“The new Canadian federal government has made a conscious choice to re-centre energy and critical minerals in how we think not only about our domestic affairs but also about Canada’s place in the world,” Tim Hodgson, the federal minister of energy and natural resources, said recently in Berlin.
This evolution in our critical minerals strategy is a sign of the times. While welcome and overdue, it opens up new policy challenges, including determining the proper balance between public and private interest, as well as figuring out how much to do in partnership with our allies and how much to pursue alone.
Canada needs to address these issues urgently.
Fortunately, while some people may have concerns about individual projects, a consensus has developed across Canada about this overall strategy.
First, while the focus of the 2022 Canadian critical minerals strategy was on the energy transition, especially EV and battery metals, discussions are revolving around security in 2025. This means resilience in the face of Chinese market manipulation, strengthened defence industrial supply chains and the need to leverage our resource endowment to enhance relations with our allies.
Second, it has become widely accepted that Canada can, and should, intervene directly in domestic critical mineral production, particularly through financial support such as grants and loans.
This is a departure from decades of a laissez-faire approach, of which I am normally a proponent. But it is necessary. While a free market is ideal, it is not appropriate when our adversaries actively manipulate markets. Security of supply, especially for defence-related materials, is the proper remit of government.
Third, there is acceptance that Canada can, and should, align support for critical mineral production and processing with its NATO spending commitments.
IRPP conference | Canada’s Next Economic Transformation: Industrial Policy in Tumultuous Times
The United States has long done this through Title III of the Defense Production Act (DPA), including investing in Canadian mines, which the U.S. considers domestic for the purpose of this law.
Canada has matched DPA allocations to Canadian mines and companies through Natural Resources Canada. In the forthcoming defence industrial strategy, critical mineral investment or strategy is likely to shift in some manner to the Department of National Defence.
Balancing public and private interests
Consensus aside, there are new policy challenges to be met.
The first is determining the proper balance between public and private interests in developing critical minerals. In a perfect world, the market would dictate the nature and amount of investments, while government would focus on creating a competitive regulatory and tax environment.
But the world is far from perfect and this approach has essentially given China free reign to develop global monopolies in key materials over several decades.
Government intervention is necessary for some commodities, but it will by definition have market-distorting effects. At its worst, this can undermine Canadian producers instead of boosting them in several ways:
- favouring one project over another, thereby disadvantaging domestic competitors;
- impeding price discovery through mechanisms such as government-backed stockpiles, contracts for difference or offtake agreements;
- shifting producers’ business models into strategies that meet Ottawa’s needs instead of the market’s, thus weakening productivity and global competitiveness. As well as creating the conditions for cronyism.
While no solution will be perfect, developing a suite of financial and policy tools in concert with the private sector, as well as being flexible, transparent and responsive in their application, can help mitigate these unintended consequences.
Working with allies – and acting alone
Another challenge comes from figuring out how much to do in partnership with allies and how much to pursue alone.
China has been able to run up the score on critical minerals for a few reasons.
Its state-led capitalism means it could make decisions that private market investors would never tolerate. As well, its huge manufacturing base means it was able to vertically integrate entire supply chains from production to processing to finished products, while its size and stature mean it was able to make strategic decisions autonomously and therefore quickly and decisively.
As a bloc, Western nations could easily provide a counterweight to China and secure their own supply chains from their own spheres of influence. But the Western bloc is not particularly well-aligned today. We have known about the risks China poses, particularly in rare earth elements, for at least 15 years, but were not able to act in a matter that effectively mitigated the disruption and risk.
There are worthwhile efforts, such as the U.S.-led minerals security partnership and the G7 critical minerals action plan. But the collective desire to counter China’s dominance of global mineral supply chains hasn’t easily translated into economically viable and politically durable projects
There are also clear tensions between the interests of the United States, India, Japan, South Korea, the European Union, Canada and Australia, particularly since U.S. President Donald Trump’s second term began in January. That makes co-ordination more difficult and risky.
As a middle power and producer with a lot of untapped potential, Canada benefits from Western co-ordination and should encourage more of it. But it should not count on, or restrict, its efforts to such partnerships.
Strategic opportunities for Canada
There are things the country can do on its own.
First, it can work in a bilateral fashion with allies and potential buyers. Indeed, Canada has struck several such agreements and MOUs.
However outside of U.S. DPA spending, no high-profile investments or big deals seem to have come from these pacts. Overall Canadian mineral production actually declined for the past two years (although different commodities have had different outcomes). Hopefully, the deals start bearing more fruit.
Second, it can develop strategic and defence-related minerals and mineral products on its own, rather than wait for foreign commitments, and simply absorb those costs.
Bulldozer or bystander? Canada’s stakes in the new global economy
Only targeted industrial policy will fulfil Canada’s value-adding potential
China’s export-restriction list and NATO’s defence-critical raw material list – where there is considerable overlap – are a great place to start. Canada is well-placed to supply a number of these, including germanium, gallium, tungsten, graphite, titanium, aluminum, cobalt, platinum and some rare earths. Recent announcements supporting rare earths and graphite production are moves in that direction.
Because many of these minerals have small global markets, it would not be too hard for Canada to become a more meaningful international actor with just one more mine or one more processing facility – things that generally take tens or hundreds of millions of dollars. That’s not chump change, but it’s also not a lot in the grand scheme of our commitment to allocate five per cent, or even 2.5 per cent, of GDP annually to military spending.
Critical minerals as soft power
Canada does not need to displace China’s dominant position, which it probably could not do anyway. It just needs to supply enough product and redundancy globally to better constrain China’s ability to manipulate markets and ensure an adequate supply for NATO’s defence industrial base.
Why should Canada spend a couple billion dollars of its promised defence spending to subsidize critical mineral supply? Because we need to be useful to our allies so that one day they might be willing to be useful to us.
Critical minerals can be a huge source of soft power and influence for Canada. The reality of geopolitics in 2025 is that that matters. We can no longer coast on being friendly and well-liked, especially since we are becoming less well-liked, given that our previous laggard approach to NATO spending harmed our reputation abroad.
While economic and security interests are driving policy, values still matter. If you believe in western values – rights, freedoms and the rule of law, no matter how imperfect they are in practice – you should want Canada to be an arsenal for democracy.
