How should Canada respond to the scourge of economic nationalism?

Donald Trump did not invent economic nationalism, despite his claims to the contrary, nor will he be the last populist autocrat to espouse it. Today, we are inflicted with another bout of economic nationalism. The current variant is reshaping policies in the world’s two major economic markets—the United States and China—and risks infecting the rest of us. Coming at a time of profound structural changes in our economies from pervasive digitalization, strategic competition between America and China, and a massive energy transition, it could deepen geopolitical divides and further ignite de-globalization. What makes the American embrace of economic nationalism especially challenging for Canada is that it is strongly bipartisan and enjoys wide public support. China, an old hand at aggressive industrial policies, has shifted further into “techno-nationalism” to gain economic and military supremacy. The American toolkit to implement today’s economic nationalism is an amalgam of old and new, with the Biden Administration retaining and adding to Trump-era policies. In addition to expanded "America First" policies and the broader use of tariffs and sanctions, it now includes the mis-named Inflation Reduction Act with its enormous industrial subsidies, restrictions on technology transfers and investments related to China yet capable of affecting third parties, “de-risking” supply chains by mandating China carve-outs, and a broadening of national security over-rides on trade that counter-intuitively can affect allies such as Canada, as well. The scale and scope of these subsidies are impacting friend and foe alike. For Canada, the ad hoc decision to match the Americans in wooing Volkswagen and Stellantis to build new EV battery factories in Ontario rather than competing U.S. jurisdictions has been very costly—capital and operating subsidies totalling nearly $30-billion—with unclear long-term net benefits to Canadian taxpayers. Going forward, we cannot out-subsidize the United States, nor can we do nothing in the face of aggressive American and Chinese industrial policies. So, what should we do? First, we have to pick our interventions strategically and surgically. Will a subsidy-enabled investment create a sustainable, competitive advantage and nurture a cluster of related firms and technologies, or will it be a stand-alone facility whose lifespan is dictated by the duration of the subsidy? Does it relate to inherent national advantages such as scarce commodities, skilled talent, favourable business climate and intellectual property? Can it help achieve other policy objectives such as tackling climate change? Does it enhance or restrict competition? Second, we should double-down on strengthening our national competitiveness with effective regulations, efficient public services, modern infrastructure, fiscal anchors to manage debt and deficits, and reasonable corporate taxes. Indeed, as recent analysis by the Peterson Institute for International Economics shows, the U.S. will not be able to sustain the cost of its new industrial policy forever, given the size of the fiscal deficits and debt accumulation it entails, and the private sector opposition it generates. Third, since much of the bipartisan U.S. economic nationalism is directed at China, for geopolitical, security, technology, and economic reasons, it cannot be successful acting alone in today’s hyper-connected global markets. It needs allies. Canada is a natural ally but, in return, should advocate for inclusive industrial strategies. A “Team North America” approach to clean energy products and supply chains, which would create an integrated approach rather than a hodgepodge of local markets competing for subsidies as it is now becoming, is one such example. Fourth, this may be the time to de-emphasize the G20, which is incapable of a consensus agenda with disruptive actors like Russia and China as members, and to re-value the G7 as the main forum for like-minded nations to take collective and cooperative actions. With the newly expanded BRICs, it might also be appropriate to expand the G7 by including Australia and South Korea—to better counter China in the Asia Pacific region—and possibly Mexico given its influence in Latin and South America, and its growing heft in global supply chains. Finally, it is the time to build networks among like-minded countries as we advance a different, more cooperative, narrative with the U.S. government and the American public. When open markets and rule-based trade are out of favour, it is precisely the time for Canada to double down on diplomacy, and use our soft power on the global stage. History shows that this bout of economic nationalism too will pass, although the timing and circumstances of its passing are unknowns. What is known is that countries need to plan and prepare for the pressures and risks of economic nationalism as it plays out in the U.S., China, and elsewhere including the European Union and member states. For Canada, this also means closer federal-provincial-private sector communication and co-operation, and using the unique strength of our people-to-people and business-to-business links with the U.S. to help us get through these challenging and disruptive times better than most. Kevin Lynch is a former clerk of the Privy Council and vice chair of BMO Financial Group. Paul Deegan is a former a public affairs executive at BMO and CN, and served in the Clinton White House. The Hill Times