Resilience is the boardroom buzzword of the coronavirus crisis, as companies fight for survival or simply fix vulnerabilities exposed by a brutal shock to global supply chains. It has now become the motif of choice for EU policymakers as they plot their response to the slump and eye an opportunity to bring manufacturing jobs back to Europe.
Nobody can be against resilience. But beneath it lurks the menace of protectionism from which Europe still has much to lose.
Ursula von der Leyen, European Commission president, used the word four times when she unveiled plans for a €750bn recovery fund last week. EU leaders at their last summit in April said more investment in digital and green technologies “will also help make us more resilient and less dependent by diversifying our key supply chains”.
The pandemic and economic shutdowns laid bare Europe’s reliance on imports, particularly from China and most starkly in medical products. European governments have been unable to depend on their normal supplies of protective equipment, ventilators, some generic drugs and the basic ingredients that go into more sophisticated pharmaceuticals. Cue calls for the return of production to European plants.
Like their international competitors, European companies, mostly large ones, have made increasing use of global value chains, where different stages of the production process are carried out by different businesses often in different countries. Specialisation, economies of scale and tight inventory management help drive down costs. But the growth of this model means supply shocks can ripple across economies, causing far more damage than the original outage. Extended supply chains are only as strong as their weakest link.
European dependence on Chinese inputs is not huge. It ranges from about 3 per cent of gross output in Greece to 8 per cent in Hungary and the Netherlands, according to economists at France’s CREST-Ecole Polytechnique. But it has grown strongly — more than fourfold between China’s entry to the World Trade Organization in 2000 and 2014, the latest available figures. We can assume it has only accelerated since then.
The researchers modelled the impact of a 10 per cent cut in Chinese production on European economies. Their rough estimate is that it lops off on average half a percentage point of growth, quite a hit for a region with lacklustre growth prospects. Most significantly, the hit is ten times bigger than it would have been a decade ago, when China’s role in global value chains was more limited.
Companies were given a foretaste of global supply chain disruption in 2011 with the earthquake in Tohoku, Japan. It appears they did not heed the warning, notes Isabelle Méjean, professor of economics at the Ecole Polytechnique. She says there is a case for government action to nudge or force businesses to take into account the wider economic impact of their choice of suppliers.
Prof Méjean suggests a hierarchy of intervention. First, there needs to be much better information about where supply chain vulnerabilities lie since the available data is generally poor. Second, EU authorities could follow the example of bank stress tests and oblige companies to assess the impact of disruption to their main sources of supply. Third, they could devise favourable tax treatment for larger inventories, to encourage businesses to maintain a buffer. Lastly, they could subsidise or invest in new industrial capacity to ensure Europe has diversity of supply or can capture more of the value-added in production.
The commission is already acting as stockpiler of medical equipment. Its new €750bn recovery fund, if approved by member states, would include a facility for equity stakes in strategic industries to ensure diversity of supply of important components.
Even before the pandemic, the EU had embarked on a drive to develop advanced manufacturing in technologies deemed strategically important. It has approved state aid for a programme to establish an indigenous car battery manufacturing base and reduce dependency on Asian suppliers. It is doing the same for microelectronics and hydrogen technologies. With an investment fund, it can expand its ambitions. Thierry Breton, industry commissioner, said the investment fund would be the “armed wing” of the bloc’s efforts to defend its economic sovereignty.
Critics of globalisation say the outsourcing of supply chains to China has left Europe weak and vulnerable and it is time to bring production back home. Prof Méjean acknowledges the risk of drifting towards protectionism but says concentration of supply in one country or even one company is the issue, not globalisation. “Importing [medical] masks from China is not a problem. Importing all our masks from China is a problem.”
Source: Economy - ft.com
