Prime Minister Justin Trudeau visited Honda's automobile manufacturing plant in Alliston, Ontario on April 5, 2023.Carlos Osorio
John Rapley is a writer and academic who lives in London, Johannesburg and Ottawa.His books include: why empires collapse (Yale University Press, 2023) and Twilight of the gods of money (Simon and Schuster, 2017).
In a global economy dominated by major powers like the United States, China and the European Union, a medium-sized, trade-dependent country like Canada has little choice but to follow in the footsteps of others. So it may be a little surprising that for all the talk surrounding last week's federal budget, so little attention was paid to events in the outside world.
Surprisingly, the world has changed a lot in recent years. In particular, industrial policy, and with it the era of big government, has returned. And Canada may be spending in the wrong places and not investing enough to boost growth, even though the ruling Liberal Party is often criticized for spending too much.
Academic economists are making increasingly strong claims about this, but the main reason is Policymakers are reconsidering measures to support industrial development as a practical consideration: A case study of China.
The country has used subsidies for decades to foster the development of large-scale manufacturing, and its share of global production has risen from 5% to 35% in the quarter century since 1995. did.
At first, Western countries also went along with it. The flood of cheap Chinese goods brought down store prices, lowering inflation and, with it, interest rates. That, in turn, triggered a rebound in Western asset markets. Meanwhile, Western companies outsourced production to China, boosting profits and stock prices while securing a niche in China's rapidly expanding luxury goods market.
But it was bad for the workers. As jobs were lost, they rose up and supported populist politicians like Donald Trump, who promised to revive moribund industrial cities. Trump imposed tariffs on Chinese imports during his presidency, a strategy widely seen as a failure.
So when Joe Biden became president, he championed the use of industrial policy instead. The government is currently handing out huge subsidies to support industry to make it more competitive with China.
These policies appear to have increased labor productivity in the economy. This not only raises the prospect that the new US expansion will become self-sustaining, but also as the US becomes more competitive with Europe and Canada, private investment is starting to flow out of these markets and into the US. European IPOs (initial public offerings) and deals are on the decline as the US once again becomes the land of opportunity. As a result, the American stock market suffered a crushing defeat for its peers.
Europe is currently in a predicament. As producers are forced out of major export markets, governments will be forced to respond with some form of industrial policy. So far this has taken the form of tax policy, but European countries are now trying to find ways to compete with Chinese exports and join the wave of decoupling.
Of course, industrial policy costs money. The United States currently has a budget deficit that is about five times larger than Canada's, and its debt-to-GDP ratio is three times worse than hers. But the alternatives to big government may be even worse.
In Canada, despite the government's relatively restrained borrowing (government debt-to-GDP ratio has risen less than 10 percentage points over the past 15 years, compared with three times the rate in the United States), household debt has risen sharply. is increasing. In contrast, prices fell in the United States.
This is not unusual. Private and public debt often change in opposite directions. But the end result was that overall U.S. debt (public and private) was lower than Canada's. Meanwhile, the economy is more productive. That's because most of Canada's debt was used by investors to fuel the housing bubble and is now an impediment to economic growth.
Some may argue that if debt is to increase, it would be better for the government to direct the process and come up with some kind of strategy. US debt trends are unsustainable, but as long as the country's industrial policies create a self-sustaining boom, the economy may be able to weather an eventual fiscal contraction. In Canada, by contrast, a hands-off approach effectively brought the economy to a standstill, as housing produced nothing.
So, at a time when the economy is stagnant with private debt and the industrial sector has already been hit hard by the rise of Asia, Canada faces a world where major corporations are pouring resources into developing the next generation of industrial champions. ing.
The country is trying to emulate them and has attracted several electric vehicle projects, including a deal with Honda announced Thursday. But Canada's results pale in comparison to other Western countries, and the policy debate appears to be focused on tax and spending levels, as if we were still living in the 1990s. is.
I can't help but wonder if this country is unprepared for what's to come.
