The COVID-19 pandemic highlighted a range of challenges for the management of Australia’s international relationships and revealed weaknesses in the country’s health system and vulnerability in supply chains.
This chapter will provide an outline of:
challenges in the management of Australia’s international relationships;
the effects of the pandemic on Australia's health system;
the effects on the Australian economy;
scenarios under which future crises might occur;
vulnerability revealed by the pandemic, particularly Australia’s supply chains; and
initiatives taken by Australian industries in response the pandemic.
Challenges in international relationships
The Committee was given evidence about recent developments in international politics which have given rise to new challenges for Australian policy-makers.
Although the pandemic did not cause the rifts between the US and China outlined in Chapter Two, it has exacerbated tensions between the world’s two leading powers. Such developments have created challenges for Australia’s management of these two critical relationships.
Since the US and China are two of the most important economic and security relationships for Australia, the oft-cited pressure on Australia to make choices between the two partners has become even more acute in a post-pandemic world. This view was put by Ben Scott of the Lowy Institute:
Canberra faces a particularly daunting challenge. It is deeply enmeshed with the United States — its longstanding security ally —but has China as its dominant trading partner. The continuing US–China escalation could, as well as weakening international cooperation against COVID-19 and its economic impact, see China further restricting Australian access to its markets. And, though US– China military conflict is still unlikely, the risks are growing.
Professor Michael Heazle from Griffith University argued that since relations between the US and China were most likely to worsen as a result of the pandemic, Australia’s freedom of manoeuvre was being constrained:
For Australia—and other status quo states that prioritise maintaining the existing US led, liberal order—the choice of making no clear choice between its relationships with China and the US will soon disappear altogether. Therefore, the task for Australian policy makers now is to develop a way of effectively opposing China’s ongoing attempts to overturn the region’s liberal order, in cooperation with the US and its allies (in particular Japan), while limiting the economic damage as much as possible.
The Institute for International Trade (IIER) at Adelaide University also highlighted the growing difficulty of managing the China relationship during the pandemic with:
…trade disputes over barley and beef linked to [Australia’s] call for a COVID-19 Inquiry through the World Health Organization, as well as Chinese government advice, absent any supporting evidence, that students should reconsider studying in Australian on safety grounds, political risk is a factor that must be integrated into the thinking around supply chain risk management in the context of the Australia-China trade relationship.
Natasha Kassam, Richard McGregor and Roland Rajah of the Lowy Institute contended that ‘Australia’s relationship with China is entering a new, more difficult phase, for which there are no easy answers’. But they argued ‘the narrative of [Australia’s] dependence’ on China that had grown up was ‘unhelpful’ because the relationship was ‘mostly one of interdependence’ from which both partners stood to gain. They pointed out that:
The past two years have seen Australia placed in China’s so-called ‘diplomatic freezer’. Yet, the total value of Australia’s merchandise exports rose by 30 per cent during that time. Merchandise exports to China rose by 50 per cent.
The Department of Foreign Affairs and Trade (DFAT) concluded that China and Australia can maintain a constructive relationship:
Even as we recognise some clear differences between us, Australia remains committed to a constructive relationship with China that is not defined by those differences, and works in the interests of both countries. Our relations have never been more consequential, nor more complex, as we seek to navigate the bilateral and international impacts of COVID-19. We have already shown how we can work together in addressing challenges in the initial stages of the outbreak. It is in both countries’ interests that our Comprehensive Strategic Partnership, including our important and mutually beneficial trade relationship, remain robust and effective throughout the critical economic recovery phase.
Impact on Australia’s health systems
The first case of COVID-19 in Australia appeared in January 2020. By November 2020 the country had recorded around 28,000 cases, with over 900 deaths. Initially, the majority of infections had occurred overseas, but due to local transmissions the number of cases acquired in Australia had reached 80 per cent of total cases by November 2020. The greatest impact was felt in Victoria, where a second wave of infections from July to October 2020 brought the state’s total to more than 20,000, with over 800 lives lost. The greatest loss of life was amongst people over the age of 70, with around 840 deaths Australia-wide occurring in that age group.
Health authorities also mentioned that the imposition of lockdowns and other restrictions were also having a range of other health effects, especially on mental health. The Australian Government’s Deputy Chief Medical Officer for Mental Health noted that ‘while physical distancing is helping to prevent people from contracting the coronavirus, it has also created other problems, including isolation, loneliness and anxiety’.
While the health effects of COVID-19 in Australia have been less severe than in other comparable countries, the pandemic has drawn attention to weaknesses in the country’s health system.
These weaknesses were highlighted by Mr Terry Slevin, CEO of the Public Health Association of Australia, who told the Committee about:
…the cracks in the public health infrastructure that this pandemic has created. Obviously, this has tested our system, more so than ever before … If one conceptualises this as a war, then the resources we’ve brought to this fight are stretched to the absolute limit and we’re showing our weaknesses. One of the ways that has manifested itself is that various other ongoing public health work that’s necessary for the health and wellbeing of Australians has also been compromised. Our programs in immunisation, cancer screening, areas of nutrition and many, many other areas have been compromised because all hands have gone to the COVID pump.
The pandemic created particular strains on the aged care system. Despite their tiny proportion of the wider Australian population, residents of aged care facilities made up over seven per cent of the total COVID-19 cases in the country. By November 2020, nearly one third of all deaths due to COVID-19 occurred amongst aged care residents.
The great bulk of the evidence presented to the Committee about challenges to the health system was related to the level of dependence on imported medical inputs and consequent disruptions to supply.
In their submission, Dr Andrew Dowse and Dr Sascha Dov Bachmann pointed out that the pandemic has exposed vulnerability in medical and pharmaceutical supply chains:
[The pandemic has] …highlighted vulnerabilities in our imports – that is, the critical dependencies of our supply chains on foreign sourced materials. The most obvious and direct example of this has been in medicines and medical equipment. If the pandemic had resulted in extended loss of supplies through interruption of sea and air lines of communication, through closure of production in foreign nations or through trade-impacting tensions, the impact on our economy and society could be significant.
Ms Angela Bell from Ethical Clothing Australia made the point that:
Had the production of these items already been procured onshore by our government, the crisis and concern about the supply of PPE [personal protective equipment] would have been a relative non-issue, as local manufacturers can respond easily to increases in demand and/or changes in requirements.
When supplies from China and India were disrupted, Australia’s ability to secure vital supplies became problematic. Australian-owned pharmaceutical company Arrotex said that factory closures, border restrictions and export bans in the early stages of the pandemic highlighted Australia’s dependence on other countries for its pharmaceuticals:
The Indian government moved in February to selectively restrict API exports and then followed with some hard closures of its internal borders. While China’s factories are now re-opening, there still remains [sic] extraordinary challenges to get much needed medicines into Australia and into the hands of our hospitals, prescribers, pharmacists and their patients. With the pandemic starting in China and hitting countries across the globe, and the resultant fallout and shortages, the need for mitigating risk has become more evident than ever.
Arrotex noted that such measures resulted in shortages of common medicines in Australia:
A cursory glance at the Therapeutic Goods Administration (TGA) critical medicine shortages list in April showed that due to the global surge in demand, there loomed alarming shortages of vital medicines in Australia. The medicines at risk were intended to help Australians with diabetes and high blood pressure, patients with Lupus and other serious auto-immune diseases, those at risk of a potential heart attack and Australians with severe mental illness. All of these key medicines are currently fully imported from off-shore manufacturers.
Dr David Sparling from the Institute for Drug Technology Australia Limited (IDT) Australia described the difficulties of trying to secure supplies of drugs and precursor chemicals in the early stages of the pandemic, when China went into lockdown and India implemented export restrictions:
We were looking for any supplies of the active pharmaceutical ingredients and/or the finished dose form. We were making calls to Europe late at night, making calls to our American colleagues in the morning and dealing with the subcontinent and China in the middle of the day—pretty much working around the clock. After a week of effort we still hadn’t secured any of that material and the COVID-19 numbers in Australia had tripled in that particular week. That’s what still resonates with us here about having some robustness in those supply chains so that we can potentially avoid those situations happening again.
The IDT Australia submission described how the company has observed over many years the concentration of global suppliers of active pharmaceutical ingredients (APIs) and medicines in India and China. IDT said that:
In the U.S. over 90% of its medicines are generic products which are now imported from India and China, with India importing in excess of 80% of its APIs (to be manufactured into those generic drug products) from China. Australia also sits at the end of a very long and often opaque supply chain, importing over 90% of its medicines.
While sources of imported supplies can generally be identified, the Australian and New Zealand College of Anaesthetists said in its submission that drug supply processes can be opaque. The College noted that a particular drug’s country of origin may not be readily apparent, sometimes worsening supply chain disruptions:
The usual process is for an overseas supplier or manufacturer to be sponsored by a private company which has established operations in Australia in order to have a product that is manufactured overseas approved for use. Although details regarding the sponsoring company and supplying company are readily available, often the country of manufacture is not explicitly stated. This can create uncertainty and acts to constrain the ability of industry to effectively engage with government agencies and suppliers to address supply chain disruptions. This issue is further compounded at times such as COVID-19 where a manufacturer may make decisions and/or renege on orders of products to redirect to other countries. It creates an opaque policy setting that limits supply modelling and ultimately affects the provision of anaesthetic services.
Evidence to the Committee showed that the greatest supply problems occurred at the start of the pandemic and were mostly dealt with over subsequent months. Carolyn Edwards, Deputy Secretary of the Department of Health, told the Committee that:
To date, the supply chain has been reasonably robust. It’s something where we use both people in posts and other departments to keep a very close eye on, including in Austrade. But, at the moment, because our modelling is so conservative, we don’t see any imminent major risk to the supply chain, although obviously that’s an issue. In fact, a lot of supply chains which were very limited early on have now freed up, so we’re seeing a greater flow of product into the country.
However, Sanofi said that in spite of the problems it faced, it has managed to maintain continuity of supply into Australia:
Despite the rapid decline in cargo capacity (both sea and air) and global logistics slowdown due to reduced accessibility to ports, shipping containers, and labour forces resulting from COVID-19, Sanofi Australia has largely been able to overcome these challenges by working across our global industrial network to ensure continuity of supply of our medicines and vaccines to Australian patients.
Medicines Australia, which represents many multinational drug companies, argued that global supplies of pharmaceuticals ‘stood up very well’ during the pandemic, partly as a result of diversification:
Any concerns about disruptions (strategic or otherwise) to the production of active pharmaceutical ingredients and subsequent medicines in China and India were largely unfounded. China’s production volumes returned as soon as they were able, while India’s restrictions on exports of certain medicines were short-lived and diplomatic efforts proved valuable to mitigate specific issues as they arose, such as country bans on exports of certain products. That said, the global diversification of these sorts of production lines also assisted to mitigate major supply disruptions.
To dismiss concerns about supply chain resilience based on the observation that ‘China’s production volumes returned as soon as they were able’ ignores the structural vulnerabilities exposed by COVID. If the next disruption is due to coercion or conflict rather than pandemic, the effect will be sustained. Although the initial shortages were managed, the Public Health Association expressed its concerns that the ‘long-term impact of that we still don’t know’.
The Royal Australasian College of Surgeons (RACS) submission argued that COVID-19 revealed that overseas suppliers cannot be relied on, and that Australia must begin planning for the next crisis:
A worsening global pandemic may place great pressure upon ‘in demand’ PPE manufacturing countries like China and India and their status as sustainable and reliable suppliers for the rest of the world … Problems associated with international PPE and ventilator supply chains have shown high producing countries like China cannot be relied upon due to the pandemic, the consequences of social isolation, and the shutdown of medical specific manufacturing industries overseas. Contingency plans in Australia need to be realised.
Impact on the economy
Describing the economic impact of the pandemic, the Institute for International Trade (IIT) at Adelaide University said measures taken by federal and state governments to restrict the flow of people and goods to control the virus produced ‘four separate but related economic shocks’:
The supply shock as factories in affected countries have been forced to close, together with most forms of international transportation being heavily reduced
The demand shock as social distancing and other measures imposed by governments caused an unprecedented drop in business activities in sectors such as hospitality, tourism, elective medicine, personal care services, and public entertainment
The financial shock as cash flows of many businesses became severely constrained and the high degree of uncertainty caused financial markets to become increasingly volatile and the share prices of those companies most exposed to the above two shocks experienced precipitous drops
The employment shock as hundreds of thousands of workers were laid off and were unable to find alternative employment given the profound and pervasive nature of the economic downturn. The Government’s ‘job keeper’ response has provided temporary relief for many of these laid-off workers, but this has required an unprecedented dramatic increase in the national debt.
The Lowy Institute submission noted that the impacts of the pandemic on the Australian economy have been less severe than initially feared. Nevertheless, it said:
…the damage is substantial, and will have lingering effect. The output loss compared to pre-COVID forecasts may well top 6 per cent of GDP. The number of unemployed will increase to over a million. With big spending programs to support employment and incomes, and government revenues falling, the record high 2019/20 budget deficit will be more than doubled for the current financial year. Business and household debt have also increased.
Restrictions on the movement of people
As the pandemic spread, nearly every country in the world imposed restrictions on the movement of people, limiting the number of entrants to a country, as well as implementing ‘lockdowns’ which restricted domestic movements.
Australia’s travel restrictions and border closures were implemented in March and April 2020, and were critical to the country’s comparatively successful pandemic response. Mr Terry Slevin of the Public Health Association of Australia (PHAA) said that ‘Australians should be proud of the response we have made to this pandemic’:
I think any objective analysis of the evidence suggests that, so far, at least, our capacity to close our borders to do the necessary public health actions—contact tracing, identifying cases, and the kinds of isolations, lockdowns and quarantining that have been practised—has been, for the large part, very successful.
The imposition of restrictions nevertheless had serious economic and human impacts.
The Australian Manufacturing Growth Centre submission said that many manufacturing businesses experienced substantial logistical challenges as a result of restrictions on the movement of people:
Domestic and international lockdowns have made it impossible for nearly half of the manufacturers that spoke to AMGC to access the staff, sites and equipment necessary for maintaining operations and filling orders.
In addition to the closure of international borders, states and territories also implemented border closures. Some submitters drew the Committee’s attention to the problems caused by restrictions on interstate travel.
The Grain Growers submission said that the uncertainty created by the pandemic was worsened by inconsistent rules surrounding movement of people and goods adopted by different states and territories:
Uncertainty was further compounded by the different approaches and rules of Australia’s states and territories. For grain farmers and exporters that regularly cross borders, these differences were particularly challenging.
Shipping Australia said that border closures between states and territories disrupted movement of specialist staff to their work:
Hard borders between states / territories are preventing specialists, e.g. specialist helicopter engineers, and some maritime workers from travelling around Australia or imposing 14-day quarantine requirements on them (sometimes consecutively in different states).
Of particular concern was evidence of the unfortunate fate of many seafarers during the pandemic. A number of submissions, including from Shipping Australia, the Maritime Union of Australia (MUA) and the International Transport Workers’ Federation (ITF), said there was a ‘crew change crisis’ where ship crews have been unable to undertake their usual changes of shifts because of restrictions on the movement of people imposed to combat COVID-19.
According to Shipping Australia, ‘seafarers normally work 11-month-long shifts at sea’, but because ‘Australian and international governments have closed borders’ there are around 300,000 seafarers in the world who have been unable to disembark and have been aboard ships for up to 17 months or more’.
Maritime Industry Australia Limited (MIAL) pointed out that while seafarers would normally expect some shore leave while a vessel was in port during their shifts, current restrictions have prevented even this respite from time on board. Moreover, the inability of such a large number of crews to disembark after many additional months on board has meant that other seafarers have been unable to replace them, with the result that there are ‘250,000 awaiting their opportunity to work and earn a living to support their family’. This was also mentioned by the MUA, who referred to the thousands of ‘unemployed seafarers … desperate to relieve these seafarers and start earning wages again’.
The MUA also drew the Committee’s attention to the reality that:
…the stranding of seafarers aboard is putting tremendous strain on seafarers’ mental and physical health. Fatigue, isolation, anxiety and depression is affecting a large number of these seafarers. The MUA and the ITF are concerned about seafarer wellbeing, and we suspect there has been a rise in suicides, with a number of prominent cases in recent months related to the growing desperation of crew.
On the same matter, Ports Australia gave evidence to a Committee hearing that:
…deaths on board vessels coming to and from Australia have increased 100 per cent in recent times. Sadly, as we speak this afternoon, the body of yet another unfortunate soul is being taken off a ship in Newcastle after he appears to have taken his own life.
Impact on exports
DFAT informed the Committee that Australian merchandise exports have, overall, remained steady in spite of the disruption to overseas markets:
In broad terms, Australia’s exports have held up despite the COVID-19 crisis, although some sectors were more adversely affected. The total value of Australia’s goods exports hit a record high in March 2020 of $35.3 billion. While goods export values then dropped back 11.3 per cent to $31.4 billion in April, these levels are still relatively high by historical standards and only one per cent down on a year earlier ($31.8 billion in April 2019), indicating a resilient overall performance. Some of this resilience was due to strong iron ore exports, while the lower Australian dollar helped offset price weaknesses for other exports such as LNG and coal.
But while Australia’s exports of goods have fared relatively well, the export of services which depend on the movement of people have been severely affected. Evidence to the Committee showed that this was especially the case in the tourism and education sectors.
The consequences for tourism and international education were explained by Dr Dowse and Dr Bachmann:
An obvious implication of a pandemic is the resultant impact on the movement of people. Whereas other economic activity may resume after a period of disruption, the threat of pandemics may have longer term influences on activities that rely on travel. The biggest impacts to Australian trade of a pandemic therefore are associated with education and tourism/travel, representing the nation’s third and fifth biggest exports respectively. While increased tension with other nations (such as we have seen as part of China’s retaliation) may impact these aspects of the Australian economy, the much greater potential is the prospect of travel constraints due to border closures.
The DFAT submission also noted the impact of travel restrictions on the tourism and education sectors:
COVID-19 restrictions on people movements have had a profound effect on our international education and tourism sectors. Travel services have made up almost two-thirds of Australia’s services exports in recent years. Our international education sector is worth over $40 billion per annum to the economy and supports 250,000 Australian jobs. The tourism industry alone has seen business closures, job losses and estimated revenue losses of $10 billion per month.
The Perth USAsia Centre described the situation in stark terms:
The international tourism sector has been effectively shut-down by the closure of international borders to non-residents. International tourism contributed $38 billion to the national economy in 2018-19, accounting for 26 per cent of the tourism sector by dollar value. The tourism industry is important as a key employer, particularly in regional areas, and pre-COVID-19 employed 5.2 per cent of the Australian labour force.
The international education sector is similarly affected by international border closures. While international students already in Australia have been able to continue studies, tertiary institutions have been unable to enrol new onshore international students. In 2018-19, international education generated $38 billion in services exports, of which $25 billion was in the university sector.
The Australian Capital Territory (ACT) Government submission noted that international border closures have caused significant problems for education, one of the Territory’s largest industries:
Restrictions as a result of COVID-19 have had a significant impact on the ACT’s tertiary education sector. Universities closed campuses and many international students were either unable to arrive in Australia, or returned to their home countries for family, health, financial or other reasons.
The tertiary education, training and research sector overall accounts for around 8 per cent of the ACT economy, or $3.3 billion in value add, and supports 20,000 jobs.
The Northrop Grumman submission also noted the pandemic’s impact on the education sector, and argued that it may have negative long-term consequences:
Australia’s tertiary education sector has been deeply affected by the COVID-19 pandemic, with the ban on international travel impacting the revenue provided by foreign students. This has forced most organisations to cut back on staff and research budgets. This has the potential to undermine Australia’s ability to retain the skills it needs to help develop critical technologies that will assist in countering external threats, be they physical or virtual.
Impact on imports
Apart from problems with medical supplies in the early months of the pandemic, Australia has not suffered from shortages of imported goods for consumption. Container shipping has continued, warehouses have been supplied, and stores and supermarket shelves remain stocked with imported wares.
Australia is in a good position regarding food security. As the Department of Agriculture, Water and Environment (DAWE) said in its submission:
Australia has the 12th best food security rating in the world due to being a significant net exporter of food and only imports around 11 per cent of food based on taste and variety. According to ABARES (Australian Bureau of Agricultural and Resource Economics and Sciences], in 2018–19 Australia’s food exports exceeded $42 billion, more than double the value of our food imports of just under $20 billion. Consequently, any potential disruptions to imports would be unlikely to have any impact on food security as a whole, although higher prices or limited availability of specific products may disappoint or inconvenience some consumers.
Scenarios for future crises
The cascading effects of restrictions on the domestic and international movement of people and disruptions to the supply of critical supplies drew attention to problems in Australia that were dormant and largely unnoticed. The initial disruptions to health services were overcome and Australian authorities’ handling of the crisis has generally been effective by world standards. But the pandemic has raised questions about the resilience of the Australian economy and its capacity to deal with future emergencies of similar or greater magnitude given the country’s dependence on imported inputs.
Possible future crises for which Australia should be prepared include:
Security threats and military conflict
Ms Alison Verhoeven, Chief Executive of the Australian Healthcare and Hospitals Association (AHHA), argued that:
Infectious diseases have been identified … as one of the greatest risks to public health that we will face internationally over the next 10 years. This has been fuelled by globalisation, urbanisation and climate change, and we are likely to see increased incidents of pandemics like COVID-19. Therefore, we believe that it’s absolutely essential that governments seek to prepare and implement strategies that ensure that systems are appropriately resourced and prepared for such events.
International health specialists had been warning about an ‘ever-increasing risk of pandemics’ for some time. A specialist on epidemic diseases in Southeast Asia, Professor Sara Davies from Griffith University, affirmed that after the SARS outbreak there was ‘growing consensus that an outbreak of novel infectious disease was inevitable’ and indeed that ‘it is likely that the 21st century will see a continued rise’ in diseases emerging from zoonotic (non-human animal source) pathogens’.
The Australian Council for International Agricultural Research (ACIAR) observed that ‘emerging zoonotic diseases, such as Coronavirus, are an inevitable, systemic consequence of the growing intersection between animal, human and environmental health in a highly interconnected world’. In such circumstances, ACIAR concluded ‘we must stop reacting to zoonotic pandemics as though they are a shock, unpredictable and random event’.
Security threats and potential military conflict
Concerns about scenarios for future conflict were outlined by DFAT, which told the Committee of its emerging priorities for responding to existing and emerging threats to regional and international security:
Combatting people smuggling and human trafficking.
Countering terrorism and violent extremism.
Countering proliferation of weapons of mass destruction.
The 2020 Defence Strategic Update highlighted emerging trends in Australia’s security environment:
Military modernisation in the Indo-Pacific has accelerated faster than envisaged ... [and] challenge[s] Australia’s military capability edge. Expanding cyber capabilities – and the willingness of some countries and non-state actors to use them – are further complicating Australia’s strategic environment.
Confidence in the rules-based global order is being undermined by disruptions from a widening range of sources. Major power competition has intensified and the prospect of high-intensity conflict in the Indo-Pacific, while still unlikely, is less remote than in the past.
The conduct of ‘grey-zone’ activities has also expanded in the Indo-Pacific.
Given the combination of such developments with the onset of the COVID-19 pandemic, the Strategic Update concluded that:
This security environment is markedly different from the relatively more benign one of even four years ago, with greater potential for military miscalculation. This could conceivably include state-on-state conflict…
Although the long-term impacts of the coronavirus (COVID-19) pandemic are not yet clear, it has altered the economic trajectory of the region and the world with implications for Australia’s prosperity and security. … Some countries are using the situation to seek greater influence, while countries that were expected to become more prosperous and stable may experience economic hardship and instability.
The scenarios under which Australia could experience natural disasters appear to be growing. As the report of the National Resilience Taskforce, Profiling Australia’s Vulnerability, concluded:
There is national and international recognition that the dynamics, frequency and extremes of many natural hazards, and the resulting emergency events, are intensifying. Globally we are experiencing the confluence of trends and extremes not previously recorded, leading to events that are triggering disastrous consequences for individuals, communities, regions and nation states. …
The cost of disasters to society and the economy are growing and it is becoming increasingly apparent we need to urgently do more than change at the margins – reducing disaster risk is critical to improving resilience.
In similar terms, the National Disaster Risk Reduction Framework argued that:
Many natural hazards are becoming more frequent and intense. More people and assets are exposed and vulnerable to these hazards. The essential services we rely on – power, water, telecommunications, the internet and finance – are also exposed to these impacts. As a result, the cost of disasters is increasing for all sectors of society – governments, industry, business, not-for-profits, communities and individuals. These costs include not only direct costs but the indirect ones, including costs from all the flow-on effects that disasters have.
Vulnerability of supply chains
In the context of evidence about the pandemic’s damage to Australia’s health system and economy, and the possibility of future crises, a range of submitters told the Committee about the vulnerability of Australia’s supply chains during emergencies. This included export industries’ dependence on imported inputs, lack of diversity in suppliers, vulnerability to protectionism and coercive trade measures, as well as problems created by Australia’s geographic position.
In its submission to the inquiry, the Shoal Group – a consultancy specialising in systems thinking – argued that the COVID-19 pandemic revealed weaknesses in Australia’s ability to survive large disruptive events:
The current COVID-19 pandemic has exposed elements of Australian society with respect to our ability to operate, indeed survive, through a concentrated period of national disruption. Whilst the current situation originated as a health crisis, it rapidly developed into an economic crisis and highlighted the importance of understanding the nature of the relationships between elements of the Australian society and the associated vulnerabilities. In that sense it has also become a social crisis.
In many submitters’ eyes, the pandemic brought into sharp focus the fragility of the international supply chains on which Australia’s market economy relies. The IIER, for example, said:
The early days of the pandemic provided a graphic example of just how quickly societal cohesion can fracture when supply chains were compromised, or simply perceived to be compromised. During March 2020 Australia witnessed panic buying in the supermarkets, health professionals around the country were confronted with the reality of shortages of vital personal protective equipment (PPE) and pharmacists were struggling to fulfil prescriptions for medicines as people started stockpiling. The extensive global outsourcing of the production of pharmaceutical ingredients, medicines, PPE and other essential inputs to supply or finished products across a range of goods and services, has left many nations shocked and now saying ‘never again.’
Many of Australia’s export industries are vulnerable to supply chain shocks because they depend on the import of critical inputs. While primary and secondary producers have continued to export, their reliance on inputs from overseas suppliers places them in a potentially problematic position in the event of adverse developments in global conditions.
This situation revealed itself very early on. Speaking about the initial period of the pandemic, Dr Jeffrey Wilson from the Perth USAsia Centre said that:
Given the complexity of global value chains, Australia has faced many unexpected import supply shocks in the last three months alone:
Some manufacturers and food processors have struggled to secure packaging materials from China and Southeast Asia.
The farm sector may face shortages of fertiliser and pesticides due to Chinese factory shutdowns, depending on the duration and severity of value chain interruptions.
DFAT highlighted problems of reliance on inputs from overseas:
Most Australian industries rely on global supply chains as providers of commodity inputs or as importers of intermediate goods. To date, the impact on some Australian supply chains has been significant. This reflects measures including the imposition of trade restrictions by many countries, reduced transport options and increased port loading/unloading times.
The Institute for International Trade pointed out that:
For countries that are highly reliant on imports for essentials such as medicine and food supplies, the dangers of this situation are obvious. Even for those only partially reliant on trade for essential goods, the COVID-19 global pandemic has accelerated the urgency to rethink the need for managing supply chain risks that had already taken hold before the crisis.
The Griffith Asia Institute submission emphasised the weaknesses in Australia’s supply chains stemming from over-reliance on a single supplier:
The Covid-19 pandemic has exposed vulnerabilities across international supply chains, the overreliance on services of exports (e.g., tourism and international education), the hollowing out of manufacturing in the West (acutely felt in the medical supplies sector) and stark inequalities within communities. For Australia and the rest of the world, the pandemic has highlighted the need to diversify its supply chain of personal protective equipment (PPE) and basic medical supplies from major suppliers, particularly China.
The IIER argued that geography intensified the vulnerability of Australia’s supply chains to disruption:
We are an island nation, at the end of long global trade routes, heavily reliant on just in time supply chains, with limited resilience in those chains, and low tolerance for loss and disruption. In 2018 alone there was A$304B of imports and A$344B of exports. Should any significant trade interruption occur, the flow on effects on the economy and our society would be significant.
Dr Wilson outlined four separate supply chain shocks to trade and investment:
The first is the COVID-19 pandemic itself, which, we’ve already seen, has interrupted supply chains. This has undermined our trade links on both the export and import sides. The second is the global recession that COVID has triggered, which is undermining our ability to attract investment from key partners. The third is a global turn towards protectionism, which has seen governments around the world impose trade barriers at an alarming rate. The fourth is trade warfare activities involving the US and Chinese governments, which have also threatened many of our key export sectors.
Dr Wilson argued that these shocks were compounded by a lack of diversity in Australia’s trade partners:
[T]he effect of these shocks is magnified by a decided lack of diversity in our external economic ties. While Australia is a very open economy, its trade and investment relationships are also deep but narrow. Trade is concentrated on a small number of Indo-Pacific markets, especially China, and is dominated by a few sectors—minerals, agriculture, education and travel.
However, the DFAT submission also noted that individual sectors vary in their ability to cope with the pandemic:
Supply chain disruptions have been uneven and have differed from sector to sector. Some supply chain issues have been resolved relatively quickly; for example, the shortage of refrigerated containers caused by congestion at ports. Some supply chain disruptions have benefited from solutions implemented by government and industry such as the International Freight Assistance Mechanism (IFAM), while others may linger for some time. Resources and energy supply chains largely remained robust – especially those relying on sea freight.
The following sections outline evidence to the Committee about supply chain problems in agriculture, manufacturing, defence industries, fuel supplies and shipping.
The exposure to imported inputs extends even to areas of Australia’s greatest export strengths, such as agriculture.
The Institute for International Trade said in its submission that Australians are used to thinking of themselves as self-sufficient in agriculture, but that this view is mistaken:
Australia is considered to have food security, due to available farmland and resources, which allow the country to produce far more food than the population needs … However, a weak point in Australia’s food production supply chain became visible during March 2020. After drought-breaking rains across the country generated a spike in demand for essential farm inputs, such as chemicals for pestilence control and fertilizer, this demand was met with diminishing supply from China due to the latter’s virus lockdown. A lack of these crucial inputs posed a major risk to Australian farmers seeking to plant crops.
The submission from DAWE also pointed out that the agriculture, fisheries and forestry (AFF) sector requires inputs from overseas, and that these supply chains may be vulnerable to disruptions:
Australia’s AFF sectors rely heavily on imports of products from the oil and gas, chemicals and fertilisers, machinery and equipment, packaging and other production materials and business services sectors. This means both domestic processing and farming businesses are vulnerable to disruptions caused by a lack of imported inputs. While foreign agriculture input supplies have kept flowing into Australia during COVID-19, a number of industries have flagged the risk related to potential disruptions, though it is likely domestic workarounds will be found.
Nufarm, an Australian crop protection (i.e. herbicide, fungicide and insecticide) and seed company, argued that Australian production of critical crop protection products (CPP) is under threat, making the sector further dependent on imports which come primarily from China:
Over the past decade, major crop protection companies have withdrawn from Australian manufacturing as the economic rationale for investment has been diminished – Australia makes up only 2% of the global crop protection market. As a result, many other suppliers are focused on larger markets …
Domestic manufacturing capacity has reduced steadily over the past decade. Nufarm is the largest manufacturer and the last company manufacturing CPP in Australia from raw materials. Nufarm has closed two manufacturing sites in the past five years and announced the closure of insecticide and fungicide formulation capacity in June 2020.
The Development Policy Centre at the Australian National University pointed to the potentially disruptive effect on Australia’s food industry of border closures:
Australia’s horticulture industry is facing a major labour shortage for the summer harvest season unless new labour arrives. Border closures and repatriations have resulted in lower numbers of backpackers and Pacific seasonal workers, the critical mass in horticultural labour … The rural labour shortfall could be as many as 40,000 workers, creating a major threat to the supply of fruit and vegetables for the domestic market.
In a similar vein the DAWE submission said that restrictions on the movement of people resulting from lockdowns and travel restrictions have the potential to disrupt Australia's agriculture industry and pointed out the steps that the Government had to take in response to the problem:
The pandemic has restricted the movement of people and hence labour into and within Australia during the response to COVID-19. To reduce impacts of the closure of Australia’s border on the AFF workforce in wake of COVID-19, the Australian government made temporary visa changes to allow Pacific Labour Scheme (PLS) and Seasonal Worker Programme (SWP) workers and Working Holiday Makers, to continue working in agriculture and food processing until the COVID-19 crisis has passed.
Grain Growers characterised the impact of the pandemic on its industry as follows:
COVID’s direct impact on the grains sector included: supply chain disruptions for inputs, such as herbicides, at a time of radically increased demand; farm input and processing business were faced with uncertainty for their ongoing operations and were required to make significant operational changes to comply with social distancing requirements; and, the constriction of export supply chains due to pressure on freight and customs processing resources.
Many submissions to the inquiry drew the Committee’s attention to the impact COVID-19 has had on Australia’s manufacturing sector. The evidence highlighted the fact that manufacturing exporters were exposed to supply chain risks from their reliance on imported inputs.
A large proportion of Australian manufacturers export their products. The Export Council of Australia said in its submission that Australian manufacturing exporters have suffered from four main challenges during the pandemic:
higher freight costs and problems accessing freight and logistics services due to cancellation of air freight and (to a lesser extent) sea freight;
problems with supply chains and just-in-time inventories. In some cases these problems impacted both imports and exports;
market access issues due to border closures and lockdowns;
export documentation problems.
The Australian Manufacturing Workers Union (AMWU) said that the small size of the Australian market makes manufacturing companies dependent on imports:
Australia’s lack of a ‘middle market’ in manufacturing means that many crucial inputs are sourced from offshore, which makes our industry particularly susceptible to disruption. When factories in China were closed down early in 2020, many local businesses struggled to find replacements for the inputs that were no longer being produced in China. This issue has persisted during the crisis, as other nations have closed down or slowed domestic production in response to the crisis.
The AMWU further noted that the COVID-19 pandemic highlights the vulnerability of the Australian manufacturing sector to disruption:
Many of the complex goods that we do produce here are heavily reliant on imported components. While the current crisis has been caused by interruptions to production caused by a global pandemic, there are many other conceivable scenarios in which imports to Australia may be interrupted for an extended period.
The submission by the Australian Manufacturing Growth Centre (AMGC), a not-for-profit network of manufacturers, similarly described problems experienced by its members in securing access to inputs:
Domestic and overseas restrictions have resulted in a quarter of the businesses AMGC spoke to struggling to source supplies that are necessary for their operations. In some cases, buyers are continuing to place orders, but manufacturers do not have the means to fill them.
The AMGC also said that lockdowns around the world had made it significantly more difficult, and often more expensive, for manufacturers to secure supplies:
Australian manufacturers struggled to manage their supply chain with full lockdowns in many countries from which raw materials are usually sourced, including China, the United Kingdom, India and parts of Europe. In some instances, if raw material supply had become too low, this would have forced shut downs and the standing down of employees. In instances where manufacturers were able to fulfil their raw material demand, this was often at a much higher price.
The AMGC cited the following examples of difficulties experienced by its members:
One waste heat generation company has been unable to source compressors from India, resulting in major project delays and shrinking revenue. A manufacturing company that is already facing a 35% revenue downturn has found that its regular Chinese suppliers are increasing the price of tools and other critical supplies by 60%. Manufacturers with ‘just in case’ stock levels have been able to navigate the restrictions more easily than those that follow the ‘just in time’ principle.
As with manufacturing generally, the risks associated with dependence on imported inputs are evident in the case of defence industries.
The Defence Teaming Centre (DTC), a not-for-profit member-based defence industry association, said that its members – defence industry companies – had experienced supply issues during the pandemic largely arising from the disruption to global air freight networks:
The reports received from our members regarding supply chain integrity were largely focused around freight. The reduction in passenger airline routes resulted in many companies having to source alternate freight options, adding significant delays to project delivery. In these instances, Defence and defence primes were accommodating and supportive of industry’s feedback and identification of delays. Freight cost blow-outs, in most cases, were accommodated and managed by Defence and defence primes, as were schedule impacts as a result of freight delays. Freight issues also created delays for the importation of input materials and supplies required to manufacture products in Australia, prompting some businesses to carry higher levels of stock than usual and challenging previous Just-In-Time inventory management thinking.
In its submission, the South Australian Government said that defence industry has shown considerable agility through the pandemic but that supply problems are foreseeable in the future:
…whilst industry has shown the agility to manufacture low complexity products at short notice, sustaining a fighting force with complex modern weapon systems and actual weapons presents significantly different challenges. Rapid adaptation, attrition in conflict and concurrent demand on a global supply chain in a crisis, all challenge the concept of supply always meeting demand in time.
The submission highlighted, by way of example, the likelihood of disruptions to global supply chains when all participants experience higher supply requirements at the same time:
Global defence supply chains such as those involved with the P-8A Poseidon and Joint Strike Fighter programs have centralised logistics using a prioritisation system, which will be pressured in times of crisis where all users will likely be drawing on the supply system simultaneously.
Along similar lines, the defence contractor Northrop Grumman Australia said in its submission that the defence industry’s work to assist in the health response to the pandemic and to keep businesses open was ‘a remarkable achievement’. It also noted that:
The coronavirus pandemic exposed the weaknesses inherent in an over-reliance on a sole supplier and the shortcomings of just-in-time manufacturing processes.
Northrop Grumman also observed that restrictions on the movement of people have hampered research and development and manufacturing:
The inability of qualified and security-cleared personnel to travel to Australia from countries such as the US to assist local industry is a threat to Australia’s research and development programs and manufacturing base. As such, there needs to be a greater emphasis on allowing for the transfer of technologies and intellectual property to Australia.
Exposure to risk from imported fuel supplies
The pandemic did not result in interruptions to Australia’s fuel supplies, but it has drawn attention to risks flowing from the country’s dependence on imported supplies and declining domestic refinery capacity.
The IIER described the problem in these terms:
The number of oil refineries in Australia has dropped from 7 to 4 in recent years. Three of the four remaining refineries are foreign-owned … It would be foolhardy to expect the refinery owners to act in any way other than to look after their own business interests. That is a free market reality. We could therefore be 100 per cent dependent on foreign owned fuel imports. … This is not reassuring, particularly when we are seeing an ‘every man for themselves’ pandemic panic emerge around the world, disrupting critical supply chains.
The Cognoscenti Group submission also argued that our liquid fuel supply chains represent a risk to Australia:
Our dependence on global supply chains for critical commodities and manufactured goods pre-dates, and is more serious, than the shortages of medical equipment and pharmaceuticals illuminated by the pandemic. Liquid fuel is a prime example. COVID-19 has driven home Australia’s dependence on overseas supplies of crude oil and a range of critical, refined products. Although the government has taken steps to reduce that dependence by establishing a sovereign petroleum reserve in the US, we are a long way from where we should be.
NIOA, an Australian-owned defence company that supplies weapons and munitions to the Australian Defence Force and law enforcement, argued that the Government’s proposed investment in an enlarged reserve of liquid fuel held in the United States is an example of ‘clear thinking’ about economic sovereignty in the wake of the pandemic:
This has been illustrated by Australia recently acting to ensure our nation has a sufficient and guaranteed supply of fuel. Energy Minister Angus Taylor announced the Federal Government would spend $94 million on a fuel reserve in the United States to bolster the national stockpile. They would take advantage of historically low fuel prices to build a ‘strategic fuel reserve’ to ensure Australia had enough fuel in case of future global disruptions.
By contrast, the Australia21 submission argued that holding a national stockpile in the United States does not sufficiently reduce the risk to Australia:
The COVID19 experience has demonstrated that we cannot expect to rely on global ‘just in time’ delivery systems for the provision of goods and services for which we must be assured of continuity of supply. Fuel supplies are a particular concern. It is not evident to us that maintaining crude petroleum in underground storage in the United States enhances our fuel security, especially as we have permitted our domestic refinery capability to wither.
In his evidence to the Committee, Mr John Blackburn from the IIER was more blunt:
I can tell you one thing: buying oil stocks to stick in a cabin in America is not going to do anything for our domestic oil or fuel security.
Risk from lack of Australian-owned shipping
The vast majority of Australian imports, including imports of fuel, arrive by ship. While the shipping industry has for the most part continued to function with minimal disruptions throughout the pandemic, submitters drew the Committee’s attention to risks to Australia’s economy from foreign ownership of shipping. The AIMPE/AMOU submission pointed to the risks posed by Australia’s near-complete dependence on foreign-owned shipping:
[COVID-19] has exposed the heavy over reliance of Australia on foreign shipping operators. Australia no longer has Australian ships to service most of our international trades and our coastal shipping requirements. Instead Australia relies on foreign shipping to carry all of our imports and all of our exports, there is real community concern about Australia’s near total reliance on foreign shipping to manage our national liquid fuel demands.
Similarly, the MUA highlighted the very small number of remaining Australian-owned or Australian-flagged shipping vessels:
The COVID-19 pandemic has revealed critical risks in Australia’s supply chains that arises from the nation’s almost complete dependency on the use of foreign ships, not only in international inbound and outbound trade, but in domestic coastal trade … All of our seaborne exports and imports rely on the international ships’ crew drawn from countries around the world – we only have four Australian international trading ships, all carrying LNG exports.
The MUA argued that unless Australia addresses this risk, its supply chains will inevitably be vulnerable to future crises:
…unless there are actions taken to address these risks, a future military conflict, natural disaster, economic crisis or pandemic that cuts or significantly impeded seaborne trade will result in catastrophic consequences for the economy.
MIAL also pointed to the lack of an Australian shipping fleet as a national vulnerability:
Australia now relies almost exclusively on international ships, foreign crews and international companies to maintain our international and domestic supply chain security. For an island nation, with an extraordinarily large shipping task this is an uncomfortable and regrettable circumstance to be in, and the COVID-19 global pandemic has further exposed this national vulnerability.
Initiatives and opportunities created by COVID-19
Amongst the evidence about Australia’s exposure to risk there were encouraging signs of resilience and agility amongst Australian producers, together with the realisation that COVID-19 could even open up new opportunities. Australian industries have shown the capacity to adapt, to pivot to new kinds of production and to seek out potential new markets.
The Advanced Manufacturing Growth Centre (AMGC) gave evidence to this effect when it told the Committee:
…as COVID-19 has evidenced, when we put the manufacturing industry to task, we were able in the shortest amount of time to make complex things onshore despite the disrupted supply chain, culminating in my view to be able to manufacture invasive ventilators 99.3 per cent Australian made. … There’s an unrecognised opportunity for Australia in manufacturing capability, but we have evidence that with the little we have, we have done very well. It would be, however, better, if we could do better.
Producers have demonstrated the capacity to pivot into new areas of production and localise the manufacture of previously imported inputs. This is especially the case if there is effective government-business cooperation and a level of assistance.
Mr David Williamson, Deputy Secretary of the Department of Industry, Science, Energy and Resources (DISER) told the Committee:
…it’s become very stark that the capacity of Australian manufacturers to pivot to shifting supply or quickly repurpose or turn on manufacturing has in a number of instances allowed industry to work with government to meet the challenges of the pandemic as well as continue to be a source of employment and capability across the economy.
The DISER submission described its cooperation with, and support to, business to overcome supply gaps:
The department worked closely with industry through the crisis to help the Department of Health procure PPE from domestic and international suppliers and manufacturers. Government and industry together addressed the most critical capability gaps.
We identified businesses with existing production capacity and relevant capabilities that could quickly pivot to produce what was needed. This involved supporting a number of domestic manufacturers to retool or scale up their production for a number of critical products. We supported industry through a mix of targeted support and general facilitation to minimize barriers to market entry. For example, the department worked with ResMed, an Australian manufacturer of technical medical equipment and ICU equipment, to supply 7000 invasive and non-invasive ventilators to the National Medical Stockpile (NMS). The Government provided a grant of almost $4 million to Med- Con, a Shepparton-based surgical mask manufacturer, to scale up their production capacity and supply masks to the NMS.
The AMGC detailed its activities to support manufacturing initiatives to meet the challenges of the pandemic:
AMGC has introduced a portal for Australian manufacturing, component suppliers and skilled design, engineering and manufacturing staff to register their interest and core competencies in support of the national response to COVID-19. Within 48 hours, over 600 entities had registered their interest. This register has been devised to capture expressions of interest from Australian based manufacturers and individuals looking to assist with supply of goods, services or knowledge in tackling the current COVID-19 outbreak in Australia.
From the industry side, the Detmold Group – a paper and board product manufacturer – provided an example to the Committee of its response to shortages of PPE.
Detmold explained how it overcame problems of supply disruption and limited technical capacity and has localised production of certain inputs:
In the initial stages, when the project was scoped, many international borders were shut, and so you couldn’t procure PPE raw material or equipment that made PPE. Once the border in China was open we had significant issues in procuring equipment. Fundamentally, we paid two times the price…
There were not a lot of people in Australia that understood how to manufacture a mask of each type. So it was really up to us as a business to make linkages back into Kimberly-Clark in the US. We actually had some technical sessions with them, and they gave us an indication on how to manufacture product. We’ve learnt quickly but, at this point in time, the raw material still remains one of the greatest risks, and we would have an issue especially if we went into a second wave of COVID and some international borders did shut. We have localised melt blown with someone in New South Wales to ensure we remove the risk.
Another initiative was described by the health services company, Sterequip:
Reusable PPE can be used in the order of 50-plus times before it needs to be disposed of and does not have an expiry date, like disposables. It must, however, be reprocessed on occasion, i.e. annually to remain valid. If Australia were to move to reusable PPE, it would provide greater security of supply for the national pandemic stockpiles due to the longer lifespan and not incur the high replacement costs of expired disposable PPE.
Sterequip is building Australia’s first complete outsourced sterilisation reprocessing facility compliant to AS/NZS 4187 for reusable medical devices and has the capability and capacity to sterilise critical reusable PPE.
From the perspective of health providers, the Australian Healthcare and Hospitals Association outlined the operational changes and government-industry coordination that had been introduced as a result of COVID-19:
…one of the things that we’ve managed to do during the last couple of months is to have a greater understanding of the resources that are available right across the public and the private system, so what capacity there is. An example of that is actually in intensive care. For the first time we now have a data collection which shows what intensive care beds are available and what intensive care staffing is available across the country in both the public and the private sector, whereas previously that information has been held by state governments, so it's been at state level and it hasn't generally included the private system. That one database relates to intensive care units, but there are many other ways that we could look, for example, at inventory in the system and run national registers around inventory. So I think those are opportunities which I hope the Australian Health Protection Principal Committee will see the wisdom of pursuing in the future.
The Committee received a number of submissions from defence industry organisations. Amongst their evidence was mention of their role in responding to both problems and opportunities generated by the pandemic.
The South Australian Government emphasised the capacity of defence industries to respond in an agile fashion:
The defence industry has also shown an ability to adapt and produce critical medical supplies at short notice, because of their inherent high quality standards, advanced manufacturing technology and trusted relationship with the Australian Government.
Quickstep Holdings, an Australian aerospace composite manufacturer, added that the defence industry has supported the health sector and the economy more broadly through the pandemic, calling the sector's performance ‘a considerable achievement’. Their submission said:
From the outset of the coronavirus pandemic, Australian defence industry pivoted to support Australia’s health response, by assisting with the manufacture of critical health equipment like ventilators and personal protective equipment (PPE). During the crisis, Quickstep was proud to support our industry partner Micro-X increase their X-ray production to detect COVID-19 in patients, through the supply of our composite components.
The Naval Shipbuilders’ submission noted that defence industry provides a buffer against economic shocks like COVID-19:
Defence Primes have worked proactively to ensure that critical supply chains have continued in the wake of COVID-19, working flexibly and supportively to resolve any issues that may have arisen. In the post COVID-19 era, our programs will also help revitalise the manufacturing sector. … Defence industry has proven itself a very resilient sector and one that can support sectors that are prone to or unduly effected by ‘shocks’ like COVID-19. Both in terms of helping them pivot into a new supply chain, but also by bringing on and advancing existing skills and workforces that are unfortunately affected by these shocks.
The Committee was informed of opportunities emerging from COVID-19 to develop relationships with trusted international suppliers in order to help surmount supply chain risks exposed by the pandemic.
One submission suggested that current strains in relations in the Asia-Pacific region could create openings for Australian producers to develop business partnerships with counterparts in the US. Quickstep Holdings, an exporter to the US, reasoned that:
Australia’s geographic position in the Indo-Pacific and the ongoing friction between the US and China present an opportunity for Australia to advocate for the amendment of existing US trade policies, given the Trump administration will likely encourage companies to cut their ties to dominant suppliers in country like China. This could include the outsourcing of greater volumes of US defence manufacturing contracts to world-leading Australian businesses.
Amaero International, an aerospace and defence products manufacturer, told the Committee of its concerns that ‘the coronavirus outbreak has highlighted the vulnerability of the Australian defence industry and the manufacturing industry in general to disruptions in the supply chain’. But the company highlighted what it saw as an opportunity for Australia to develop a processing and export industry for the critical mineral titanium. This would benefit Australian economically and break down the current domination of the global critical minerals markets by Russia, China and Kazakhstan, thus providing secure supplies to countries with close relationships with Australia. Amaero’s submission went on to recommend that Australia ‘establish and secure a sovereign facility to process titanium alloy powder and supply the local additive manufacturing sector’, a proposal that is discussed in more detail in Chapter Five.