Can Canada move its manufacturing back from China? It’s complicated

The COVID-19 pandemic has led to questions about whether the world is relying too heavily on mainland China as a producer of goods, particularly on essential products during the coronavirus pandemic, like medical equipment and food. The charge is mainly being led by the United States.

Many nations have been caught without enough ventilators or personal protective equipment, such as medical masks, to help fight the deadly virus and outsourcing production of such equipment to China is being partially blamed.

In Canada, at the request of the federal and provincial governments, companies pivoted their production lines to begin manufacturing some of the items in short supply.

Some argue the shift shouldn’t be just for the duration of the pandemic, but that we should be encouraging manufacturing to be done in Canada once again.

“In the longer run, we will be much better served if we can — as the Germans have done, as the Danes have done — develop much more higher-tech manufacturing,” said Mark Rowlinson of the United Steelworkers Union. “We could become an exporter of those manufactured goods and be less exposed to unfair trading practices of other countries.”

Such initiatives are being taken abroad.

According to Bloomberg, in Japan the government has used financial incentives to encourage Japanese companies to move their manufacturing back home from China.

The policy comes as part of an economic stimulus from the Japanese government and is a response to mass disruptions in supply chains in China caused by the outbreak.

Meanwhile the U.S. has heard similar chatter, with Larry Kudlow, the director of the U.S. National Economic Council, floating the idea that the government could help pay some of the costs for companies moving their production back to the United States from China.

The U.S. and China have been engaged in a trade war in recent years, with Washington calling the relationship with China “unbalanced.”

Canada’s trade deficit with China was about $44 billion in 2017, according to a report last year from the Macdonald-Laurier Institute. China accounted for five per cent of Canada’s exports and 13 per cent of its imports according to the study, Moving Beyond Rhetoric, which focused on trade between the two nations.

But Canada has not had any federal government plans to build up domestic manufacturing in years, Rowlinson said. Helping manufacturing to grow will be important for a robust economic recovery after the COVID-19 pandemic, he said.

He said one place where Canada has missed out is wind turbines. Though Canada makes some parts for them, the turbines themselves are not manufactured in the country. It’s technology such as this that Canada should be encouraging its industry to develop, he said.

At the same time, Rowlinson pointed to more low-tech products, such as steel, as being ripe for Canada to support with government policy. He said steel for major construction projects is being shipped into the country for projects such as bridges and dams in British Columbia, despite Canada having the capacity to produce all the steel the country needs.

“You could easily ensure that all the steel going into construction projects in British Columbia comes from Canada,” he said. “That would promote the Canadian steel industry right here, right now, and would hopefully grow the industry.”

Though some of the products Canada consumes could be repatriated to the country for manufacturing, it isn’t as simple as it sounds, said Jean-Francois Letarte, a partner at consulting firm KPMG, who specializes in supply chains.

Letarte said that traditionally, Canadian industry has done well when clusters of manufacturing in some subsectors, for example the automotive industry, allow companies and suppliers to supply and feed off each other. Today there are some clusters in the automotive, aerospace and food processing sectors, but otherwise these would take time to develop elsewhere.

“Let’s say you have a manufacturing plant. You’re going to have a lot of different types of suppliers required very close to that plant,” he said. “Generally, the success we’ve had as a country in particular sectors were revolving around that industrial cluster concept. So, building such clusters that aren’t already existing in Canada would be a challenge in the near term.”

Labour is another issue, he said. Canada has had historically high employment rates in recent years, making it harder for manufacturers to find the labour needed to scale up.

Twenty years ago the Canadian manufacturing sector accounted for 20 per cent of the federal GDP, he said, but even with that cut in half now it is still more productive than it was two decades ago.

“While it’s a smaller share of the economy, it employs just over nine per cent of the country’s workforce,” Letarte said in a followup email.

But he said due to an ongoing trade war between the U.S. and China, moving manufacturing out of China is not an “unusual” conversation to have with clients.

Many of them are starting to place a greater importance on balancing the risks in their supply chains and not focusing just on cost effectiveness, he said, adding trade arbitrage —mimimizing the customs tariff and duties — is still an important factor.

“A lot of companies that were adapting to globalization and had been for 20 years had developed supply chains that are global and integrated,” he said. “They are placing more weight on business continuity, agility and nimbleness, all characteristics of the concept of micro supply chains, which have been quickly gaining interest.”

He said critical sectors such as pharmaceutical or food supplies will be most likely to think about a shift back to Canada.

Sylvain Charlebois, a professor in food distribution policy at Dalhousie University, said he suspects many countries will be looking at what they could be manufacturing more of domestically once the pandemic is finished, and also said food will be one area of interest.

Canada isn’t good at creating new food products or producing them, Charlebois said, calling for more attention to be paid to innovation in the industry to add value to the food chain.

“We could have more Canadian-made dried pasta, for example,” he said. “We basically export our commodities globally only to buy them back in a bottle or bag at 10 times the price.”

But due to Canada’s hard winters, it isn’t realistic to expect the country to support itself with domestically produced food year-round without a return to canned vegetables all winter or giving up bananas and coffee.

“The danger that I think we’ll face post-COVID is to decide to become food sovereign and that is utopic in Canada,” he said. “If we decide to do that as a country in Canada our food prices would go up 20 per cent.”

But, he said, with grocery stores running out of certain products as people stock up during the pandemic, the food industry is in the spotlight, and it could be used as an opportunity to create superclusters around food innovation.

Jeremy Nuttall is a Vancouver-based investigative reporter for the Star. Follow him on Twitter: @Nuttallreports