Finance Minister Chrystia Freeland has many reasons to lose sleep.
The rising cost of living has Canadians lining up at food banks. Federal Liberals anticipate a possible recession. And Freeland is personally connected to people living throughout war-torn Ukraine.
But in April, the finance minister said she had another looming problem on her mind.
“If you ask me what’s keeping me up at night, I’d say, ‘China’s zero-COVID approach and the very severe lockdowns we’re seeing right now,'” Freeland said at an event hosted by the Canadian Chamber of Commerce. . .
If Beijing’s strict COVID-19 rules and factory closures had her most worried, it was because they, more than anything else, would surely wreak havoc on the supply chains Canada depends on to keep its economy running.
In July, Canada dodged what was potentially an even bigger blow when the US expanded a policy that would have significantly benefited the sale of US-made electric vehicles to include its NAFTA partners.
However, the other problems remain.
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Eight months after Freeland’s comments, China is only now beginning to relax its tough lockdown policy amid public uproar, and Russia’s invasion of Ukraine has continued to drive up the cost of global commodity prices.
Now the government of Prime Minister Justin Trudeau is trying to strike a tricky balance in managing Canada’s supply chains, trying to shore up trade with like-minded countries while also taking advantage of China’s relentless growth.
“To put it mildly, there is a bit of light between the two perspectives,” said Michael Manulak, a Carleton University professor in the Norman Paterson School of International Affairs.
Supply chain turmoil is here to stay, so what is Canada doing about it? #CDNPoli #SupplyChains
Supply chains have gone haywire since the World Health Organization declared COVID-19 a pandemic in March 2020. Shipping containers were diverted to medical supplies or sat unused in remote ports. And in the resulting chaos, Canadians saw a myriad of effects: semiconductor shortages, rental car shortages, a rise in lumber prices.
A September analysis by Statistics Canada found that businesses have yet to fully adjust, with manufacturers reporting that raw materials cost a fifth as much this summer as they did last year.
“Businesses expect supply chain issues to continue in the near term, specifically when procuring inputs, products or supplies at home and abroad, and maintaining inventory levels,” according to the report.
Mark Warner, a trade lawyer with experience in both Canada and the US, said the main factor is Beijing’s lockdown policies, because many North American products are assembled with parts made in China.
“It’s still coming out of China, so when they slow down, or when they close a city or a factory because of COVID, it affects the world,” he said.
As a counterbalance, the liberal ministers have said during their visits to Washington that they want to emulate the US’s “support the friends” approach, which involves diverting trade from China to allies such as South Korea and growth markets in Southeast Asia. .
“Democracies must make a conscious effort to build our supply chains through each other’s economies,” Freeland said in a speech in October.
“Friend-shoreing is a historic opportunity…it can make our economies more resilient and our supply chains true to our most entrenched principles.”
Later that month, Industry Minister François-Philippe Champagne made a similar comment.
“What we want is certainly a separation, certainly from China and I would say other regimes in the world that don’t share the same values,” he told a panel.
“People want to trade with people who actually share the same values.”
But Warner said the idea will be difficult to put into practice.
Large democracies like India are no match for China’s fluid infrastructure and regulatory environment, he said. And Chinese-owned companies operate all over the world, including in Southeast Asia, where Canada is negotiating multiple trade deals as a counterbalance to Beijing.
“It doesn’t surprise me that autocracy or non-autocracy is going to be the driving force behind supply chain changes. It’s going to be who we think we can trust,” Warner said.
Ottawa’s argument for promoting friends goes beyond what Canadians matter. And upping its export game could help Canada avoid other tangled supply chain problems.
Liberals want to make Canada a powerhouse for electric vehicle parts, arguing that it can mine lithium, cobalt and graphite just as reliably as countries with less pristine environmental and human rights records.
Canada already has easy access to nickel, but environmental reviews and indigenous consultations may block access to other critical minerals, a problem Ottawa is just beginning to address.
That leaves companies that import minerals such as cobalt from Congo, despite well-known human rights abuses occurring in the country’s mines.
Business groups have raised similar criticisms of liquefied natural gas, for which Japan and South Korea have voracious appetites. Despite that potential, only one export terminal is planned to operate on the West Coast.
The government’s Indo-Pacific strategy, released last month, hints at the need for better supply chains by calling for “major improvements to Canada’s maritime, port, airport, highway and rail infrastructure, increasing domestic trade capacity, fluidity and efficiency”.
But there are no clear goals.
“Some of the government rhetoric in that space has outpaced reality,” Warner said. “We have to wait and see how far Canada can get the permits.”
The strategy says Canada should have “clear eyes” on China but put a fence around areas of collaboration and avoid cutting all ties, and Liberals argue a balanced trade portfolio could help control the effects of inflation. .
Manulak says that diversifying trade in Asia could help Canada’s relationship with the US, which is of great importance amid cross-border supply chains and as the government aims to support growing industries such as manufacture of electric vehicles.
“Canada is actually most useful to the United States as an ally and a partner, and has its greatest leverage in its relationship with the United States, when we have a well-developed set of relationships that we can draw on,” Manulak said, particularly with countries that have greater differences with the Americans.
“That’s what makes us a more relevant and influential player in Washington in the long run.”
This report by The Canadian Press was first published on December 14, 2022.