Industrial policy is having a moment. Will the Liberals seize it?

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Heading into the federal budget next week, a long-neglected term is back in fashion: industrial policy.

Canadian miners are anticipating government support for rare-earth mineral production and refining capacity. Automobile part-makers are pushing for additional federal dollars to spur the development of supply chains for electric-vehicle batteries. Both groups are calling for a more aggressive industrial strategy, where governments target specific industries and play a role in shaping markets.

Every budget involves business lobbying. But this latest round is happening against the backdrop of rapidly changing global supply chains. The new U.S. administration’s plan to spend US$174-billion to promote electric vehicles has accelerated investment planning by major car manufacturers. Likewise, the United States’ intention to expand its domestic semi-conductor industry and secure a supply of “critical minerals” is upending patterns of global trade.

These changes, prompted by a worldwide push toward green energy and U.S. concerns about China’s control over advanced manufacturing inputs, present opportunities for Canadian companies. But without a focused industrial strategy, advocates say, Canadian businesses will be left on the sidelines of emerging supply chains.

“You can’t get an anchor order from Ford Motor Company unless you can prove you can make battery cells or batteries at scale,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association of Canada.

“The role of the government is to get the Canadian battery supply chain there for when Ford makes that decision in 2035,” he said, adding that private companies are unlikely to make risky long-term bets on battery production without government support.

Canadian governments have always engaged in targeted support for “strategic” industries in the form of subsidies, procurement policy, tariffs and tax incentives. But open discussion of industrial policy has been out of favour for decades.

The COVID-19 pandemic has brought the conversation back into the mainstream. Over the past year, shortages in personal protective equipment, vaccines and semi-conductors have revived concerns about supply chain resilience. Governments moved to the centre of the economy, running gargantuan deficits to support ailing businesses. For example, consider Monday’s $5.9-billion rescue package for Air Canada .

Now governments around the world are targeting economic recovery dollars toward green energy initiatives and next-generation technology, including electric vehicles, 5G communications and artificial intelligence, in the hopes of grabbing national market share in these new industries. The European Union has been pursuing a continental EV battery strategy since 2017.

“Other countries are doing it, so in a sense we have to have our own industrial strategy to meet the strategies of countries like the U.S. and China and the EU,” said Royal Bank of Canada senior economist Josh Nye, who co-authored a report last month arguing for more government support for industries such as carbon capture technology and battery metal production.

“It’s a case of playing to our strengths and seeing what opportunities are presented by more activist industrial policies and green stimulus spending in the U.S.,” Mr. Nye said.

It remains to be seen exactly how the Liberals will approach industrial policy in next week’s budget, which is expected to focus heavily on social spending, notably child care. The government’s climate change strategy published in December, which explicitly links industrial policy to the goal of decarbonizing the economy, provides the best insight into Liberal thinking on the issue.

The most significant item was a $3-billion top-up to the Strategic Innovation Fund, the government’s main vehicle for large private-sector investments. The new pot of money, dubbed the “Net Zero Accelerator,” is earmarked for three purposes: developing clean technology for the aerospace and auto sectors; developing battery supply chains; and helping large emitters, such as oil producers and steel manufacturers, reduce their carbon footprints.

Over the past year, the fund mainly supported vaccine developers and manufacturers. But there were a handful of investments in clean technology, including $295-million to help Ford retool its Oakville, Ont., plant for electric-vehicle production, and $50-million for EV maker Lion Electric Co. to build a battery pack assembly plant in Saint‑Jérôme, north of Montreal. It also made two investments, totalling $70-million, in nuclear power companies developing small modular reactors.

The climate change plan also announced $1.5-billion for low-carbon fuel development, in line with the recently released hydrogen strategy, and an additional $750-million to help startups develop and commercialize clean technology.

Brendan Marshall, vice-president, economic and northern affairs with the Mining Association of Canada, expects there to be additional announcements in the budget around developing rare earth mineral production capacity.

Canada has large reserves of rare earth minerals, which are used in a range of high-tech products, but no active mines or refineries. Most production and refining happens in China, and the U.S. has taken interest in Canadian rare earth mineral deposits for national security reasons. Last January, Canada and the U.S. signed a joint plan to strengthen North American supply chains for minerals deemed to be essential for defence, the aerospace industry and clean technology.

Building a rare earth mineral industry from scratch won’t be easy, Mr. Marshall said. Rare earth miners cannot attract investment unless they have customers to buy their wares, and no one wants to invest in processing and refining capacity without inputs.

“Let’s say a mine comes online with a product, how does that mine remain financially viable until that next segment of the supply chain comes on line?” Mr. Marshall asked. “Maybe the government will decide to buy that resource and maintain a customer-client relationship with the site until that next segment comes online.”

“Market forces to date have not demonstrated an ability to allow that supply chain to be established,” he added.

The same is true for batteries. Canadian mining companies produce most of the minerals that go into EV batteries, such as nickel and cobalt. But Canada does not have refining capacity to turn those raw materials into high-grade battery metals, let alone manufacturers further down the supply chain who can turn battery metals into battery cells.

Mr. Volpe of the Automotive Parts Manufacturers’ Association suggested a manufacturing cluster approach where EV startups, supported by government spending, could become the anchor clients for battery manufacturers until supply chains are robust enough to support the needs of major auto manufacturers.

The Liberal government has pursued an “innovation cluster” approach for other industries, announcing $918-million in 2017 for five clusters focused on digital technology, agriculture, advanced manufacturing, artificial intelligence and the ocean industry. The program, however, has been slow to take off.

A Parliamentary Budget Office report published in October found that as of March, 2020, only $30-million of the supercluster money had been spent, as opposed to $104-million that was meant to have been spent by that time. It also said that there was little evidence to support the Liberal government’s claims that the program – which is meant to attract private sector investment alongside public money – would create 50,000 jobs and boost GDP by $50-billion over 10 years.

With talk of industrial policy back in vogue, both advocates and critics are advising caution. The history of industrial policy in Canada and elsewhere is littered with white elephants: Firms that were heavily subsidized by governments but unable to compete internationally.

Robert Asselin, senior vice-president of policy at the Business Council of Canada, and a vocal supporter of industrial policy, said spending needs to be company agnostic, focusing instead on building up “sectoral capability.”

“Once you decide that one company is better than another, then it becomes problematic,” he said.

Bill Robson, chief executive of the C.D. Howe Institute, was more wary of Canada’s ability to pick industries that have a competitive edge. Too often regional political considerations trump smart investment decisions, he said.

“If I thought that in Canada we could discipline ourselves to provide support to sectors that had real potential and then withdraw it from the ones that weren’t going to succeed, then I would be less nervous about industrial policy. But I just don’t see that we’ve got that kind of a culture,” Mr. Robson said.

If the Liberals do embark on more active industrial policy, they may point to recommendations from the Industry Strategy Council, established by the federal government last year to sound out the business community on how to respond to the pandemic. In a December report, the council recommended an “ambitious industrial strategy” targeting four sectors: digital technology, agriculture, advanced manufacturing, and clean technology and its resource supply chains.

Monique Leroux, the former CEO of Desjardins Group and chair of the council, said she was surprised at the level of support in the Canadian business community for industrial policy.

“Business leaders were perfectly aware that other countries were going in that direction … [and] people were a little bit concerned, generally speaking, that the geopolitics and geo-economics of the world would change and that Canada cannot stay passive hoping for the best,” she said.

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