Supply of goods in times of crisis: analysis and lessons for Switzerland

In spring 2020, people around the world were directly affected by the shortage of medical supplies such as protective masks and disinfectants. Since the beginning of 2021, the economy is recovering. However, difficulties within global supply chains have by no means disappeared. On the contrary: currently, congested container ports and a mismatch between supply and demand are causing delivery delays worldwide.

The economic consequences of the pandemic have reignited the discussion about security of supply in Switzerland. Calls for more self-sufficiency are being voiced. However, the crisis has shown that decoupling the Swiss economy would not be an effective means of strengthening the supply of goods. Thanks to a diversified procurement network, complemented by sensible measures at home (e.g. compulsory stocks), there have been no prolonged supply bottlenecks for important goods in Switzerland.

However, further crises cannot be ruled out. It is therefore important to tackle reforms at national and international level that will consolidate Switzerland’s resilience in the long term. This includes, for example, strengthening digital trade or intensifying international cooperation in research and development.

The pandemic and its economic consequences show us not only the efficiency but also the complexity and fragility of global supply chains. The availability of an essential commodity cannot be taken for granted. For Switzerland as a country with a small domestic market and no raw material resources, the following questions therefore arise:

• How can Switzerland secure its supply in times of cross-border supply chains?
• What role do the economy and the state play in this?
• What lessons need to be learned from the current pandemic in order to better anticipate risks in the future and respond more effectively in the event of a crisis?

Experience from one and a half years of the pandemic allows to distinguish between alleged and actual supply bottlenecks, and between self-sufficiency and security of supply. Myths can also be clearly separated from facts when analysing the causes. The concrete policy recommendations for the economy are also based on this kind of differentiated analysis.

Switzerland wants to be supplied with essential goods and services.‘Security of supply’ is guaranteed when vital goods are available in sufficient quantities. There are those who would prefer to produce domestically as much as possible. However, it is questionable whether such ‘self-sufficiency’ would be possible at all.

Statistics show that Switzerland is far from being able to produce all essential goods by itself. It is therefore dependent on imports. This is the case with food, for example. Here, the net self-sufficiency rate (ratio of domestic production to total domestic consumption) was 51 percent in 2018, due to the small agricultural area available. However, this value was only possible thanks to imports – of agricultural machinery, diesel, or fodder, for example. The situation is even more pronounced in the case of oil. Here, Switzerland is entirely dependent on imports.

This dependence is not new. In the last hundred years, Switzerland has never been able to and has never had to be completely self-sufficient. Nevertheless, it is important to note that despite epidemics such as SARS (2003), the swine flu (2009) or the current COVID-19 crisis, food security has never been at risk in recent decades. Security of supply was achieved without self-sufficiency. However, a variety of instruments and measures are needed to achieve it.

According to the National Economic Supply Act (NESA), supplying Switzerland with essential goods and services is the responsibility of the private sector. The state only intervenes in a supporting role (principle of subsidiarity). This is the responsibility of Switzerland’s National Economic Supply (NES), which includes the Federal Office for National Economic Supply (FONES).

The NES has various instruments at its disposal for national supply. All measures are to be understood as supplementing imports of goods from abroad.

• Compulsory stockpiling: if the supply of a commodity can no longer be covered by the market due to shortages, the Confederation can release compulsory stocks. Sugar, rice, fertiliser, animal feed, mineral oil and various medicines are stored. However, stockpiling is the responsibility of the companies themselves.
• Import promotion programs: in the event of emerging shortages, tariff quotas can be expanded, or customs duties reduced.
• Export controls: the export of certain goods can be regulated for security policy reasons (export licence). However, supply policy considerations may also be relevant (e.g. export controls of medical equipment by individual EU states in March 2020).
• Supply and consumption management: this involves the targeted promotion of the production of certain goods and the management of their intended use (e.g. electricity quotas for large consumers by the NES).
• Monitoring tools: information and coordination platforms are available to keep a constant eye on the situation (e.g. online therapeutic products reporting platform).

It is well known that Switzerland is one of the world’s strongest exporters. However, in the context of security of supply, a precise knowledge of the Swiss import structure is also helpful. Optimal access to foreign procurement markets is essential for Switzerland with its small domestic market and lack of raw materials.

• The illustration of Switzerland’s top 20 import partners in 2020 (see chart below) reveals its close integration with Europe: of the ten largest import partners, eight are European countries (orange bubbles). This situation is facilitated by geographical proximity and largely non-discriminatory access to the EU internal market.
• The two non-European countries (red bubbles) in the top 10 are the USA and China. The latter was able to record a relatively high average annual growth rate in imports of around 10 per cent between 2000 and 2020.
• Switzerland can also draw on a diversified network with countries from Asia or the Middle East. The Arab Emirates, Vietnam, and Singapore, for example, have the highest annual growth rates of all the top 20 importing countries.

• Switzerland’s close ties with its neighbouring countries are also reflected in the individual product categories: Germany is the largest import partner in eleven out of twelve categories (exception: China is the largest import country in the category of textiles, clothing and footwear). In addition, Italy or France are the second largest import partners in eight out of twelve categories.
• At 52 per cent, the cumulative share of the top four importing countries is second lowest for chemical and pharmaceutical products (after watches and jewellery).

With regard to the issue of supply, the COVID-19 crisis can be divided into two distinct phases:

Acute pandemic phase (from spring until end of 2020): due to the rapid spread of the coronavirus, the demand for goods to fight the pandemic skyrocketed. This led to shortages of products such as medical masks and disinfectants in many countries. Calls for greater self-sufficiency have followed in many countries. In Switzerland, too, there have been calls for certain production capacities to be relocated domestically.

Recovery phase (from spring 2021 to present): thanks to a global vaccination campaign and expansion in the production of medical goods, the epidemiological and therefore also the economic situation have recovered. However, disruptions in global supply chains have been accentuated. An unexpectedly strong increase in demand since last autumn is currently creating a tense situation in logistics. Various raw materials, intermediate products and industrial goods are being affected. A rapid easing of this challenging situation is not in sight.

Triggered by the COVID-19 pandemic, the global economy fell into a deep recession in the spring of 2020. Government-imposed closures of production facilities and export restrictions also had a severe impact on certain Swiss imports. In the second quarter of 2020, imports recorded a seasonally adjusted decline of 16 percent compared to the previous quarter – the sharpest drop in decades.

During this acute pandemic phase, public interest was particularly focused on goods for the prevention and control of the pandemic. A list of such ‘important medicinal products’ is provided by the COVID-19 Ordinance 2 of 13 March 2020, which divides them into three categories:

Although Switzerland did not experience any persistent supply bottlenecks, the supply situation for some of these goods was tight for several weeks.

I. Active substances and medicinal products

From February 2020 onwards, the FONES reported a temporary sharp increase in reports of supply disruptions on the therapeutic products reporting platform. More than a third of the reports from 2020 concerned antibiotics (33%), but antifungals (14%), analgesics (12%) and muscle relaxants (4%) were also mentioned. The reason most often given for the shortage was the increasing global demand. The data also show that the situation returned to normal after a short time (April 2020).

II. Medical devices

While medical oxygen was always available, steel cylinders were in short supply at times. Therefore, the Swiss Agency for Therapeutic Products (Swissmedic) temporarily permitted the use of other technically suitable tanks. In the case of respiratory equipment, the supply could always be guaranteed despite strongly growing demand; only individual components were in short supply at times.

III. Protective equipment

The demand for disinfectants increased sharply over a short period of time, resulting in a shortage of ethanol in particular. To counteract this shortage, the Federal Office of Public Health (FOPH) issued a temporary exemption permit for locally produced ethanol. In the longer term, the re-introduction of a compulsory stockpiling of ethanol is planned (see ‘Lessons from the crisis’ below).

There was also a temporary shortage of face masks. As with the active substances, Switzerland is heavily dependent on imports (around 80 per cent of mask imports come from China). As global demand increased massively in a very short time in March 2020, Switzerland had to procure masks in a tight market. In addition, various states temporarily blocked the export of medical protective equipment to Switzerland. This also included some EU member states.

Since spring 2021, logistical problems in global supply chains have expanded and intensified. Transport on the world’s oceans is disrupted. Many consumers and companies around the world are waiting in vain for their goods to be delivered on time. Industry experts call it a ‘perfect storm’.

• In 2020, a production freeze in Asia and a global decline in demand led to the short-term withdrawal of around 550 container ships from the market.
• In 2021, global demand increased massively. At the same time, it shifted from services to private consumption (‘e-commerce’). As a result, demand for goods exceeded transport capacities for the first time in decades.
• On some routes, transport costs have increased by more than 500 per cent compared to the previous year. In many cases, this price increase is passed on to consumers.
• Containers are currently lacking on the most important trade route from Asia to Europe. This is because, among other things, medical equipment was transported to the southern hemisphere at the beginning of the pandemic.
• Port closures have led to congestion of countless container ships near the ports. In 2020, 65 percent of container ships were still running on time; in 2021, this figure dropped to 35 percent.
• Congestion at the ports shifted the problem to inland transport – aggravated by a lack of truck drivers.
• Due to the pandemic, there were repeated factory closures and corresponding production losses.

Many Swiss companies are currently affected by the supply chain disruptions. a rapid normalisation of this tense situation cannot be expected. This is shown by a survey conducted by economiesuisse involving 237 companies and associations in October 2021:

A sales problem last year has meanwhile turned into a production problem. Four out of five companies report difficulties in sourcing input products. This proportion is significantly higher than during the acute phase of the pandemic last year (see chart below).
The shortage of materials affects almost the entire industrial sector (including construction), but also trade. Raw materials (steel or wood), as well as intermediate products (computer chips) and end products (washing machines or cars) are in short supply.
The supply bottlenecks for computer chips and semiconductors in particular are causing problems for numerous sectors. Medical technology, for example, currently lacks any planning security for procurement and production.
The most frequently cited reason for delivery bottlenecks is problems with transport and logistics (72%). However, limited production capacities (68%) and production stoppages at suppliers (64%) are also cited.
As a countermeasure, about two-thirds of the companies have increased their stocks, and about half of the companies are looking for additional suppliers.
Likewise, about half of the companies have already been forced to raise prices. Three-fifths are planning this step within the next six months.

The preceding examples show that decoupling the Swiss economy is not an effective means of strengthening security of supply in the long term. A state-supported expansion of domestic production for certain goods would be equally short-sighted.

At the same time, it is important not to focus exclusively on security of supply in the follow-up to the COVID-19 pandemic. The next crisis of global proportions may not necessarily be epidemiological in nature. Energy supply, cyberattacks, military conflicts or natural disasters also carry considerable risk. With this in mind, the current pandemic situation should be used to strengthen the systemic resilience of Switzerland and the international community in the long term. According to the business community, this requires various measures – both at the unilateral as well as at the bilateral and multilateral levels.

• No protectionism in the context of security of supply: trade-restrictive measures should only be used for a limited period of time, in a proportionate manner and as a last resort. New trade restrictions or state subsidies to promote Swiss production are to be avoided.
• Ensure security of supply with sufficient legally required compulsory stocks: legally required compulsory stocks should be reviewed and expanded where appropriate (e.g. re-establishing a compulsory ethanol stockpile). Larger end users of critical goods (e.g. hospitals) should also take responsibility for reviewing their own storage strategy.
• ‘Just-in-case’ instead of ‘just-in-time’: when choosing its suppliers, companies focus on minimising costs. However, the pandemic has highlighted the risks of this strategy. For greater resilience, forward-looking inventory planning and supplier diversification should therefore be increasingly included in strategic decisions once again.
• Improve the use of free trade agreements: SMEs in particular are sometimes unable to benefit from free trade agreements due to limited resources. Support is needed here in the form of appropriate information services and platforms.
• Drive digital trade: companies should invest more in digital supply chain management and supply chain transparency. At the same time, the state should support the private sector’s risk management strategies by creating the right regulatory environment (e.g. digitalisation of customs processes).
• Implement the principles of the circular economy in a meaningful way: by extending the life and useful life of goods, Switzerland can better cushion the risks of global supply chains in the long term. There is still great potential in the area of waste recycling in this country – especially for private initiatives.

• Securing supplies in times of crisis through international treaties: supply shortages of important goods have occurred not least due to restrictions on the movement of goods by individual states. Bilateral agreements can minimise Switzerland’s exposure (e.g. assurance that export restrictions will be waived in the event of a crisis).
• Cross-border harmonisation of conformity regulations: not fragmentation, but cross-border harmonisation of product regulations strengthens security of supply in times of crisis. This includes, for example, mutual recognition agreements (MRAs).

• Further development of market access: improve existing agreements with those countries where the largest increases in trade can be expected. Despite its dense network of free trade agreements, there is much potential for Switzerland in this regard (e.g. with the US, MERCOSUR or India).
• Strengthening the WTO and further development of multilateral trade rules: for Switzerland as a small economy, trade liberalisation achieved through the World Trade Organisation (WTO) is clearly the ‘first-best solution’. For example, it should support the WTO Trade Facilitation Agreement to accelerate trade in essential goods.
• Intensify cooperation in research and development: Switzerland must maintain its leading position and intensify its exchange with the strongest research centres worldwide. Innovation also contributes to resilience for future crises, as the example of mRNA technology shows. The latter has been researched for years as a possible treatment against cancer. Through its successful application in vaccines, a surge in innovation in the field of cancer treatment is now conceivable.
• Acceleration of certification and market authorisation processes: Efficient certification processes increase the international availability of critical goods (e.g. clinical studies conducted in parallel for the approval of vaccines).
• Aim for regional cumulation in trade in goods: the creation of a ‘cumulation region’ between several common trading partners would enable Switzerland to take inputs from this cumulation region into account when manufacturing a product. This would facilitate trade and strengthen competitiveness.
• International coordination of production capacity: greater coordination of production in times of crisis should be promoted at continental level (e.g. for active medical substances).
• Transparency of supply and demand of critical goods: there is a need for a timely and comprehensive exchange of information between business and politics, both nationally and internationally. This is because uncertainty fuels protectionist policies. For example, a communication channel between vaccine manufacturers and other stakeholders could raise awareness of shortages.