Security of supply for medical and pharmaceutical goods must become a high political priority—with industrial policies promoting reshoring.
The pandemic and accompanying restrictions on international trade have demonstrated the vulnerability of global supply chains. Particularly in the case of critical goods—medical and pharmaceutical products—global production networks (GPNs) have lacked resilience and security of supply was threatened.
The impact within the European Union differed by sector and product. In particular, previously well-functioning supply chains for medical products relevant to the pandemic response—such as medical gloves, face masks and respirators—suffered bottlenecks due to demand surges and lockdowns in the EU, the United States and elsewhere.
By contrast, shortages of pharmaceutical products in the EU were limited. Yet short-lived export restrictions imposed by India on some critical medicines and intermediates, as well as production losses due to lockdowns in China, once again demonstrated the potential threats to pharmaceutical GPNs. This directed public attention to the rising supply shortages in the last two decades for various pharmaceutical products.
According to a report by the European Parliament’s Committee on the Environment, Public Health and Food Safety, pharmaceutical product shortages in the EU rose 20-fold between 2000 and 2018, 12-fold since 2008. A study by the Organisation for Economic Co-operation and Development found shortages in 14 member countries had increased by 60 per cent between 2017 and 2019. Medicines for cancer treatments, heart disease, nervous-system disorders and hypertension, as well as antibiotics and vaccines, were particularly affected.
The causes of shortages are complex and include production and quality problems, sudden surges in demand, parallel imports and others. Despite their variety, however, the key common factor comprises globalised and decentralised production networks.
There are considerable product-specific differences between and within sectors: it is primarily production of less complex and low-priced goods which has been outsourced to the global south and emerging economies. For medical products this mainly concerns personal protective equipment (gloves and masks). In the pharmaceutical industry, production of generics has been especially outsourced. Usually outsourcing has not affected the entire pharmaceutical manufacturing process but the production of intermediates or ‘active pharmaceutical ingredients’ (APIs).
Production of more complex and higher-priced goods—medical devices such as ventilators, magnetic-resonance imaging or patent-protected drugs such as new anti-cancer agents—is still located in the EU. But especially for more complex medical goods, they are also embedded in GPNs and often dependent on a variety of inputs and global suppliers.
Another problem has been the consolidation of supplier companies and their regional concentration. International competitive pressure increased as production sites in the global south became more attractive, due to active industrial policies associated with low wages and/or social and environmental standards, leaving only a few global suppliers for many products. On top of these factors, certain products depend on local availability of inputs: the bulk of global production of medical gloves is in the hands of six companies, mainly in Malaysia, linked to the availability of rubber and climatic conditions.
Much generic API production (including most antibiotics and analgesics) is located in China and India, and some APIs are only produced by a few firms or a single company, adding to the vulnerability of supply chains. In the case of paracetamol, for example, there are a comparatively large number of API-producing companies, but global production is essentially limited to China due to the availability of a product-specific supplier ecosystem; almost all other API producers are dependent on imports from China of para-aminophenol as an intermediate input.
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So how can the resilience of supply chains be increased? In addition to strengthening stockpiling for emergencies, liberal economists stress rebalancing supply chains. This includes measures to increase their robustness in crises—such as increasing inventory levels or the number of regions and suppliers for key inputs—but does not fundamentally change the global orientation of production itself. Such measures may reduce the risks of regional clusters and single sourcing, but to what extent firms will implement them voluntarily, given their cost, remains unclear.
In contrast to rebalancing, reshoring—bringing parts of the production back to the EU to increase supply security—remains controversial. Since the profitability of production in the EU for many of the critical products is limited, reshoring would have to be supported by industrial policies, such as subsidies or payment of higher prices, to compensate for enhanced security of supply and sustainability.
The opportunities and costs of reshoring however vary widely between products. The coronavirus crisis has shown, for example, that developing EU capacities for face masks is comparatively easy. Reshoring of generic APIs is significantly more complex and would not be viable without significant government support. For yet other products, such as medical gloves, the climatic conditions, the lack of local availability of essential inputs and the required production scale make EU production very unlikely. In these cases, increased stockholding would be a possible alternative.
The pandemic has highlighted the need for a broad public discussion about which products are critical, which policies should be implemented for which product groups and what resources our society is willing to invest in security of supply. The large variety of critical products and respective GPNs call for a policy mix, including increasing the resilience of supply chains, supporting stockpiling and promoting reshoring. As to the latter, in particular, European solutions are necessary, given high subsidy costs, the larger market and pronounced economies of scale in production.
In the case of pharmaceuticals, and despite political pressure from some EU member states—France in particular—the European Commission’s new Pharmaceutical Strategy aims to support the resilience of supply chains but is vague about reshoring. Although legislative proposals are planned for 2022, including regulatory measures for firms to increase supply security for medicines, the role of reshoring is yet to be discussed.
In light of increasing crisis dynamics—whether due to climate change, political conflict or pandemics—it would be irresponsible to bury the issue of supply security quietly after Covid-19 has faded or to respond to it with only half-hearted measures.