Crisis is the mother of transformation

A good friend, former colleague and mentor would often say that “if necessity is the mother of invention, then crisis is the mother of transformation.” The Great Depression of the early 1930s gave rise to Roosevelt’s New Deal. A string of high-profile corporate scandals in the early 2000s beget the Sarbanes-Oxley Act, a U.S. law established to protect investors and the public.

More recently, the COVID-19 crisis exposed the vulnerabilities of the manufacturing processes that we had come to rely on in the name of customer-centricity and enhanced productivity. Pent-up demand unleashed in the aftermath of pandemic-induced shutdowns, completely overwhelmed our productive capacity and the logistics networks on which they depend, causing inflation not seen in 40 years. In response, the United States passed a series of legislation to invest more than US$2 trillion in economic competitiveness, innovation, and industrial productivity. 

Notable among these is the massive infrastructure bill aimed at renewing America’s transportation infrastructure, bolstering its broadband networks, and building out its electric vehicle (EV) charging grid. There’s also the Inflation Reduction Act (IRA), directed at boosting clean energy investment, enhancing domestic manufacturing capacity, encouraging procurement of critical supplies, and incentivizing the commercialization of leading-edge clean technologies. Finally, the CHIPS and Science Act is designed to bolster U.S. semiconductor capacity and ensure the secure supply of microprocessors.

These bold moves by the U.S. Congress are part of a broader industrial policy framework meant to entice businesses to reshore elements of their supply chains. In addition, state and local governments are providing incentives to win back manufacturing plants. Now it’s clear that supply-chain snags and logistical resilience aren’t the only drivers here. U.S. consumers are signalling a readiness for “Made in America” policies, with more than 83% saying they would be willing to pay up to 20% more for products manufactured at home, according to recent surveys. 

Shifting consumer preferences and the changing political landscape are leading to real results. The value of construction investment in the manufacturing sector jumped 34% in 2022, compared to average annual growth of 2.6% between 2010 and 2021. This increase was mainly driven by a 220% jump in spending on the construction of factories for computer, electronic and electrical components. And this trend is only expected to continue to pick up steam, as the U.S. races to secure essential technologies and supplies in the name of economic prosperity and national security.

Reshoring isn’t the only element of this evolving industrial policy framework gaining traction in Washington, D.C. Production of solar panels, EVs, hydrogen fuel cells, smart phones, medical equipment, and host of other products require critical minerals and rare earth elements. The U.S. holds only 1.3% of global rare earth reserves, while China and Russia control 38% and 10%, respectively. This means that the U.S. will have to be more creative in securing its supply of these minerals and elements. There are, for example, abundant mining wastes and aqueous sources in the U.S., which can be harnessed to recover significant amounts of these minerals domestically.

Should Canada be worried about this doubling down on protectionist policies? While the IRA might divert critical risk capital and labour toward the development of U.S. clean technologies, projects there will also create export and investment opportunities for suppliers all along the cleantech value chain, from providers of raw materials and feedstock, key components, critical technologies and intellectual property to construction and project planning services. There’ll also be opportunities to identify niche areas where resource and innovation advantages can help Canada secure long-term positions, and even move up the value chain, in industries that are candidates for mass global production.

The bottom line?

The COVID-19 crisis, together with emerging geopolitical tensions and the evolution of the domestic policy discourse, have forced a fundamental rethink of production networks and security of supplies. Industrial policy, once a taboo of free-market economics, is now a common feature of the post-pandemic global economy. 

As a small, open economy Canada does have reason to be concerned. However, our strong bilateral relationship with the U.S. should see trade continue to flow freely across our southern border. Some exporters may even stand to benefit from new sources of demand. But far from sitting back, Canadian businesses and policy-makers must continue to innovate to secure our position in the economy of tomorrow.

This week, a very special thanks to Prince Owusu, senior economist in our Economic and Political Intelligence Centre.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you would like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.