By Stephen Nagy, February 16, 2022
Wuhan, China, was the epicenter of the COVID-19 pandemic in late 2019. The initial region-wide lockdown to stem the domestic transmission of the virus negatively affected global supply chains of a variety of sectors including the semiconductor, pharmaceutical and the automobile, among others.
Though geographically distant from the COVID-19 epicenter, Canada felt and continues to feel the challenges associated with disruptions in supply chains connected to the Indo-Pacific. These disruptions are prompting Canada and other countries to think about their economic security.
At the onset of the coronavirus pandemic there was a shortage of personal protective equipment, demonstrating the link between nontraditional security issues like transnational diseases such as COVID-19 and the disruption of supply chains. We also saw the weaponization of supply chains with Canadian products being prejudiced by China through economic coercion associated with the arrest of Huawei’s chief financial officer Meng Wanzhou. This showed the link between geopolitics and the weaponization of supply chains. This economic coercion demonstrated that black swan events like the COVID-19 pandemic were not the only threat to supply chains and economic security.
In both cases, disruptions in supply chains affected Canadians. It wasn’t until the floods in late 2021 in British Columbia did Canada and its Indo-Pacific partners like Japan understand that there were supply chain resilience issues on the North American side of the Indo-Pacific with agricultural products such as potatoes being disrupted.
These events have highlighted the importance of building resilience into the Indo-Pacific portion of the supply chain. Critically, this is not a Canada specific issue. It has garnered increased interest among like-minded countries such as Japan, the United States, Australia, India and many more. They are looking to supply chain resilience as an important part of their economic security and a critical tool to negotiate the challenges of U.S.-China strategic competition across the Indo-Pacific region.
An area of increasing significance for Canada, Japan and others are supply chains for sensitive technologies produced by Taiwan Semiconductor Manufacturing Co. Ltd. TSMC produces critical semiconductors that are used in civilian and military grade technologies such as Apple Inc.’s iPhone chips, Nvidia Corp.’s AI chips and semiconductors used in the cutting-edge F-35 stealth fighter jets.
Importantly for Canada and Japan, these semiconductors are key components in automobiles produced by Japanese car manufacturers based in North America. Simply, man-made or nature-made dislocations in semiconductor production would have ramifications on Japan’s largest corporations in Canada and as a result Canadians employed in those corporations.
How much impact do you ask? According to World’s Top Exports, in 2020 Canada was the 13th-largest auto-producing nation in the world, and seventh-largest auto exporter by value, producing 1.4 million vehicles and exporting $32 billion worth of vehicles in 2020. In terms of employment, the automobile sector accounts for approximately 10% of manufacturing GDP; 23% of manufacturing trade with the automobile industry directly employing more than 125,000 people in vehicle assembly and auto parts manufacturing; and another 380,000 in distribution and aftermarket sales and service.
The role of critical technologies and their associated critical materials such as rare earths will only deepen in the years to come as artificial intelligence and other such tech advancements further permeate our lives. Therefore, gridlocks and logjams in the supply of semiconductors, sensitive technologies and critical materials will require investing in resilience through cooperation with like-minded states such as Canada, Japan and the U.S.
This investment will need to take into consideration unexpected events like the COVID-19 pandemic and extreme weather patterns that are emerging. Unfortunately, they will have to also take into account the well-documented track record of interference by states such as China in technology firms, the selective use of supply chains to engage in economic coercion and vulnerabilities associated with an overconcentration of critical production and manufacturing of products and components in one country (natural or manmade).
The list is long
Japan experienced the weaponization of rare earths in 2010 after the arrest of a Chinese fisherman. Australia is still experiencing trade weaponization in specific sectors following its requests for an international investigation into the origins of the COVID-19 pandemic, and we have seen the weaponization of supply chains following Canada’s arrest of Huawei executive Meng. Canola, beef and other products faced increased scrutiny as Beijing attempted to pressure the Justin Trudeau government’s position on Meng’s extradition to the U.S., which had requested that Canada detain her.
Canada, Australia and Japan are not the lone victims of economic coercion: South Korea and, most recently, Lithuania have also fallen prey to such pressure to change domestic political decisions.
More and more multilateral cooperation between states is being undertaken to inculcate better resilience into supply chains and insulate them from weaponization or unforeseen events.
Prominent initiatives include the Resilient Supply Chain Initiative between Australia, Japan and India. The Quadrilateral Security Dialogue comprising the United States, India, Japan and Australia has also vowed to strengthen supply chains and commit significant funds to ensure they continue to diversify. Initiatives included developing shared technical standards, 5G diversification and deployment, horizon scanning and technology supply chains.
They have also agreed to boost vaccine production and distribution to ensure vaccine diplomacy remains exactly that, the no strings attached distribution of critical vaccines and other medical equipment to the most vulnerable of countries.
Lamentably, Canada has been absent from these multilateral responses. It continues to prioritize supply chains that form the basis of the Canada-United States-Mexico Agreement. This is questionable as Canadian prosperity and economic stability are also linked to supply chain resilience in the Indo-Pacific.
Diversifying and building resilience in such manufacturing is no longer a hypothetical initiative. The past several years has demonstrated that black swan events like COVID-19, the weaponization of supply chains due to political differences or the use of monopolies in critical materials do negatively impact Canada, as well as like-minded countries.
Building mutually beneficial dependency into such chains among countries is needed to secure the globe’s collective economic prosperity.
Diversification does not mean decoupling from China. China has many comparative advantages that cannot be replaced. For example, its huge seasonal labor force, logistic capabilities, human capital and skilled laborers can deliver in a timely and sizable fashion the materials and goods that countries need during times of instability.
These advantages benefit our everyday lives by providing cheap and easily accessible products. Notwithstanding, the recent weaponization of supply chains to achieve geopolitical objectives has transformed the thinking by many nations, including Canada, about the appropriate trade footprint that should be maintained with China.
For Canada, supply chain resilience in the Indo-Pacific is going to be about building mutual beneficial dependency in several key areas that reflect our comparative advantages. These include critical materials, rare earth materials, agriculture, energy and natural resources.
Canada needs to position itself using its comparative advantages to maximize its contributions to supply chain resilience and stability within the Indo-Pacific. It also needs to maximize the benefits that it can bring back home. This may include guaranteeing stable and open access to critical materials and other resources that are needed for manufacturing within the region but also benefit ordinary Canadians”
Stephen Nagy is a senior associate professor at the International Christian University in Tokyo and a senior fellow at the MacDonald Laurier Institute.