British MPs have welcomed government promises that its mysterious “Project Defend” will not involve localising supply chains, warning businesses that onshoring due to Covid-19 could have unintended consequences for trade.

It emerged in May that Prime Minister Boris Johnson had instructed civil servants to produce a strategy for reducing dependence on individual countries for critical supplies – widely reported as an attempt to cut the UK’s reliance on goods imported from China.

So far the government has been reluctant to discuss Project Defend. However, in a report published early on July 29, the cross-party International Trade Committee (ITC) cites evidence given by trade secretary Liz Truss suggesting onshoring supply chains “is not being proposed” as part of the scheme.

Truss told the committee she could not “go into the details of Project Defend for obvious security reasons”, but that localising supply chains risks creating new vulnerabilities to production shocks in the UK.

The committee expresses relief that localising supply chains is “not on the table”.

“Any proposed measures to bring about onshoring of production in the UK need to be approached with caution,” it says in today’s report – part of an ongoing inquiry into the impact of Covid-19 on UK trade.

“Onshoring may not be easy to achieve; it may have unintended consequences in respect of factors such as the price of goods and tit-for-tat actions by other countries; and it may replace one form of vulnerability with another. In addition, it may have implications regarding the terms of international agreements.”

However, prior to the publication of today’s report, there have been indications from the private sector that firms are already looking to localise their supply chains.

A recent survey by trade association MakeUK found that 46% of manufacturers believe they will “significantly or moderately increase supplies in the UK”, when asked how they expect their supply chains to change in the next two years.

Figures provided to GTR show that nearly 30% of UK manufacturers expect to decrease supplies from the Asia Pacific region, while 19% plan to do so for EU imports.

The ITC report does acknowledge the underlying motivation for onshoring.

Manufacturers “have suffered significant adverse effects from the disruption of international trade caused by the pandemic, with the flow of raw materials, parts and sub-assemblies seriously impeded, and the ability to sell finished products greatly curtailed”, it says.

It refers to evidence given by Dr Sam Roscoe, a lecturer at Sussex University’s business school, saying the pandemic has laid bare firms’ reliance on complex, global supply chains with several points of failure. A fundamental shift towards localisation would be “good business sense”, Roscoe said.

However, the committee says it does not necessarily share those conclusions. It cites Professor Simon Evenett, the coordinator of policy monitor Global Trade Alert, arguing that vulnerability due to overreliance on individual countries is “a problem that has been grossly exaggerated”.

For example, Evenett says the UK imports 151 different types of medical goods from China. However, Chinese goods make up the majority of imports in just six of those cases.

The report proposes several alternatives to onshoring, such as increasing supply chain diversity, building in overcapacity, stockpiling or sourcing more from nearby countries.

With medicines, it suggests the government looks into the possibility of building “surge capacity” within parallel supply chains.

In effect, that would mean UK companies produce a small proportion of required supplies in normal times but, in times of stress, can significantly increase that capacity to meet domestic demand.

Rebecca Harding, an independent economist and chief executive of Coriolis Technologies, says she expects to see the emergence of “distributed supply chains, with smaller inventories held in different places”.

“That’s the best way of hedging bets,” she tells GTR. “That does involve more lean management and more of a just-in-time approach, but it doesn’t have to be more costly if you can get the right kind of finance.”

Harding adds that supply chains were already moving in that direction before the pandemic.

“Another very important driver has been environmental sustainability,” she explains. “A lot of companies have been talking about making supply chains shorter, as have a lot of banks, which means that irrespective of the cost, supply chains are closer to home, leaner and easier to manage.”