Industrial policy’s changing landscape

For many years, Canada’s business community insisted government should set the rules, then step back and let the market take care of everything else. In 1983, for example, the Business Council on National Issues told the federal government: “We do not believe that a comprehensive national industrial strategy is either feasible or necessary.”

This outlook 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. By 2022, however, Robert Asselin, Senior Vice-President of the Business Council of Canada, had penned an article that took the opposite stance, calling on Ottawa to embrace a “bold industrial strategy”.

What changed?

A couple of things. First, the world has grappled with some major challenges, which only government had the scope and resources to address — the financial crisis of 2008, the COVID pandemic, and war in Ukraine. 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 business narrative, Dani Rodrik, an expert in industrial policy at Harvard University, argued business actions on the ground did not change. The United States may be a bastion of free market thinking, yet the country’s military establishment supported the early growth of Silicon Valley, while government labs led innovations such as the Internet and GPS. The Texas Railroad Commission, started in 1898, still tightly regulates oil and gas in this private sector-loving state.

Canada's governments have been somewhat more restrained than their southern counterparts, but they too have provided significant support to major industries. In the auto sector, for example, the federal government provided $131.6 million to Honda Canada, for a manufacturing facility for hybrid vehicles. The Alberta Film Commission provides tax credits of up to 30 percent for motion pictures in the province.

The meaning of “industrial policy”

Google this term, and you will get dozens of distinct definitions. Many of them focus just on manufacturing, while some include all government interventions in the economy. The most mainstream definition is from the OECD: “Government intervention intended to improve structurally the performance of the domestic business sector.” 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.

U.S. efforts

The US has embarked on a very ambitious program, provoked by competition with China. According to U.S. Secretary of Commerce Gina Raimondo, its four main objectives include:

• "transformational investments in American innovation”;
• “bolstering our domestic capabilities and creating new ones to prevent China from undermining our national security and democratic values”;
• “partnering with our allies in new ways to advance our shared values and shape the strategic environment in which China operates”;
• “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.”

More specifically, this program targets three families of technology: IT (microelectronics, quantum information systems, and artificial intelligence), biotechnologies and biomanufacturing, and clean energy. The American government has committed hundreds of billion of dollars to the implementation of these priorities, through sweeping legislation — the Inflation Reduction Act, the Chips and Science Act, and the Bipartisan Infrastructure Act — much of which can be considered as industrial policy.

Canada’s efforts

In the Fall Economic Statement made In November 2022, Finance Minister Chrystia Freeland offered this outlook on the federal government’s approach:

“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.”

Conclusion

Canada and the U.S. have embarked on a period of more activist government, which the business community appears to be ready to support. What remains to be seen is what exactly will be done, and how effective those efforts will be.

Peter Josty is Executive Director of The Centre for Innovation Studies (THECIS), a Calgary-based not-for-profit research company specializing in innovation and entrepreneurship. In addition to working in private research and business development, he holds a PhD in chemistry from the University of London and an MBA from the International Institute for Management Development in Geneva.

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