Julie Adès is a senior economist and Pedro Antunes is the chief economist at the Conference Board of Canada.
The COVID-19 pandemic has disrupted product shipments and forced many Canadian businesses to adjust their supply chains. For some, this has involved sourcing more inputs from local suppliers. The current economic hardship has also caused a surge of solidarity from Canadians who are supporting businesses by buying locally. But a strategy focused on buying local is not the solution Canada’s economic needs.
A recent survey of 561 businesses conducted by The Conference Board of Canada’s Global Commerce Centre found that many Canadian organizations are looking to move supply chains closer to home. In fact, 43 per cent are planning to source more inputs from local suppliers after the pandemic is over. For large and medium-sized organizations, the share is even larger at 50 per cent.
Survey results suggest that Canadian firms experienced more supply chain disruption from China and overseas suppliers than from U.S. and domestic sources. Yet sourcing more inputs at home is not a panacea to mitigating supply chain shocks.
Nearly three-quarters of surveyed organizations sourcing Canadian inputs experienced domestic supply chain disruptions owing to COVID-19, and 38 per cent said COVID-19 disruptions were having an impact on their capacity to source inputs in Canada.
Sourcing inputs internationally has enabled businesses and consumers to buy cheaper goods and services. Global trade and technological developments have brought us electronic devices such as smartphones, computers and televisions that most Canadians can easily afford. Domestic inputs may not be available or, if they are, may be costlier.
Research also suggests that global economic ties are central to building supply chain resiliency and supporting the economic recovery. A study by the Organization for Economic Cooperation and Development found that increased localization would “add further GDP losses to the economic slowdown caused by the COVID-19 pandemic.” Furthermore, localization, with fewer options for adjusting to shocks, would add more volatility to the economy.
Supply chain restructuring was already under way before the pandemic hit, owing to geopolitical considerations, the increased costs of tariffs and technology adoption. Yet, a company seeking to mitigate future supply chain shocks should consider their risk tolerance. Companies need to strike the right balance between resiliency (the ability to return to normal operations quickly after a disruption), robustness (the ability to maintain operations during disruptions) and efficiency rather than relying on “reshoring” as a sourcing strategy.
Canadian businesses should evaluate their choices carefully. Diversifying suppliers and avoiding too much dependence on one country or region (even one’s own), adopting digital technologies to help react quickly to supply chain disruptions and strengthening relationships with suppliers are a few strategies that should be adopted.
Given the current recession, encouraging Canadians to spend domestically can be positive — and will help some businesses get through the pandemic. But for a small trade-dependent economy such as Canada’s, the long-term implications for exports and this country’s economic recovery could be dire if our trading partners adopt a similar “buy local” approach.
As the global economy reopens from the pandemic, our trade-dependent industries need to remain globally competitive. Foregoing efficiencies could hurt competitiveness and lead to higher costs and lower economic activity. That would be the opposite result of what is needed to recover from the worst plunge in Canadian GDP on record.
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