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Donald Trump’s re-election as president of the United States has left our entire country in a state of flux. His tariffs on key Canadian exports have already resulted in people losing their jobs and businesses scrambling to find new markets. Entire industries are in doubt. The only certainty, as Prime Minister Mark Carney has said, is that the “old relationship we had with the United States, based on deepening integration of our economies and tight security and military co-operation, is over.”
While this doesn’t mean we need to throw out one of the world’s most productive trade relationships, we need to be able to succeed as a country independent of U.S. public policy. We have no idea what Trump’s plans are from one day to the next, so we must be prepared for a more uncertain future.
Canada at a crossroads
Given the deterioration not only in our trade relationship, but also in our security environment, we need to do big things — fast. Could a stronger role for Canadian industrial policy be part of the answer?
The Institute for Research on Public Policy consulted hundreds of people from academia, business, government, industry groups and non-profits as part of a multi-year research project on Canada’s future economic choices. A final report is to be released at a conference on Sept. 16 in Ottawa.
The institute ran four workshops, guided by a group of experts, across the country. During those conversations we heard potential ways industrial policy could be applied, as well as divided opinions about how much — if anything — governments ought to do to support or reshape parts of the economy.
To some, a more robust industrial policy represented an opportunity for Canada to play a leadership role in future industries. To others, it sounded like heavy-handed government intervention. There was considerable openness to using targeted government actions to address some public priorities that financial markets have little incentive to address, for example, ensuring that Canada has the domestic capacity to manufacture vaccines.
Industrial policy is a loaded term. It means many things to many people. Most broadly it means governments actively attempting to steer a portion of economic activity. That can range from small things like tax credits to bigger plans to promote a particular sector or region.
IRPP study: How Industrial Policy Can Strengthen Canada’s Economy and Sovereignty
Some would argue that industrial policy is a form of socialism. Financial Post editor Terence Corcoran refers to it as “industrial statism.” He equates all industrial policy with the Trump administration’s arbitrary attempts to coerce and forcibly take equity stakes in American companies. If one believes there is no legitimate role for the government in the economy, this makes sense. Of course, by that logic the oilsands — arguably Canada’s biggest industrial policy success story — are socialist to the core.
There is always some level of government intervention in the economy, whether it’s setting and enforcing intellectual property law or building infrastructure or funding research. It is certainly true that governments can go too far, which is why it is crucial to distinguish between seizing the means of production versus giving industries incentive to do things in the public interest.
Doing big things right
While we are now faced with needing to do big things fast to adapt, we need to do them right. Reducing reliance on the United States while boosting internal trade and diversifying our export markets requires more and better infrastructure, fewer internal trade barriers, more effective marketing of Canadian research and development, and deeper integration with other trading partners. There are businesses that would be eager to participate in this transformation, but the overarching goals are far beyond the means of individual companies. Governments need to make investments in training, education, research and infrastructure, but also, in some cases, help de-risk private investments. Building more manufacturing capacity isn’t cheap, for instance, but it may be necessary in a world with thicker borders.
But big things tend to happen slowly — especially with major infrastructure projects that are often rife with delays and cost overruns. Canada’s many interminable transit projects are one example. Some might lament we can’t build big things anymore like the railway that tied the country together. But construction of that “ribbon of steel” came at a terrible price for workers who were treated as disposable and for Indigenous communities along the route. We would never think to build like that again. Nor should we. We can’t steamroll over communities or exploit labourers. We need to work in genuine partnership with Indigenous Peoples, and ensure that we don’t sacrifice safety or the environment.
Governments often do industrial policy badly. Everyone has a favourite example. That isn’t necessarily an argument against such policy. There are some public priorities that the private sector won’t address. The question isn’t whether governments are able to outsmart the market, but whether they can give companies reasons to contribute toward those priorities.
Getting industrial policy right isn’t a science. It’s also inherently prone to failure. Governments will make a lot of mistakes when stepping in where markets won’t. The key is learning from those mistakes and using those lessons in future decisions. One thing heard time and time again at the workshops was that we have often failed on that front, because there aren’t any rules to ensure that we examine failures rather than simply move on.
A three-legged stool
To get it right, governments should think of industrial policy as a three-legged stool. The legs are sound strategy, rigorous evaluation and good governance.
Sound strategy sounds easy, but is perhaps the least straightforward. Setting priorities isn’t easy, particularly when attempting to steer cutting-edge technologies that might not work out or when other countries might beat us to the punch. Rather than considering industrial policy as an investment in economic growth, Canada should primarily view it as a means to address pressing public priorities that private companies lack the incentive or capacity to address. The economic growth prospects should be viewed as a secondary benefit.
Rigorous evaluation is in some ways simpler. It’s routine to collect data and evaluate results. The trouble is inconsistency in assessing industrial policy initiatives. Governments would rather quietly roll up failed programs than learn from failure. In some cases, this leads to repeating the same mistakes. More consistent evaluation isn’t just about accountability. It’s hard to establish best practices without incorporating lessons from trial and error.
Finally, there’s governance. Managing industrial policy can be challenging, given that multiple departments or levels of government can be involved. Achieving a particular goal might require the federal government to co-ordinate with universities and colleges (provincial) and local infrastructure (municipal), while tapping several areas of federal responsibility.
This is where arm’s-length institutions can be beneficial. Entities that are nimble and insulated from day-to-day political influence, such as well-structured Crown corporations, can oversee projects that require governments, departments and external stakeholders to work together. One example is the expansion of the Trans Mountain pipeline. The project was at an impasse when Kinder Morgan decided it was no longer viable due to regulatory challenges and public pushback. The federal government determined the project was in the national interest, bought the pipeline and created Trans Mountain Corp. to complete the expansion, although at a far higher cost than anticipated. Nevertheless, the government set a priority and reached its goal through a targeted economic intervention.
Industrial policy for a changed world
Whether one likes industrial policy in concept, it’s something that governments use all the time. We can debate its merits, but it would be more productive to discuss how to get it right. That’s particularly important in an era in which we need to adapt to a global energy transition, geopolitical conflict and uncertain supply chains.
The COVID-19 pandemic and the Russian invasion of Ukraine caused many to recognize that seamless global economic integration can come to a halt with a single bullet or virus. We can no longer assume that we are immune to international conflicts.
National security and trade diversification have taken centre stage in industrial policy conversations. But that doesn’t mean the priorities identified before the trade dispute are irrelevant. There is still an ongoing energy transition as well as a housing crisis. Many Indigenous and remote communities continue to be left behind. Existing industrial policies can still be improved upon. We need to make big bets. Some are likely to fail, but with the right strategy and sound mechanisms, some may succeed. We can’t afford not to take chances while dealing with so many interlocking crises at once.
The world has changed dramatically since the IRPP’s project was conceived. And many more, darker changes could be afoot if the geopolitical winds blow the wrong way. Canada needs to be resilient to those changes and take control of our own destiny. Industrial policy can be part of that.
