Building Resiliency in Supply Chains Post-COVID-19

August 24, 2020

onths after the onset of the coronavirus, which causes COVID-19, signs indicate that many global leaders will continue to move toward nationalist and protectionist sentiments that will further compound supply chain fragmentation. Disruptions to global supply chains had first come from the unintended consequences of the virus impacting production in source countries such as China, but this was compounded by matters such as shipping delays, cross-border trade interruptions and, in the case of our food supply, businesses’ inability to bring in seasonal migrant labour to complete production processes. Canada needs to better prepare for ensuring its markets are resilient, in particular in sensitive and strategic industries such as agri-food, pharmaceuticals, and manufacturing of essential health and medical supplies (such as personal protective equipment and ventilators), to name but a few sectors. Canada can seize the opportunity created by COVID-19 to modernize its supply chains by retooling for advanced manufacturing processes enabled by investment into better fifth-generation (5G) connectivity, big data, robotics and artificial intelligence (AI).

To better prepare for global transformations, be they from a pandemic or the continued impacts of climate change, Canada must identify its social, political and economic vulnerabilities in the event of disrupted global supply chains. After years of public trust in the efficiencies and resiliencies of unfettered globalization, just-in-time delivery and globally integrated supply chains, Canadian policy makers were forced to address public and industry concerns about supply chain disruptions due to COVID-19. While supply chain resilience is a matter that policy makers have engaged in through an ad hoc approach that deals with specific sectoral challenges, such as the 2016 drug shortages response, a national examination of supply chain resilience should be taken through a whole-of-government approach. Undoubtedly, the role of the provinces and the private sector in ensuring the resilience of our supply chains needs to be incorporated into any meaningful discussions. While we witnessed innovation in our production capacity to make needed items at the height of the pandemic and, overall, Canadians did not starve, thankfully, there is no room for complacency and there is a need for better preparation in case of disruptions. After all, the pandemic has exposed global trends that should challenge our complete faith in unfettered globalization and bring national security and intelligence into the uncomfortable conversation with all levels of government on assessing risks and our vulnerabilities

This pandemic will further reveal the political impetus to strengthen real and figurative borders.

In recent years, the level of global cooperation was already at an all-time low, thanks to the rise of populist nationalist sentiments, China-US trade wars, political pressures of decoupling trade and investment in sectors deemed of national security importance, and an introverted US administration under President Donald Trump, who refuted taking the helm. This pandemic will further reveal the political impetus to strengthen real and figurative borders. Unfortunately, this approach will put Canada in more precarious positions and force us to reassess our dependencies on foreign markets and even our trade with once-trusted regional economic and political allies. The Great Depression of the 1930s taught us that the introverted beggar-thy-neighbour sentiments served as the inflection point when the global economy had suffered and domestic fissures in society were exposed. Sadly, the lack of global leadership, the eroding will to cooperate and the diminishing fiscal means to cushion the collective blow in our respective economies mean we will need to brace for the worst to come. While some might argue that the COVID-19 pandemic is a temporary blip, there is blind hope in finding a vaccine in short order that is seen as a panacea to all our challenges. I would argue that we will see economic scarring in our supply chains, and a pharmacological solution to the pandemic and our economic slump cannot be guaranteed. These challenges may continue into the medium term, especially as we consider the anticipated long-term potential climate change disruptions to key sectors such as agri-food.

In addition to populist nationalism, the global movement to raise awareness of the environmental and climate impact costs of global supply chains is growing. The pandemic has elevated the political power and influence of climate action campaigners that will increasingly change public opinion on the unfettered nature of globalized production and its detrimental impact on the environment. This movement cannot be discounted as there is increased public support for rethinking our carbon emissions due to global travel and transportation. With mounting Canadian support for more green initiatives and a “clean recovery” post-COVID-19, societal pressure for better corporate social responsibility (CSR) will eventually touch on the core question of a business’s supply chain. Consumers, investors and stakeholders will increasingly ask firms to take CSR concerns seriously. Supply chain optimization is often not a green operation, and progressive global movements will be shining the light on the negative impact global supply chains have on our health, environment and society. These progressive environmental movements have been buoyed — if not, in their supporters’ view, vindicated — by the global pandemic such that their ability to change consumers and citizens’ behaviour will challenge “business as usual” in a post-pandemic economic recovery.

Canadian resiliency in our supply chains will be key to both preparing for a post-pandemic future and our economic recovery and preserving our national security. The global pandemic has revealed the vulnerabilities of economic globalization and global business activities that we took for granted for decades. Interdependencies, principles of comparative advantage, economic efficiencies, offshoring production, and transportation and communication breakthroughs had put our collective faith in the smooth functioning of global supply chains. When looking at global supply chains, Canada has certainly expended a great deal of its trade and business strategy on investing in higher-value-added activities such as research and development (R&D). This approach has served us well for many years, and continued investment in our knowledge and talent hubs is vital. The economic benefit to Canadians from government investment in our comparative advantage of world-class knowledge industries was — and is — a worthwhile government strategy in global trade, but the pandemic has also raised increased awareness of the need to also consider the role for reshoring essential services and strategic production.

Devising our trade policy through the lens of business interests without due consideration to national security interests is certainly myopic. This is not an argument for building a local supply chain across all sectors and industries or for added tariffs and inefficient trade barriers, but rather reshoring strategic production of goods and services deemed essential, building resilience in more trustworthy local and regional hubs, and accelerating investment in our knowledge industries that will help us secure our markets for essential goods and services. Canada will never return to manufacturing through manual production in assembly line types of work or the 1950s branch plant model, nor should it. After all, Canadian labour costs continue to be considerably higher than common offshore manufacturing locations, such as East Asia and Mexico, and rewinding the clock is not realistic, nor desirable. Of course, this means the costs of goods and services may be higher in a reshoring scenario, and the question of whether consumers would be willing to pay higher costs for goods and services is warranted. The rise of consumer awareness of the environmental and, perhaps, insecurity costs of offshoring may change consumer behaviour in favour of reshoring and paying for such items. Certainly, we have seen similar debates in the fair trade and CSR literature; how this meshes with international trade and regulatory commitments will require further discussion.

The future landscape of Canadian manufacturing includes increased automation in manufacturing production that takes advantage of knowledge-intensive production, or what is often termed as the Fourth Industrial Revolution. Hence, the future of reshoring manufacturing is high value added. Nevertheless, this necessitates stronger Canadian government investment in high-value-added areas of R&D such as robotics in manufacturing, remote and digital health care, AI, big data and machine learning. As much of this innovation is in small and medium-sized firms, policy attention toward raising awareness among Canadian innovators in valuing and controlling their patent ownership, better commercializing their ideas, and developing a national strategy for retaining Canadian-made knowledge and data would provide a better return on the Canadian government’s investment in R&D.

To capitalize on this Fourth Industrial Revolution, Canada will also require stronger and more concerted investment in R&D into the application of 5G technology in manufacturing and production. South Korea provides an interesting model where government investment in 5G technology is revolutionizing the country’s manufacturing sector in promising ways. To take advantage of opportunities in the application of 5G technology, Canada needs added investment in higher education, skills training and advancing knowledge hubs with a strong focus on science, technology, engineering and math. Studies have already shown that Canadian investment in our innovation sector, such as universities, talent hubs and R&D, may be a more efficient and effective means of attracting international companies to Canada; the same could be said for reshoring production at home.

Policy makers who recognize the opportunity in 5G technology must also consider the inherent security challenges in this software-based technology. As the global security concerns over China’s Huawei grow, and as 5G infrastructure is becoming a significant part of our potential to take advantage of future growth in the manufacturing sector, national security and intelligence play an important role in any conversation about our supply chain resilience. Canada’s policy debate about supply chains has been led by Public Services and Procurement with the creation of a COVID-19 Supply Council to provide advice on procurement and resiliency of our supply chains. While this is an important initiative, the role of Canadian security and intelligence institutions such as Public Safety Canada is necessary. Public Safety Canada certainly has a non-regulatory role and provides guidance, as opposed to enforcement, but its role in policy development and implementation and its ability to set direction by creating an enabling environment for resilience suggest that it could spearhead, or at minimum convene, this discussion.

A fiscal stimulus needs to offer Canadians and policy makers a political buy-in.

Among Public Safety Canada’s mandates is to prevent disruptions to our critical infrastructure. These processes and systems include the most obvious critical infrastructures of energy, finance and transportation, but also include lesser-known sectors such as food, health and manufacturing. Canada’s last National Strategy for Critical Infrastructure was written in 2009. It is outdated and overly reliant on mitigating risks to cross-border trade within North America, and the time has come for an update to consider supply chain resilience in our understanding of national security and public safety. While, in recent years, Public Safety Canada has considered insider risk, both physical and cyber, and the impact of climate change on our critical infrastructure, analyzing the risks of disruptions from interdependencies on global supply chains is even more necessary. In addition to cyber threats and climate change disruptions, weaknesses in our existing critical infrastructure strategy include an inability of the federal government to have the “policy and operational clout to impose solutions, even when they are known.” Hence, while Public Safety Canada plays an important convening role, it often has its hands tied with the realities of the myriad of public and private owners of critical infrastructure, multiple layers of governance and jurisdiction over critical infrastructure, and the difficult task of coordinating the interrelated parts of the critical infrastructure system. Yet the global pandemic has highlighted the need for stronger strategic and whole-of-government thinking about ensuring supply chain resiliency. Supply chain resilience is not simply a procurement or redeployment of industry issue but one of national security that requires a stronger oversight role for Public Safety Canada in coordinating our efforts. Lastly, supply chain resilience is about prosperity.

Our post-COVID-19 recovery will require government investment in promoting economic prosperity. With very little space for the Canadian government or the Bank of Canada to use traditional monetary levers, such as lowering interest rates to stimulate the economy, only fiscal levers are viable. That said, a fiscal stimulus needs to offer Canadians and policy makers a political buy-in. To that end, supply chain resilience and optimization can help our own domestic prosperity. Economic prosperity is the way to get political buy-in from Canadians who will see a tough road ahead. With the Canadian government’s investment in enhancing our digital expertise, AI and innovation in supply chain resilience, we will also achieve the requisite economic prosperity piece of this policy.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.