Written by Laurence Todd, Research Director of IDEAS
COVID-19 – we need to protect supply chains at home and abroad in response to MCO extension
- Following extension of the MCO we must ensure our supply chains are protected
- Food and other essential goods rely on supply chains at home and abroad which are coming under severe strain
- The government should consider how to extend exemptions across the supply chain and work urgently with other counties to maintain the flow of trade
The Prime Minister has announced the extension of the Movement Control Order (MCO) until 14th April. This was expected by many but now we have to ensure we have the measures in place to sustain the supply of essential goods and services. To do this, our focus on what is and is not essential is going to need to gradually expand.
The MCO is rightly shielding essential goods and services as defined by the government but the longer the restrictions continue, the harder it may be to disentangle these essential goods and services from the rest of the economy. Probably most of us have heard examples of businesses connected to essential services, that are struggling to operate under the restrictions. The farmer that cannot make deliveries because no hauliers are available or the manufacturer who cannot procure the spare part. What this points to is the interdependence of our economy through supply chains. Let’s take the example of food supply. the shops and supermarkets are receiving their products from manufacturers and processers who in turn receive their inputs from our farmers. They in turn are supported by several cross-cutting industries – fuel, utilities, machinery, distribution.
Most of these activities are (in theory) exempted by the MCO, although operations on the ground are facing some teething problems to say the least. The problem comes when we consider that each industry playing some role in the supply chain of food, has a supply chain of its own. The metal needed to repair the fan used in the farms, or the auto repair workshop to fix a broken-down truck delivering supplies to supermarkets. Over times the restrictions across the wider economy will start to have an effect on those industries we are trying to maintain. As the MCO is extended, firms will drawn down on inventories and need to look to their suppliers to continue operations.
The problems get more complicated when we consider international supply chains. Trade is coming under pressure in a number of ways. Exporting businesses are caught by restrictions, reducing their output and some exports are being deprioritised in favour of meeting domestic demand. We must ensure we can supply Malaysia with the goods and services we need, but to do so we may need to be encouraging trade rather than restricting it.
Combatting the virus is a global struggle and restrictions are not just emerging in Malaysia but also in other countries. This is something we need to address, given the internationalisation of supply chains, including for essential goods and services. Taking the example of food again, it is well known that we rely heavily on imports. It is clear that this raises fundamental questions of food security, but these cannot be fixed overnight. The tonnage of food and agricultural products we import is more than double what we produce, once palm oil is excluded. Domestic suppliers will not be able to ramp up activity to meet that demand, especially when their own supply chains are under pressure. Furthermore, what we export does not match what we import: the palm oil we sell cannot replace the sugar we buy. So simply redirecting our exports for domestic consumption will not maintain our current supplies.
Along with medical supplies food is perhaps “the” essential good, so rightly our focus should be on securing our supplies. But over time the strain on supply chains both domestic and international trade may be felt in other areas. With so much working from home, IT servicing may even become crucial if restrictions continue for an extended period. Thinking about other industries, again we need to think about the supply chain that make our economy work. The majority of what Malaysia exports are what we call “intermediate goods”, which means they are used to produce something else, such as semiconductors made in Penang and shipped to Korea to make a smartphone. Some of the smartphones end up back in Malaysia. The same is true for what we import -most of it is taken and processed here. This means that our exports cannot easily be redirected to meet our domestic needs – there’s not much we can do with the semiconductor on its own. What we need is to continue to keep the supply chains functioning as much as possible – starting with the essential goods, such as medical supplies and food, but as restrictions continue more widely across the economy.
What does this mean? The goods we consume are the product of complex local and international supply chains that are coming under severe strain. We must continue to take all necessary measures to ensure we combat the virus, but we must also take all possible steps to mitigate the economic impact of doing so, that means we need to focus more attention on preserving supply chains.
As with everything else on Covid-19, there are no easy answers. What we can do, is learn the lessons of the last ten days. If restrictions need to continue, we must also look hard at the exemptions and redirect resources within government to ensure decisions to enable businesses to operate can be taken quickly. We also need to recognise the essential role of trade in sustaining Malaysia’s economy and think again about restrictions on exporting and importing firms. And we must urgently work with our partners to keep trade flows open, particularly for the supply chains of essential goods. Nowhere is the case clearer for this than with food.