The Need for Proactive Industrial Policy

The Institute for Research on Public Policy (IRPP) has recently been running an excellent series on trade in an era of global insecurity, with a selection of interesting articles and then a webinar today featuring four of the authors: Jorg Broschek , Laura Dawson , Patricia Goff , and Patrick Leblond . The intersections of economic security, trade policy, and industrial policy are a particular area of interest for me, and a topic I'm getting the chance to do a bit of extra thinking on for a UK client. Given that, it has been great to read these pieces and listen in today to think more about it from the Canadian perspective. I thought I would write up a quick article on some of my takeaways.

We Can't Avoid the Conversation on Economic Security and Industrial Policy

A thread that runs through all the articles and all the speakers, is that that questions of Canada's economic security and industrial strategy can no longer be avoided. In relative terms, Canada is becoming economically smaller and less significant as other countries catch up and surpass us and that is happening at a time where the world is becoming a less friendly place. A variety of global challenges are buffeting Canada and other states, from climate change, technological developments, threats to democracy, to geopolitical conflicts. And Canada's preferred responses of trade liberalization and multilateralism are no longer as easy to accomplish or as effective - as Patricia Goff put it, all of Canada's eggs have been in the trade basket.

How we respond to this new reality requires a clear consideration of what will protect Canada's economic security, as well as clear decisions on what policy levers to pull and that is where industrial policy comes in. J?rg Broschek made the great point that industrial policy has always been there, even if it hasn't necessarily been in fashion, and that even nominally pro-market politicians are intervening in the markets to push economic activity in certain directions, citing Danielle Smith's moratorium on clean energy developments in Alberta at the same time as continuing to support the fossil fuel industry. If we're engaging in industrial policies no matter what, then we really need to have a better idea of what we hope to accomplish.

Proactive not Reactive

It is here, in having a coherent strategy, that we've really been failing. In Patrick Leblond's view, Canadian policy makers have become much more reactive and are now playing a game of "whack-a-mole". For issues like EV and battery subsidies and tariffs, Canada has taken to reacting to what others are doing elsewhere rather than having a strategy that sets out how Canada is approaching the challenges it faces, and what it is bringing to the table for allies. For Leblond, if we aren't bringing ideas and solutions that are good for us and good for our partners then our allies are going to turn elsewhere regardless of the consequences on Canada.

This is most pronounced when it comes to the US. For Laura Dawson, our current approach to navigating headwinds from the US is falling short. In a world that is getting more protectionist and confrontational, we are going to end up relying more and more on the US, who represent 77% of our exports, with 66% of Canadian GDP overall tied up in trade. That leaves us "over a barrel" when it comes to dealing with the US - and makes damaging policies from the US perhaps the biggest threat to Canada's economic security. Unless Canada ups our advocacy "issue by issue, and region by region" in the US, the chances of policies aimed at China or at other issues having a major negative blow back on us increase. No matter who wins the next US election, we're likely to be facing a constant negotiation to secure Canadian opt-outs and our current approach is falling way short of where it should be.

It's All Interconnected

This strikes at something that I believe very deeply - that we need to be having more joined up conversations on the linkages between economic security, trade policy, innovation policy and more. This is a point that Patrick Leblond made on the panel when he argued that we are seeing too siloed a debate amongst policy experts, when decisions made in one policy area, whether trade, innovation, competition, infrastructure or many more, affect the others. Given the lack of connected policy debate, is it surprising that we don't have an overarching strategy?

I agree that we aren't seeing the level of debate in Canada we need on the intersections of economic security concerns and the geopolitical headwinds that we face as a country and how it impacts other policy areas. We need to be doing far better to join up these debates. Like it or not, the policy changes happening in China, the EU, and most of all the US, impact Canada and either constrain or open up our policy space to shape our economy and achieve the societal outcomes we want to see. Unless we understand those linkages, we can't craft effective policies and remain liable to be trapped in playing whack-a-mole.

History is Always Open

Fortunately, J?rg Broschek made a positive argument that "history is always open - we know it is possible to govern for the long term". While we may have missed a good opportunity at the start of the pandemic to have this debate, the door is not closed. For Broschek, and other panelists, a missing piece is to hold a Royal Commission along the lines of the MacDonald Commission. Having one would help governments form a more coherent approach, and play a role in helping shift the political discourse, as well as build the foundations of policies that can be sustained over time. Laura Dawson agreed with this, emphasizing the need for a public airing of the relationship with the US and where do we want to get closer and where do we want to maintain areas of protection and sovereignty. The situation has changed so much since the MacDonald Commission in the 1980s that this kind of public debate is long overdue. Likewise, Broshek made the point that our governmental structures also need updating - with provinces and municipalities factoring in more heavily than ever into matters of trade and geopolitics. For Broshek, municipalities should be represented in intergovernmental mechanisms if we are to have the kind of debates that are needed given the cascading impacts of problems that pay no heed to constitutional divisions of responsibility.

Last Thoughts

All in all, a lot of great discussion and a lot of food for thought. There is a need for more of this kind of debate to really probe deeply into where Canada is right now and where it can and should go next. Along the theme of being proactive, I'd love to see more work that examines how we can calibrate these policies to help build a more inclusive economy, one that addresses the inequities that currently exist. I like some of the arguments that Rachel Reeves , the UK Chancellor, has made that connect an inclusive economy to a resilient one (even if some of her early policies seem rather lacking in this regard):

An "error that persists among policymakers is the belief that the people and places that matter to an economy are few in number and that a nation can rely on growth in just one corner of the country or a handful of industries. The result has devalued people and places, and wasted so much human potential. In the process, it has left our economy dangerously exposed to the shocks that emanate from this uncertain world."

How we now go further in connecting those dots into how we consider Canada's economic security and our industrial strategy is I think another big challenge we should grapple with.