18, January 2023
Industrial Policy – a changing landscape?
For many years the narrative from business in Canada was that government should set the rules and then step back and let the market take care of everything else. For example:
In 1984, the Business Council on National issues wrote: “We do not believe that a comprehensive national industrial strategy is either feasible or necessary”.
This reflected the Washington consensus, a set of free market principles (including privatization of state enterprises, deregulation and trade liberalization), that became widely accepted for a while.
But in 2022 the Senior Vice-President of the Business Council of Canada wrote an article titled “Canada needs a bold industrial strategy”1.
I believe a couple of things changed. First, the world has grappled with a number of challenges that it was clear than only government had the scope and resources to address – the financial crisis of 2008, the COVID pandemic and the Ukraine crisis. It was clear to everyone that a government role was indispensable in addressing these challenges. Second, looking towards the future, it is clear that some of the major challenges of the next few decades – climate change, an aging workforce and geopolitical risks – are well beyond the capacity of markets to solve by themselves.
But did it really change?
Despite the change in narrative from business, Dani Rodrik, an expert in industrial policy at Harvard University, observed that while the narrative from business changed, the actions on the ground didn’t change. In the US – the bastion of free market thinking – the US military supported the early growth of Silicon Valley and government labs developed major innovations such as the internet and GPS. Even Texas has the Texas Railroad Commission, started in 1898, that to this day (despite its name) tightly regulates oil and gas in Texas.
In Canada governments have been somewhat more restrained than the US but provided significant support to several major industries. In the auto sector, for example, the federal government provided $131.6 million to Honda Canada to support a manufacturing facility for hybrid vehicles. The Alberta Film Commission provides tax credits of up to 30% for motion pictures in the province.
What does it really mean?
If you Google “Industrial policy” you will find dozens of definitions, so the term means different things to different people. Many definitions focus just on manufacturing and some include all government interventions in the economy. The most mainstream definition is from the OECD2:
“Government intervention intended to improve structurally the performance of the domestic business sector.”
So this definition;
- Includes the whole economy, not just manufacturing;
- Excludes most routine government activities, i.e. not business as usual;
- Generally targeted at areas of future growth potential.
What is the US doing now?
The US has embarked on a very ambitious program provoked by competition with China. The main objectives are3:
“First, we are making transformational investments in American innovation.
Second, we are bolstering our domestic capabilities and creating new ones to prevent China from undermining our national security and democratic values.
Third, we are partnering with our allies in new ways to advance our shared values and shape the strategic environment in which China operates.
And fourth, we are advocating for U.S. trade and investment and the benefits that come with it, as well as working together with China to address transnational issues, such as climate change and global macroeconomic stability.”
They are specifically targeting three families of technology:
- Computing-related technologies, including microelectronics, quantum information systems, and artificial intelligence;
- Biotechnologies and biomanufacturing
- Clean energy technologies
To implement these priorities the US has recently passed three major pieces of legislation, much of which can be considered to be industrial policy – The Inflation Reduction Act, The Chips and Science Act and the Bipartisan Infrastructure Act. Hundreds of billions of dollars have been committed.
What is Canada doing?
In November 2022 the Finance Minister said4:
“They (investments) will help make Canada a leader in the industries of tomorrow. They will help to build an economy that is more sustainable and more prosperous for generations to come…. And that is why today, what Canadian workers need is a government with a real, robust industrial policy; a government committed to investing in the net-zero transition, to bringing in new private investment, and to helping create good-paying jobs from coast-to-coast-to-coast….. The global green transition calls for an industrial transformation comparable in scale only to the Industrial Revolution itself.”
The commitment has been made both in Canada and the US for a period of more activist government. Business looks to be supportive of this approach. It remains to be seen what exactly will be done and how effective it will be.
- Globe and Mail, December 8, 2022 p. B4
- An Industrial Policy Framework for OECD countries, May 2022 https://www.oecd.org/sti/an-industrial-policy-framework-for-oecd-countries-0002217c-en.htm
- Fall Economic Statement – https://www.canada.ca/en/department-finance/news/2022/11/remarks-by-the-deputy-prime-minister-for-the-2022-fall-economic-statement.html