How the Canadian economy can continue to benefit from U.S. battle with China

When Jerome Powell, the world's most powerful central banker, meets with the media this Wednesday, nobody expects him to say the soaring inflation we're seeing has forced him to hike interest rates.

Despite data out last week showing year on year inflation has shot up to levels unseen for 13 years, most economists expect the U.S. Federal Reserve is not yet ready to end the stimulus low rates offer to an economy that has once again become an engine of North American and global growth.

Some worry Canada will be left out of the hot U.S. economic revivial, due to the U.S. Buy America strategy, but a series of developments last week offer evidence that this country can continue to profit by supplying the needs of its bigger neighbour. 

Still, as the U.S. focuses on a battle with China for future industrial and technological supremacy, some experts here say Canada must up its game when it comes to industrial policy if it wants to take full advantage of a coming technological renaissance.

A different kind of stimulus

An even more powerful kind of economic stimulus may be set to brighten the North American longer term economic outlook following a new bill that sailed through Washington's normally divided Senate last week, aimed at countering China's increasing technological strength.

The smooth passing of the Innovation and Competition Act with support from both Senate Democrats and Republicans — though it has yet to make it through the Democrat-dominated lower house — signals a big step beyond trying to hype the economy with low interest rates as central banks have been doing. The new focus instead is to target the fundamental twin drivers of economic growth: innovation and productivity. 

Essentially, they want to beat Beijing at its own game, using hundreds of billions of dollars in government cash to invest in key industries and technologies to prevent the U.S. from slipping behind China's recent technological great leap forward.

"It's really a bill to keep the U.S. in the technological forefront in competition with China which it sees as its adversary," said James Meadowcroft, a long-time Canadian advocate for industrial policy. Meadowcroft, a Carleton University professor in the School of Public Policy and Administration, is the lead author of a report on the very subject for the private sector Transition Accelerator.

As for Canada, Bank of Canada deputy governor Timothy Lane noted last week that there are early signs that adaptation to the rigours of the pandemic has already generated business innovation by redirecting efforts into Canada's digital economy.

"There is a good chance that productivity growth, a key driver of potential, will be stronger than expected, giving the economy more room to grow before inflation becomes a worry," he told a virtual gathering of Western Canadian financial advisors.

And while Lane said there were increasing signs that the post-pandemic innovations were sprouting up on their own in response to market forces, that's no longer good enough for the Biden administration. Nor, it seems, for the U.S. Senate. 

'No longer a dirty word'

As CBC Washington correspondent, Alexander Panetta, has reported, if the Innovation and Competition Act act becomes law, it could put serious political and economic demands on Canada because it will not only use government money to spur investment, but require its allies to scale back use of Chinese technology.

That will require some tough decisions by the Canadian government.

But speaking on the phone Friday, Meadowcroft said that one decision is obvious. If Canada wants to take a seat at the big kid's table where economic decisions are made, the country must develop an industrial policy of its own.

He said that industrial policy — crucial in Canadian history for doing things like building a railway across Canada and developing the oil sands — went out of favour during the Thatcher and Reagan years. But it is "no longer a dirty word" and has come back into fashion, especially as a tool for fighting climate change. 

In fact, he said, it never really went away, even in the U.S., where many industries continued to be supported under the guise of military spending.

Where did the jobs go?

In Canada, the government has already been targeting projects for special government support such as last week's $1.3 billion investment in a hydrogen plant. But Meadowcroft says Canada must follow the U.S. lead and develop a broader coordinated strategy. 

One example he gives is in the electric vehicle industry where Canada already has a foothold, with the minerals, the battery technology and the automotive manufacturing tradition, never mind plenty of low carbon electricity, where Canadian champions could so easily be purchased or co-opted by larger foreign players.

"But pulling all this together to build an industrial base will require strategic intervention by government," said Meadowcroft. "Otherwise we'll lose the opportunity and wake up in 15 years and say 'What happened to those auto jobs.'"

Follow Don Pittis on Twitter @don_pittis