Critical supply chains: do we need to bring them back home?

A few weeks ago, Friends of Europe hosted a platform on the Transatlantic Security Jam. During two days we reached out to over 200 ‘Jammers’, many of them senior officials and prominent experts, to elicit their views on the impact of the COVID-19 crisis on the European Union and the lessons for its future cohesion and effectiveness. As we reviewed the results of this wide-ranging consultation over the past few days, one clear conclusion emerged from several of the interventions: Europe needs to overhaul its critical supply chains.

A crisis often shines a sharp and revealing light on situations that have been allowed to deteriorate over a number of years, but in a way that has remained below the political and public radar screen. This has certainly been the case with COVID-19. For me, a dominant image of the crisis was that of a British RAF transport plane parked on the tarmac of Istanbul airport for days while the UK government negotiated somewhat desperately with Turkish companies producing personal protective equipment for a cargo load of supplies. As the days went by, the media focus on this incident proved increasingly embarrassing for the UK government, putting the spotlight on its lack of adequate national stockpiles and inability to ramp up domestic production quickly enough and in sufficient quantity to protect the front-line National Health Service workers. When the RAF plane eventually arrived back in the UK with its precious cargo, the embarrassment was compounded when it was discovered that much of the protective equipment was sub-standard and could not be used in intensive care wards.

In France too, the consequences of outsourcing supplies to countries like China with their cheaper labour costs and just-in-time globalised delivery systems rapidly became apparent. Pharmacies ran out of simple things such as cotton swabs, reagents and paracetamol tablets within days. In 2009, after previous pandemic fears surrounding the H1N1 flu virus, the country had amassed a stockpile of 1.17 bn face masks. Yet as the validity dates on these items expired, they were not replaced. By last March, the French national stockpile had shrunk to 150 mn masks. A French company located in Plaintel, Bacou-Dalloz, was receiving government orders back in 2005 to manufacture 180 mn masks. Yet by 2018 this plant closed due to a lack of new orders. The French government, like so many others in Europe, had decided that maintaining large stocks of protective equipment or vaccines, that might not be required for years, was too expensive. France subsequently transferred responsibility for maintaining reserve supplies to local authorities and private companies but failed to match this with the funds that could incentivise them to implement this commitment.

Increasingly, the pharmaceutical products that Europe used to produce itself are instead imported. For instance, in 2000 the EU imported only 20% of its requirements, but this figure now stands at 60 to 80%. As COVID-19 spread across Europe, governments and local authorities found themselves competing with each other in contract bidding wars to secure supplies from China and Turkey which today have a dominant market position. India announced a temporary ban on the export of medicines as it feared shortages at home. President Macron reacted with alarm to the statement by the CEO of the major French-owned vaccines firm Sanofi, that the company would give the US priority delivery of its new vaccine against the coronavirus due to the large US investment in its research and development work. The CEO was promptly summoned to the Elysée for a frank discussion about Sanofi’s policy, after which it emerged unsurprisingly that France would be a priority for the vaccine delivery too.

All these episodes have raised questions within the EU about its member states control, or at least its influence, over critical supply chains and over European companies operating in a global market with an increasing degree of foreign investment and ownership.  Certainly, globalised supply chains have not failed catastrophically during the COVID-19 crisis. European countries have obtained the supplies they have needed even if at the eleventh hour, at higher prices and with many complaints about quality and contract performance. The efforts that European countries such as Italy have made in the past to help China cope with disease outbreaks such as Avian Bird Flu and SARS have been reciprocated by Chinese donations of protective clothing and testing kits to Italy during the COVID-19 outbreak. Many have nonetheless argued that China has milked these donations (which are a tiny fraction of its overall deliveries for which it has been handsomely paid) for propaganda and to burnish its image as a friend, in contrast to the US and even the EU itself.

At the same time, many European companies have shown imagination and initiative in moving rapidly to fill the supply gap. Formula 1 and Mercedes came together to devise a simple and easily manufactured respirator. Burberry shifted from producing expensive raincoats to hospital gowns. A company in Northern Ireland producing plastic fittings for aircraft shifted to producing face visors. Several European universities have partnered with pharmaceutical companies to develop a vaccine and start trials with the University of Oxford and Astra Zeneca bring the first globally.

Yet these domestic efforts are too modest and have come too late to have a decisive impact. Often they have received insufficient support, funding and orders from governments which have been unsure whether they want to switch from reliance on shaky but known global supply chains to domestic sourcing in the middle of a major crisis. As the coronavirus fades, and hopefully Europe is able to avoid a devastating second wave, the EU must determine whether its preparations for the next pandemic require only a small tinkering to the existing dependencies on outside suppliers and globalised supply chains, or whether the lessons learned from the crisis necessitate bringing those supply chains back home to Europe. Would the costs in terms of the EU turning its back on globalisation outweigh the benefits in terms of the EU’s autonomy and resilience?

Already the EU’s actions in helping its member states to improve their responsiveness during the crisis give us some pointers as to how it can play a larger, and more effective role next time around.

In the first place, the concept of the EU’s ‘strategic autonomy’, which was a core feature of the EU’s Global Strategy of 2016, needs to be widened beyond the discussion of defence spending and cooperation on multinational military capability development. The dimensions of economic, scientific and digital resilience need to be added to the list of priorities.  The EU needs to conduct a survey of its current level of autonomy and effective control in these areas against the template of what would be required for the EU to defend its populations against a range of future shocks (such as terrorist attacks, cyber disruptions, climate change-induced weather stresses or pandemics ) without being dependent on outside resources or goodwill. From this review the EU should define a level of ambition for strategic autonomy by 2030 and a roadmap of actions at both the EU, member state and local authority and big city levels to reach this objective.

Second, it seems clear that member states should now give the EU more authority to handle public health issues. Currently this is a national responsibility. Yet at the beginning of the crisis the European Commission came up with a plan to bulk buy medical supplies on behalf of EU member states, using its enormous purchasing power to negotiate good prices and push itself to the top of the priority list. The Commission subsequently organised a multilateral initiative with the WHO to develop a vaccine, bringing in a large number of international actors and raising US $7 bn for this effort at its first online pledging conference. The EU’s coordinating and convening powers suggest it could be given other roles too. For instance, in managing a stockpile of key pharmaceutical products, medical equipment, vaccines, testing kits and protective clothing on behalf of the member states or defining minimum levels for member state stockpiles that could be monitored by Brussels.

The EU could look at those industries and companies that could switch quickly to crisis production, as car companies have shown they can do for respirators, and ensure that the workforces in those companies are trained and certified to produce this kind of crisis-driven surge capability. Brussels could also look at alternative supply chains, for instance in North Africa, Latin America or Southeast Asia, where labour and production costs are also low, and encourage member states to begin testing these supply chains, working to improve standards and product reliability and develop contingency plans for a crisis situation.

The EU could also draw lessons in terms of the airlift and transportation requirements in bringing vital supplies to Europe and distributing them within the union. It could conduct EU-wide pandemic management exercises to harmonise national procedures and things like reporting and data, and statistics collection and classification. COVID-19 has shown that EU member states even have different methodologies for counting coronavirus-related deaths.

The EU could seek to come up with an EU-wide tracking and tracing and alert system for pandemics, given the large variety of technologies and apps that member states have experimented with so far. Some have been happy to rely on US social media platforms such as Apple and Google to do this; others like France have insisted on their own national system. The EU could encourage its citizens to download and use these apps by applying a common regulatory framework ensuring data protection and privacy in preference to a permanent system of mass surveillance.

Finally, there is definitely a role for the EU in combating fake news and disinformation campaigns, which depressingly surge as another type of virus to contend with during pandemics and crises.  Just this week, two European lobby groups for the telecommunications sector, ETNO and GSMA, reported that there have been 140 arson attacks against 5G masts across Europe since March and maintenance workers have been attacked too. Some people clearly believe that 5G infrastructure represents a health risk and that the virus is transmitted by radio waves. As laughable as this view may seem, it needs to be actively debunked. Here the EU with its recent experience in tracking and combating Russian disinformation by its StratCom East unit has a useful role to play.

As the EU debates the size of its new Recovery Fund, a portion of the loans and grants that could be made available to member states should go to local authorities and cities to help them improve their resilience and crisis preparedness. For its part, even before the COVID-19 crisis the Commission was re-examining the issue of foreign direct investments in Europe’s critical infrastructure such as ports, energy grids and transport, but also in its high tech, innovation sector as well. Some EU leaders, such as President Macron, have expressed fears that an economically weakened Europe would be vulnerable to hostile takeovers in key industries and companies. Certain member states have already started to take action. Germany for example recently moved to protect its vaccine producer Curevac by lowering from 25% to 10% the threshold of foreign ownership which would trigger an investment screening and advisory procedure. France has taken similar steps and the Commission has been looking at the possibility of an EU-wide set of rules and standards for industries that benefit the overall strategic autonomy of the union.

By relaxing the rules on state subsidies to companies during the pandemic it has made it easier for member states to resist hostile takeovers or further rounds of deindustrialisation. The next step will be Commission proposals to frame EU-wide security standards for the procurement of 5G communications equipment, especially in the wake of fears of data compromise that the US but also many EU governments have underscored. Yet the best way for the EU to reduce dependency on untrustworthy and non-transparent foreign suppliers is to nurture its own European companies that are able to deliver these services, such as Nokia and Ericsson, so that governments have a real choice in balancing commercial and security interests.

As it emerges from the COVID-19 crisis, the EU will look upon a world where multilateralism has again suffered at the hands of geopolitical rivalries and authoritarian political posturing. The EU will be mindful that it needs to try to fill the leadership vacuum in the West left by a retreating and even incoherent United States. In this context autonomy is not autarky. There are enough parties seeking to undermine globalisation, and the EU – which has been a great beneficiary of a more open global trading system – will not be in this camp. It will want to engage China and the United States on the basis of inclusion in exchange for accepting agreed rules rather than by confrontation. Consequently, the EU will be careful not to break up global networks, investment and knowledge flows, and supply chains in the name of Fortress Europe. This is neither feasible nor desirable.

The lessons of COVID-19 for European resilience are serious and require action by Brussels, but it is not a case of going from one extreme to another.  A balance will need to struck between cost and risk, more self-reliance at home versus remaining a force for multilateralism and cooperation abroad. It will not be an easy balance to find, let alone to translate into effective action on an EU-wide basis. Yet it will be an early and key test of the leadership skills of those now in charge in Brussels and EU capitals.