Finance Minister Chrystia Freeland delivers remarks during an event at the Peterson Institute for International Economics in Washington, DC., on April 12.Kevin Dietsch/Getty Images
Chrystia Freeland went to Washington last week to remind our American neighbours that “friendshoring” is supposed to include your friends.
Ms. Freeland – Canada’s Deputy Prime Minister and Finance Minister, and the country’s most prominent voice on international trade – delivered a speech in the U.S. capital taking aim at the Biden administration’s Inflation Reduction Act, which really has remarkably little to do with inflation reduction. At the heart of the plan is US$370-billion in government support for clean energy sources and technology. It amounts to a massive pool of subsidies for the private sector – with a proviso that the vast bulk of the money flow to U.S.-located manufacturers, contractors and workers.
The themes in Ms. Freeland’s message weren’t much different than things Canada regularly has to say when the U.S. government goes all buy-America on us, as it does every few years: We have a long history of friendly and mutually fruitful trade; we must honour the letter and spirit of our free-trade agreements that have been in place for more than three decades; you need us as much as we need you. (That last one is pretty much never true.)
What’s changing are the lines on the global trading map. And the arrival of a massive new overlay on that map – the green transition – that is simultaneously a huge risk and a tantalizing opportunity for a resource-intensive trading nation such as Canada.
In a world where the notion of free trade is being increasingly overshadowed by geopolitical rifts, there’s a fine line between seeking economic security and retreating into protectionism. The global green transition could well be a major test of that line.
Ms. Freeland’s speech took place next door to the spring meetings of the World Bank and International Monetary Fund. Her audience was, in effect, the who’s who of the world’s central banking and government economic policy-setters who were in town for the week.
Ms. Freeland has taken to the global stage in the past to extoll the virtues of friendshoring: the notion that as the geopolitical goals of countries such as China and Russia increase risks in existing global trading patterns, countries can foster trade security by deepening trade ties with friendly trading partners who share political and economic values.
The friendshoring concept has the U.S. administration’s stamp of approval. In fact, the term was popularized by U.S. Treasury Secretary Janet Yellen. But the Inflation Reduction Act is a reminder that American policy-makers often look at trade relationships and agreements differently than Canadians do. The United States is big and powerful enough that it can afford to view global trade liberalization as a grocery aisle of opportunities from which to pick and choose, according to self-interest.
When it comes to trying to sell to its voters a green transition – and the economic strains that inevitably come with it – it just makes political sense to do so with the promise of domestic jobs and growth. If that shuts out a few trading partners, well, that’s their problem.
Ms. Freeland responded in last month’s federal budget with a package of green-innovation subsidies of our own, as well as measures that would, effectively, freeze U.S. suppliers out of government procurement contracts if Canadian suppliers didn’t have equal access to U.S. contracts.
But Canada, with little power and more dependence on access to foreign markets, cannot afford to engage in a subsidy arms race with anyone – least of all the United States, which accounts for three-quarters of Canada’s exports of goods, and more than half of services exports. Canadian exporters, including green innovators, need fair access to that market.
Certainly, Canada has its own self-interest in mind. We’d love to leverage our technologically advanced, highly skilled economy into a healthy slice of the jobs, growth and future prosperity that would come with being a leader in the green transition.
But historically, Americans are much more geared up for the kind of innovation investment that the green transition will require than Canadians are. According to OECD figures, U.S. spending on research and development, as a percentage of GDP, is more than double that of Canada. (Canada is well below the OECD average, and has been for decades. The lack of innovation investment is one of our country’s most glaring and persistent economic weaknesses.)
Add the heaping helping of U.S. government funding, and the incentives are there for a highly innovative economy to dominate this emerging global industry, if it sets its mind to it. In that environment, Canada has a better chance as a strategic partner than as a competitor.
Ms. Freeland hopes to convince our American neighbours that the same is true from their side of the fence. That, as she said in her speech, “No single country – not even the United States – can invent all of the new technologies, or possess all of the natural resources, that the net-zero global economy requires.”
How this plays out will say a lot about whether friendshoring is a realistic path for global trade. Or, alternatively, expose it as a well-meaning step on a slippery slope to a more protectionist future.