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Neil Desai is an executive with Canadian cybersecurity company Magnet Forensics and a senior fellow with the Centre for International Governance Innovation. He previously served in senior roles in the government of Canada in the Prime Minister’s Office and Global Affairs Canada.

Last fall, Bank of Canada Governor Tiff Macklem described the country’s inflation as “transitory but not short-lived.” This was after he spent much of the year attributing growing global inflation on supply chain woes and statistical anomalies.

While commodities such as energy and food have seen sharp price increases, the inflation pinch was first felt with the global chip shortage, which caused price increases on goods including smartphones, cars and other “connected” devices.

Inflation as a result of commodity prices may return to normal levels in 2022, although extreme shocks from the economic sanctions on Russia make that much less likely. Regardless, there is no evidence to suggest that microprocessors and other intellectual-property-intensive categories will see drastic price reductions ahead. And that’s even if the cost of their inputs, whether they be tangible components or the talent required to produce and commercialize the ideas, go down.

“Techflation” is here to stay, because the modern global economy has been reshaped around value chains. The holder of intellectual property – such as patents, trademarks, trade secrets and data – that is valuable to the development and commercialization of products and services walks away with the lion’s share of the profit margin and dictates the terms of economic engagement. This creates monopolies and offloads risk on to lower-value parts of the supply chain.

Gene Munster, a long-time Apple analyst speaking about the company’s iPhone component suppliers, characterized their supply arrangements as “the classic deal with the devil … You know you’re going to pay a price for it, whether it is getting left behind completely or squeezed on your profits.”

Suppliers to some e-commerce platforms, most notably Amazon, that are dependent on them for customer acquisition are also in a similar, asymmetric arrangement. Beyond having their margins squeezed, they also carry the risk that their “partner” may become their competitor once they’re armed with critical product and customer data.

The modern economy has become dependent on inelastic, IP-intensive inputs such as semi-conductors, cloud computing and data-driven platforms. Tech behemoths have been hoarding IP assets through internal development and acquisitions. Their aim is to own all IP in high-value, global-growth verticals, such as electric and self-driving cars, e-commerce, low-orbit satellites and medical devices.

Under these circumstances, we should not expect input or final product prices in the tech space, whether they be consumer or business-to-business technologies, to come down, even if overall inflation normalizes.

It is understandable that Canada’s policy-makers were concerned about our access to medical supplies and food early in the pandemic. However, their use of antiquated notions of supply chains as central considerations for long-term economic analysis and the development of policy options predates COVID-19. This should be of concern to all Canadians.

Governments across the country have invested heavily in creating foreign-direct-investment promotion agencies. A key component of their strategies is to lure foreign tech giants and position Canada as a high-quality and a relatively low-cost talent market. The latter is true, in-part, owing to our health care and other social programming being highly subsidized by taxpayers.

Governments have amplified this with economic development programming that places foreign tech firms at their core. The federally funded “superclusters,” provincially financed regional innovation centres, such as MaRS, and other research collaborations through our publicly funded universities and colleges are a few examples.

This approach is tantamount to subsidizing our own economic colonization.

Amazon, Google, Huawei and other tech-intensive companies have set up research and development outposts and partnered with our postsecondary institutions to leverage Canada’s high-quality engineering and data-science talent. Many have also engaged in opportunistic acquisitions of early-stage Canadian tech companies.

This, alongside the heavy capitalization of the global tech sector and work-from-anywhere approaches, has led to sharp wage inflation among Canadian knowledge workers. The Business Development Bank of Canada’s annual tech industry outlook reports that “some tech entrepreneurs have already increased salaries by 20 to 25% in an attempt to retain current workers.”

While a spike in wages among Canada’s limited number of technical staff will provide a nice short-term dividend to Canada’s desperate fiscal situation through increased personal-tax revenue, it is contributing to a longer-term liability.

Canadians have been at the forefront of technological breakthroughs such as artificial intelligence. Our subsidies in research and development are among the highest of advanced industrialized countries. But such inventions acquired or developed by foreign companies are not being commercialized at scale from Canada.

As a result, we don’t see the widespread wealth-creating effects that benefit all Canadians: The hiring of well-paying executive and non-technical roles that usually reside in “head offices,” corporate-tax windfalls, and large-scale philanthropy. Tech firms trying to scale from Canada are also being priced out of the technical talent market, stunting their, and Canada’s, growth potential.

Canada and its companies will continue to pay premium prices for tech and IP-intensive inputs in the years ahead. Today, almost every industry requires them. Even traditional commodity-based industries such as mining and agriculture are becoming IP-dependent.

Further, companies in emergent sectors that we and other countries will be dependent on for our security, such as cybersecurity and pharmaceuticals, and others developing technologies tied to achieving policy priorities, such as the reduction of greenhouse-gas emissions, are deploying similar, winner-takes-all strategies.

If Canada’s antiquated approach isn’t updated to squarely focus on growing IP-intensive, globally-relevant companies that commercialize their ideas domestically, we will see “techflation” persist and our standard of living decline. We will sell our low-value-add commodities at a discount, participate in low-value parts of IP- intensive supply chains and buy high-value, IP-intensive inputs and products at increasing premiums. Even those we had a mind, hand or dollar in creating.

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