Think global, act local. It was a phrase often heard in the 1970s and 1980s. But that phrase is about to be turned on its head. Increasingly, we see the downside to having become too dependent on faraway sources for essential ingredients of our economy, from microchips to wheat.
On the micro level, could shortages of a tiny one-dollar part used in most consumer appliances and all automobiles cause a deep worldwide recession? In the big picture, how will a war halfway around the world impact prices for Canadian commodities like oil and wheat?
As the world economy enters yet another period of turmoil, the impetus to turn to local rather than global sources is about to strengthen.
In the pre-pandemic era, there was no better illustration of how interdependent the global supply had become than the tiny microchip. Despite the fact microchips individually cost a dollar each, there are up to one thousand used in an average internal combustion engine vehicle and double that number in an electric vehicle. Microchips are also essential in all forms of electronics, from computer gaming consoles to smart appliances and smart phones. The tiny microchip has even taken a leading role in high stakes international diplomacy, with the US threatening to cut off Russian supplies of microchips if it proceeded to invade Ukraine.
The recent worldwide shortage of microchips resulted from a perfect storm of circumstances. First, the pandemic prompted an increase in demand for the chips as the world shifted to remote meetings and electronics sales soared. Widespread disruptions to supply and shipping followed during a worldwide shutdown. And a major chip-making plant in Japan was shut down due to a large fire in 2021. Now, rumblings of a serious COVID-19 outbreak in China threaten to shut down ports through which flow most of the world’s microchips.
On the macro level, Canada has always been an exporter of commodities like oil and wheat, most of which pass through BC’s ports to Asian markets. The Russian invasion of Ukraine has immediately impacted those commodities, positively and negatively.
Oil prices skyrocketed initially but appear to be dropping as alternatives to Russian oil are secured. While that geopolitical shock may benefit Alberta producers, it will cost BC drivers dearly and push up the cost of transporting goods, contributing to inflation.
With access to Ukrainian and Russian wheat severely restricted due to war, Canadian wheat has risen $60 per ton in the past month. Assuming Canada avoids another devastating drought like the one in 2021, we can grow and ship more wheat. China relied heavily on Ukrainian wheat in 2021 and Canada can step in to fill the gap. Yet there is rising uncertainty about China’s potential as an export market, at least in the short term.
China has begun instituting massive lockdowns in a frantic effort to prevent the spread of a variant of Omicron. Two of the busiest hubs of international shipping, Shenzhen and Shanghai, have now gone into total lockdown. According to Reuters’ Joe Brock, “The spread of the highly infectious Omicron variant this month has led to movement controls across China…paralysing factories making goods from flash drives to car parts.”
Why should we care in British Columbia about wheat and microchips?
Two reasons. First the cost of many common goods, especially anything with embedded electronics, is about to go up. The sky-high cost of used vehicles in BC is caused in part by the lack of new car availability. And since wheat is one of the most basic commodities in the world, expect food costs to rise.
Second, as a major Pacific hub for shipping, any disruptions felt in global supply chains will be accentuated in Vancouver. This will create short-term challenges but also present some enticing longer-term opportunities for an economy like BC.
Get ready to hear more about “on-shoring” in the months ahead, a process by which major companies, incentivized by governments, move to manufacture items previously shipped here, like batteries, microchips, and other key ingredients of a modern economy. While “on-shoring’ may make some of the essential ingredients of the economy more expensive, it will also dramatically increase the reliability of our supply chain.
On-shoring may even create a boom of new high-tech manufacturing opportunities, which we can export to the globe.
Think local, act global.
Bruce Cameron has been a pollster and strategist for over 35 years, working initially for Gallup Polls, Decima Research and the Angus Reid Group before founding his own consultancy, Return On Insight.