Forum: Politics affecting global supply chains

While the world is looking to recover from an economic slump caused by COVID-19, the pandemic also has contributed to global supply chain disruptions, ranging from vital components for goods such as auto-grade chips to raw materials.

The shortage of shipping containers and warehouse capacity have led to higher prices and massive delays at ports and logistics hubs.

The disruptions have posed many challenges to businesses in Canada and around the world. However, experts believe that politics and geopolitical issues are the factors most affecting supply chain and investment decisions rather than the pandemic.

"Supply chains are very rational entities. However, we're now in a very odd period. On top of that, we have a geopolitical environment where the world is being remade, and it's inevitable that supply chains will change," said Constantine Karayannopoulos, president and CEO of Neo Performance Materials Inc, at a business forum last week hosted by the Canada China Business Council (CCBC).

The surging price of critical raw materials has squeezed manufacturers around the world. In a recent Investor Intel interview, Karayannopoulos highlighted the insufficient supply of rare earth and other critical materials required for the clean-energy transition and electric-vehicle revolution.

Flavio Volpe, president of Canada's Automotive Parts Manufacturers' Association, said it has spent the last 25 to 30 years with major partners around the world pushing for globalization that was put in place by the former North American Free Trade Agreement (NAFTA) in 1994 and then the inclusion of China in the World Trade Organization in 2000, from which Canada's automotive industry has benefited.

As China has modernized, it has moved well beyond a cheap place to manufacture goods into a sophisticated manufacturing and supply chain environment that many companies depend on.

While rising labor costs have prompted companies to diversify outside China in recent years, the absence of acceptable substitutes and China's domestic market dynamism have made it logical for many companies to keep making and sourcing goods there. However, the pandemic has heightened sensitivity to supply chains, particularly when goods flow can be disrupted by politics.

"Washington's protectionist and bipartisan support for using whatever leverage to encircle China with trading partners for the US … is going to be the dynamic that dictates the way we do business in automotive, given the critical shift to electric and connected vehicles and the need for raw materials and resources," Volpe told the forum.

Volpe said that in the last three or four years of trade, the parts makers have been through renegotiations with the Americans on NAFTA's successor — the US-Mexico-Canada Agreement (USMCA) — in which many of the automotive rules have shifted to include more local supply, although they believe the largest supplier is China.

"We all looked at China as the biggest commodity supplier for steel for iron ore; we also looked at them for very critical supply of magnesium, which has hit the news the last few days," said Volpe. "But I'm not sure that we really understood that when we go into the autonomous world, we're going to a place that requires sensors, cameras, processing capability, and China's the biggest player there."

The Biden administration said it's going to pump $52 billion into domestic microchip production to counter China. All those materials and components that go into Canadian cars are profitably leveraged by technology brought in from China, according to Volpe.