Trudeau’s real North America agenda is reacting to Biden’s industrial strategy

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It was nice that U.S. President Joe Biden and his Mexican counterpart, Andres Manuel Lopez Obrador, tacked a Three Amigos summit with Justin Trudeau onto meetings about Mr. Biden’s more pressing issue: the Mexican border.

The idea of a common North American agenda seems a distant thing for the Mexican and U.S. presidents, both of whom are so wrapped up in domestic politics that there hasn’t been a lot of room for continental friendship. The get-together in Mexico was more like a Three Acquaintances summit, even though Mr. Biden promised to visit Canada in March.

But Mr. Trudeau does have a North American agenda – and it has been consuming his government’s attention.

Right now, it is about responding to Mr. Biden’s big-spending industrial strategy, which will pour hundreds of billions of dollars into subsidizing the adoption of clean technology and “advanced” manufacturing.

The Liberal government’s response will be one of the most consequential issues in Canadian politics in 2023. Government officials have signalled it will mean billions and billions in Canada’s next budget, too.

The U.S. Inflation Reduction Act (IRA) included a lot of incentives and subsidies, and they had little to do with reducing inflation. They were partly a plan for addressing climate change, largely by creating incentives for adopting clean technologies. But that’s not all.

The IRA is also about competing with China or decoupling from its economy. China dominates electric-car batteries and the critical minerals used to make them; the IRA creates incentives to make electric cars in the United States. It is full of incentives to encourage investments that establish clean-tech manufacturing in the U.S. It is part of an effort to reshore, and part of the rivalry with China.

A lot of Mr. Biden’s industrial strategy is built for that. Another law passed last August, the CHIPS bill, poured US$280-billion into incentives for producing semiconductors and technologies like artificial intelligence. It’s not just a jobs bill, but a geopolitical tactic to prevent China from gaining a dominant place in tech production.

When the White House put out its list of “deliverables” from the North American Leaders’ Summit on Tuesday, it topped the lists with plans to work on building North American supply chains for semiconductors and critical minerals – that is, supply chains far from China. The good news is Mr. Biden included Canada and Mexico. The tricky part is keeping up with what Mr. Biden is doing at home.

For Mr. Trudeau, North American strategy is now about reacting to that U.S. industrial strategy, and it will shape a lot of his plans, including climate policy, foreign policy, economic policy and the government’s budget.

The U.S. is pouring so much into industrial incentives that the European Union has complained it violates trade rules and their electric cars won’t be able to compete. Canadian officials argue they must level the playing field, or manufacturing investments will bypass Canada entirely for the U.S.

The sums it would take to fully match the U.S. could be enormous. And Canadian officials have made it sound like that’s what they have in mind.

When Finance Minister Chrystia Freeland delivered her fall economic statement in November, a senior official who briefed the press described the IRA as nothing less than a game-changer for the industrial structure of North America – and indicated Canada would respond in kind. Ms. Freeland said the $6.7-billion clean-tech investment tax credit she unveiled then was merely a “down payment” on the plan to come in her 2023 budget.

The U.S. Congressional Budget Office estimated the IRA includes US$374-billion in clean-tech incentives over 10 years. But there is no cap on some of its tax credits, so it could be a lot more: Credit Suisse projected it will be US$800-billion. If Canada tried to match like-for-like, would it cost $60-billion or $80-billion?

Ottawa doesn’t have to go toe-to-toe with the U.S. on all its incentives. It could focus on attracting investment in high-productivity sectors, in Canada’s own industrial strategy. But the politics will be driven by loss-aversion, by the fear all North American investment in manufacturing will be sucked into the U.S. The Liberals will be keen to promise they are putting a lot into delivering the clean, green jobs of the future.

For all the distance between the Three Amigos, Mr. Biden’s domestic policies have once again pushed North America to the centre of Mr. Trudeau’s agenda.