The COVID-19 pandemic has renewed interest in international supply chains. While international supply chains proved to be very robust in the pandemic period of closed borders, restrictions on movement of people and goods, and closures of businesses, the pandemic proved the need for better tools, particularly for policy makers, to ascertain the health and resilience of international supply chains and the impact they have on their respective economies. This report attempts to provide one such tool with the creation of a set of indices to measure the vulnerability of Canadian industries to disruptions in both upstream and downstream international supply chains.

This paper builds on the previous limited supply products study and provides an updated framework for identifying Canadian imports that are vulnerable to foreign disruptions. Several limitations from the previous study are addressed, including the consideration of domestic production capacity and the availability of alternative global suppliers.

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The containment measures enacted to combat the COVID-19 pandemic was one of the factor that left heavy negative impacts on Canadian exports and other aspects of the Canadian economy in 2020. An interesting feature of the “COVID-19 downturn” is the exceptionally large month to month variation in economic and trade activity, especially in the first half of 2020. Early in the pandemic, both exports value and the number of exporting enterprises suffered greatly, declining 34% and 20%, respectively, between February and April. Starting in May, both exports value and the number of exporters started to recover at a fast pace, and the fast pace of the recovery continued throughout most of summer 2020. Beginning in the fall of 2020, the recovery in exports value and the number of exporters continued but at a slower pace. By the end of the year, exports value has almost reached pre-pandemic (February 2020) level but the number of exporters was still 3.5% below pre‑pandemic level.

In order to analyze the vulnerability and risks of a supply chain disruption to Canada, it is important to understand where Canada and Canadian firms fit into GVCs. On the one hand, if Canada’s production mainly happens at the beginning—or upstream—of a GVC, the primary concern would be a negative demand shock to Canadian industries. On the other, if Canadian production happens at the end—or downstream—of a GVC, the primary concern would be a supply shock to key inputs. If Canada’s production is in the middle of a GVC, both supply and demand shocks are concerns. This paper will attempt to answer where Canada fits into the global production process by assessing the upstreamness and downstreamness of Canadian production and trade.

In this study only merchandise trade will be considered. This is partly due to data constraints, and partly because most services, especially those that can be delivered digitally, are assumed to be minimally affected by transportation disruptions.Footnote1 For both imports (upstream supply) and exports (downstream demand), this paper uses a customs-basis Canadian merchandise trade dataset from Statistics Canada for 2019 at the most detailed level of Harmonized System (HS) available, i.e. 10-digit codes for imports and 8-digit codes for exports. This dataset contains five dimensions that are useful for the study of GVCs: country of origin/destination, province of origin/destination, product, mode of transportation, and port of entry/exit; although, for our purposes we drop the country and province dimension.

Largely due to the COVID-19 pandemic, Canada’s merchandise trade —and merchandise trade around the world—has been volatile in the last two years. Business closures to control the spread of the virus, shifts in spending patterns, volatile commodity prices, and lingering supply chain issues have all contributed to the disruptions in trade. Between February 2020 and May 2020, Canadian imports and exports both fell 29%. As pandemic restrictions gradually eased, monetary policy become more accommodating, fiscal supports materialized, and Canadians transitioned to working online, Canadian trade rebounded. As of October 2021, Canadian merchandise imports were 5.7% above 2019 average (pre-pandemic) levels, while Canadian merchandise exports were 13% above pre-pandemic levels. However, the fall and subsequent recovery of Canadian trade is more complicated than the simple narrative that things have returned to normal. In general, two components determine the value of Canadian trade: the quantity of goods traded and the price paid for those goods. Examining the quantity and price changes over the last two years provides more nuance on what actually changed during the pandemic, and contributes to a clearer narrative of the emerging trends in merchandise trade.