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1. Products with limited number of import sources

The first dimension aims to capture products that have few existing import sources. This should be intuitive as Canadian imports that are heavily reliant on specific countries for shipment are more likely to run into supply constraints due to transportation disruptions and/or unforeseen policy changes (e.g., border closures and export restrictions). In this study, we again use the Herfindahl–Hirschman Index (HHI) to measure the market concentration of Canadian imports. ^{Footnote 7} HHI index ranges from 0 to 1, with values under 0.15 usually considered as diverse in economic literature; values between 0.15 to 0.25 as moderately concentrated; and values above or equal to 0.25 being regarded as high market concentration (Pavic et al., 2016; Statistics Canada, 2017).

Figure 3. Number of Canadian imports by import market concentration measured by HHI, 2019

Description of Figure 3.

Figure 3. Number of Canadian imports by import market concentration measured by HHI, 2019

HHI	Number of products
0-0.15	102
0.15-0.25	787
0.25-0.5	2,281
0.5-0.81	1,279
0.81 - 0.99	749
1	133

Source: Author’s calculations based on data from UN Comtrade

Figure 3 plots the number of Canadian imports at each HHI threshold. We see that most products have high import market concentration, with over fourth-fifths of Canadian imports having HHI values higher than 0.25. This is not unexpected since Canada’s supply chains are highly integrated with the United States, resulting in high geographic concentration for many of the goods traded. Within the list of products with low import diversification, the most vulnerable are the 882 products with HHI values greater than 0.81. The high HHI values imply these products have a dominant supplier supplying most of Canada’s imports.^{Footnote 8} These products with a dominant supplier are of key interest and are referred to as Limited Supply Products (LSP) in the following sections. As Canada’s trading relationship with the United States is unique and deserves its own analysis, we will discuss the group of LSP with the U.S. as the dominant supplier (U.S. LSP) separately from products with a dominant supplier from overseas (overseas LSP).

2. Products with low domestic supply

As previously mentioned, one of the limitations from the previous study was that it did not consider Canada’s domestic production capacity. For instance, within agriculture products, lobsters were identified as having a limited number of international suppliers for Canada. While this is true based on the geographic concentration of Canadian imports, the fact that Canada is one the world’s top producers of lobster makes it so that policymakers should not be too concerned with this kind of shortage. Because actual data on domestic production by HS code is not readily available, in this second step, we used Canadian export data as a proxy. For each LSP identified in the previous step, we computed its export to import ratio. If Canada had a negative trade balance for that product in 2019 (Value^Exp/Value^Imp < 1), the product is presumed to have inadequate domestic production capacity to cover international supply issues.^{Footnote 9} This second step removed 275 products with high domestic supply from our list of LSP, so we are left with 607 LSP. Appendix B provides a glance of LSP with high domestic production capacity in each product sector.

3. Intermediate and Capital Goods

To get a better understanding of which products are the most vulnerable, we delved deeper into our lists of LSP. First, which product sector each LSP belonged to was determined based on the product’s parent HS2 chapter (definition in appendix A). The 607 LSP were thus broken down into 12 categories. Chemicals & Fertilizers had the largest number of vulnerable products, followed by Agriculture, and Metals & Minerals. In contrast, manufacturing sectors such as Electronics and Pharmaceutical Products contained few vulnerable products.

However, a closer inspection of this list of vulnerable imports, revealed that many were consumption goods, according to the Broad Economic Categories (BEC) classification from the United Nations. The hypothesis is that while a shortage of certain consumption goods may result in some inconvenience or a decrease in quality-of-life, their temporary shortages would likely not translate to widespread supply chain disruptions here in Canada. Therefore, since the goal of this study is to identify supply chain vulnerabilities, we only focused on the 500 LSP that are classified as intermediate, capital, or dual use goods in the BEC in the following sections. 

Out of the 107 consumption goods removed, 80 of them were agriculture goods. High value goods removed in this product sector included pet food, beverages, and a variety of meat products and vegetables. These agriculture goods for direct consumption are mainly supplied by the U.S. (42 products) and China (10 products). Besides agriculture, 27 consumption goods were removed in 5 other product sectors, which contained high value imports such as washing preparations mainly shipped from the U.S., video game consoles and holiday decorations from China, and wrist watches from Switzerland.

After removing consumption goods, 500 products remained in our LSP list. Within this list, Canada’s import values ranged from US$6 to US$10 billion in 2019, with an average of US$58 million and a median of US$3.4 million. Because it is difficult to determine the importance of an input within a production chain based on its monetary value alone, we chose not to implement a value cutoff to exclude products of low import value. However, we acknowledge that there were 25 LSP with import values of less than US$1000, mainly found in Chemicals & Fertilizers and Clothing & Textiles.

Source: Author’s calculations based on data from UN Comtrade

4. Products with alternative global suppliers

In this last step, we explored which LSP have a limited number of global suppliers. This dimension theoretically makes a product the most vulnerable in the sense that if export restriction measures were issued or specific modes of transportation become unavailable, companies will have a hard time finding alternative suppliers in other countries. To proxy for the number of global suppliers and quantify the export concentration of each product, the HHI was calculated on each product’s export values. However, instead of taking out products from our list of LSP, we only ranked the products from having the most concentrated global supply to the least concentrated.^{Footnote 10}

Results

Based on this analysis, 500 Canadian imports out of 5,331 were identified as vulnerable Canadian imports. These products totaled US$29 billion in value or approximately 6.6% of total Canadian merchandise imports in 2019. Geographic concentration of LSP is extremely high. The United States was the most dominant supplier of LSP by far with 396, while main suppliers of LSP from overseas were China, India, Germany, Italy, and Switzerland.

In the previous limited supply framework, over 2,300 10-digit HS codes were identified as vulnerable Canadian imports, which represent nearly 1,500 products at the HS6 level. Thus, the new framework only identified one-third of the number of vulnerable imports. There are several reasons for this discrepancy. First, although the previous study used the same HHI threshold, conducting the study at the 10-digit level will naturally include more products because if a single HS10 code satisfied the “vulnerable” criteria, the entire parent HS6 code would be counted. ^{Footnote 11} Second, the previous framework included products with no more than 3 suppliers regardless of their import source concentration. This dimension was not considered in this updated framework as it was decided to focus on the concentration of imports as the main indicator of vulnerability. Finally, as explained in the earlier sections, the update framework addresses several limitations of its prior version, resulting in a more restrictive set of criteria that excludes Canadian imports with high domestic production capacity and goods used for direct consumption.

Figure 4 plots the distribution of Canadian imports by product sector. The horizontal axis shows Canadian import concentration for each product and the vertical axis shows the global exporter concentration, both measured by the HHI index. The 396 products that were identified as vulnerable imports primarily supplied by the U.S. are colored in red, while the 104 vulnerable imports from overseas are colored in blue. Non-LSP are colored in grey. By product sector, vulnerable Canadian imports are concentrated in Chemicals & Fertilizers (162 products), Metals & Minerals (85), Agriculture (58), Wood & Paper (52), and Clothing & Textile (50). Additionally, Wood & Paper and Chemicals & Fertilizers were the top 2 in terms of LSP share of total number of sector imports (over 20%). Combined with the fact that a large portion of LSP in these two product sectors also have high global exporter concentration, data suggest that products in these two sectors are the most vulnerability to international disruptions. On the other hand, not only was the share of LSP in manufacturing sectors such as Electronics, Misc. Manufacturers, and Machinery generally low (under 5%), the availability of alternative suppliers on the global market was also better.

Figure 4. Distribution of Canadian imports by product sector, vulnerable vs non-vulnerable imports

Description of Figure 4.

Figure 4. Distribution of Canadian imports by product sector, vulnerable vs non-vulnerable imports

Category	Other	Overseas LSP	U.S. LSP
Agriculture	861	9	49
Chemicals & Fertilizers	648	39	123
Clothing & Textiles	863	26	24
Electronics	260	3	2
Fuels	33	1	7
Machinery	641	3	15
Metals & Minerals	673	11	74
Misc. Manufactures	324	5	3
Pharmaceutical Products	34	2	6
Plastics & Rubber	184	1	23
Transport Equipment	120	2	20
Wood & Paper	190	2	50

Source: Author’s calculations based on data from UN Comtrade

Box 1. Canadian imports of Limited Supply Products during the COVID-19 pandemic

As a robustness check, we analyzed Canadian imports of LSP at the height of the pandemic when countries implemented strict trade restriction measures and movements of goods were restricted due to border closures. The goal is to see if trade data indeed supports the hypothesis that LSP are disproportionately impacted by a global crisis. Due to seasonality in international trade flows, we compared Canada’s import values at the height of the pandemic with the equivalent periods in the year prior. Data shows that besides Canadian imports of LSP suffering a larger decline than imports of other products in the second quarter of 2020 (-43% vs -28%), imports of LSP outperformed other imports in the next two consecutive quarters as restrictions were gradually lifted at home and abroad. Moreover, 9 out of 12 product sectors saw a greater import decline for LSP in Q2. These results should not be considered conclusive as products are not homogenous and there are countless other factors that contributed to the decline in Canadian imports. However, at the aggregate level, these findings do support the hypothesis that there was a tighter supply constraint for LSP at the height of the pandemic.

Figure 5. 2020/2019 year-over-year % change in Canadian imports, Limited Supply Products vs other products

Description of Figure 5.

Figure 5. 2020/2019 year-over-year % change in Canadian imports, Limited Supply Products vs other products

	Q1	Q2	Q3	Q4
LSP	-3.8	-43.4	1.0	7.0
Other	-6.6	-28.5	-7.3	0.2

Source: Author’s calculations based on data from UN Comtrade

Vulnerable imports from the United States

Due to Canada’s unique commercial relationship with the United States and the integrated supply chains between the two countries, the U.S. consistently shows up as one of, if not, the largest supplier for Canadian imports. To put the importance of the U.S. for Canadian imports into perspective, in 2019, the United States was responsible for roughly half of the value of Canada’s total merchandise imports. It was Canada’s largest supplier for almost 3,000 products; supplied over 50% of Canadian imports (by value) for 2,217 of them; and it was the sole source supplier for 91 Canadian imports. The U.S. was also the dominant supplier for 396 out of the 500 vulnerable imports for Canada identified in this paper, mainly concentrated in Chemicals & Fertilizers (123 products), Metals & Minerals (74), and Wood & Paper (50).

Figure 6. Flow of LSP into Canada by dominant source country and number of imports

Description of Figure 6.

Figure 6. Flow of LSP into Canada by dominant source country and number of imports

Category	China	EU	ROW	United States
Agriculture	4	0	5	49
Chemicals & Fertilizers	13	12	14	123
Clothing & Textiles	8	7	11	24
Electronics	2	0	1	2
Fuels	0	1	0	7
Machinery	2	1	0	15
Metals & Minerals	4	1	6	74
Misc. Manufactures	3	0	2	3
Pharmaceutical Products	0	2	0	6
Plastics & Rubber	0	0	1	23
Transport Equipment	0	1	1	20
Wood & paper	2	0	0	50

Source: Author’s calculations based on data from UN Comtrade

Even though the U.S. supplied over 90% of Canada’s LSP in terms of import value, the degree of Canada’s reliance on the U.S. for LSP varied by product sector. For vulnerable imports in sector such as Fuels, Wood & Paper, and Agriculture, Canada almost entirely imported from the U.S. (Table 3). Yet, Asian countries played a major role in supplying electronics, clothing & textiles, and other manufactured goods, while European countries supplied a quarter of Canada’s Chemicals & Fertilizer LSP imports and was an important source for pharmaceutical products. Canada’s reliance on the U.S. also varied by state. Michigan was the largest source state for vulnerable Canadian imports by far, mainly transport equipment. Indiana was the second largest source state, followed by Texas, Missouri, and Ohio.

Vulnerable imports from overseas

Figure 4 above showed the distribution of vulnerable imports mainly supplied by the U.S. and those from overseas. Interestingly, we see that apart from Wood & Paper, U.S. LSP are heavily concentrated in the lower right corners of each plot with exporter HHI values below 0.25. This indicates that U.S. LSP have many alternative suppliers, potentially suggesting that for many of those products, Canadian companies may have chosen to import from the U.S. due to convenience or lower cost; and restructuring supply chains if needed is possible.^{Footnote 12} In contrast, even though there are fewer LSP from overseas than from the U.S., overseas LSP in general have few alternative global suppliers (i.e., high exporter HHI values). In other words, Canada’s vulnerable imports sourced from overseas are likely imports out of necessity. Moreover, Canadian companies have access to limited forms of transportation for sourcing goods from outside of North America. By having to mostly rely on shipping containers and air transportation, overseas LSP are more susceptible to port or border closures and transportation disruptions. In this sense, the 104 overseas LSP colored in blue are more vulnerable than U.S. LSP.

China is the largest supplier of overseas LSP with 38 products. Vulnerable imports from China are concentrated in Chemicals & Fertilizers (13 products), Clothing & Textiles (8 products), and Agriculture and Metals & Minerals (4 each). While the number of LSP supplied by China is relatively low compared to the United States, China’s importance may be understated since many of the LSP it supplies are not easily substitutable. In table 4 below, we see that China is currently the dominant supplier for 8 of the top 20 Canadian LSP imports with the highest global exporter concentration. Moreover, imports from China play an important role in strategic sectors and essential activities. Appendix C provides an example of applying this updated LSP framework to identifying vulnerabilities in critical vaccine inputs.

Since we saw restrictions in the movement of goods and people within the European Union during the COVID-19 pandemic, we considered each EU member as a separate international supplier for Canada in this study. In total, 25 LSP had an EU member as the top Canadian supplier. Germany had the highest number at 9, mainly Chemicals and Pharmaceutical products; Italy was the second largest with 7, mainly Clothing & Textiles; and France in the 3^rd place with 1 product each in Fuels, Chemicals & Fertilizers, and Machinery.

Box 2. Global comparison of vulnerable imports

Findings from this report reemphasized the importance of Canada’s key trading partners for Canadian supply chains. While the heavy reliance on the U.S. for Canadian LSP can be predicted by economic theory such as the gravity model of trade, one question we have is how Canada’s import vulnerabilities compare to that of similar economies around the world. Sweden is a great candidate for such comparisons. Although Sweden is a much smaller economy than Canada in size, the two countries share a similar trade profile. Notably, over 60% of Sweden’s merchandise imports are supplied by the large and geographically proximate European Union. By applying the same framework to Sweden’s merchandise imports in 2019, we identified over 1,000 vulnerable Swedish imports,^{Footnote 13} which totaled over 10% of Swedish imports by value. And like Canada, Sweden’s vulnerable imports were dominated by its largest trading partner, the EU.

Another country we can use for comparison is Australia. Although the country’s trade does not heavily rely on a single partner or trading bloc like Canada on the U.S. or Sweden on the EU, it boosts an economy that is not only similar in size to Canada’s but also similar in structure. At the aggregate level, Australia’s geographic diversification for imports is diverse with an HHI of 0.10, compared to Canada’s 0.27. This higher import diversification is also reflected in its vulnerable imports. By using the same framework, we identified 356 vulnerable Australian imports, which only account for 3.3% of its merchandise import value.

Another interesting finding is that Canada shares nearly 200 vulnerable imports with Sweden and 100 with Australia. Together, there are 42 vulnerable imports shared by all three countries, mainly found in Chemicals & Fertilizers and Clothing & Textiles. This implies that Canada and its allies face similar challenges, and it is in every country’s interest to work together to find alternative supply and build resilient supply chains.

Appendix

Appendix A. HS - Sector Concordance

Appendix B. Examples of LSP removed due to having high domestic production

Appendix C. LSP framework application in identifying vulnerable vaccine inputs

One application of this updated LSP framework is the identification of vulnerable products in critical sectors or essential activities. The WTO recently released a , which included 83 products, classified as one the following activities: vaccine manufacturing, vaccine storage and distribution, or vaccine administration. Since products are defined at the universally consistent HS6 level, researchers and policymakers can easily spot vulnerabilities with the help of the updated LSP framework.

By cross-referencing WTO list of critical vaccine inputs with our list of 500 LSP, “HS291521 - Acetic Acid” and “HS220720 - Ethyl Alcohol And Other Spirits, Denatured, Of Any Strength” are quickly flagged as the two products that Canada may run into supply issues. The next step requires industry experts to individually assess the degree of vulnerability of those identified products based on their industry-specific knowledge. For example, acetic acid is listed as an inactive ingredient for the manufacturing of the Moderna vaccine. But because Canada currently does not produce these vaccines domestically, their shortages may not be of paramount concern. On the other hand, denatured ethyl alcohol is used for vaccine administration, which potentially makes securing its supply the highest priority. Once the supply of products found in the LSP list is secured, we can relax one or more of the LSP criteria to identify what other products may run into supply issues.

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