The Canadian supply chain – Should we be worried?

cargo ship carrying container for business import and export logistic supply chain,sea freight

The COVID-19 pandemic has highlighted the importance of a strong and resilient international supply chain. The tightening and closing of borders, restrictions of movement (people and goods) and the closure of businesses all serve as tools to control the spread of the virus. The disruptive outcome from this approach was expected. But :

  • when will everyday return and what does it look like?
  • As countries carefully, slowly find the path to COVID control, what are politicians doing to expedite a robust return?

Early in this pandemic, research was conducted with a goal to identify the industries most vulnerable to slow down or stop. It found international supply chains proved more resilient than many had feared. While important challenges existed from a Canadian perspective supply chains by-and-large survived the COVID 19 test of a global pandemic – critical foods and medicines continued to flow and supply chain issues did not prove to be a major constraint on restarting industries as lockdowns were eased. However, there are shortages some devastating.

International Supply Chains Recovery- What To Expect?

Smooth recovery and growth to international supply chains certainly remain important to Canada. Canadian politicians will be working to support growth and employment in their economies and certainly will be tempted to engage in efforts to restore jobs in the name of supply-chain security. International supply chains are showing key drivers of increased productivity and thus contributing to faster economic growth. It should result in improved incomes for workers and lower costs for consumers. However, it may not.

Sources Of Disruptions To The International Supply Chain:

There are countless potential sources of disruptions to the international supply chain. From natural to human disasters all improving resiliency and the vigor of supply chains remains an important consideration for politicians. One example…the global pandemic has accelerated the long-overdue shift from paper to electronic documents in the maritime shipping industry. This facilitates trade but it also improves the resilience of impacted supply chains to disruption while also enhancing the ability to monitor their performance. COVID-19 has accelerated the drive for more digitization of the world’s transportation industry. Other measures, such as the Government of Canada’s policy of trade diversification to build supply chain resilience while maintaining or increasing the benefits deriving from supply chains.

International Supply Chain In A Broad Perspective:

It is beneficial to take a broad perspective of international supply chains and how they relate to Canada. International supply chains may be categorized into three (3) general types.

The simplest first type would be a firm that imports goods or services for direct consumption in Canada.

Roughly, 44% of Canadian imports are directly used for consumption.

For this type of supply chain, only the upstream supply side is vulnerable to an international disruption.

The second type is like the first, however once the good or service is imported into Canada, it is then re- exported without significant transformation, a practice commonly referred to as Transhipment.

Transhipments make up 8.1% of Canadian merchandise exports.

While this transhipment chain may not seem of great importance compared to the other two types of supply chains illustrated here, it still has an impact on Canada, as this is trade that enters and exits Canadian ports, uses Canadian infrastructure, and relates to Canadian jobs in ports workers, truckers, rail workers etc.

The third more complicated type of supply chain is where a Canadian enterprise imports intermediate goods and/or services to be used as intermediate inputs in the production of goods that are then consumed in Canada and/or exported to other markets.

Approximately 56% of Canadian imports are used as intermediate inputs by enterprises in Canada.

In this type of chain Canadian firms are vulnerable to disruptions on both the upstream supply side and the downstream demand side. It should also be noted that firms can also be indirectly impacted by both upstream and downstream shocks through indirect imports and exports.. These three-broad type of international supply chains provide a general framework to imagine how Canadian firms are being impacted by shocks outside of Canada.

Impact of Border Closure on Supply Chain:

Borders are another potential stress point as export restrictions, barriers to movement of people, or even physical border closures can leave goods (and even services provided through cross-border movement of people) stranded outside of Canada. In the case of COVID-19, not only do we see foreign border closures and restrictions, but our own Canadian border also saw closures, compounded by a limiting of capacity in Canadian ports.

Impact of Transportation Restrictions on Supply Chain:

Another possible stress point is in the transportation of goods and services. Canadian firms with international supply chains must rely on a global transportation infrastructure of trucks, planes, trains, ships, pipelines, airports, roadways, canals etc., all of which are at the mercy of the businesses which run them and the countries with in which they operate. And like the firms that supply the products, these transportation links are also dependent on a wide range of people, not just truck drivers and airplane pilots, but also road construction crews, air traffic controllers, dock workers and many more, whom in the case of a pandemic, natural disaster or even war may not be able to make it in to work.

Canada As A Trading Nation:

These stress points matter to all three-broad types of supply chains and can hinder a Canadian companies’ ability to import as well as export. Canada is a trading nation,

In 2019 Canada imported $766 billion of goods and services, equivalent to 34% of Canadian GDP and exported $728 billion, or 32% of GDP.

Canada is home to 50 thousand goods exporting establishments and 120 thousand establishments that import goods. Therefore, many Canadian companies are vulnerable to disruptions to both their upstream supply (imports) and selling to downstream markets (exporting). This is not just large Canadian companies that are susceptible to supply chain disruptions, many Canadian small medium sized enterprises (SMEs) are part of international supply chains and thus exposed to international shocks such as COVID-19. Broadly speaking, SMEs are more exposed to international disruptions through imports than exports;

In 2018 there were 118 thousand SME’s that imported goods in Canada – almost three times as many as exported goods.

These potential disruptions to supply chains, and the ones currently happening due to the COVID-19 will likely impact all industries within the Canadian Economy. However, some industries will be impacted more than others. Some will be more exposed to stress in upstream supply, while others more vulnerable to disruptions in downstream demand, and some, unfortunately, both. On the other hand, there may be some sectors of the Canadian economy which are more domestically focused and isolated to international supply chains and thus ready to kickstart the Canadian economy as both Canada and foreign countries begin to start up after the COVID-19 closure. The Canadian Government continues to work towards strengthening the Canadian Supply chain however the chain is only as good as the weakest link.