We need to take this innovation challenge much more seriously, the United States is

TORONTO—While the midterm elections will clearly change the political dynamic in the United States, one thing they are unlikely to fundamentally change is the America First industrial strategy. There is strong bipartisan agreement for a more innovative economy that ensures some level of U.S. technological leadership, with a high level of public investment and an increased dose of American protectionism. This means Canada must move much more rapidly and strategically to ensure a competitive economy here, with a more vibrant manufacturing sector, and with much more ambition to build global-scale Canadian-headquartered and controlled companies along with much greater effort to shield Canada-developed proprietary technology from takeover by foreign corporations. Without adopting America First protectionism, we need some Canada First thinking. While Finance Minister Chrystia Freeland’s recent fiscal update attempted to counter some U.S. incentives, it fell far short of articulating a Canadian strategy or demonstrating the federal government really understands what we are up against. What is remarkable about the United States is that, in the space of 18 months, the Biden administration not only succeeded in getting three major pieces of legislation passed, with hundreds of billions of dollars to be invested for a more innovative U.S. economy, but also that in this period programs are actually up and running and projects are already being financed. The U.S. strategy was set out clearly last month, by Brian Deese, director of the Biden administration’s National Economic Council. The core idea, he said, was that the “strategic public investments” were essential to achieving the full potential of the U.S. economy. Taken together, the initiatives of the past 18 months—the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act—represent a new American industrial strategy which, he indicated, was to raise the growth potential of post-pandemic America. What this strategy does, Deese said, is to identify “areas where relying on private industry, on its own, will not mobilize the investment necessary to achieve core economic and national security interests. It then uses public investments to spur private investment and innovation.” The strategic areas, he said, were those expected to form the backbone of future U.S. economic growth and where there was a need to urgently expand U.S. innovation and productive capacity. The three key areas were: transportation infrastructure to efficiently move people and goods; technical innovation to foster American capabilities, especially in manufacturing; and, third, clean energy and a transition to a zero-carbon economy. These, Deese argued, were where strategic, long-term investments could yield the highest potential return in the economy’s productive potential, in sectors such as electric vehicles, semi-conductors and clean-energy systems. Altogether, Deese claimed, the aggregate U.S. investment resulting from this industrial strategy should result in some US$3.5-trillion in public and private investment over the next decade. For example, the U.S. government will provide more than US$135-billion to build the electric vehicle industry. In one instance last month the Biden administration announced US$2.8-billion in grants to 20 American companies, leveraging a total of more than US$9-billion to boost electric-vehicle battery production. These included projects to provide enough battery-grade lithium to supply two million electric vehicles a year, develop enough battery-grade graphite to supply 1.2 million electric vehicles a year, and produce battery-grade nickel to supply about 400,000 electric vehicles a year. By the end of this decade, Deese said, the U.S. will need 950 million solar panels and 120,000 wind turbines, billions of semi-conductor-powered devices, millions of electric vehicles and thousands of miles of fibre-optic cable and transmission lines. Critical minerals will be one of the essential building blocks. And all of this largely south of the border with American technology and components. In Canada, Industry Minister François-Philippe Champagne seems largely focused on attracting foreign corporations to invest here for a new branch-plant economy where profits flow to the owners of their foreign proprietary technology. Clearly, it is to the advantage of the U.S. and other foreign companies to invest in Canadian factories and to conduct research and development here. By investing here, multinational corporations help underwrite their innovations and scale up their new technologies, gaining economies of scale and profits from their intellectual property which can be used to finance their innovation strategies for the future. And at a time of a global talent shortage, setting up R&D branch plants to use Canadian talent and tap Canadian research also strengthens the competitive advantage of the multinationals. The Canadian talent creates intellectual property for the foreign parents to strengthen the technological competitiveness of these companies. In 2019, according to the U.S. National Science Foundation, U.S. businesses spent US$6.9-billion on R&D in Canada. Of that amount, 60 per cent or US$4.1-billion was spent in IT-related industries by Google, Microsoft, Amazon, and others through their Canadian R&D branch plants. U.S. pharmaceuticals companies, with US$684-million of R&D spending, also tapped Canadian talent and research. To be sure, these investments create jobs and generate tax revenue. But this isn’t a great economic model for Canada’s future. In the meantime, U.S protectionism is blocking Canadian exports. All U.S. infrastructure projects using any federal funds must ensure that “all of the iron, steel, manufactured products and construction materials are produced in the United States.” At least 60 per cent of the components of manufactured products must be U.S.-made, up from 55 per cent in 2020, and this will rise to 75 per cent by 2029. This is why Quebec’s electric school-bus builder, Lion Electric, must build buses in the U.S. if it is to participate in the US$5-billion federal school bus program. This will be a difficult decade in the global competition for investment, talent, resources, and new knowledge. We have to take this innovation challenge much more seriously. While many worry about China, we must also worry about the new American challenge. David Crane can be reached at crane@interlog.com. The Hill Times

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We need to take this innovation challenge much more seriously, the United States is

Without adopting America First protectionism, we need some Canada First thinking.

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