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Only a small fraction of Australia’s imports are vulnerable to serious supply disruption, according to a new analysis released by the Productivity Commission.

The Commission’s interim report on Vulnerable Supply Chains identifies where disruptions could occur and looks at targeted policy options to protect local supply chains.

Commissioner Jonathan Coppel said modern supply chains are increasingly complex – often relying on inputs from across the globe and sometimes consisting of hundreds of firms.

“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,” he said.

“But some supply chains are more vulnerable – if they rely on a single, concentrated source of supply where few alternatives exist.”

The Commission used data to identify imports which are used in essential industries, and which come overwhelmingly from a single source country, which dominates global supply.

“Our results suggest that around two per cent of imports are from a single, concentrated source and are used in essential industries,” Commissioner Catherine de Fontenay said.

“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.”

Most risks are best managed by individual firms. But government could have a role where the whole market for an essential product is at risk.

“The policy response should be efficient and targeted to the particular circumstances of the case,” she said.

Essential products include items such as PPE (personal protective equipment), chemicals used to treat drinking water and pharmaceuticals.

Various policy responses can provide some ‘insurance’ against supply chain risks – but like insurance, they come at a cost, which should be weighed up against the benefits.

Governments can help provide the information firms need to manage the risk in their supply chains. Fostering a rules-based trading environment also supports firms’ abilities to respond to global shocks.

Governments can require firms to take additional precautions, such so as keeping larger stockpiles or diversifying their suppliers, if there is evidence that firms are not managing their risks. A policy of replacing imports with domestic production will generally be a very high-cost option.

“Subsidising domestic manufacturing could not achieve efficient scale in many of the products we are talking about,” Commissioner Coppel said. “And it could crowd out actions that firms would otherwise take to manage their own risks.

The interim report Vulnerable Supply Chains can be found at www.pc.gov.au/supply-chains

This interim report was released on 26 March 2021 and focuses on imports. The final report will add material relating to exports.

Written submissions close 30 April, 2021.

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