If Joe Biden is right, one of the most consequential things for Canada’s economic future is happening right now.
The U.S. President just invited Canada to take part in a global economic decoupling, in a multination effort to repatriate critical supply chains away from authoritarian countries such as China. And Canada said yes.
Details are to come in Tuesday’s federal budget. What we know already is that Canada will follow the U.S. in establishing a major package of industrial subsidies. Those incentives are supposed to create the industrial base for a low-carbon future and bring jobs to North America. But it’s also supposed to separate supply chains from authoritarian countries.
Mr. Biden, through the U.S. Inflation Reduction Act and a pair of other big-money laws, has embarked on industrial strategy that offers massive subsidies for high-tech and green industry. The President referred to them in his speech to the House of Commons Friday as “the single largest investment in human history.”
But that has raised fears in Canada that the U.S. effort to lure investment out of other countries will also draw industry away from Canada. Mr. Biden came to allay those fears. And his ambassador to Canada, David Cohen, said that the goal is not simply to build industry in the United States but to rebuild supply chains in democratic countries, including Canada.
“You’re right about the purpose: It is to create American jobs. And it is to pull investment from unreliable countries, countries that do not share our commitment to the rule of law and to fair competition,” Mr. Cohen said in an interview at the ambassador’s residence in Ottawa.
“Canada is not one of those countries.”
Mr. Cohen argued that the massive U.S. incentives will not only lead to industrial investment in the U.S., but as it boosts the economy it will lead to “parallel investments” in Canada; It will make North America more competitive and accelerate the transition to greener industry.
But it’s worth noting the other part: Geopolitics, competition with China, and the desire to rebuild critical supply chains that don’t rely on authoritarian countries, such as China and Russia, are driving a lot of U.S. economic policy now. The U.S. wants Canada to join that strategy – and Europe, too, Mr. Cohen noted.
“Our focus is on trying to have the broadest possible competition with autocracies that, in the end, will not have the interests of the world’s democracies in mind.” With that as the goal, the U.S. built its own industrial strategy to be copied, he said.
“That is a purpose of what the United States did: To lay out a template, to lay out a format, and to hope that other democratically inclined countries like Canada would follow the lead, and would put in place their own comparable incentives,” he said.
“Not matching dollar for dollar, but creating an environment for green-economy, climate-change-oriented, clean-energy commitments – including in the critical-minerals space – to be developed in democratic countries to provide a counterweight to the dominance by China in this space.”
We now know that the Liberal government has signed on. Prime Minister Justin Trudeau adopted Mr. Biden’s rhetoric from top to bottom, although we don’t know how much money Canada will devote to it. Finance Minister Chrystia Freeland is now preparing a package of incentives in Tuesday’s budget.
In large part, the Liberals are seeking to make a virtue of what they deem to be necessity. They fear that if they don’t compete in the subsidy game, swaths of Canada’s industry will be pulled south of the border. Mr. Cohen argues that the U.S. industrial strategy creates opportunities for Canada, but it also presented a hard choice to Ottawa.
“Although I have no specifics … I think you’re going to see Canada dipping its toe in the waters with what I’ll call U.S.-style, U.S.-structured, business incentives to be able to stimulate the growth of the green economy in Canada, as well as the United States,” Mr. Cohen said.
On Tuesday, we will see just how far Canada goes in competing with those U.S. subsidies. And presumably, there will be debate about whether Ottawa’s plans will transform Canada’s industrial base or throw money down the drain.
But already Mr. Trudeau has signalled that Canada will sign on to Mr. Biden’s industrial strategy and green-technology incentives – and the geopolitical goal of decoupling the Western world’s key supply chains from China.