Canada's uncertain economic times

by Maj (ret'd) CORNELIU E. CHISU, CD, PMSC,

FEC, CET, P. Eng.

Former Member of Parliament Pickering-Scarborough East

As the pandemic continues with renewed strength, a weakening sentiment arises in Canada about an optimistic return to normality. The new containment measures imposed to dampen the second wave of COVID-19 in Quebec and Ontario have applied the brakes to economic recovery. The new lockdown measures include closures of bars, restaurants and gyms as well as limiting the number of people at social gatherings.

In addition to causing a steep drop in economic output, the pandemic has exposed risks inherent to how companies operate their supply chains. More specifically, as businesses adapt to the changing economic landscape caused by the virus, the balance between supply chain resiliency and efficiency has come into focus.

Until the pandemic started, efficiency meant economies of scale, just-in-time production and minimal warehousing costs. The shift to resiliency has led to a focus on withstanding supplier and distribution disruptions.

The erratic government mandated shutdowns have created a wide range of issues for businesses. In addition to shutdowns causing obvious backlogs for manufacturing operations, there have also been less apparent problems: backlogs at distributors' warehouses due to companies being closed and unable to receive their merchandise; cargo container shortages causing bottlenecks for companies that need the containers for outbound shipping; and closures of third-party service providers, leaving some businesses unable to maintain critical back-office functions. Domestic challenges are compounded by those at the global level. Companies have seen the collapse of available air cargo capacity due to the steep drop in the number of passenger flights. This reduction is a huge problem, since air cargo delivers 35 percent of the value of global trade.

These domestic and international developments have disrupted economic productivity. In the case of export controls on medical supplies, they have also created risks to Canadians' health.

Another major piece of COVID-19's economic impact is the accelerated decoupling of the US-China economic relationship that was well under way before the pandemic. Concerns about how China responded to the disease, and the growing bipartisan US consensus on the need to take a harder line with Beijing have increased pressure on Canada to align with its American allies. The next element in increasing Canada's supply chain resiliency is to establish criteria for ranking the importance of particular sectors. Doing so is easier said than done. As we have seen during shutdowns earlier in the year, provinces differed widely in how they defined essential businesses. The federal government did not show leadership, only publishing non binding guidance. The net effect of this regulatory incoherence was further disruption for companies that operate in more than one province or territory. Sometimes an activity was allowed in one province but not in another.

Supply chains include both goods and services. While physical products attract the most attention, services are equally important. This category includes financial services, back-end transportation logistics and after-sales servicing, as well as front-end engineering and design. Intellectual property (IP) and data-intensive aspects are also critical for keeping Canadian businesses competitive.

While it may be tempting to make a sharp distinction between the so-called old economy and the new economy, the dividing line is quite blurry. In sectors such as the agricultural and automotive sectors, the knowledge-intensive parts of the supply chai

n are critical to the efficiency of the rest of the chain. They are linked in this sense.

Supply chain resiliency is not simply a matter of building capacity to produce everything within Canada. Doing so is neither possible nor desirable. It would be difficult to create the conditions for companies to profitably produce a volume of components to supply a comparatively small Canadian market.

It is important to remember that Canada relies on exports for its economic security. Using supply chain policies to achieve economic resiliency should be benchmarked against several criteria. First, federal and provincial governments need to assess whether the goods or services are critical to the health and well-being of Canadians, since public safety and security help enable economic activity. Second, they need to determine whether the good or service currently comes from an unreliable source. Third, they must ask whether the good or service is essential to global supply chains that support Canadian economic prosperity. Fourth, they need to decide whether moving the good or service offshore or letting it fall under the control of a hostile power creates a critical challenge.

The list of economically critical sectors under discussion includes specialized engineering services that support functioning infrastructure, manufacturing of medical equipment and supplies, financial services required for business transactions, and the mining for rare earth minerals that come from only a handful of sources, even if they can be obtained from spent nuclear fuel, of which Canada has plenty, but no action has been taken.

Despite this broad list of critical sectors, the government has an extensive range of instruments to elicit outcomes it considers to be in the national interest. These include:

Reshoring production to reverse Canadian manufacturing decline, foremost among them making Canada's tax and regulatory systems competitive. In a post-COVID-19 era where governments around the world will create substantial new incentives to generate domestic manufacturing, Canada needs a compelling narrative to attract capital.

Procurement, to stimulate demand for companies' outputs and encourage local production, while respecting Canada's trade obligations. One justification could be on the grounds of public health and safety.

The government can also deploy a number of measures with an international focus. The Investment Canada Act gives the government wide latitude to deny foreign takeovers to support our economic and national security objectives. However, prudence must not be a back door for protectionism. As a trade-dependent nation, Canada relies on foreign markets to generate income and source products not made here. Canada requires a rules-based trading system. COVID-19 demonstrated how quickly export restrictions emerged, even in countries with which Canada has trade agreements.

The identification of the tools at the government's disposal is relatively easy. The real work comes in the execution where you need competence and determination. This challenge will demonstrate who is up to the task; the Liberals in government or the Conservatives in opposition.

As critical as the economic recovery will be for the government's post-pandemic economic policies, there are basically four concrete ways to move ahead.

The first is having advisory bodies, that rather than looking solely at traditional economic metrics, will consider national security and resiliency where appropriate to reflect all aspects of the national interest.

A second key measure is the pressing need for a comprehensive review of Canada's tax system. Businesses need a coherent and competitive regime to attract investment.

The third step is a reinvigoration of regulatory reform to incorporate economic competitiveness into the mandates of Canadian regulators.

The last step is to review Canada's international policy. The global landscape is rapidly evolving, and Canada needs to make foreign policy and trade policy work together, instead of operating randomly.

Economic security is necessary for economic recovery. In the current global environment, no foreign leader wakes up wondering how to protect Canadian interests. With crucial national security and our economic interests at stake, Canada needs to be both strategic and determined as we chart our course.

Are our elected leaders up for the task?