Canada has long striven to be more than a mere supplier of raw resources to more developed trading partners.
From the national policy of the 1870s, to the industrial planning of C.D. Howe after the Second World War, to the Canada-U.S. auto pact of 1965, our economic development strategy tried to nurture secondary and tertiary sectors that add value to primary resources instead of just exporting them raw.
Through the latter half of the 20th century, this strategy largely succeeded. Value-added industries were built in auto, aerospace, pharmaceuticals and technology – in some cases by Canadian-owned businesses, in others relying heavily on foreign investment.
By 2000, less than one-fifth of Canada’s merchandise exports were unprocessed or barely process primary products. We were no longer just “hewers of wood, drawers of water.”
Unfortunately, much of that progress has been undone in this century – for a variety of reasons, heightened recently by U.S. President Donald Trump’s tariffs and other economic threats. Today, primary exports make up almost half our merchandise exports.
The federal government should use every tool at its disposal to craft a targeted industrial policy to reverse the current trend toward precarious over-dependence on resource extraction and export.
More than “diggers of critical minerals”
After entering a free-trade agreement with the U.S. in 1989, Canadian governments retreated from proactive industrial strategies, instead relying on our supposedly privileged access to U.S. markets.
The commodities boom of the 2000s reinforced the focus on resource extraction – first and foremost, the massive expansion of bitumen production and export. Evolving global competition, including the rise of China and Mexico as manufacturing powerhouses, further challenged our value-added export industries.
IRPP conference | Canada’s Next Economic Transformation: Industrial Policy in Tumultuous Times
Why Canada’s nation-building moment demands a skills revolution
Now, Trump is hammering more nails into the coffins of Canada’s value-adding industries with his targeted Section 232 tariffs.
It’s no coincidence these tariffs are aimed squarely at Canada’s most important high-value manufacturing. To date, his sectoral tariffs have targeted auto, aluminum, steel, copper and lumber, while aerospace, heavy trucks, pharmaceuticals and semiconductors are next in his crosshairs.
Trump’s various tariffs, including the so-called “emergency tariffs” levied under the International Emergency Economic Powers Act, are being challenged in various U.S. courts. However, the worrying erosion of the rule of law in the U.S. leaves Canadians with little confidence that his unilateral measures will be significantly constrained.
Trump is happy, it seems, to keep importing Canadian raw materials, which he treats more leniently, with lower tariffs on energy and potash, as well as CUSMA exemptions (for now, anyway) for most other primary products.
His goal is clearly to increase U.S. industrial dominance in the sectors that transform raw resources into more expensive value-added products – the very sectors Canada must defend and grow.
Otherwise, Trump’s trade war will pigeon-hole Canada as a continental resource pit – and a lucrative market for America’s more innovative (and expensive) exports.
To “hewers of wood and drawers of water” we would then add “steamers of bitumen and diggers of critical minerals.” The economic, geopolitical and environmental risks of this structural retreat from value-added industry are worrisome.
Therefore, this is the moment for Canadian policymakers to rediscover the importance of targeted industrial policy, which is essential to help our value-added industries survive Trump’s attacks and to reverse Canada’s over-dependence on resource extraction and export.
Believers in the traditional “comparative advantage” theory see little wrong with a country being so reliant on production and export of a specialized portfolio of unprocessed resources. If that’s what global markets want from a country, it should simply go with the flow, they believe. Accepted fully, this approach leads to ahistorical and fatalistic passivity in trade policy.
As Nobel economist Paul Samuelson famously quipped, the fact that “the tropics grow tropical fruits because of the relative abundance of tropical conditions” is hardly useful for a country that wants to do more than export bananas. The same warning applies to other countries that can’t see beyond the limited horizon of their immediate resource endowments.
The industrial success of Asia
Contrary to comparative advantage theory, the most successful global examples of industrialization in the last century have been countries such as Japan, Korea, the other Asian “tigers” and China. They – more often by necessity than choice – did not focus on building industries based on what was buried beneath their feet.
Instead, they mobilized capital, skills and technology to carve out competitive (not comparative) advantages in strategically important and growing high-value industries.
Those efforts relied on powerful state-directed strategies to twist markets and alter incentives. Many tools were invoked – all with the overarching goal of expanding domestic capacities to manufacture, innovate and export higher-value products and services.
Comparative-advantage thinking says “export what you were endowed with.” Good industrial policy acknowledges it’s better to specialize in some industries than others, especially industries that are technology-intensive, export-oriented, anchor valuable supply chains and demonstrate high and rising productivity.
Instead of relying on resource endowments and private markets alone to guide a country’s specialization in global trade, these countries take deliberate action to build a presence in targeted, desirable sectors.
They have all used a wide range of industrial policy levers to become global manufacturing giants. These include channeling capital (including public or sovereign wealth) to targeted industries on favourable terms; powerful public-private missions to develop and commercialize strategic technologies; and complementary investments in skills and infrastructure to lubricate the high-value export machine.
Many European countries have followed broadly similar strategies, using public capital, planning, regulation and knowledge to nurture successful global firms and high-value domestic production.
Even the U.S., while mouthing free-market jargon, relies regularly on powerful, targeted interventions, including massive defence and energy subsidies, to buttress its presence in strategic industries.
These lessons of successful industrialization have renewed relevance for Canada as we confront Trump’s economic aggression.
Some have concluded Canada should double down on extraction and export of natural resources – facilitated by new pipelines and other export infrastructure to sell our resources to countries other than the U.S. But the urgent task of export diversification needs to take account of what we produce, not just where we sell it.
Enter industrial policy, which holds new relevance for Canada as we try to protect our economy and our sovereignty against Trump’s erratic actions. Good industrial policy draws on a full suite of policy measures applied to shift incentives, motivate investment and innovation, reinforce the vitality of domestic industry and penetrate high-value export markets.
Call it “sector-development policy”
The tools of industrial policy are many and varied, including fiscal rules and incentives, technology supports, preferential access to capital, public investment (including public equity or co-investments), infrastructure construction, skills and training support, trade policy, government procurement and more.
These tools need to be applied creatively and flexibly, reflecting the specific challenges and opportunities of each sector. Governments need strong internal capacity to understand and manage industrial policy (to avoid being captured by rent-seeking businesses). As well, the goals and performance requirements need to be explicit and enforced.
Industrial policy doesn’t apply only to conventionally understood industry, which is often stereotyped as large-scale goods-producing facilities, such as resources and manufacturing.
Any technology-intensive, high-productivity, tradeable sector – including technology, business, digital, entertainment or education services – is a candidate for targeted attention. A better moniker for this theme might be “sector development policy,” moving past the outdated assumption that industrial policy is only about smokestack industries.
A fully capable industrial nation must do more than harvest resources. This has always been true.
The global energy transition – which will continue despite Trump’s best efforts to roll back history – gives further impetus for Canada to diversify beyond fossil fuels.
The current concern with Canada’s lagging productivity growth provides another important motive. Indeed, it’s no coincidence that the countries leading productivity growth globally (such as Korea, the U.S. and Ireland) are those with the biggest domestic presence of high-tech production.
Those industries didn’t end up there by accident or thanks to the autonomous logic of market forces. They ended up there because those countries undertook targeted efforts to attract and build them.
Trump’s trade war is forcing our governments, businesses and workers to collectively renew Canada’s historic crusade to build an economy that is more than a northern appendage to a larger, more developed neighbour.
A comprehensive industrial strategy – using every tool to add value to our resources instead of exporting them raw, and sustaining and growing a strong Canadian footprint in innovative value-adding industries – needs to play a central role in that nation-building mission.
