assess whether they are essential or critical. A qualitatively similar picture holds for exports. Our consultations with stakeholders through roundtables, bilateral meetings and written submissions put forward sometimes differing views or emphasis on where supply chain vulnerabilities lie and their significance. This is why specialised expertise is vital in stress testing the data-led approach. Expert knowledge is also required to identify whether an import is technically critical in the sense that its absence would interrupt the supply of an essential good or service. The Commission’s method for assessing supply chain risks is best seen as a tool that complements an approach that relies on expert consultation. Jonathan Coppel Dr Catherine de Fontenay Commissioner Commissioner July 2021 FOREWORD iii Terms of reference I, the Hon Josh Frydenberg MP, pursuant to Parts 2 and 4 of the Productivity Commission Act 1998, hereby request that the Productivity Commission undertake a study into Australia’s resilience to global supply chain disruptions. Background Australia’s experience with the COVID-19 pandemic has highlighted Australia’s potential vulnerability to global supply chain disruptions. While Australia’s supply chains have held up relatively well during the COVID-19 pandemic, future shocks to supply chains will likely be different in nature. Scope The purpose of the study is to examine the nature and source of risks to the effective functioning of the Australian economy and Australians’ wellbeing associated with disruptions to global supply chains, identifying any significant vulnerabilities and possible approaches to managing them. In undertaking the study, the Commission should consider Australia’s part in global supply chains as an importer and exporter, and: • consider the factors that make supply chains vulnerable • develop a framework for identifying supply chains that are vulnerable to the risk of disruption and also critical to the effective functioning of the economy, national security and Australians’ wellbeing • use trade and other relevant data to identify supply chain vulnerabilities • explore risk management strategies, including the roles of, and options for, government and businesses to manage supply chain risks. Process The Productivity Commission should undertake appropriate consultation, and provide an interim report focusing on Australia’s role as an importer in March 2021; and a final report including Australia’s role as an exporter in late May 2021. The Hon Josh Frydenberg MP Treasurer [Received 19 February 2021] iv VULNERABLE SUPPLY CHAINS Contents Foreword iii Terms of reference iv Acknowledgments vii Abbreviations viii Executive summary 1 Findings 11 1 About this study 17 1.1 Background to the study 17 1.2 What was the Commission asked to do? 20 1.3 How this study relates to other reviews and government initiatives 22 2 Supply chains and risks 23 2.1 Supply chains are complex, and becoming more so 24 2.2 Firm-level supply chain risks and vulnerabilities 30 2.3 From firm-level risk to market-level risk 35 3 A framework to identify vulnerable supply chains 41 3.1 The links between wellbeing and supply chains 42 3.2 The approach to identifying goods and services that are vulnerable, essential and critical 44 4 Applying the framework to Australian imports 53 4.1 How important are imports to economic activity? 55 4.2 How vulnerable are Australian imports to disruption? 56 4.3 How reliant is the production of essential goods and services on vulnerable imports? 68 4.4 Direct and indirect contribution of vulnerable imports to the consumption of essential goods and services 81 CONTENTS v 4.5 Possible extensions to this work 86 5 Applying the framework to Australian exports 89 5.1 Australia’s exports — where and what 90 5.2 Demand-side vulnerability 92 5.3 Vulnerable imports used to produce exports 103 6 Supply chain risk management 109 6.1 A framework for managing risks 110 6.2 Understanding risk 114 6.3 Risk management strategies 119 7 The role of government in risk management 131 7.1 Responsibility for managing supply chain risks 132 7.2 Role of government in managing supply chain risks 134 7.3 A framework for determining whether government intervention is justified 149 A Consultation 153 B Case studies in vulnerability 157 C Technical application of the analytical framework to imports 167 D Price elasticities of demand for imports 189 E Downstream vulnerability of exports 201 F Maritime shipping and ports capacity 205 References 211 vi VULNERABLE SUPPLY CHAINS Acknowledgments We are very grateful to all those who have given their time and shared their experiences and expertise with the Commission. We also thank the team, Marcelo Muñoz, Jess Nugent, Max Oss-Emer, Tyler Reysenbach, Melisa Bubonya, Phil Smith, Owen Gabbitas and Patrick Jomini, who provided us with expert support, many valuable insights and the drafting of the report. ACKNOWLEDGMENTS vii Abbreviations ABS Australian Bureau of Statistics ABF Australian Border Force ACCC Australian Competition and Consumer Commission ANAO Australian National Audit Office ANZSIC Australian and New Zealand Standard Industrial Classification BEC Broad Economic Classification BLADE Business Longitudinal Analysis Data Environment CHAPS Clearing House Automated Payment System CIF cost, insurance, and freight CSIRO Commonwealth Scientific and Industrial Research Organisation DISER Department of Industry, Science, Energy and Resources EU European Union FOB free on board HHI Herfindahl Hirschman Index HS Harmonized System HTISC Harmonized Tariff Item Statistical Code I–O Input-Output IOIG Input-Output Industry Groups IOPC Input-Output Product
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