COVID-19 has changed many things, including our vocabularies. Few had heard of MRNA, social distancing or WFH before the pandemic, let alone zoombombing, covidiots or the rona.
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"Sovereign capability" is another expression that's become well known. Supply chain challenges in everything from timber and tissues to cars and construction have led to growing calls to make our economy less reliant on the rest of the world.
It sounds sensible. But spend more than 60 seconds thinking about how this works in practice and it quickly reveals itself to be a fantasy in most circumstances.
There are four fallacies that mislead us into thinking sovereign capability is plausible, let alone a good idea.
The first is the Made in Australia fallacy. Ask yourself this simple question: What do toilet paper, lettuce, and tissues have in common? If your answer was that they are supply chains which have struggled lately, you'd only be half right. The other thing they have in common is that they are all things we make in Australia.
The notion that our supply chain challenges are solely the result of international trade is nonsense. Plenty of the things we are struggling to buy are made right here at home. Made in Australia does not guarantee a resilient supply chain.
The second fallacy is the input fallacy, where things we think we "produce" in Australia actually include many inputs that come from overseas.
Take surgical face masks as an example. Face masks have at least four components: the medical grade fabric, the elastic, the thin metal strip that bends over your nose, and the stitching that holds it together. Having genuine sovereign capability in the production of face masks means we need to be able to produce all four of these things in Australia, and then assemble them here, too.
And that's just a simple face mask. A ventilator has more than 240 components. And don't forget that all those components have their own inputs, too. To be sovereignly capable, Australia needs to make every single one of them.
The third fallacy is the "just in case" fallacy. A favourite catch-phrase of politicians is that we need to move away from "just in time" business models towards "just in case". Requiring businesses to hold buffer stocks, they argue, is a great way to make our supply chains more resilient.
It's also a great way to make ourselves poor. Any business owner will tell you that stockpiling inventory costs a lot of money. Requiring Aussie businesses to hold buffers in case a once in a 100-year pandemic strikes would make Aussie business uncompetitive.
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The bigger question for "just in case" supply chains is: Just in case of what? If local cafes need to prepare for a once in 100-year pandemic, why not the zombie apocalypse, world war three, and world-destroying asteroids? Where do we draw the line?
The fourth fallacy is the "essential business" fallacy. The idea of having sovereign capability in producing essential goods and services assumes we know what an 'essential' good or service is. Australian governments - federal, state and territory - have had three years to agree on what constitutes an "essential business" and still don't have an answer.
What constitutes essential also depends on the crisis. Hand sanitiser is essential during a pandemic, but pretty low on the list during world war 3. And what about inputs? Many governments designated PPE as essential during COVID-19, but not the components used to make it. Governments designated ventilators as essential, but not the machines used to treat sleep apnoea, even though it's the same machine.
"Sovereign capability" is not a serious solution. But supply chain resilience is a serious problem. So, what can we do it about?
First, we need to understand when a supply chain is at risk and when it is not. It has nothing to do with international trade. Whether a supply chain is at risk depends on how many alternative suppliers are available for a particular good or service and how easily businesses in one industry can substitute over and start producing that good or service (think: sleep apnoea machines being switched to ventilators, or gin distilleries making hand sanitiser).
Second, we need to get smarter with data. Understanding all the components needed to make something - and all the components needed to make those components - is a tough job when there are millions of products that are constantly changing. Modern data sets make this easier. Bank transaction data - combined with a proper system of classifying what businesses actually produce - lets us follow the money to build a picture of Australia's production capacity. It tells us who makes what, how much they make, and how many alternative suppliers are available.
Third, we need to strengthen our connections as a country. Alternative suppliers aren't much use if our businesses aren't connected to them. It was our business community which saved us during the pandemic in being quick and nimble in sourcing alternative supplies. There's a role for government through our export and investment promotion agencies to help Australian businesses make those connections, find suppliers overseas and become more resilient in the process.
Supply chain resilience is a serious problem. It deserves serious solutions, not pandemic buzzwords like sovereign capability. We need to stop being covidiots and start being covinnovative.
- Adam Triggs is a director within Accenture Strategy, a non-resident fellow at the Brookings Institution, a visiting fellow at the Crawford School at the ANU and a fellow at the e61 Institute.
Adam Triggs
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
