The potential ‘no deal’ exit of the UK from the EU in March 2019 serves as a good example of a potentially disruptive event, involving a discontinuity in the conditions of production and supply. At the time, businesses recognized the risk of disruption from a no-deal Brexit, but they were loath to invest in their supply chains ahead of a potential cliff-edge. When they did, it was at significant cost, to build resilience that was ultimately never needed (and this situation risks repeating itself, as the current impasse in UK-EU future relationships negotiations means another ‘no deal’ cliff-edge looms at the end of 2020). Ultimately, building resilience in this way increases costs which, inevitably, get passed on to the consumer.
Diversification of the value chain is part of the solution, because if disruption in one part of the world impacts one supplier, the chain is better able to adapt itself to replace that supplier with another from somewhere else. Physical location might also help, because it seems self-evident that a simpler value chain that is physically more compact is more difficult to disrupt. This pushes the concept of increasing production in the EU and being less reliant on foreign imports. Here, the idea is to build resilience by shifting production destined for European markets closer to Europe.
The concept of the EU increasing its share of domestic production, particularly in strategic sectors such as healthcare, highlights a potential economic opportunity. Countries which had previously seen production outsourced abroad could now benefit from a reversal of this trend, with domestic production being on-shored, with its ensuing economic gains. On-shoring also sits well with a goal of increasing the EU’s strategic autonomy. To date, the concept of strategic autonomy had generally been limited to the EU’s ability to act according to its own best interests, in the context of foreign and security policy. However, in a world post-Covid-19, when treating the concept more holistically and having as a goal the need to assure the health and wellbeing of its peoples, it is clear that the concept of strategic autonomy should be treated more broadly.
In this light, strategic autonomy demands the reduction in excessive dependence on other nations, notably China. Covid-19 may have exposed the EU’s reliance on China in the healthcare sector, but the problem doesn’t stop there. In rare earth metals, for example, some estimates suggest that China accounts for more than 85% of the global production capacity. These metals are crucial to components found in rechargeable batteries, computers and smartphones, wind turbines and solar cells, lasers, fibre optics and semiconductors, to name a few. The problem isn’t just a European one. A year ago, the U.S Commerce Department recommended the United States take urgent steps to boost domestic rare earth production, warning that a halt in Chinese supplies could disrupt global supply chains. It would, at least theoretically, be possible to diversify the sources of rare earths metals, because they are mined elsewhere in the world (at some expense, it should be added – rare earth metals can be expensive to extract and the methods used are site-dependent, making them difficult to duplicate elsewhere). More prosaic examples of reliance exist though, in industrial and consumer goods, machinery and equipment, footwear and clothes. Again, diversification, either to elsewhere in the world or to Europe, or both, would help dilute China’s strategic influence.