Increasing resilience of medical supply chains during the COVID-19 pandemic

The prevailing economic model of the late 20^th century was characterized by expanding globalization. This expansion has slowed, however, and is being tempered by countervailing trends of de-globalization and regionalization, largely driven by digital advances, economic nationalism, and now the COVID-19 pandemic. How and whether the current crisis has reshaped these trends remains to be seen, but it has certainly highlighted the fact that many global value chains (GVCs) are optimized for profit maximization and efficiency instead of resilience. This has created a rigidity that some claim1 has inhibited GVCs’ ability to respond to economic shocks, at least in the short term. Others challenge this interpretation with respect to COVID-19, based on detailed monthly trade data during the pandemic showing how quickly Chinese exports of personal protective equipment (PPE) rebounded after March 2020.2 

Although the COVID-19 health crisis called for rapid responses to achieve short-term goals, it also presents an opportunity to build a more resilient GVC model for the longer term, especially with regard to medical supplies. This piece3 explores this issue further by looking at the movement of COVID-critical supplies prior to and during the pandemic, specifically comparing long value chain products such as technologically sophisticated medical devices with relatively short-chain products, i.e., less sophisticated PPE items.

The relevance of GVCs for medical supplies

The outbreak of the COVID-19 pandemic, first in China, and then the rest of the world led to a demand spike, followed by production shutdowns and logistics disruptions, creating shortages across a wide variety of consumer goods, from food to toilet paper to hand sanitizer. But more significantly, the essential products needed to fight the pandemic—medical devices to treat patients and PPE to limit the spread of new infections—were additionally hit by export bans, as producer countries struggled to serve their own markets. Indeed, 80 countries temporarily restricted the export of COVID-19-related products in the early months of 2020.4 Countries that rely more heavily on imports bore a lot of the brunt – the U.S. reported a monthly shortfall in medical grade masks of approximately 72 per cent (figure below, estimates as of May 2020).

It thus comes as no surprise that the question of reliance on imports for essential health supplies has become a major topic of debate. In the case of the U.S., COVID-19 critical supplies worth USD 22 billion were already being imported annually prior to the pandemic, with 26 per cent of supplies coming from China (mostly surgical masks and respirators, protective garments, and medical goggles).5 Countries such as China, Viet Nam and Mexico have typically been leading suppliers of PPE products. This specialization, together with low tariffs, spurred the wide availability of low-cost medical supplies around the world. Yet it is reasonable to claim that GVCs for medical goods can generally be characterized as an ‘interdependence’6 rather than a trade asymmetry.

Before the outbreak of the pandemic, the U.S. was the biggest importer of COVID-critical products (accounting for 18 per cent of global imports), followed by Germany (9 per cent). These two countries were also among the biggest exporters in this class: Germany exported 15 per cent of the world’s COVID-critical supplies whereas the U.S. exported 11 per cent. Imports to those countries were dominated by PPE and similar goods, while the U.S. and Germany were leading suppliers of technologically sophisticated medical devices, such as mechanical ventilators or medical imaging equipment. Trade between the two economies took place as well, with the EU supplying the U.S. with CT systems, patient monitors, X-ray equipment and breathing masks. The international character of GVCs is even more complicated, however, as industries producing more sophisticated devices tend to be led by large, vertically integrated multinational enterprises that have worldwide production facilities. Furthermore, these firms rely on access to growing markets in developing economies, such as China and India.

The specialization described above is not static, however, as developing economy PPE exporters have increasingly made incursions into the production and export of higher value medical equipment. While an ageing population and increased healthcare spending have prompted growth in medical supply exports across many countries, “non-traditional” exporters (developing economies) have registered higher growth than “traditional” exporters (developed economies) in both sophisticated (medical devices) and non-sophisticated (PPE) product classes.7 Not only have medical device exports increased among developing country exporters in absolute terms, they have also expanded substantially as a share of medical supply exports (see figure below).

While the U.S., Germany, Japan and the Netherlands are leading “traditional” exporters of medical devices, “non-traditional” exporters such as China, Malaysia and Viet Nam are the leading global suppliers of PPE and Mexico is the third most important exporter of medical devices after the U.S. and Germany (figures below).

The growth of medical device production in and exports from “non-traditionals” (developing economies) will now likely be countered by an increase in domestic PPE production among “traditionals” (developed economies). With recent shortages at the forefront of everyone’s mind, a resurgence in domestic production of system-critical products (back-shoring) and some regionalization of supply chains (near-sourcing) will likely mitigate the risk of logistics disruptions. But this is simply the continuation of an ongoing trend. For example, Asian GVCs have been gradually regionalizing for some time, which likely contributed to China’s swift economic recovery from the pandemic. This could also be an indication that GVCs have been overextended and are now undergoing a corrective adjustment. Yet there are equal risks associated with regionalization, and not all products or GVC segments will be affected in the same way.

In the case of medical supplies, PPE typically requires less sophisticated inputs and production techniques, and consequently less specialized skills, fewer materials and simpler supply chains. However, specialized intermediates for particular PPE items, such as natural rubber derivatives used in making medical rubber gloves, have allowed Malaysia to be the dominant supplier with two-thirds of global market share.8 On balance, though, less industrialized countries may be disproportionately negatively affected by reshoring, losing a greater share of their stake in PPE GVCs, while more industrialized producers will retain, or even consolidate, their hold on medical device production. Advanced manufacturing economies can, however, also lose out, as production chains become more vulnerable to regional shocks and intermediate products become more expensive as a result of reduced competition. Localizing production chains, in other words, risks undermining the efficiency gains achieved through specialization and comparative advantage, as well as the welfare gains of poorer countries that rely on integration in GVCs.

Building flexibility

Building future resilience in the wake of the pandemic will require a delicate balance between increased flexibility, on the one hand, and efficiency and welfare advantages of GVCs, on the other. Strengthening flexibility may mean incorporating some degree of redundancy – contingencies in terms of inputs, stock, storage capacity or emergency funds to accommodate shocks.9 Built-in redundancy should be carefully managed to avoid a total loss of cost control. This can be achieved through risk management processes, such as stress testing and analysis to identify risk clusters and bottlenecks where buffers are decisive. In the case of medical supplies, flexibility can also be improved through further standardization of specifications to increase substitutability between intermediate products.10 Furthermore, blaming GVCs for the acute shortages experienced at the height of the pandemic ignores the important contributions of public health and other domestic and international policies – in fact, the International Monetary Fund (IMF) estimates that international trade only fell by 10 percent.11 

Nevertheless, important questions about the resilience of GVCs have been raised, which are well worth considering. As the pandemic amplified the existing trend towards a fragmented, multipolar and regionally oriented global trade system, it is important to remember that inter-country reliance is not a one-way, or even a two-way, dependency. Rather, it is a complex and evolving ecosystem of interdependent trade and investment relationships that will be difficult, if not impossible, to dismantle. If the pendulum swings too far or too quickly from a ‘just-in-time’ economy to a ‘just-in-case’ economy, it risks squandering the substantial global gains associated with integrated GVCs.