Treasurer Chrystia Freeland has plenty of reasons to lose sleep.
Soaring cost of living has Canadians queuing at food banks. The federal Liberals predict a possible recession. Freeland has personal connections with people living across war-torn Ukraine.
But in April, the finance minister said she had another looming problem.
“If you were to ask what’s keeping me up at night, I’d say, ‘China’s zero-COVID approach and the very severe shutdowns 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 shutdowns worry her most, it’s because those, above all else, are sure to wreak havoc on the supply chains Canada depends on to keep its economy afloat.
Canada dodged a potentially bigger blow in July when the U.S. expanded a policy that would have significantly benefited sales of U.S.-made electric vehicles to include its NAFTA partners.
However, other problems remain.
Eight months after Freeland’s comments, China is only beginning to ease its draconian lockdown amid popular uproar, while Russia’s invasion of Ukraine has been driving up the cost of global commodity prices.
Now, Prime Minister Justin Trudeau’s government is trying to strike a delicate balance in managing Canadian supply chains, trying to continue to capitalize on China’s growth momentum while boosting trade with like-minded countries.
“To put it mildly, there’s a little gap between the two views,” said Michael Manulak, a professor at Carleton University’s Norman Paterson School of International Affairs.
Supply chains have been in disarray since the World Health Organization declared COVID-19 a pandemic in March 2020. Sea containers are being diverted for medical supplies or sitting idle in remote ports. In the resulting chaos, Canadians see myriad repercussions: semiconductor shortages, rental car shortages, rising lumber prices.
A Statistics Canada analysis in September found that companies still haven’t fully adjusted, with manufacturers reporting raw material costs that were a fifth higher this summer than last year.
“Firms expect supply chain issues to persist into the near term, especially when sourcing inputs, products or supplies domestically and abroad and maintaining inventory levels,” the report said.
Mark Warner, a trade lawyer with expertise in both Canada and the United States, said the most important factor was Beijing’s blockade policy, since many North American goods are assembled using components made in China.
“It’s still coming out of China, so when they slow down, or when they shut down cities or factories because of COVID, it affects the world,” he said.
As a counterweight, Liberal ministers have said during their visit to Washington that they want to emulate the U.S. approach of “supporting friends” by shifting trade away from China to allies such as South Korea and growing 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.
“Supporting a friend is a historic opportunity to make our economy more resilient and our supply chain to stay true to our deepest principles.”
Industry Minister Francois-Philippe Champagne made similar comments later that month.
“What we want is of course decoupling, of course decoupling from China, and I would say other regimes in the world that don’t share the same values,” he told a group.
“People want to transact with someone who really shares the same values.”
But Warner said the idea would be difficult to pull off.
Large democracies such as India cannot match China’s smooth infrastructure and regulatory environment, he said. Chinese companies operate globally, including in Southeast Asia, and Canada is negotiating multiple trade deals to counter Beijing.
“It doesn’t shock me that dictatorships or non-authoritarianisms will be the drivers of change in the supply chain,” Warner said. “It’s going to be whoever we think we can rely on.”
Ottawa’s pitch for supporting friends goes beyond Canadian imports. Strengthening its export business could help Canada avoid other thorny supply chain problems.
The Liberals want to make Canada a powerhouse for electric vehicle parts, arguing that it can mine lithium, cobalt and graphite as reliably as countries with less robust environmental and human rights records.
Canada already has easy access to nickel, but environmental reviews and Indigenous consultations could limit access to other critical minerals, an issue Ottawa is only beginning to address.
That has allowed companies to import minerals such as cobalt from Congo despite known human rights abuses at mines in the country.
Business groups have leveled similar criticisms of LNG, which has a strong appetite in Japan and South Korea. Despite this potential, only one export terminal is planned to operate on the west coast.
The government’s Indo-Pacific strategy, launched last month, does hint at the need for better supply chains, calling for “significant upgrades to Canada’s ocean, port, airport, road and rail infrastructure to improve the nation’s trade capacity, mobility and efficiency.”
But there is no clear goal.
“Some of the government rhetoric in this area has outstripped reality,” Warner said. “We’ll have to wait and see to what extent Canada can go through with licensing.”
The strategy says Canada must keep a “clear head” on China, but ring-fence areas of cooperation and avoid cutting all ties, with the Liberals arguing a balanced trade mix can help control the impact of inflation.
Manulak said diversifying trade in Asia could help Canada’s relationship with the U.S., which is extremely important in cross-border supply chains as the government aims to support growth industries such as electric vehicle manufacturing.
“Canada is actually America’s most useful ally and partner — and wields the greatest leverage in our relationship with the U.S. — when we have a well-developed set of relationships that we can leverage,” Manulak said, especially Countries that disagree with Americans.
“That’s what makes us a more relevant and influential player in Washington in the long run.”
The Canadian Press report was first published on December 14, 2022.