Are Diverse Supply Chains More Stable? Measuring Risk in Canada’s Critical Imports

The lasting effects of the pandemic and the war in Ukraine highlight the need for dependable, resilient supply chains. In response, governments have been devising ways to foster greater stability in their trade relationships, especially in critical industries essential to economic security.

One way to insulate an economy from market shocks is diversification. Much like diversifying a personal investment portfolio, expanding supply networks should make a country less vulnerable to disruptions in any single partnership. But does diversification work or is it better to rely on a few dependable trade relationships?

A close look at 235 trade industries in Canada suggest that diversification promotes stability, but it also depends on who those trade partners are.

Wealthy, industrialized economies were not immune to recent shocks. Canada is the world’s 13thlargest trader and 20thmost diversified economy. Yet, like many countries, it experienced an alarming 25 percent drop in total imports during the spring of 2020 as pandemic measures slowed global production and shipping.

This sharp decline in imports left everyday consumers facing empty store shelves and higher prices. However, the main concern facing many governments was not consumer goods: they were more concerned about shortages of the raw materials and commodities that drive production, including critical imports in the energy, health, and information technology sectors.[i] Failure to stabilize supplies of these critical goods can have broader implications for economic, and national, security.

It turns out industries with more diverse supply networks suffered smaller shocks during the COVID-19 outbreak. The median number of Canadian trade partners across all imported industries is 60 countries. Critical products imported from more than 60 partners saw a 12 percent smaller drop in trade in April of 2020.[ii] Trade in more diverse industries also rebounded faster from the initial pandemic shock. On average, it took industries with a wider network of suppliers 6 months to recover to pre-pandemic import levels. In less diverse industries, it took 10 months.[iii]

Those COVID-19 numbers are consistent with general trends. Over the last 5 years, critical goods imported from more than 60 foreign markets were about 35 percent more stable. Critical minerals imported from more than 60 foreign markets were twice as stable.

Data source: United States International Trade Administration

Of course, not all trade partners are alike. Foreign economies differ in ways that make them more or less dependable, including the stability of their political systems and the transparency of their trade-related regulations. There are also concerns about relying too heavily on specific countries – most notably, China – because of their growing share of critical supply chains.

For now, however, Canada still imports far more critical goods from the United States than from China.[iv] That turns out to be a good thing from a stability point of view. Getting a higher share of critical minerals from the United States is associated with less volatility.[v]

Data source: United States International Trade Administration

That general trend implies that deep trade ties aren’t too dangerous as long as they are stable. It’s a simple but important lesson. Given that Canada and the United States have one of the strongest bilateral trade relationships in the world, ensuring that markets operate predictably is vital to reducing risk and protecting firms – and their workers – from costly shocks.

[i] The United States International Trade Administration offers a list of product codes deemed critical to economic security. This list is broad . https://www.trade.gov/data-visualization/draft-list-critical-supply-chains

[ii] All calculations use monthly trade data for 235 industries recorded in 5-digit NAICS codes from 2017 to 2022.

[iii] The data corrected (seasonally adjusted) to natural fluctuations in monthly trade levels.

[iv] Canada gets about half of its total imports from the US in any given year compared to about 13 percent from China. This balance has shifted in recent years, but only by a couple of percentage points. 

[v] Volatility is calculated as the standard deviation of month-on-month differences in seasonally adjusted imports.