Electrifying North American trade

Many Canadians celebrated the election of Joe Biden as U.S. President and the Democrats taking control of Congress and the Senate, albeit with narrow majorities, in January 2020. At a superficial level, Biden’s win was believed to symbolize a return to some kind of normalcy after Trump’s four-year aberration.

It was a comforting but mistaken thought. With political polarization accelerating inside and outside the United States, incidences of drought, fires and floods rising globally, and a global pandemic gaining strength across the Pacific, yearnings for stability were misplaced then as they are now. Drastic measures are needed to meet today’s interrelated political and economic challenges, with global warming at the top of the list.

And so, Canadians should probably have celebrated for real when the new administration began to lay out the climate-friendly and worker-focused industrial strategy that Joe Biden and running mate Kamala Harris had promised in their presidential bid. Finally, it seemed, the world’s largest economy and highest-total emitter of greenhouse gases was getting serious about climate change.

As a bonus, or perhaps as a bare minimum requirement for any just transition off of fossil fuels, the Biden-Harris plan included commitments to redress racial and income inequalities and reverse the hollowing out of domestic supply chains for energy, transportation and information technologies. It wasn’t as transformative as the vision laid out by Bernie Sanders and progressive Democrats, but it wasn’t bad either.

Instead, Canadian government officials and corporate lobbyists could see only undertones—and sometimes overtones—of Trump’s “Make America Great Again” politics in what’s now dubbed Bidenomics. While a rejuvenation and “greening” of America’s industrial base would naturally benefit the Canadian economy in the short- and long-term, there were legitimate reasons to wonder if Canadian jobs may be at risk.

Private sector unions worried another round of “Buy American” conditions on U.S. manufacturing subsidies and major infrastructure spending would drain investment from Canada. Some Canadian solar energy firms had left Canada for the U.S. when Trump imposed tariffs on U.S. imports of Canadian solar panels and modules, for example. Now, Canadian electric bus manufacturers have shifted some production to U.S. plants to make sure their products aren’t disqualified from government procurement contracts as “foreign-made.”

Probably the biggest shock to Canada came when President Biden announced he would be changing the federal tax incentives scheme for electric vehicles so that, after 2026, only U.S.-made vehicles would qualify. Why would anyone build new electric cars and trucks in Canada if it meant those vehicles would be up to US$12,500 more expensive than American-made cars sold on the U.S. market?

Months of Democratic Party infighting eventually nixed the “Buy American” condition on qualifying electric vehicles, which must now be assembled in North America, ideally with substantial North American content. And while some of the financial heft was cut away from the 2021 Bipartisan Infrastructure Law, the CHIPS and Science Act and the Inflation Reduction Act of 2022, together they still represent the largest public investment in U.S. infrastructure and manufacturing renewal since the New Deal.

As a result, Canada is faced with a new challenge to North American economic relations—a new era, perhaps, that the government must carefully navigate. Notably, with their frequent nods to a stronger role for government in driving economic transformation, Biden’s COVID-19 reconstruction bills have massively upstaged Canada’s minimally interventionist—we might say conservative—efforts to contain the damage from pandemic shutdowns and supply chain disruptions.

“After the pandemic of 2020 and the supply chain crisis of 2021, the energy crisis of 2022 is further breaking old constraints on what the state can do to capital,” wrote Nicholas Mulder in a recent essay in Noēma, on the new era of big, active government. “The ability to engage in democratically directed capital leadership—and if necessary, capital coercion—will be a key dimension of state capacity in the implementation of future climate policy.”

The U.S. administration has opened the door to Canadian and Mexican cooperation on this front through the “friendshoring” amendment to its contested electric vehicle tax credits. Could a “Buy North American” mindset be developing in Washington? What are the risks and rewards of closer economic cooperation with the U.S. on the “green” transition?

Finally, is Ottawa even capable of the outside-the-neoliberal-box thinking that is needed to ensure such cooperation is sustainable and with real benefits for workers here too?

Jolting a North American EV market

The Inflation Reduction Act pumps billions of dollars into renewable energy and “clean” technology and manufacturing to help the U.S. catch up with global competition in these sectors while also lowering overall carbon emissions. Through tax incentives for consumers, industrial subsidies (e.g., to battery manufacturers) and use of the Defence Procurement Act to guarantee a market for U.S.-made products like heat pumps, the Biden administration is signalling to domestic and foreign investors that their stake in U.S. decarbonization is secure.

Brian Deese, Biden’s director of the National Economic Council, refers to these measures as being part of a new industrial strategy rather than the “industrial policy” his allies, like the Roosevelt Institute, are calling it. Still, Deese, who coordinated the administration’s hugely impressive supply chain vulnerability reviews across the departments of defence, health, commerce, energy, agriculture and transportation, readily admits the strategy is inspired by state-led development policies in China, Europe and elsewhere.

In one important and high-profile area—electric vehicle manufacturing—Biden’s new law could have significant spinoff benefits for Canada and Mexico. But those benefits will not materialize on their own nor as a result of maintaining good relations with the Biden administration. Enticing investment into Canadian production of decarbonization technologies like battery plants is important but insufficient for making sure Canadian communities benefit from the transition.

The North American auto sector is years behind China, Korea and Europe in electrifying consumer vehicles. According to the International Energy Agency, in 2021, 16% of all new vehicles sold in China and 26% of those sold in Germany were electric, compared to 5% in the U.S. and 7% in Canada. There are just over 100,000 public EV charging stations in the United States; China adds nearly that many to its transportation grid each month.

The Inflation Reduction Act of 2022 hopes to incentivize billions in new investment in North American battery manufacturing and auto assembly. The bill includes a US$35/kilowatt-hour subsidy to battery cell makers, which would be worth about US$1.5 billion a year up to the year 2032 for a 40-gigawatt factory, according to a recent Financial Times column. While European and Korean officials are complaining the subsidy violates WTO trade rules, it will clearly benefit Hyundai, Honda and Volkswagen, which already have significant U.S. manufacturing footprints.

Clean Energy Canada released a cautionary report in September warning that if Canada merely rests on its laurels now, having attracted two major battery plants to Ontario and Quebec, we risk missing the chance to create 200,000 additional jobs across the full lifecycle of an EV. That includes mining, refining, battery and other component manufacturing, final assembly and recycling.

Unifor, the union that represents Canada’s autoworkers, was more to the point in an important auto policy report this year. After the demise of the Auto Pact (a production-sharing agreement between Canada and the U.S.), the absence of a government-led industrial development strategy “left Canada in the lurch,” it reads. The report offers 36 recommendations for not repeating the same mistake with EVs. These include launching an auto parts supplier transition support program, building Canada’s critical minerals processing sector, and requiring fair share agreements between mining firms and Indigenous and Northern communities “to localize the economic benefits of mining projects.”

One simple way Canada could create an additional boost to the North American content quotas in the new U.S. EV tax credits is by copying them here, as Prime Minister Trudeau said we might last November. “There are a number of solutions we’ve put forward,” said Justin Trudeau. “One of them would be to align our incentives in Canada and in the United States, to make sure that there is no slippage or no unfair advantages on one side or the other. We are happy to do that.”

Currently, federal credits of up to $5,000 are available to consumers purchasing a long list of qualifying EVs. These are topped up in several provinces by additional credits of $1,000 to $5,000. The goal of these credits, which can be claimed to purchase popular European, Korean and Japanese EVs, is simply to speed up the adoption of electric cars and trucks to help lower carbon emissions.

A “Buy North American” condition on enhanced Canadian EV credits, which could be phased in as Canadian and North American capacity increases, would reinforce the U.S. incentive for firms to invest in domestic technology, manufacturing and jobs. The emissions reduction benefits would be the same, but the benefits to workers would be much greater. This should increase public support for decarbonization.

De-carbonization or re-imperialization?

In his Noēma essay on the state-directed green energy transition, Mulder warns of narratives that pit countries against each other. “The discourse of energy security and ‘geo-economics’ stimulates a competitive and zero-sum mentality about global politics. Once in place, such paradigms become self-fulfilling. This dynamic poses a real danger to international peace and global governance.”

We must be extremely wary, in other words, of Sinophobic or just plain paranoid rationalizations for doing otherwise good things like electrifying our transportation networks and power systems, or onshoring good manufacturing jobs.

U.S. consternation with rising Chinese competitiveness in areas of historical U.S. dominance, notably high-value and resource-intensive information and military technology, has reached a fever pitch, with significant risks to geopolitical security. How often do we hear that America’s reliance on China for 80% of processed rare earth minerals used in high technology products is a huge strategic blunder?

In 2017, the Trump administration declared the “critical materials” deficit a major supply chain weakness for the U.S. A list of critical minerals was drawn up with the intention of devising a plan to identify new sources, increase their exploitation, alloying, recycling and reprocessing in the United States, and seeking “options for accessing and developing critical minerals through investment and trade with our allies and partners.”

As geography would have it, Canada is an important supplier of 13 of 35 of the minerals on the list. In June 2019, Canada and the U.S. announced they would develop a joint action plan to “improve mineral security and ensure future competitiveness of their minerals industries.” The third meeting of the Canada-U.S. Critical Minerals Working Group took place in July 2021.

Canada’s specific objectives in this effort, other than improved Canada–U.S. relations, are hard to gauge from the public record. Natural Resources Canada speaks of “positioning Canada as a global supplier of choice” in critical minerals, but also promises to identify ways to “unlock innovation,” whatever that means.

Since then, Canada has been courted, in highly publicized state visits, by the German chancellor and European officials seeking “secure” access to Canadian nickel, lithium, graphite and cobalt. Canada signed MOUs (not yet public) with Volkswagen Group and Mercedes, “supporting the development of a sustainable critical mineral supply chain in Canada.” In September, South Korean President Yoon Suk-yeol visited Canada looking for the same for his country’s formidable EV manufacturers.

As the Unifor and Clean Energy Canada reports point out, there would be more jobs in a value-added strategy aimed at upgrading raw materials into usable clean technology in Canada. A secure Canadian supply of batteries, not simply their component minerals, would arguably improve the competitiveness of North American electric vehicles in line with Biden’s vision for domestic manufacturing renewal.

For this to happen, Canada needs to be helping set the terms of a sustainable sourcing policy. This is something the federal government has been wary of and may, in some cases, be restricted from doing by laissez-faire investment provisions in CUSMA and the Canada–EU Comprehensive Economic and Trade Agreement. Can the government shift gear at this point? It must try—or risk watching from the sidelines as investment and jobs flow south.

Buy North America: Are we there yet?

International labour unions and civil society organizations have been warning for years that the permanent austerity locked in by the global trade treaty regime is grossly imbalanced and socially unsustainable. They were also the first and loudest to call for an active role for the state in the just transition from a fossil fuel economy to a clean, high-wage economy.

Canadian federal governments, of all political stripes, have generally recoiled from these now mainstream critiques of globalization, insisting that the solution to the crisis of hyperglobalization is more hyperglobalization. The audience for that defeatist message continues to shrink while public anger at government inaction in the face of climate change grows.

Despite steep political obstacles, the U.S. administration is taking efforts to shed certain neoliberal precepts in ways that will have profound impacts beyond its borders. Canada will need to swiftly come to terms with its largest trading partner and ally’s new stress on worker-centered policies, military preparedness and decarbonization. Yet, so far, Canada has only tepidly responded to the new U.S. industrial strategy initiatives.

In contrast to the rapid mobilization of diplomatic, business and even civil society assets in response to the Trump challenge to “Make America Great Again” and the renegotiation of NAFTA, the Canadian government seems to be at a loss on what to do next. Neither Ottawa nor the provinces have outlined any remotely comparable industrial policy responses, despite facing equally daunting challenges. Not least of these are Canada’s overreliance on fossil fuel exports (coal, natural gas and crude oil) and the transformational demands put on Canada’s auto sector by electrification.

Though the geopolitical risks are real, Canada should make every effort to encourage the more benign form of American recovery expressed in Biden’s green industrial strategy and to be a constructive partner in decarbonization. This will involve wrenching, but unavoidable, changes for the Canadian economy and a serious commitment to ending our current lopsided dependence on fossil fuels.

It will also mean embracing policies equal to the huge task of halving global emissions within a decade, protecting vulnerable workers and communities through a just transition, and reversing the trend to concentrated economic wealth and political power.

Stuart Trew is director of the CCPA’s Trade and Investment Research Project (TIRP) and Scott Sinclar is retired as the founding director of TIRP.

This article draws from the authors’ chapter in the anthology, Canada and Great Power Competition: Canada Among Nations 2021, which was just published by Palgrave Macmillan.