April 7, 2020

By Katherine Monahan

This post is part of Smart Prosperity Institute’s Smart Stimulus Project. To see other posts from this project, click here.

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Face masks held up at the border, ventilators in short supply, fears about the availability of life-saving drugs. COVID-19 is testing Canada’s medical supply chains like never before, exposing vulnerabilities and forcing Canadians to consider the impact of potential disruptions. While climate change may seem like a distant problem when held up against the devastation being caused by this coronavirus, it too threatens to profoundly disrupt Canada’s supply chains. 

Around 80% of global trade is rooted in supply chains. And with Canada’s 2018 trade-to-GDP ratio at 66% -- well above the global average -- Canada is particularly reliant on international supply chains.

Building resilience in our supply chains will help prepare Canada for the next pandemic, but will also help brace the Canadian economy for the expected shocks emerging from climate-related events around the world. Government and businesses would be wise to heed the lessons currently being learned from the pandemic, and to make our supply chains more resilient for the big climate test that lies ahead.

 

Disruptions in Canada

The focus for the moment is on medical supplies, such as masks, ventilators, testing kits, and other equipment. The rush to procure more ventilators, for example, where supply has been squeezed by large orders from other countries, has led to a made-in-Canada approach, that includes the manufacturing of some parts by the domestic automotive industry. 

From Canadian distilleries and beer breweries having to shift production to hand sanitizer, to complaints by the multinational 3M company that it was mandated to stop all shipments of N95 masks to Canada, there are escalating and legitimate concerns over supply disruption to Canadian markets.

But medical supplies are only the most visible victim of the supply shock. As a result of heavy dependence on China as the world’s production center, the world has witnessed shortages in finished products including automotive parts, electronics, and pharmaceuticals as plants there shut down. China also provides many of Canada’s companies with the raw materials and components they need.

Even the supply of food, which most of us take for granted, faces uncertainties. COVID-19 has exposed potential weaknesses, and the World Trade Organisation and United Nations recently issued a joint statement cautioning countries to minimize potential impacts on food supply as borders close and response measures continue to ramp-up.


Supply Chains and Climate Change

For many years, prominent economic bodies, such as the Word Economic Forum, have been advising governments and businesses that they must place a greater focus on building supply-chain resilience in the face of climate change.

Last summer, the Expert Panel on Climate Change Risks and Adaptation Potential warned Canadians about climate-related supply chain disruptions as part of its broader report on climate risks. Global business, industry, and employment will continue to be impacted by extreme weather events and wild fires in other areas, it argued. Delivery routes such as the St. Lawrence River could also be impacted by changing water levels, it said.

Analysis on the impacts of Thailand’s 2011 devastating flooding, for example, showed that more than 14,500 global companies, dependent on regional suppliers, experienced significant damage, with insured losses between $15 to $20 billion. Honda’s production at auto plants in the United States and Canada was slowed by 50% through to 2012 due to shortages of parts normally made in Thailand.

California’s wildfires are another example of how climate-related events can impact supply chains, particularly the movement of goods and services. In 2017, over 66,000 fires burned more than 800 square kilometers, closing highways and airports and halting deliveries.

While big businesses are beginning to wake up to climate risks, many Canadian companies and financial institutions still treat climate change as a far-off or non-material risk.

 

Building Resilience

The good news is that efforts to build resilience to supply-chain shocks from pandemics like COVID-19 can yield results for climate resilience.

Until now, companies have been mostly driven to maximize efficiency and reduce costs of their supply chains. Now the focus needs to shift from driving down costs, to predicting and addressing risks.

First, companies need to better identify and report on the potential risks they face from global supply-chain disruptions. From a climate-change perspective, these risks can be identified using modelling and stress testing. For example, the insurance sector has been using catastrophe risk modelling since the 1990s.

Transparency and knowledge can go a long way. Making climate intelligence front and center, and building this into decision making frameworks, will pay long term dividends.

Second, businesses, and governments, need to make decisions with these scenarios in mind. For example, they may decide to broaden the geography of their distribution network or source more locally. Or they may decide to move from “just-in-time” to “just in case” inventory in some of their stocking decisions.

Supply-chain risk management tools can also be adopted as technology continues to advance. For example, digital supply networks, where organisations are connected to their complete supply network, are improving visibility and allowing for better planning.

Building more transparent, agile and diversified supply systems when we eventually put COVID-19 behind us, will better prepare Canada for the consequences of climate change that lie ahead.

Katherine Monahan

Senior Research Associate