Strategic industrial growth plan

Objective
Strengthen domestic industries, accelerate investment, and enhance economic productivity and resilience

Fast-track strategic infrastructure

Infrastructure investment is critical to economic resilience and long-term competitiveness. Canada must take immediate steps to prioritize and fast-track key projects in energy, transportation and digital infrastructure to ensure continued economic stability:

• Immediate funding through internal reallocation for essential infrastructure projects that support economic resilience, including energy, trade and Research and Development (R&D) infrastructure such as industrial labs.
• Expedite project approvals, harmonize regulations across levels of government and eliminate bureaucratic bottlenecks that delay strategic investments.

Industrial R&D in high-growth industries

To build a more competitive and innovative economy, Canada must prioritize R&D and commercialization in high-growth industries where Canada has a competitive advantage. A new targeted industrial R&D public-private effort should be deployed in strategic sectors:

• Advanced Manufacturing – Invest in precision manufacturing, automation, and AI-driven production to enhance global competitiveness.
• Ag-Tech – Promote modernized food production and precision agriculture to increase efficiency and sustainability in farming.
• Clean Tech – Focus on next-generation energy solutions, including advancements in nuclear and carbon capture technologies.
• Biotechnology – Accelerate growth in synthetic biology and agricultural biotech to strengthen Canada’s position in global innovation.
• Semiconductors and Advanced Materials – Develop capabilities in microchip production and new material sciences to enhance industrial sovereignty.

Strengthen the defence industrial base

Canada’s defence industrial sector is crucial for national security and economic growth. Bolstering the defence industry not only enhances sovereignty but also supports domestic technological innovation. The federal government must take steps to:

• Develop a national defence industrial base strategy that enhances domestic production capabilities and strengthens international commitments.
• Streamline defence procurement to improve efficiency, support domestic suppliers, and drive technological innovation in defence-related industries.
• Strengthen defence-related R&D to support aerospace, cybersecurity, and advanced weaponry sectors, ensuring that Canada remains competitive globally.

Canada-first procurement policy

To reduce reliance on U.S. supply chains and boost local economic activity, Canada must implement a Canada-first procurement policy which should:

• Prioritize domestic manufacturing and suppliers in public contracts to strengthen local industries.
• Expand federal and provincial/territorial procurement programs to ensure Canadian companies receive preference in government projects.

Accelerate business investment

To stimulate immediate business investment, Canada should:

• Implement a five-year 100 per cent capital cost allowance for businesses making strategic investments in domestic production.
• Partner with the private sector to ensure talent development in AI, advanced manufacturing and other high-growth fields, thereby strengthening Canada’s industrial competitiveness

Eliminate interprovincial barriers to trade and labour mobility

The Canadian economy has been constrained by internal barriers to trade and labour mobility, which essentially act as domestic tariffs. The negative impact that these barriers have on our economic competitiveness, productivity and growth are as great if not greater than the impact of the threatened tariffs on Canadian exports to the U.S. They must be eliminated, completely and immediately.

Energy and critical minerals strategy

Objective
Expand energy production, secure new markets, and enhance national energy independence.

Accelerate development and secure the full value of Canadian energy and natural resources

Canada’s energy sector must expand rapidly to secure long-term energy independence and new markets. The federal government should:

• Expedite approvals for energy and critical mineral projects.
• Expand domestic refining and processing of critical minerals essential for advanced materials, batteries, military and clean energy technologies.
• Streamline project approval and permitting processes for major projects by advancing the principle of “one project, one assessment, one decision.”
• Ensure efficient and predictable operations of Canada’s port and railroad systems.

Expand energy export corridors

To expand the capacity to export energy and critical mineral resources, Canada should:

• Develop new export opportunities to support the long-term energy security goals of our allies and trading partners.
• Prioritize new pipeline development, LNG terminals, and port capacity to facilitate competitive energy exports.
• Partner with provincial/ territorial governments and Indigenous communities to ensure jurisdictional harmony, public support and shared benefits through additional export opportunities.

Invest in nuclear technology

• Expand partnerships with private sector firms to drive innovation and create high-value jobs in the nuclear sector.
• Accelerate commercial-scale deployment of proven and innovative nuclear technologies including both large and small modular reactors to establish Canada as a global leader in next-generation nuclear energy.
• Ensure a robust and responsive nuclear regulatory system that supports the development and application of new technologies while maintaining public confidence.
• Develop export markets for Canadian uranium, nuclear fuel, equipment, technology and services

Conclusion

The potential imposition of U.S. tariffs on key Canadian exports poses a significant economic challenge, but it also presents an opportunity to strengthen Canada’s industrial base and enhance energy security for generations to come.

By swiftly implementing the strategic industrial growth plan and energy and critical minerals strategy, Canada can mitigate the immediate economic risks while positioning itself for sustained long-term prosperity.

The post Ambition and Action appeared first on Business Council of Canada.

As the Business Council of Canada (BCC) argued last year in its report, Economic Security is National Security, many of Canada’s closest allies have developed integrated approaches to economic and national security that seek to enhance their safety, security, and economic prosperity in a period of heightened geopolitical confrontation. ^[1]

Canada has not.

For decades now, successive Canadian governments have overlooked, taken for granted, or simply ignored the principle that Canada’s national security is dependent on the vitality and resiliency of our economy.

The Government of Canada’s failure to embrace this vital link applies not just to its inability to develop and implement an integrated national security strategy as we argued last year.

This lapse has also led to inadequate government support for the country’s defence industrial base – that is, the network of businesses, infrastructure, and technologies that equip and support our military.

Simply put, the Government of Canada does not have the policies in place to build and secure the defence industrial base needed to effectively navigate a new and far more dangerous world.

Such neglect makes Canadians vulnerable. For decades, a relatively stable international order has led to a high level of safety, security, and economic prosperity for Canadians. Now, increased geopolitical tensions, if not carefully navigated, have the potential to impose terrible human costs on Canadians at home and abroad, as well as to directly threaten Canadian workers’ livelihoods.

However, the Government of Canada’s failure to adequately invest in Canada’s defence industrial base means far more than our country being unprepared for a more tumultuous world. Increasingly, it means our country is also isolated from vital partners.

In the past decade, successive Canadian governments have made three fundamental commitments to their North Atlantic Treaty Organization (NATO) allies:

1. Invest at least two per cent of Canada’s Gross Domestic Product (GDP) on defence,
   
   
2. Ensure that at least 20 per cent of Canada’s defence expenditures are made on the acquisition of new major equipment and related research and development (R&D), and
   
   
3. Develop a national plan to strengthen Canada’s defence industrial capacity.

The Government of Canada’s failure to uphold these three fundamental obligations has damaged Canada’s global standing and threatened the country’s diplomatic relationships with its closest allies.

By way of example, senior officials from the United States have repeatedly warned that Canada’s preferential access to the U.S. export market – a market which supported the livelihoods of more than three million Canadian workers in 2022^[2] – could be jeopardized if the Government of Canada fails to move with urgency to meet its NATO commitments.  

Fortunately, it is not too late to act.

The Government of Canada can safeguard Canadians and honour its international commitments by investing in a strong and sovereign defence industrial base. By doing so strategically, it can also supercharge Canada’s broader economic security and prosperity.

To seize this generational opportunity, the BCC urges the Government of Canada to develop and implement a new Defence Industrial Base Strategy (DIB Strategy). Canada’s DIB Strategy must articulate a vision for how the public and private sectors can jointly achieve three strategic outcomes:

1. Build and secure a sovereign, but internationally linked, defence industrial base capable of providing Canada and its allies with the capabilities needed to respond to challenges presented by increased geopolitical confrontation, advance our national interests at home and abroad free from external threats, and support our allies and partners in times of need.
   
   
2. Honour Canada’s international defence obligations, including to invest in increased industrial capacity, by reprioritizing current government investments and making new investments so that:
   
   
   • By 2029/2030, Canada meets the commitment it made to its NATO allies to annually invest at least two per cent of GDP on defence with at least 20 per cent of that sum being dedicated to the acquisition of new major equipment and related R&D;
     
     
   • By 2034/2035, Canada’s defence expenditure surpasses the NATO alliance’s current median investment ratios such that the country annually invests at least 2.5 per cent of GDP on defence with at least 35 per cent of that total being dedicated to the purchase of new major equipment and related R&D; and
     
     
   • After 2034/2035, Canada’s annual defence expenditure continues an upward trajectory to three per cent of GDP, aligning Canada with key allies – like the U.S. – who have committed to a similar benchmark, as well as our country’s historical investment-levels during a period of heightened geopolitical confrontation.^[3]
     
     
3. Strengthen Canada’s broader economic security and prosperity by enhancing productivity and innovation within advanced dual-use sectors vital to the creation of high-skilled jobs, as well as the country’s long-term economic resiliency and competitiveness.

At a time when national and economic security are increasingly intertwined, Canada will be unable to sustain a healthy and prosperous economy without a defence industrial base capable of providing itself and its allies with the capabilities needed to safeguard our country, our continent, and the international order upon which we rely.

Now is the time for policymakers to recognize this vital linkage and come together with the private sector to protect Canadians from an increasingly dangerous world.

Canada’s defence industrial base is no longer “fit for purpose”

Despite a growing acknowledgement among Canada’s political leaders of the dangers posed by a new, more tumultuous geopolitical reality,^[4] Canada’s defence industrial base has changed far too little to meet the oncoming challenge.

Indeed, much about the way the Government of Canada operates continues to reflect the geopolitical realities of the post-Cold War era.

In the aftermath of the Cold War, with the Soviet Union vanquished and our closest friend and ally, the U.S., reigning supreme as the world’s sole superpower able to win wars and keep the peace, Canadian policymakers calculated that our country could afford to downsize its military to harvest the so-called peace dividend.^[5]

The procurement holiday that followed saw dramatic cuts in military force size and structure, weapons development and production, as well as the stockpiling of munitions and other key resources.

Like any sector seeking to adjust to a new reality, Canada’s defence industrial base pivoted. Instead of structuring itself to contend with the great-power rivalry that marked the Cold War, the sector shifted gears to address lower-intensity, but still dangerous, threats, such as terrorism and counterinsurgencies.^[6]

During this same time, a series of factors converged to weaken our defence industrial base. This included a rapidly aging workforce^[7] and offshoring to low-cost jurisdictions abroad.^[8]

It also included stagnating economic growth and innovation across the broader civilian economy, which supplies Canada’s defence industrial base with capital as well as dual-use technologies and infrastructure. ^[9]  

In fact, for many years now, Canada has underperformed its global peers in a range of areas essential to spurring innovation, scaling companies, and capturing global market share in advanced dual-use industries vital to our prosperity and security.^[10]

A key contributor has been successive Canadian governments that indiscriminately subsidized companies across various sectors and regions without a clear and targeted strategy. This stands in contrast to rapidly industrializing nations that have adopted focused industrial policies aimed at enhancing productivity and innovation within advanced dual-use sectors where their country has a comparative advantage.^[11]

Finally, like many other segments of the economy, Canada’s defence industrial base felt the impact of growing economic security threats, such as espionage,^[12] economic coercion,^[13] and mercantilist trading practices,^[14] which displaced skilled workers and weakened key industrial capabilities.

Meanwhile, our military rivals went to work and made significant investments year-after-year to field a growing arsenal of capabilities designed to undermine our military strengths and to exploit our vulnerabilities.^[15]   

To develop these new capabilities, our military rivals adopted innovative industrial strategies that prioritized high-risk, high-reward research, as well as created new government-industry linkages, allowing them to more effectively harness advanced dual-use technologies initially developed by the commercial sector.

The upshot is that when it comes to supporting Canada and its allies’ armed forces, our country is no longer the industrial powerhouse that it once was. In a broad range of advanced sectors essential to our national and economic security – from shipbuilding and photonics sensors to advanced biological manufacturing and microelectronics – our military rivals’ industrial and technological capabilities vastly exceed our own.^[16]

A strong and sovereign defence industrial base safeguards Canadians

Canada needs a strong and sovereign defence industrial base. By providing the foundational elements of military capability, a robust defence industrial base is essential to Canada’s ability to respond to the challenges presented by increased geopolitical confrontation, to advance our national interests at home and abroad free from external threats, and to support our allies in times of need.

Russia’s illegal invasion of Ukraine, the largest conflict in Europe since the Second World War, reinforces the importance of a strong and sovereign defence industrial base to preserving a country’s national and economic security.

Earlier this year, the then-Secretary General of NATO, Jens Stoltenberg, described the war in Ukraine, now in its third year, as a “war of logistics” that “depends very much on production capacity.”^[17]

Stoltenberg argued that supply chain disruptions, production bottlenecks, limited workforce numbers, and a lack of workers with specialist skills – not just in Ukraine, but in allied countries like Canada – have significantly hampered Ukraine’s ability to expel Russian invaders from its territory.^[18]

The resulting cost has been immense. By 2026, Russia’s illegal war is expected to have cost the Ukrainian people $167 billion in lost economic output and $1.4 trillion in lost capital stock.^[19]

Meanwhile, despite staggering losses inflicted by Ukrainian forces, Russia’s larger and more resilient defence industrial base has allowed Russia to recover far faster than expected to continue the fight.^[20]

A country’s ability to defend itself depends on the health and vitality of its defence industrial base. Our military rivals understand this. In our own country, intelligence estimates have repeatedly warned that if an armed conflict broke out, Canadian industry would very likely be the target of attack.^[21] The goal: cripple our ability to mobilize for war.^[22]

It is time for the Government of Canada to also recognize the strategic importance of a strong and sovereign defence industrial base.

We have left behind the post-Cold War era where our primary opponents were terrorists and counterinsurgents. In our new and far more turbulent geopolitical reality, we must now contend with advanced nation states who can wage war on an industrial scale. That is an entirely different proposition.

To safeguard our country, our continent, and the international order from increasingly sophisticated and pervasive threats, the Government of Canada must recognize that we are unprepared and move forward urgently with a credible plan to strengthen our defence industrial capacity.

As Canada’s Chief of the Defence Staff^[23] and many of her foreign counterparts^[24] have recently made clear, we do not have much time.

A strong and sovereign defence industrial base enhances Canadians’ economic security and prosperity

The benefits of a more robust and resilient defence industrial base stretch far beyond protecting Canadians from a more dangerous world. If pursued strategically, investments in Canada’s defence industrial base have the potential to significantly enhance Canadian workers’ economic security and prosperity.

For example:^[25]

• Strategic investments in Canada’s defence industrial base can have some of the greatest returns on investment when it comes to stimulating broad-based economic prosperity and security. This is because Canada’s defence industrial base, spread across every province and territory,^[26] includes some of the nation’s most high-skilled, export-oriented, and R&D-intensive industries.^[27] In addition, many of the innovations and human skills cultivated within the defence industrial base can find high-value commercial and academic application outside of it.^[28] This means that government investments in the sector tend to drive far greater levels of innovation and productivity than in other sectors, leading to higher rates of economic growth and high-wage job creation.^[29] Moreover, given the strategic value of many of the dual-use goods and services created by the sector, increased investments in Canada’s defence industrial base also tend to disproportionately contribute to economic security by building greater domestic resiliency and reducing risks associated with excessive reliance on overseas industries and supplies.^[30]
  
  
• Strategic investments in Canada’s defence industrial base can also translate into economically rewarding industrial partnerships that improve global relevance by solidifying relationships with important allies and trading partners. For instance, a stronger defence industrial base, more responsive to the defence requirements of Canada and its allies, would improve the country’s ability to negotiate its admission into AUKUS Pillar II. Joining this capability-sharing coalition would have immense economic benefits for Canadian businesses and entrepreneurs seeking to develop and commercialize advanced dual-use technologies, including in the fields of cyber, space, cloud computing, and artificial intelligence. Admission to this exclusive geopolitical club would also benefit the Government of Canada diplomatically by solidifying the country’s collaboration with three of our closest security and trading partners – the U.S., United Kingdom, and Australia.
  
  
• Finally, by assisting Canada’s military in securing NATO’s northern and western flanks from growing aggression, strategic investments in Canada’s defence industrial base can help reverse Canada’s reputation as an unreliable partner that is either unwilling or unable to uphold its global security responsibilities. This should improve other pressing aspects of our bilateral relationships with key allies and trading partners. Take for example Canada’s trading relationship with the U.S., our most important economic partner. Senior American officials have warned that a smooth review of the Canada-United States-Mexico Agreement (CUSMA) – a trade deal ensuring the orderly flow of approximately $3.6 billion of goods and services across our shared border each day – will be tied to the Government of Canada strengthening its defence posture, including stepping up its industrial contributions to NATO.^[31]

Canada’s closest allies are moving forward

Many of Canada’s closest allies are pursuing the economic benefits associated with investing in their defence industrial bases.

In fact, as the global security environment continues to deteriorate, a large and growing majority of Canada’s allies have independently assessed the increased likelihood of geopolitical confrontation and have decided that it is in their national interests to develop and implement new defence industrial base strategies.

These strategies are aimed at rebuilding their onshore defensive capabilities to contend with a far more dangerous world, as well as stimulating broad-based economic prosperity and security across their jurisdictions.

For example:

• The U.S.’ first-ever National Defense Industrial Strategy, published in January 2024, contends “that America’s economic security and national security are mutually reinforcing, and ultimately, the nation’s military strength depends…on our overall economic strength.”^[32] In light of this important linkage, the U.S. strategy asserts that the “current and future strategic environment requires immediate, comprehensive, and decisive action in strengthening and modernizing our defence industrial base ecosystem to ensure the security of the United States, our allies, and our partners.”^[33]
  
  
• For its part, the U.K.’s 2021 Defence and Security Industrial Strategy recognizes that the U.K.’s “global role requires us to retain Armed Forces equipped: to deter and where necessary defeat the military threats of the future; to be present and persistent; and to be agile and adaptable to the changing face of warfare and global engagement.” To do that, the U.K.’s strategy asserts that the country must “sustain and grow onshore industrial capability and skills for the future in those areas most critical to defence and security, supporting economic growth across the Union, and improving the competitiveness of our companies in the global market.” ^[34]
  
  
• The European Union’s first-ever European Defence Industrial Strategy, published in March 2024, follows the same logic. It contends that the bloc’s “security and its ability to effectively support its partners depend on its capacity to swiftly mobilise defence equipment.”^[35] To deliver what is needed, in the right quantities and places, at the right time, the E.U.’s strategy states that Europe’s defence industrial base “needs to undergo a paradigm shift and take more risks to be more responsive to the needs of all Member States.”^[36] The E.U. seeks to achieve this by encouraging member states to procure at least 50 per cent of their defence investments within the bloc by 2030 and at least 60 per cent by 2035.^[37] The E.U.’s strategy also expressly acknowledges the economic advantages created by investing in Europe’s defence industrial base: “[i]ncreased investments contribute to the Union’s wider economic security, as the [defence industrial base] is a key driver of technological innovation and resilience across our societies.” ^[38]

Canada is falling further and further behind

Despite both Canada’s military rivals and allies strengthening their defence industrial bases to contend with a period of heightened geopolitical confrontation, no serious efforts are currently underway to do the same at home. Instead, Canada’s political leaders are still trying to cash-in on the so-called peace dividend.

This remains the case in spite of a strong and growing desire among Canadians to see their government invest more in Canada’s defence readiness,^[39] NATO actively considering “industrial capacity” becoming a measured component of member states’ contributions to the alliance, and the Government of Canada signing a NATO pledge this July committing Canada to “developing national plans to strengthen industrial capacity.”^[40] 

Two metrics are indicative of the Government of Canada’s unwillingness to invest in Canada’s industrial capacity: Canada’s investment in defence as a proportion of national GDP, as well as the share of that sum spent on new major equipment and related R&D.

Despite Canada first making a commitment to its NATO allies 10 years ago to invest at least two per cent of Canada’s GDP on defence,^[41] and Canada recommitting to that pledge last year with the additional criterion that at least 20 per cent of its defence expenditure be dedicated to the purchase of new major equipment and related R&D,^[42] the country has never honoured either of these fundamental promises.

As of 2024, Canada’s investment-to-GDP ratio remains at a paltry 1.37 per cent – only two-thirds of NATO’s two per cent target, and even further behind the alliance’s median investment-to-GDP ratio of 2.11 per cent.^[43]

Canada performs better when it comes to the purchase of new major equipment and related R&D as a proportion of total defence expenditure. The country currently sits at a ratio of 18.6 per cent. However, Canada still performs well below the alliance’s median investment-to-equipment ratio of 30.85 per cent.^[44]

Canada underinvests in new major equipment and related R&D

Source: NATO, “Defence Expenditure of NATO Countries (2014-2024)”, June 12, 2024

Recent government announcements set out a “plan” to reverse the Government of Canada’s poor performance on these two metrics. In April, the Government of Canada claimed that by 2029/2030 Canada will reach an investment-to-GDP ratio of 1.76 per cent with 29.6 per cent of that total being spent on new major equipment and related R&D.^[45] In July, after weeks of intense criticism of its April announcement,^[46] the Government of Canada further claimed that it “expects” Canada’s defence expenditure to reach two per cent of Canadian GDP by 2032.^[47]

Yet, serious doubt remains as to whether Canada is currently capable of hitting NATO’s two-pronged investment “floor.” The Parliamentary Budget Office (PBO) has warned that, given historical gaps between the Government of Canada’s planned and actual expenditures on major equipment^[48] as well as its overly pessimistic projections for GDP growth,^[49] Canada’s investment-to-GDP ratio will fall well below the announced targets. For instance, in October, the PBO projected Canada’s investment-to-GDP ratio will more realistically sit at 1.58 per cent by 2029/2030.^[50]

The Government of Canada’s poor performance is deeply troubling on its own. But once compared to our allies, it is simply indefensible.

Despite Canada’s storied history as a founder and steadfast contributor to the NATO alliance, investing an average of 3.09 per cent of GDP annually on defence during the Cold War,^[51] in 2024, Canada’s investment-to-GDP ratio of 1.37 per cent meant that the country ranked 27^th out of NATO’s 32 member-states for overall spending.^[52] When it comes to Canada’s  investments-to-equipment ratio of 18.6 per cent, Canada ranked even worse: 31^st out of NATO’s 32 member-states.^[53]

When our performance on both metrics is combined and charted on a graph, Canada is now only one of two NATO allies that exists within the so-called “Quadrant of Shame”:^[54] an area reserved for those countries that have met neither prong of NATO’s investment “floor”.

Figure: The “Quadrant of Shame”

Source: NATO, “Defence Expenditure of NATO Countries (2014-2024)”, June 12, 2024

Meanwhile, the vast majority of NATO countries have not only met NATO’s two-pronged investment “floor” but believe that it is currently set too low to ensure the alliance’s collective security and prosperity.

For example:

• Poland, which leads the alliance in defence investments, is expected to hit an investment-to-GDP ratio of 4.12 per cent by the end of this year, with 51.1 per cent of that total being spent on new major equipment and related R&D.
  
  
• The U.S. and U.K., two of Canada’s closest economic and security partners, will have investment-to-GDP ratios of 3.38 per cent and 2.33 per cent, respectively, by the end of 2024. Of that amount, they are expected to invest 29.9 per cent and 36.1 per cent, respectively, on new major equipment and related R&D.
  
  
• Latvia, host to the largest deployment of Canada’s military anywhere in the world, will hit an investment-to-GDP ratio of 3.15 per cent this year, with 36.9 per cent of that sum spent on new major equipment and R&D.
  
  
• Finland, with whom Canada recently entered into a strategic partnership to build heavy icebreakers, will invest 2.41 per cent of its GDP on defence by year’s end, with 45.8 per cent of that total spent on new major equipment and related R&D.^[55]

In addition to most NATO countries now surpassing the alliance’s current GDP investment “floor,” a growing cohort are also calling for laggards – like Canada – to follow suit.  

In fact, countries, such as the U.S., U.K., Poland, Lithuania, and Estonia, are proactively lobbying for a newer, much higher GDP investment “floor” – somewhere between 2.5 to three per cent – to be applied to the entire alliance.^[56]

U.S. President-elect Donald Trump, for example, has argued that “two per cent is the steal of the century,” and that once in office he will “insist that every NATO nation must spend at least three per cent” of their national GDP on defence.^[57]

Yet, the Government of Canada still has no credible plan to ever meet the NATO alliance’s current obligations. This undermines our industrial readiness as well as increasingly strains our relationships with key allies and trading partners.

Canadian “free riding” is not free

Critics of industrial mobilization may argue that Canada’s defence industrial base does not require significant new investments. After all, in the event of an attack, our defence partners, especially our southern neighbour, would surely step in to protect us. Similarly, critics may contend that if Canada’s allies are each investing more in their industrial capabilities, that takes the pressure off Canada to do the same.

This thinking misses the mark.

Canada’s defence partnerships are indeed at the very core of Canada’s ability to defeat aggression within its borders and territory. However, while our defence partnerships convey benefits, they also impose obligations.

And on meeting our obligations, Canada is a perpetual laggard, straining our bonds with key security partners and imperiling other important aspects of our relationships – like trade and investment.

NATO allies which meet their defence industrial obligations take a dim view of Canada not solely because the Government of Canada’s dereliction of duty imperils the alliance’s role as a source of global peace and stability.

They also view the Government of Canada’s lack of investment as an “implied tax” on their own citizens to allow for Canada’s security.^[58]

In the same vein, many NATO allies rightly complain that they had to make difficult trade offs – such as limiting spending on politically popular social programs – to meet obligations that the Government of Canada has conveniently avoided.^[59]

Further, just because investments in our NATO allies’ defence industrial bases have increased in recent years, that does not mean that the alliance’s collective capacity is anywhere near to satisfying the skyrocketing demand for defensive capabilities across the alliance.

The shortage of an all-important munition to the war in Ukraine – the 155-millimetre artillery shell – illustrates the challenge ahead. Despite NATO countries pouring billions of dollars over the last three years into increased production capacity, decades of policymakers failing to take serious warnings about the sorry condition of the alliance’s munitions industry has meant that NATO countries are still unable to adequately supply Ukraine with the thousands of shells they need daily to shift the war in their favour.^[60]

It is for these and many other related reasons that frustrations with Canada’s lack of seriousness have boiled over across the alliance, leading to a number of recent rebukes.^[61]

Consider recent statements coming out of the U.S.

A scathing editorial by The Wall Street Journal last summer took aim at Canada’s failure to uphold its defence commitments. The editorial board of the second most-read newspaper in the U.S. labeled Canada a “military free-rider” ^[62] and argued that “NATO needs members that keep their commitments.” The editorial board went on to argue that “nations of the G-7 have an obligation to lead the way” and “[i]f Canada doesn’t want to play that role, then the G-7 should consider a replacement.”^[63]

These frustrations are not limited to the U.S. media.

In May, a bi-partisan group of 23 U.S. Senators – over one-fifth of the powerful Senate – wrote to Canada’s prime minister expressing that they were “concerned and profoundly disappointed that Canada’s most recent projection indicated that it will not reach its two percent [NATO] commitment this decade.”^[64] The group of influential lawmakers warned that “Canada will fail to meet its obligations to the Alliance, to the detriment of all NATO Allies and the free world, without immediate and meaningful action to increase defense spending.”^[65]

Nor are these concerns limited to one branch of the U.S. Government.

In August, Jake Sullivan, the U.S. National Security Advisor, principal advisor to the 46^th U.S. President, Joe Biden, on national security issues, singled out Canada as failing to meet its NATO defence obligations. Sullivan urged the Government of Canada to reach NATO’s two per cent investment-to-GDP ratio “as rapidly as humanly possible.”^[66]

Such frustrations are far more than idle threats. They can dictate policy – including whether the U.S. will come to Canada’s aid in a crisis, or whether Canada will continue to benefit from its preferential access to the U.S. market, the destination for more than three-quarters of our exports.

For instance, in February, Donald Trump, the 45^th and soon to be 47^th U.S. President, explained what he would say to a NATO ally who suffered an invasion, but had not spent as much as the alliance requires: “You’re delinquent? No, I would not protect you. In fact, I would encourage [the invaders] to do whatever the hell they want.”^[67]

In October, both Elbridge Colby^[68] and Ambassador Robert O’Brien,^[69] two senior officials in the first Trump administration, and possibly the second, plainly stated that a successful renewal of CUSMA will be predicated on Canada meeting NATO’s investment-to-GDP ratio of two per cent.^[70]

Outside of the U.S., frustrations with the Government of Canada are also starting to dictate policy adverse to Canada’s national interests.

The glacial pace by which the Government of Canada has sought to strengthen the country’s defence capabilities has meant that Canada is often excluded from strategically important initiatives among some of our closest allies and partners.^[71] This includes the Quad Security Dialogue as well as the AUKUS security pact.

Both were formed without even a consideration that Canada should be at the table.^[72] This would have been unheard of in the previous century, when Canada was seen as a significant and respected contributor to global peace and stability.

The Government of Canada cannot afford to continue to shirk its defence industrial obligations. A strong and sovereign defence industrial base, capable of supporting Canada and its allies’ armed forces, is key to allied solidarity and therefore Canada’s national and economic security.

Canada must adopt a new Defence Industrial Base Strategy

Canada has done this before – we can do it again

While building a strong and sovereign defence industrial base will no doubt be accompanied by challenges, Canadians have confronted these challenges before and prevailed.

During the Second World War, from 1939-1945, Canadians built virtually from scratch one of the mightiest defence industrial bases in the world.^[73]

Despite being a minnow of a nation with a little more than 11 million citizens, Canada’s war production at the end of the Second World War ranked 4^th overall among the allies, behind only the major nations of the U.S., U.K., and the Soviet Union.^[74]

Through an astonishing feat of industrial organization and production, Canada’s factories, mines, and agricultural fields supplied far more than Canada’s million men and women in uniform needed to fight and win.^[75] Two-thirds of Canada’s war production – including arms, equipment, and food – was made available to our allies.^[76]

Canadians’ industrial contributions brought us victory. And our efforts were richly rewarded. Canadian investments in industrial capacity ensured that the postwar years would be fundamentally different from the bleak decade of economic depression, insecurity, and hardship that preceded the war.^[77] Indeed, from 1939 to 1945, the sum of all the goods and services created by Canadians more than doubled from a meager $5.6 billion to $11.8 billion.^[78]

Canada’s new strategy must advance three strategic outcomes

To protect our country, our allies, and the international order which has created so much safety, security, and economic prosperity, the Government of Canada must treat our country’s defence industrial base as a vital strategic capability in its own right.

The Government of Canada must recognize that this sector does more than just supply our military with the often highly sophisticated systems we need to advance our vital security interests.

Our defence industrial base is critical to our ability to continuously adapt to, meet, and overcome new and evolving security challenges; maintain and strengthen defensive alliances and partnerships; and promote Canada’s broader economic security and prosperity.

The Government of Canada must therefore put in place measures that will help build and secure a strong and sovereign defence industrial base.

The first step down this road must be the development and implementation of a DIB Strategy. Canada’s DIB Strategy must clearly articulate a vision of how the public and private sectors can achieve three strategic outcomes:

1. Build and secure a sovereign, but internationally linked, defence industrial base capable of providing Canada and its allies with the capabilities needed to respond to challenges presented by increased geopolitical confrontation, advance our national interests at home and abroad free from external threats, and support our allies and partners in times of need.
   
   
2. Honour Canada’s international defence obligations, including to invest in increased industrial capacity, by reprioritizing current government investments and making new investments so that:
   
   
   • By 2029/2030, Canada meets the commitment it made to its NATO allies to annually invest at least two per cent of GDP on defence with at least 20 per cent of that sum being dedicated to the acquisition of new major equipment and related R&D;
     
     
   • By 2034/2035, Canada’s defence expenditure surpasses the NATO alliance’s current median investment ratios such that the country annually invests at least 2.5 per cent of GDP on defence with at least 35 per cent of that total being dedicated to the purchase of new major equipment and related R&D; and
     
     
   • After 2034/2035, Canada’s annual defence expenditure continues an upward trajectory to three per cent of GDP, aligning Canada with key allies – like the U.S. – who have committed to a similar benchmark, as well as our country’s historical investment levels during a period of heightened geopolitical confrontation.^[79]
     
     
3. Strengthen Canada’s broader economic security and prosperity by enhancing productivity and innovation within advanced dual-use sectors vital to the creation of high-skilled jobs, as well as the country’s long-term economic resiliency and competitiveness.

Canada’s strategy should have five key components

The remaining portion of this paper identifies several of the key building blocks that the BCC believes are essential to achieving these three strategic outcomes.

The recommendations enumerated below by no means serve as a comprehensive or definitive list of actions that should be undertaken by the Government of Canada. Instead, they offer a starting point for a broader national discussion on how Canada’s DIB Strategy can deliver for Canadians.

At a high level, the BCC urges that the Government of Canada:

1. Invest more in Canada;
2. Identify, develop, and maintain core defensive capabilities onshore;
3. Focus on advancing Canada’s interest in the Canadian Arctic;
4. Boost the overall competitiveness of Canada’s defence industrial base; and
5. Protect Canada’s defence investments.

Invest more in Canada

Ultimately, an industrial ramp-up demands increased spending on Canadian defence equipment, R&D, and infrastructure. Such investments cannot be made without increased government defence budgets.

Canada has started to boost its defence spending. However, significantly greater investment, within a significantly shorter timeframe, is required.  

The Government of Canada should therefore increase its investments in Canada’s defence industrial base so that the country’s total defence expenditure grows from a current investment-to-GDP ratio of 1.37 per cent to NATO’s current GDP target ratio of two per cent by 2029/2030. Using the PBO’s projections for economic growth, meeting this target in 2029/2030 would require an approximate annual investment of $75 billion on defence, $15 billion more that year than currently planned.^[80]

To maximize the domestic benefits of such investments, Canada’s increased defence expenditure should be made primarily in the form of spending on new major defence equipment and related R&D as well as infrastructure. As a result, the BCC would expect that the Government of Canada not only meets, but surpasses, NATO’s investment-to-equipment ratio of 20 per cent by the end of the decade.

However, the Government of Canada should not stop there.

Recognizing that the world is a far more dangerous place, the significant economic opportunities created by increased investments in Canada’s defence industrial base, and growing pressure within NATO to raise the alliance’s current GDP investment “floor” up to three per cent, the Government of Canada’s annual defence expenditure should continue to grow.

In particular:

• By 2034/2035, the Government of Canada should surpass the NATO alliance’s current median investment ratios such that the country annually invests at least 2.5 per cent of the country’s GDP on defence, with at least 35 per cent of that total being dedicated to new major equipment purchases and related R&D. Meeting this target by 2034/2035 would require an approximate annual investment of $110 billion on defence, $55-60 billion that year over and above currently planned investments.^[81]
  
• After 2034/2035, the Government of Canada’s annual defence expenditure should continue its upward trajectory to three per cent of GDP, aligning Canada with key allies – like the U.S. – who have committed to a similar benchmark, as well as our country’s historical investment levels during a period of heightened geopolitical confrontation.^[82]

To ensure that the country can credibly meet these targets, such investments must be made fiscally sustainable. That can be done by three means.

First, the Government of Canada’s investments can be allocated far more strategically with the aim of generating outsized returns on investment in terms of economic growth. As discussed in greater detail below, this can be done by prioritizing investments in dual-use capabilities which have the potential for broad-based commercial application. By boosting Canada’s economic prosperity, the Government of Canada can then generate additional tax revenues needed to help pay for its defence investments.

Second, the Government of Canada can retarget some of its current investments – such as its significant portfolio of R&D ($9 billion in 2022/2023)^[83] and infrastructure ($33 billion in 2023/2024)^[84] investments – so that these outlays contribute to strengthening Canada’s defence industrial base and are therefore accounted for as a part of Canada’s NATO contributions. ^[85]  

For instance, by shifting existing government programs to invest more in dual-use R&D – such as in the discovery of new anti-GPS spoofing aerospace technologies – and dual-use infrastructure – such as airfields and aids to navigation – Canada can include the defence component of these mixed civilian-military investments within its NATO contributions.^[86]

Current government investment intended to help Canada develop its natural resources – such as critical minerals ($3.8 billion over eight years, starting 2022/2023)^[87] – could be retargeted in a similar fashion.

By way of an example, Canada could follow the U.S.’ lead in using the legislative authorities contained within its version of the U.S. Defense Production Act to stimulate the development of resilient and robust domestic supply chains for critical defence materials. This would reduce reliance on foreign manufacturing and correct domestic shortfalls of goods essential to Canada and its allies’ defence industrial bases.^[88] Once retargeted, these investments – which are already being made – could then contribute to Canada’s NATO commitment. ^[89]

Finally, the Government of Canada can immediately commit to a comprehensive review of its current programming, like the one initiated by the Chrétien government in 1995 or the one launched by the Harper government in 2011. This program review would ensure that the lion’s share of new investments in Canada’s defence industrial base are offset by a decrease in government spending elsewhere.

For context, the 1995 program review generated $29 billion in savings over a three-year period.^[90] If that program review were to occur today, at a time when federal spending is 70% greater than 1995 levels, it could generate nearly $90 billion in savings over three years.^[91]    

Identify, develop, and maintain core defensive capabilities onshore

A larger defence budget will only strengthen Canada’s defence industrial base if the funds are invested strategically in Canada.

To do this, the Government of Canada must abandon its default policy of acquiring defensive capabilities through an overreliance on competitive tenders using a very narrow interpretation of value for money, which has come to mean the lowest cost that meets the military’s requirements.

The impact of this policy has meant that Canada too often acquires core defensive capabilities fundamental to its national and economic security from other nations as an alternative to the domestic development of such capabilities. It has also meant that Canadian taxpayer’s money is too often spent fueling productivity, technological innovation, and high-skilled job creation abroad rather than right here in Canada.

To support the development of a strong and sovereign defence industrial base, the Government of Canada should broadly embrace the advice of the “Jenkins report,”^[92] and adopt a more nuanced and flexible approach to capability acquisition. This would allow Canada to rely on competition where it is in our national interest to do so, but to also opt for long-term strategic partnerships where those are needed to develop and maintain essential defensive capabilities onshore.^[93]

More specifically, Canada’s DIB Strategy should identify the core defensive capabilities that we, as a nation, need domestically to meet our major national security requirements.

From there, Canada’s DIB Strategy should then set out how the Government of Canada can develop and maintain these core defensive capabilities onshore by leveraging the full range of policy levers at its disposal. These policy levers should not just include procurement policy. Among other things, they should include information sharing, skills training, tax policy, investment screening, intellectual property laws, export promotion, and access to government facilities.

In deciding which core defensive capabilities to develop and sustain onshore, the Government of Canada should initially focus its finite resources on three to five areas of the greatest return on investment in terms of:

• meeting high-priority, core requirements,
• filling gaps in the NATO alliance’s suite of critical capabilities,
• generating new and improved high-value military goods and services in which Canada can be internationally competitive, and
• helping Canadian-owned firms move up global value chains and penetrate global export markets.

Furthermore, in developing core defence capabilities, the Government of Canada’s focus should be aligned as much as possible with existing areas of strength in the civilian economy so that Canada can take advantage of larger economies of scale and reduce the cost of developing and deploying new sovereign capabilities. This approach should also avoid the cost overruns and delays often associated with building national industrial capacity from scratch.

For instance, in an increasingly digital world, it is essential for the Government of Canada to be able to respond effectively to the contested nature of cyberspace by possessing a robust cyber capability. Given its strategic importance to Canada’s national security, as well as broad-based application in the civilian economy, core elements of Canada’s cyber capability should be cultivated and maintained onshore. This will drive increased productivity, technological innovation, and high-skilled job creation, as well as ensure that there exists no risk to our ability to deploy this vital capability at will, free from external intervention.

This approach of identifying, developing, and maintaining domestic capacity to supply critical national security requirements is neither new nor novel. Many of the most industrialized countries – including key allies such as the U.S., U.K., South Korea, and France – have explicit strategies of promoting sovereign defence capabilities, recognizing that a robust and resilient defence industrial base contributes both to national sovereignty and to broader economic security and prosperity.^[94]

This is not to say that the Government of Canada should sole-source every procurement to Canadian industry. Canada cannot, and should not, attempt to actively maintain onshore industrial capacity across the full spectrum of capabilities needed by the military.

Where it is in Canada’s national interests, Canada can, and should, continue to partner with, or import from, key allies to acquire and sustain many capabilities. This could be where our allies can offer Canada clear cost advantages, or where they can provide Canadian industry with access to vital technologies that we cannot yet feasibly develop ourselves.

Moreover, even where it is in Canada’s national interest to possess core capabilities onshore, Canada must continue to welcome and attract overseas-based companies from key allies to invest in the development and sustainment of those capabilities on Canadian soil.

Yet, these two considerations do not distract from the fundamental point: countries can either have their own sovereign defence industrial base strategies, or they can import others’.

Focus on advancing Canada’s interest in the Canadian Arctic

As a smaller nation whose national security is tied closely with membership in security alliances, Canada’s DIB Strategy should be designed and implemented in ways that maximize our contributions and influence within such alliances to enhance our national interests.

At the same time, Canada’s DIB Strategy must reflect and prepare Canada to respond to the greatest external threats facing Canadians’ safety, security, and economic prosperity.

In both cases, this means Canada’s DIB Strategy should prioritize Canada’s ability to advance its national interests in the Canadian Arctic, the northern flank of the NATO alliance and a region of growing economic importance.^[95]

In particular, the Government of Canada should prioritize the development of capabilities which address the security imperatives of the Canadian Arctic, including the monitoring of our vast, harsh, and sparsely populated land and sea territory on a near-real-time basis, while being able to rapidly deploy and support our military.

Some progress has already been made in this area, including through the gradual modernization of the North American Aerospace Defense Command’s systems. However, far more work is needed to advance Canada’s national interests in this strategically important region from a range of growing threats – including submarines, long-range bombers, and hypersonic missiles.^[96]

In delivering new capabilities, special consideration should be given to the development of dual-use technologies and infrastructure, which may significantly defray the high costs of building such capabilities while materially improving the economic prosperity and security of Canadians – especially Indigenous peoples – living in the Canadian Arctic.

Examples of potentially relevant dual-use technologies include nuclear reactors, patrol aircraft, heavy icebreakers, and low-earth-orbit satellite constellations. Each capability holds potential for significant military and civilian application in the Canadian Arctic and beyond. Examples of potentially relevant dual-use infrastructure include major roads, harbours, and airstrips.

Boost the overall competitiveness of Canada’s defence industrial base

As already noted, a series of factors over the last three and a half decades have converged to sap the competitiveness of Canada’s defence industrial base.

Adding to this challenge has been the actions of successive Canadian governments. Uncertain funding, low-volume buying patterns, changing procurement priorities, program pauses, and lengthy periods between military modernizations – amongst many other factors – have made the Government of Canada an unreliable customer for Canada’s defence industrial base.

Canada’s DIB Strategy must bring forward a comprehensive package of legislative reforms, policy changes, and internal transformations that will improve the Government of Canada’s standing as a key customer to the sector. 

This package must deepen industry engagement, drive innovation, expand and reinvigorate international defence partnerships, build robust talent pipelines, and fix government procurement.

Deepening industry engagement:

The Government of Canada must “reset” its relationship with the private sector to develop a deeper, more strategic, and sophisticated relationship.

Recommendations:

• The Government of Canada must meaningfully enhance the defence industrial base’s “voice” in government policymaking, including in the development and implementation of Canada’s DIB Strategy. This will better drive a common focus on the challenges ahead and provide much-needed clarity on the respective roles and responsibilities of the public and private sectors in strengthening Canada’s defence industrial base. Industry can be given an enhanced “voice” by the Government of Canada expanding, or creating new, fora for proactive and ongoing public-private dialogue.
  
  
• The Government of Canada must engage with Canada’s defence industrial base far earlier when it comes to procurement. Too often the Government of Canada does not engage with Canadian industry when the military’s needs and requirements are being identified and defined. This regularly results in the Government of Canada adopting a procurement approach geared towards acquiring imported off-the-shelf products that do little to strengthen Canada’s defence industrial base. Before launching a procurement process, the Government of Canada should follow the example set by its allies and engage with Canada’s domestic industry to determine whether there may be a homegrown solution. This will ensure that Canada does not squander opportunities to become a leader, instead of a follower, in developing and adopting advanced technologies.
  
  
• Major private sector investments in Canada’s defence industrial base have multi-decade amortization periods. To give companies the confidence needed to plan and invest in developing new technologies, facilities, products, and services, the Government of Canada must provide a clear, certain, and consistent “demand signal” to the defence industrial base. The Government of Canada can do so by making more substantial, stable, and sustained financial investments, as well as by improving its communication of defence priorities, requirements, and procurement pipelines to industry.

Driving innovation:

Canada has fallen dangerously behind its military rivals when it comes to the adoption of new and disruptive technologies. This is especially true of dual-use technologies initially developed and marketed by commercial companies for commercial motives.

Such technologies can often be developed at a fraction of the cost of conventional military technologies. They can also have a profoundly transformative effect on Canada’s military, providing critical operational advantages.

Some important steps have been taken to foster greater defence innovation in Canada. This includes the Government of Canada’s creation of the Innovation for Defence Excellence and Security (IDEaS) program, or its participation in NATO’s Defence Innovation Accelerator for the North Atlantic (DIANA) scheme.

Dedicated defence innovation programs are vital as they are generally sheltered from the obligations of trade agreements. This provides the Government of Canada with ample leeway to support strategic sectors.

However, both the IDEaS and DIANA programs are too small to accelerate Canadian defence innovation in any significant way. Further, neither program sufficiently harnesses the brainpower of the commercial sector, which includes most of the world’s best scientists, engineers, and technologists.

At the same time, many of the Canadian companies that have much to offer Canada’s military have soured on doing business with the Government of Canada.

They do not need the headache of dealing with a customer that takes years to close a sale and then even more time to start using their product and paying for it.

Moreover, many companies offering dual-use products will simply not allocate scarce resources to supply the Canadian military when doing so will only yield three to seven per cent margins compared to margins of 15 to 20 per cent within the commercial sector.

To address these twin challenges, the Government of Canada must help Canadian companies de-risk their investments in defence innovation by boosting support for high-risk, high-reward research. In addition, the Government of Canada must reform its processes to ensure that Canada’s military fully leverages the ideas and expertise of non-traditional commercial partners.

By getting these two things right, the Government of Canada can drive increased economic prosperity and security by enhancing productivity and technological innovation in advanced and high-value dual-use sectors.

Recommendations:

• The Government of Canada should stimulate high-risk, high-reward research with the potential to deliver breakthrough technological advances in fields essential to Canada’s national and economic security, while integrating such technologies within our military, through the strategic use of government procurement. With the Government of Canada spending an amount equivalent to approximately 13.4 per cent of GDP on procurement each year, government procurement offers Canada a powerful innovation policy lever.^[97] In using this lever, the Government of Canada should emulate the U.S.’ Defense Advanced Research Projects Agency (DARPA). In the six-and-a-half decades since its founding, DARPA has been responsible for developing many of the world’s most successful dual-use technologies, such as the Internet, GPS, and unmanned aerial vehicles.
  
   
• To provide Canada’s military with new and innovative capabilities as well as to create new business opportunities for Canada’s advanced dual-use sectors, the Government of Canada must improve its ability to integrate non-traditional commercial partners – such as technology start-ups, venture capital firms, and major corporations – into Canada’s defence industrial base.
  
  In the short run, the Government of Canada should:
  
  
  • Send a clear message to non-traditional commercial partners of the high-risk, high-reward research in which our government and military intend to invest significantly over the next five years by having the Minister of Defence and Chief of the Defence Staff jointly announce a set of “big technological bets.”
    
    
  • Ensure that the Minister of Defence and Chief of the Defence Staff meet quarterly with leaders of Canada’s most innovative and successful commercial businesses, including the chief executives of major companies, influential venture capitalists, and unicorn company founders, to break down silos by building and strengthening personal and corporate ties between the defence and commercial worlds.
    
    
  • Establish a high-profile talent exchange allowing non-traditional commercial partners to rotate through relevant branches of the government and military to build new linkages and help strengthen the public sector’s work culture by infusing it with new and innovative ideas, methods, and practices from the private sector.
    
    
  • Establish and sufficiently staff and resource a “concierge service” aimed at providing non-traditional commercial partners with a one-stop-shop for obtaining the government, technical, and business assistance necessary to successfully navigate entry into the defence industry.
    
    
  • Create flexible procurement processes and tools tailored to rapidly prototype and field advanced dual-use capabilities originally developed by non-traditional commercial partners. In developing this new approach, contractual terms and conditions – including with respect to companies’ return on investment – must be designed to be as close as possible to those within the commercial sector.

As a longer-term solution, the Government of Canada should establish a special commission consisting of senior representatives from government and non-traditional commercial partners to identify and put forward actionable recommendations on how to eliminate the significant barriers that disincentivize new entrants from contributing novel ideas, business strategies, and technologies to Canada’s defence industrial base.

• The Government of Canada should emulate the U.S.’ Defense Innovation Unit by establishing an independently run, professionally staffed venture capital fund, with a footprint in each of Canada’s commercial innovation hubs, that would enable our military to fund, access, and deploy advanced dual-use technology in three to five strategically important portfolio areas, such as energy, artificial intelligence, and aerospace. With Canada’s military as an early user, commercial startups would get up and running. With the promise of future revenue the military could provide, venture capital firms would be more likely to invest.
  
  
• The Government of Canada should grant trusted industry and academic partners access to its unique datasets, scientific expertise, technology, laboratories, and test and evaluation facilities, which are not otherwise available to the private sector, but are essential to pushing the boundaries of science and technology within the extreme operating environments of armed conflict. By granting access to these critical assets, the government can enable new discoveries, innovations, and spin-off companies, that will enhance the Canadian military’s access to advanced capabilities, while driving increased private sector investment, high-skilled job creation, and innovation across the country.

Expanding and reinvigorating international defence partnerships:

Canada’s defence partnerships with key allies are some of the country’s most important strategic assets. By providing a platform for greater defence industrial cooperation, Canada’s international defence partnerships act as a force multiplier, amplifying the country’s capacity to respond to an increasingly dangerous world and advance its economic security and prosperity.

Recommendations:

• A highly integrated, reliable, and scalable North American defence industrial base is a strategic asset for Canada and the U.S. It enables both countries to better respond to new and emerging challenges posed by heightened geopolitical confrontation, strengthens the resiliency of both nations from external economic shocks, and fuels increased economic prosperity across the continent by increasing companies’ global competitiveness as well as creating high-skilled jobs.^[98] To further strengthen this vital cross-border partnership,^[99] the Government of Canada should work closely with U.S. government officials to reduce barriers to greater defence industrial integration, including by coordinating and streamlining export controls; aligning defence industrial base planning; and removing obstacles to the secure flow of knowledge, goods, and services between both countries’ militaries, industries, and research institutions. In addition to these measures, the Government of Canada should help Canadian businesses better leverage bilateral defence production-sharing agreements between Canada and the U.S., which have for decades given Canadian defence firms unique and privileged access to the U.S. defence market,^[100] a market approximately 31 times the size of Canada’s own.^[101] Despite its special access to this large and highly strategic market, the Government of Canada has largely undervalued Canada’s unique market access to developing Canada’s own defence industrial base. To capitalize on this singular opportunity, and in the process build a stronger and more robust North American defence industrial base, the Government of Canada should roll-out a dedicated suite of business supports that assist Canadian defence companies in better pursuing U.S. defence opportunities and more fully integrating into continental defence supply chains, including for major projects like the NORAD modernization.
  
  
• While Canada must compete vigorously with its allies for business in the global defence marketplace, the complexity of modern military capability development means that in certain cases, the Government of Canada must enter into “capability coalitions” with allies to meet Canada’s defence requirements and develop a strong and sovereign defence industrial base. Capability coalitions allow allies to defray the high developmental costs of building onshore defensive capabilities by pooling demand for such capabilities. They also allow for the sharing of scientific knowledge and technical expertise, supplier networks and infrastructure, as well as programs for training and retaining a skilled workforce. Where it is in Canada’s national interests, the Government of Canada should seek to enhance existing (e.g., ICE PACT),^[102] or join new (e.g., AUKUS pillar II),^[103] capability coalitions to strengthen the capabilities of Canada’s defence industrial base.
  
  
• Canada is uniquely positioned to bolster its defence industrial base, as well as those of its allies through the provision of critical defence materials: the raw and processed resources needed for everything from night vision goggles to fighter jet engines. The COVID pandemic, the Russian invasion of Ukraine, and our military rivals’ increased use of coercive trade tactics have all highlighted the extent to which Canada and its allies’ supply chains are susceptible to geopolitical disruptions. In response, Canada must evaluate what materials – from energetics and rare earth metals to munitions and microprocessors – it can provide to displace unstable sources in allied defence supply chains. As a part of this initiative, the Government of Canada should follow the U.S.’ lead in using the legislative authorities contained within its version of the U.S. Defense Production Act to stimulate and streamline the development of critical defence supply chains.
  
  
• Special focus must be placed on critical minerals, recognizing they are a vital resource, contributing to both the economic and national security of Canada, the U.S., and other important allies. Canada is in the fortunate position of possessing significant amounts of many of the world’s most critical minerals. In addition, Canada is home to the workers, businesses, and communities that know how to explore, extract, and process these critical economic inputs at scale. Canada must therefore do far more to position itself as the trusted and reliable leader in responsibly sourced and processed critical minerals. To do that, the Government of Canada will need to assist the private sector in overcoming unfair competition from foreign producers that benefit from an intentional, state-directed policy of overcapacity and oversupply, as well as a lack of rigorous labour and environmental standards. The Government of Canada will also need to reform project approval and permitting processes, including to allow for streamlined approvals where a project is deemed essential to Canada and its allies’ national security interests. The current approval and permitting system is far too slow and unpredictable, creating the single greatest disincentive to investment in new critical mineral projects.
  
  
• Many of Canada’s allies – including France, Sweden, and South Korea – have recognized that their domestic defence markets are often too small to incentivize domestic defence firms to expand their operations and to develop industrial capabilities which are core to their country’s national security. As a result, such nations have developed defence export strategies and institutions^[104] that have helped many of their defence companies achieve the necessary scale by becoming major exporters.^[105] Despite the importance of foreign defence sales to strengthening Canada’s defence industrial base, the Government of Canada’s export support for Canadian firms is haphazard at best and non-existent at worst.^[106] The Government of Canada must therefore reorient itself for export success to ensure that overseas customers will turn to Canada’s defence industry as a supplier of choice. This can be done by the Government of Canada following the lead of our top military exporting allies by establishing a dedicated export agency within the Department of Defence. Among other things, this new agency should be tasked with improving Canada’s understanding of its allies’ defence requirements, playing a more active role in international bodies that set standards for interoperability, accelerating government export permitting processes, ensuring that Canada’s procurement processes are fully aligned with our export ambitions, improving contracting support, and facilitating high-level diplomatic and political support for sales to allies and partners. For instance, instead of hoping for an enthusiastic trade commissioner, Canadian companies should come to expect high-level support at the top echelons of power for their foreign sales. We have seen other world leaders, including the President of France, travel abroad to help close major export deals.^[107] This should be common in Canada, too.
  
  
• Overseas-based companies support our military and defence industrial base, not solely through their goods and services, but by creating high-skilled employment, investment, and R&D within Canada. Despite these clear benefits, Canada is one of the least open environments for foreign direct investment among both the G7 and G20.^[108] To enhance the overall capacity of Canada’s defence industrial base, the Government of Canada must encourage and support greater legitimate foreign direct investment into Canada’s defence industrial base, including by eliminating unnecessary regulatory burdens.

Fixing defence procurement:

It often takes many years – and sometimes more than a decade – for the Government of Canada to procure new major defence equipment.^[109] As a result, it is not uncommon to hear experts describe Canada’s defence procurement processes as being “broken” or in a “state of crisis.”^[110]

Procurement delays act as a disincentive for companies to invest in Canada’s defence industrial base. They also have at least two consequences for Canada’s military readiness.

First, procurement delays severely limit Canada’s ability to effectively invest in new capabilities. In fiscal year 2020/2021, the Government of Canada failed to spend more than $855 million, or 17 per cent, of its allotted capital budget for new equipment, primarily due to delays in the purchase of such equipment.^[111] This was no outlier. Year after year, similar budgetary lapses occur because of procurement delays.

Second, procurement delays create a perpetual “capability gap” between Canada and its military rivals. Owing to rapid technological advancements, extensive procurement delays can lead to new defence capabilities becoming outdated and obsolete before they are deployed.

The unfortunate reality is that fixing defence procurement will not be easy. As one expert has argued: “there are no silver bullets” for “reforming one of the most difficult and complex functions of public administration.” ^[112]

What this means is that meaningful reform will require strong political support coupled with laborious, painstaking, and cooperative work by the various government departments involved in defence procurement as well as Canada’s defence industrial base.

After years of too few results, the Government of Canada must finally make reforming defence procurement a national priority.

Recommendation:

• Working in close partnership with the private sector, the Government of Canada must overhaul defence procurement processes to reflect modern business practices so that Canada’s defence industrial base can provide critical goods and services to Canada and its allies at speed, cost, and scale. Alongside a long list of other changes, the Government of Canada should streamline procedures, adopt more performance-based requirements, minimize political intervention, empower procurement teams to take calculated risks, enhance transparency and accountability, and involve industry partners earlier in the procurement process such as in the development of requirements.

Building robust talent pipelines:

The lack of a sufficiently skilled and staffed workforce within both the public^[113] and private sectors presents a significant challenge to developing and maintaining a strong and sovereign defence industrial base.

The shortage of skilled labour spans fields as diverse as cybersecurity and precision-machining to chemistry and aeronautical engineering.

Like other skilled segments of the economy, the labour crunch impacting Canada’s defence industrial base is worsening year-over-year as baby boomers retire, and younger generations show lower levels of interest in defence-related careers or lack the technical skills needed for such work.^[114]

While industry and academia play an important role in building robust talent pipelines, the Government of Canada also needs to provide support.

Recommendations:

• To increase the public sector’s ability to support the defence industrial base, including by growing its pipeline of acquisitions, expediting procurement timelines, and ensuring that investments are being maximized to support economic prosperity and security, the Government of Canada must increase its commercial contracting capacity, including by hiring additional government employees with the specialized skills and training to contract in an agile and flexible manner. Given the extensive growth of the Canadian public service in recent years, the Government should first seek to reassign staff before adding net new employees to its payroll.
  
  
• To incentivize increased private sector investments in Canada’s defence industrial base, the Government of Canada should scale proven workforce development programs, both academic and occupational, to better meet the sector’s needs. With the vast majority of Canada’s labour market growth being driven by economic immigration, the Government of Canada should also seek to refocus Canada’s immigration programs to ensure that employers within the defence industrial base have quick and reliable access to the trusted, specialized, and high-skilled international talent they need.
  
  
• Women and racialized Canadians’ representation within Canada’s defence industrial base remains low.^[115] This limits the available pool of talent from which industry can draw. To create high-paying economic opportunities for women and racialized Canadians, as well as to significantly expand Canada’s pool of skilled workers available to support the defence industrial base, the Government of Canada should scale organizations with a proven track record of advancing the recruitment, training, and retention of underrepresented groups in fields like science, technology, engineering, and mathematics which are essential to the defence industrial base. This should include organizations like Women in Defence and Security, which aims to promote and support the advancement of women in careers related to Canadian defence and security.
  
  
• To increase Canada’s ability to attract, cultivate, and retain scarce talent within Canada’s defence industrial base, the Government of Canada should make it easier for highly skilled, specialized, and trusted personnel to move freely across government, industry, and academia by either enhancing existing interchange programs or creating new ones.
  
  
• To address a major barrier to the recruitment of personnel both within the public and private sectors, the Government of Canada must significantly reduce the time it takes to process security clearances. It currently takes months, sometimes years, for individuals seeking employment in the defence industrial base to obtain the required security clearances.

Protect Canada’s defence investments

Everyday, Canada’s military rivals launch an array of economic attacks against Canada which shift the economic playing field in ways that damage the health and vitality of Canada’s defence industrial base.

Such attacks also slow Canada’s engines of economic growth, reducing government tax revenues. This constrains the Government of Canada’s ability to adequately invest in the modernization of the country’s defence industrial base.

The current safeguards deployed by the Government of Canada to guard against these increasingly pervasive and sophisticated attacks are insufficient. They do not provide the full spectrum of defences needed to ensure that growing investments in Canada’s defence industrial base are preserved.

Failure to adequately safeguard Canada’s economic security undermines Canada’s industrial readiness for an era of increased geopolitical confrontation. It can also advance the military prowess and ambitions of Canada’s military rivals. For instance, if economic security considerations – such as measures to tackle industrial espionage – are not baked-in to the Government of Canada’s defence investments, then taxpayers’ hard-earned money could end up subsidizing the defence industries of Canada’s military rivals.

Canada must also be mindful of its global reputation. If the Government of Canada appears unwilling or unable to protect Canada’s industrial assets from attack, then Canada could lose the trust and confidence of its allies. This would undermine Canada’s defence industrial base by limiting the Government of Canada’s ability to attract much-needed foreign investment, engage in two-way exchanges of knowledge and expertise, or enter into strategic industrial partnerships with allies.

At the same time, as an open and market-oriented economy, any new economic safeguards adopted in Canada ought to be balanced against our economy’s reliance on foreign ideas, talent, and capital. To develop a strong and sovereign defence industrial base, the Government of Canada must therefore ensure that legitimate market participants are confident that Canada continues to welcome trusted foreign investment, and that trusted foreign-owned companies will continue to play an essential role in supporting our military.

Recommendations:

• To ensure that Canadian companies are aware of, and can build resiliency against, new and emerging economic security threats, the Canadian Security Intelligence Service (CSIS) should work with industry to immediately operationalize the new information sharing powers that CSIS was granted in June through the enactment of The Countering Foreign Interference Act.^[116] In particular, these new powers should be operationalized through the creation of a formalized threat exchange based on the model established by the U.S. Domestic Security Alliance Council (DSAC). Through the timely exchange of threat intelligence, DSAC advances the U.S. Government’s mission of protecting America’s national and economic security, while assisting the American private sector in protecting their employees, assets, and proprietary information.
  
  
• To improve the Government of Canada’s ability to investigate, and where necessary, intervene in mergers, acquisitions, and other major transactions that could threaten the integrity of our defence supply chains and sensitive dual-use technologies, the Government of Canada needs to put greater resources into the administration of the Investment Canada Act.^[117] With only 13 full-time-equivalent government employees reviewing foreign investments on national security grounds – well short of the U.K.’s 80 employees or Australia’s 100 employees – there is the real risk of problematic transactions being inadvertently overlooked.^[118] A lack of government staff also contributes to lengthy delays in the national security review process – on average 174 days in 2022/2023^[119] – which unduly prolongs the realization of the many recognized benefits of legitimate foreign investment, adds to the cost of raising capital, and discourages investment in Canada’s defence industrial base in the first place.
  
  
• To protect Canada’s defence industrial base from mercantilist economic practices, Canada must take greater defensive actions to level the playing field for Canadian companies. Among other things, the Government of Canada, in close coordination with key allies, should create new legal mechanisms to block the import of foreign goods and services that have benefitted materially from unfair economic practices. However, as it is in Canada’s national interests to uphold the rules-based economic order, these measures must always remain compliant with Canada’s international legal obligations.
  
  
• To safeguard the defence industrial base’s access to critical economic inputs from economic coercion and other unfair trade practices, the Government of Canada should:
  
  
  • Work with companies vulnerable to coercive trade practices to strengthen the depth and resilience of Canada’s critical supply chains, including by conducting vulnerability reviews, sharing threat information, developing robust mitigation strategies, curbing excessive dependence on problematic actors, and increasing the availability of commercial free-market alternatives;
  • Leverage existing, and create new, relationships with allies to reduce Canada’s reliance on military rivals for critical defence materials; and
  • Create and enhance plurilateral measures to collectively deter, withstand, and counter economic coercion and other unfair trade practices, such as through a “NATO for trade” whereby allied nations agree to come to the aid of each other when they are economically threatened.
    
    
• To enhance the cybersecurity and resiliency of Canada’s defence industrial base, the Government of Canada should:
  
  
  • Follow the U.S.’ lead and legislate safe harbour protections that eliminate legal obstacles preventing Canadian companies within the defence industrial base from working voluntarily with each other and governments to address cyber challenges.^[120]
  • Work closer with its Five Eyes partners and other like-minded allies to undermine malicious cyber actors, including by:
    • Jointly deterring, attributing, and responding to cyberattacks which breach global rules and norms in cyberspace.
    • Shutting down illegal online markets for cyber tools and services, which lower the threshold of sophistication and start-up time necessary for malicious actors to target Canadian companies.
    • Better regulating crypto assets and exchanges, which are used by malicious actors to conceal their identities and obfuscate their activity from national security and law enforcement agencies.
    • Increasing diplomatic and economic pressure on countries with lenient or non-existent laws and law enforcement related to cybercrime and other malicious cyber activities.
  • Establish a centre of excellence within the Canadian Centre for Cyber Security (CCCS) to:
    • Encourage more meaningful, two-way information sharing between government and the defence industrial base, including on emerging threats to critical cyber systems, the safety record of current technologies, and the relative benefits of different security measures.
    • Convene and support regular tabletop and threat-hunting exercises where companies within the defence industrial base and government work through simulated events to improve their collective responses to major cyber incidents.
    • Establish a systemized process to review major cyber intrusions to capture and share lessons learned as well as make concrete recommendations for improving cybersecurity and resiliency.
    • Offer onsite incident response services to companies in the defence industrial base that require immediate assistance.
      
      
• Based on the model established by the U.S. Federal Bureau of Investigation’s Chief Information Security Officer Academy,^[121] the Royal Canadian Mounted Police (RCMP), CSIS, and CCCS should jointly establish and operate a semi-annual, week-long residential program hosted at their headquarters for small groups of senior private sector security executives to gain a first-hand understanding of the RCMP, CSIS, and CCCS’s mandate, mission, and authorities, as well as how each organization works with private sector organizations before, during, and after a national security incident. The overarching goal of this program should be to increase the public and private sector’s awareness of shared challenges, their respective roles and responsibilities, and to create and sustain long-term partnerships that safeguard Canadians from growing economic security threats.

Execution and review will be critical

Canada’s DIB Strategy will only fulfill its purpose when its contents are fully executed. While this may sound obvious, execution is a major challenge for the Government of Canada. Far too often new security initiatives are announced, only for the actual funding and implementation to move slowly or fail to materialize all together.

Strengthening Canada’s defence industrial base will also necessitate much closer coordination and collaboration with the Canadian private sector. Deep and sustained partnerships with Canadian businesses, from the strategic to the tactical level, will be required to achieve success. Consultations will not suffice.

Lastly, to stay relevant in a rapidly evolving threat environment, Canada’s DIB Strategy should not be fixed in stone. Rather, it should be subject to regular reappraisal – such as every four years – to adapt to changing threats.

To ensure that these measures are taken and given adequate priority, the BCC urges that:

• The Prime Minister amend the mandate letters of all relevant ministers, including public safety, foreign affairs, defence, industry, treasury board, procurement, and finance, to ensure that each of their priorities are aligned and support the development and implementation of Canada’s DIB Strategy.
  
  
• The Government of Canada establish a dedicated planning, decision-making, and coordination unit within the Privy Council Office (PCO) under the auspices of the newly established National Security Council to engage Canadian businesses as well as organize, integrate, and direct the Government of Canada’s responses across the numerous government departments and agencies with competing mandates and responsibilities for Canada’s defence industrial base. Currently, no single government department or agency has the clear authority, responsibility, or instruments to effectively promote and sustain the defence industrial base in partnership with industry.
  
  
• The Government of Canada task its new coordination unit within PCO to liaise with Canada’s broader security and intelligence community, as well as other government departments and agencies which might not have a defence or security mandate, but which have a significant interest in advancing and securing Canada’s defence industrial base and broader economic security and prosperity.
  
  
• The Government of Canada publicly release annual implementation plans setting out the specific measures it intends to carry out within a given calendar year to implement Canada’s DIB Strategy.
  
  
• The Government of Canada mandate that all relevant senior government and military leaders drive forward the implementation of Canada’s DIB Strategy across their organizations, including by clearly articulating a vision of how the strategy will be adopted, offering sustained and forward-looking leadership and decision-making, ensuring buy-in from managers at multiple levels, revising incentive structures to realign behavior toward desired outcomes, and ensuring a greater emphasis on holding people accountable for results.
  
  
• Within eighteen months of the roll-out of Canada’s DIB Strategy, the National Security and Intelligence Committee of Parliamentarians initiate, and the Government of Canada publicly respond to, a special study on the effectiveness of Canada’s overall framework for building and securing Canada’s defence industrial base.

The time to act is now

Canada faces a new, far more turbulent world, marked by growing geopolitical confrontation.

The military dimensions of this intensifying confrontation are clear. Canada’s military rivals are investing heavily in their armed forces, and the defence industrial bases which support them, with the goal of reshaping the international order in ways that can, and do, undermine Canada’s national and economic security.

At the same time, the Government of Canada’s failure to uphold the country’s NATO commitments has aggravated the threat by isolating our country from its closest partners.

With the Government of Canada’s ability to address these twin challenges being directly tied to the strength and resiliency of Canada’s defence industrial capabilities, the time has come for policymakers to move forward and adopt a new DIB Strategy.

By doing so, the Government of Canada has a unique opportunity to also supercharge Canada’s broader economic security and prosperity by enhancing productivity and innovation within dual-use sectors vital to the creation of high-skilled jobs, as well as the country’s long-term economic resiliency and competitiveness.

The recommendations contained in this report offer a path to help government and businesses develop and implement this strategy together.  

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Canada has consistently ranked among the world’s top countries for its high quality of life. Abundant resources, a highly educated population and strong international ties have all contributed to Canada’s enviable living standards.

However, progress has stalled.

Data from various sources, including Statistics Canada, the OECD and other economic research institutions, reveal that Canada has experienced a period of economic growth lethargy over the past 15 years.

Canadians will not be able to sustain their living standards – including benefitting from cherished social programs – if the country doesn’t change course. 

Progress is a policy choice, and policymakers have the agency to ensure Canadians’ living standards and wages do not stagnate or, worse, deteriorate. It is urgent that policymakers develop the conditions for building a forward-looking society, one that leverages innovation to drive economic prosperity.

Less than a century ago, South Korea and Singapore were among the world’s poorest nations. Finland was significantly underdeveloped compared to its Western European peers. Today, through technology-focused economic roadmaps and policies, the fortunes of these three countries have dramatically reversed, positioning them among the world’s most advanced economies and leading to improved livelihoods for their citizens.

Canada can achieve the same.

This paper presents a practical and achievable roadmap and recommendations for Canada to fuel long-term growth engines, not merely for the next few quarters, but for the coming decades, to the benefit of all Canadians.

The thesis is straightforward: embracing an economic agenda that benefits workers means the Canadian economy must become more technology-driven. Instead of focusing on consumption, the Canadian economy should target production and competition at scale in technologically advanced industries. An innovative, productive, and competitive economy will result in higher wages and better job opportunities for Canadian workers. It will foster skills development and continuous learning that will enhance individuals’ capabilities and career prospects.

This economic shift will lead to higher productivity, driving overall economic growth and improving living standards, effectively lifting all boats. It will enable Canada to export high-tech products and services, boosting national revenues and creating a more resilient economy. A stronger economy will also allow Canada to have greater influence on the international stage, helping shape global policies and initiatives that align with Canadian interests and values.

Technological innovation and economic growth

For centuries, economic prosperity has mirrored technological advancements. Before the 1800s, most economies were agrarian, relying heavily on agriculture, and productivity growth was slow. Beginning in the United Kingdom in the late 18th century, the Industrial Revolution became the catalyst for exponential growth.

Significant inventions, such as the steam engine, mechanized textile fabrication, and advancements in metallurgy, transformed production processes, leading to mass manufacturing and significant productivity gains. Innovations in transportation, including the steam locomotive and improved shipping, facilitated faster and more extensive trade.

In the latter half of the 19th century, the Second Industrial Revolution was characterized by the expansion of industries such as steel and chemicals. The advent of electricity revolutionized production processes, enabling continuous and efficient manufacturing, lowering the price of goods. Innovations like the telegraph and telephone improved communication, further enhancing global trade.

The Third Industrial Revolution started in the 1970s. The rise of digital technology fundamentally transformed how information is processed, stored, and communicated. The spread of Information and Communications Technology (ICT) reshaped many sectors, including finance, healthcare, education, and entertainment.

Over the last ten years, we have witnessed a new phase of technological innovation focussed on advanced robotics and automation, artificial intelligence (AI) and machine learning (ML), big data and advanced analytics, biotechnology and genomics, and quantum computing.

History matters. The reason economic growth became exponential at the end of the 18^th century was mainly due to technological innovation. Continuous technological advancements led to exponential growth in productivity and output. Each new invention built on previous innovations, creating a compounding effect. Similarly, scientific and technical knowledge fuelled more investments in research and development (R&D).

With the onset of technological innovation, economies flourished, leading to significant improvements in per capita income and standards of living. It coincided with the rise of the middle class, more leisure time and improved healthcare.

The Canadian challenge

Following the Second World War, Canada experienced significant economic growth and productivity gains due to rapid industrialization, technological advancements and high levels of investment in infrastructure and education. It resulted in a boost in living standards and economic opportunities for Canadians from diverse backgrounds and regions.

The expansion of the manufacturing and natural resources sectors played a crucial role in driving productivity. However, Canada experienced a slowdown in productivity growth in the 1970s, partly due to the oil shocks and subsequent economic recessions. Rising energy costs and inflation affected the country’s economic performance.

The implementation of the Canada-U.S. Free Trade Agreement in1989, followed by the North American Free Trade Agreement (NAFTA) in 1994, helped stimulate productivity by increasing market access and competition. Further productivity improvements developed with the adoption of new technologies and a shift towards more knowledge-intensive industries.

The late 1990s and early 2000s saw another surge in productivity, driven by the widespread adoption of ICT as well as diversification into high-tech industries and services.

The steady improvements, however, did not last. Canada’s economic performance since the last Great Financial Crisis in 2008 has been underwhelming. Post-pandemic, it has been even worse, especially compared with peer countries.

That underperformance is not due to higher interest rates. The reason is clear: Canada is experiencing stagnant productivity, or in plain terms, an inability to generate additional income for each hour worked.

There is an increasing chorus of credible voices raising concerns over Canada’s productivity challenge: the current Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers, former Bank of Canada Governors David Dodge, Mark Carney and Stephen Poloz, former Finance Minister Bill Morneau and former Bank of Canada Senior Deputy Governor Carolyn Wilkins, numerous bank economists and policymakers, think tanks, industry associations, advisory firms, national columnists Andrew Coyne, John Ivison and Kevin Carmichael and economists including Trevor Tombe and Mikal Skuterud. 

Canada has fallen from the 6th most productive economy in the Organisation for Economic Co-operation and Development (OECD) in 1970 to the 18th as of 2022.

Outside a recession, the Canadian economy has rarely been so structurally weak. It is now smaller than it was in 2019 when adjusted for inflation and population, and it is in pretty much the same place it was a decade ago. Essentially, Canada has experienced seven years of no per capita economic growth.

Key indicators such as GDP per capita, business investments, and R&D spending all point to persistent economic weakness.

Real GDP per capita has now declined in six of the past seven quarters and is currently near levels observed in 2017. According to Statistics Canada, to return to its pre-pandemic trend over the next decade, GDP per capita would need to grow at an average annual rate of 1.7 per cent per year. A change of this magnitude would be a significant departure from recent trends.

In 1984, the Canadian economy produced 88 per cent of the value generated per hour by the U.S. economy. By 2022, Canadian productivity had declined to only 71 per cent of that of the United States. Over this same period, Canada also fell behind its G7 peers, with only Italy seeing a larger decline in productivity relative to the United States.

As Bank of Canada Senior Deputy Governor Carolyn Rogers highlighted in a March 2024 speech: “Improving productivity in Canada needs to be a priority for everyone, and there are two basic strategies for doing it. One is to have the economy focus more on the industries that add greater value than less-productive activities. The other strategy is to keep doing the jobs we’re doing but do them more efficiently. Ideally, Canada would use both strategies, leading to an economy with strong productivity growth and a large concentration of high-value industries.”

Canada’s standard of living is determined by its economy-wide productivity. It must increase across the board, but especially in the high value proportion of the economy.

The deindustrialization of many parts of Canada has had important implications. Many parts of Canada – most notably in Ontario – have traditionally bolstered the economy through the manufacturing sector. But as a recent report by RBC Economics illustrates, the impact of manufacturing is half what it was to the economy in 2000, while mining has also shrunk. The problem is as manufacturing has shrunk, it has not been replaced by high value industries. In addition, investment levels in the oil and gas sector remain far below what they were a decade ago.

If industrial or sectoral composition is worrisome, so is scale.

Canada has essentially become a real estate and consumption economy.  Ninety-eight per cent of Canadian companies are small- and medium-sized enterprises (SMEs), which explains in part why business investments are so structurally weak. To a certain degree, this is true for many advanced economies. Two interrelated issues are at the heart of the problem:

• Canada has too few large companies (which are disproportionally more likely to spend on R&D and innovation) and
• Too few SMEs are scaling up.

These problems are related because it’s the most efficient and most productive companies that scale. Unproductive SMEs are unlikely to grow.

Meanwhile investment in residential structures accounts for twice the share of GDP in Canada compared to the U.S. Businesses in Canada invest more in non-residential structures and less in intellectual property (IP) products. Canada invests about forty per cent less (as a share of GDP) in intellectual property products overall.

An economy the size of Canada that produces a small share of goods and services that can be exported into global markets will have a difficult time becoming more productive. 

Other factors contributing to Canada’s competitiveness challenges include the resurgence of political economy, heightened technological geopolitical rivalries (such as between China and the U.S.), the rise of intangibles (data, IP), and new national security requirements, which have all transformed the policy and political landscape both nationally and internationally.

Furthermore, it should be noted that China’s industrial overcapacity and reliance on foreign demand to sustain growth are consequential dynamics for global trade policy. The concern, as articulated recently by U.S. Treasury Secretary Janet Yellen, isn’t about exports or Chinese firms having a comparative advantage in certain sectors. Rather, it lies in the extensive government support in China, which causes production to be unresponsive to global market demand – an issue unique to China’s economy.

Canada is also facing a significant demographic challenge. Canadians are getting older and are living longer.

On July 1, 2023, almost one in five Canadians (18.9 per cent of the population) were at least sixty-five years of age. The gap is widening between the number of people in this age group and that of children aged 0 to 14 years (15.4 per cent of the population).

In the year 2000, there were 18 seniors for every 100 working age people in Canada. By 2022, that ratio shot up to 29 seniors for every 100 working age people. More and more retired people are dependent on tax revenues generated by fewer and fewer workers.  The 2016 decision to lower the Old Age Security (OAS) eligibility age back to 65 will add significant pressure over time to the fiscal framework.

How we react – or not –to Canada’s productivity weaknesses will have profound consequences for living standards today and for years to come.

If policymakers truly want to advocate for workers, they must ask the question: why has income growth stalled to rates rarely seen in Canada outside major recessions?

The answer is clear: there a direct correlation between productivity and earnings.

From 1945 to 1975, the real average weekly wage in Canada doubled. This was largely achieved through improved productivity. At the current rate, it would take about four centuries to achieve this feat.

Wage growth has largely decelerated due to a slowdown in labour productivity. After adjusting for inflation, the average weekly earnings have increased only 1.6 per cent between January 2015 and January 2024, or less than 0.2 per cent per year. It’s a considerable change from a growth rate of more than 1.5 per cent per year that Canadian workers enjoyed over the previous two decades.

Canada runs trade surpluses in agriculture, timber, minerals and oil and gas. But it performs poorly in technologically advanced industries. This is where advanced economies compete and innovate. It is also where productivity gains can advance rapidly and where wages are higher.

Advanced industries are sectors characterized by significant investment in R&D, high levels of technology integration, and a skilled workforce. They typically include industries such as energy, aerospace, biotechnology, information technology, advanced manufacturing, and robotics, which drive innovation and economic growth through cutting-edge technologies and processes.

As the U.S-based Information Technology and Innovation Foundation Hamilton index shows, Canada is lagging in advanced industries, trailing Mexico in total production and global market shares and the country’s relative performance is declining. This is the result of an unfocused economic policy that has failed to link research, innovation and productivity enhancement in specific sectors where Canada has the potential for global leadership.

Competing in advanced industries – such as biotechnology, aerospace, energy and clean tech, and advanced manufacturing – is crucial for modern economies. These industries drive innovation and productivity, leading to economic growth and high-wage job creation. They ensure global competitiveness by capturing significant market shares and attracting foreign direct investment. Additionally, they enhance national security by maintaining strategic autonomy and resilience. These sectors also contribute to societal benefits like healthcare advancements and better infrastructure, ultimately improving quality of life.

Canada’s poor economic performance cannot be blamed on globalization. Rather, it is largely the result of an innovation deficit.

Canada has considerable assets that are not being leveraged in this age of heightened competition: it has the human capital and the natural resources that can fuel innovation and economic growth.

Not competing at scale in advanced industries means Canada will remain a low-innovation economy and, as a result, continue to slip on the global competitiveness scale. To succeed, the country must focus on innovation in industries where it has a comparative advantage, such as energy, agriculture, infrastructure and biotechnology.

Canada can be rightly proud of its global champions in advanced industries, but there simply aren’t enough of them to maximize the country’s economic potential. And there are no signs that could change anytime soon.

The economy is too reliant on consumption and suffers from a lack of investments that makes it much less productive than it should be.

The current policy approach favours rent-seeking and low-value manufacturing sectors. Rent-seeking industrial policy stifles productivity and competitiveness by encouraging businesses to seek government hand-outs instead of focusing on innovation. In industries like the automotive sector, the federal government has provided substantial subsidies to foreign companies, often preferencing assembly plants over domestic technology design and development. This approach to industrial policy, primarily through subsidies, not only often invests in rent-seeking industries but also inadvertently attracts more rent seekers.

Countries that succeed in enhancing their economic performance typically do so by concentrating on sectoral strengths – for example electronics in South Korea, advanced manufacturing in Germany, financial services and biotechnology in Singapore, cybersecurity in Israel, pharmaceuticals in Switzerland.

In contrast, Canada’s industrial policy is unfocused and ineffective, indiscriminately subsidizing companies across various sectors and regions without a clear, targeted strategy. This lack of focus has consequently limited productivity.

Rather than continuing with a patchwork approach to innovation policy, Canada must change course, embracing a long-term plan that capitalizes on the country’s considerable strengths.

A more effective policy would adopt a modern science and technology architecture, designed to commercialize the best ideas, while nurturing talent and funding both fundamental and applied research.

Such a policy would champion sectors where Canada can have greatest potential, such as energy and energy technology, ag-tech, advanced infrastructure, and biotechnology.

It would also capitalize on the historical advantages of a high-skilled immigration system. Right now, by overemphasizing immediate labour market demands and low-wage occupations, Canada risks undermining the long-term benefits of attracting highly skilled talent.

Economic growth is also being hindered by an overly complex and inefficient regulatory framework which creates considerable unpredictability, and internal trade barriers that stifle investments and capital. In addition, preferencing small companies over large ones limits the potential for large-scale business investments, including in R&D.

The country is losing ground in tax competitiveness due to increasing taxes on corporations and individuals, which deters long-term productive investments. Canada needs a better model of growth.

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Powering up the engines of growth

Canada has a generational opportunity to boost productivity, wages and living standards for years to come.

There are five pistons that can activate the engines of economic growth:

1. Become a world leader in energy security. Canada can leverage its assets at this moment of heightened geopolitical uncertainty and help the world transition to a low-carbon economy. The country has abundant, responsibly produced natural resources, a first mover advantage in nuclear energy as well as all the elements of the supply chain, and a real – but not indefinite – opportunity in critical minerals.
2. Leverage Canada’s strengths. Canada’s people, capital and ideas are ready to make the country a player in key advanced industries – the next frontiers of technologies on which advanced economies will fiercely compete in the coming decades.  Canada should be designing, not assembling, the next waves of products and services in agriculture, energy, infrastructure, health care, computing, microelectronics, biomanufacturing and aerospace. This will ensure innovation is a core element of the country’s economic prosperity.
3. Fix domestic barriers to growth. Canada must stop scoring in its own net by correcting a dysfunctional regulatory framework and getting rid of internal trade barriers. Permitting reform for energy and infrastructure projects must become an urgent priority. It’s essential to build the physical assets and the wealth that will make the country more prosperous: producing more electricity to decarbonize and building energy generation projects including in areas of enormous potential such as nuclear and geothermal power. 
4. Develop a coordinated innovation plan. Canada can choose economic pragmatism over ideology and instead be strategic in the use of public investments. Institutions should foster economic growth and governments should reject both rent-seeking industrial policy and free-market naiveté. The 1970s state-driven economic planning and 1980s supply-side economics are not the solution. Both experiments failed.
5. Partner with the private sector. Canada can choose to build the right kind of public-private partnerships in advanced industries to foster innovation and productivity. Climate change and national security imperatives will not go away. The country must find the right balance between laser-focused government intervention and market dynamism.

Getting the fundamentals right

Reindustrialization reintroduces the debate between the production capacities of an economy and consumption prices (letting the market produce a good or service at the lowest cost). Reindustrialization aims to strengthen an economy’s production capacities, emphasizing dynamic capabilities such as innovation, technological advancement, and skilled workforce development. This approach aims to enhance economic security and competitiveness and drives economic growth by promoting high-value manufacturing and service sectors.

In economics, a positive externality is a beneficial side effect of an economic activity on unrelated third parties, such as societal gains from technological and medical advancements. Investments in R&D, skills development, and technology design produce these benefits, yet businesses face high risks and costs. To offset those risks, targeted government intervention can ensure broad economic gains that individual firms might not prioritize. The United States has been using this model for years with its DARPA approach, where the government funds high-risk, high-reward research projects that drive technological innovation and economic growth, fostering advancements that private companies might not pursue independently.

Canada cannot remedy its loss of competitiveness through protectionism. The imposition of tariffs would cause more loss of global market share.

Moreover, significant limitations complicate the repatriation of production in sectors like automotive, where decisions are driven by cost reductions, market expansion, and evolving product cycles. Ultimately, these massive subsidies result in what is essentially an ‘arbitrage’ of labour costs.

The only area where it’s impossible to arbitrage labour costs is in technology design and development. Unlike manufacturing or other labour-intensive industries, technology design and development cannot easily be outsourced to lower-cost or subsidized labour markets to save money. This is because technology design and development require highly specialized skills, expertise, and often a collaborative environment that are not as easily replicable in regions with lower labour costs. High-quality technology design and development depend on access to top-tier talent, cutting-edge research, and robust innovation ecosystems.

Certainly, the political economy of the moment partly dictates industrial policy choices. The market will not itself ensure the supply of strategic goods linked to national security. Semiconductors (electronic chips) are a good example. Today, we face significant geopolitical and economic consequences from allowing 60 per cent of global semiconductor production – an indispensable asset for national economies – to be concentrated in the hands of a single company in Taiwan, TSMC. Similarly, market forces alone are unlikely to achieve the rapid decarbonization of the economy that we need. Therefore, the government must implement strategic and targeted incentives to accelerate private investment in key sectors.

Beyond addressing critical issues like national security and climate change, Canada faces growing barriers to capital deployment. Over the past decades, these barriers have intensified due to a dysfunctional regulatory environment marked by unpredictability and uncertainty, especially for major projects. Additionally, there has been insufficient investment in strategic infrastructure such as energy production, distribution, and goods transportation via ports.

The increasingly uncompetitive tax regime for investors and corporations, coupled with an ineffective industrial policy that supports non-competitive sectors, further exacerbates the problem. Trade barriers inside Canada remain highly problematic and constitute a major barrier to economic growth.

Business investments fuel productivity enhancements, and without major reforms to make regulatory and tax systems more efficient and competitive, it will be hard to move the needle.

Recent changes to Canada’s tax system are making it less competitive to foster investments. According to the OECD, considering the tax on company dividends at the personal income tax level, the total tax on distributed profits from Canadian companies is now the highest in the G7.

Tax competitiveness is a key element for retaining talent in Canada and boosting economic prosperity. A detailed plan for tax reform is beyond the scope of this paper, but it is paramount that tax policy be used as a tool to drive innovation and productivity. That means using tax incentives to drive business investments in machinery, equipment, R&D and IP.

The Scientific Research and Experimental Development (SR&ED) program, designed to encourage businesses to conduct research and development, has serious flaws and needs to be reformed.

The 2018 Budget announced the introduction of accelerated depreciation measures, allowing businesses to immediately write off the full cost of machinery and equipment used in manufacturing and processing, as well as clean energy investments, to stimulate investment and economic growth. The challenge is these changes were temporary and starting in 2024 they will gradually be phased out and fully eliminated after 2027. This will essentially lead to a significant increase in taxes on new business investments.

Innovation, productivity and competitiveness

But even getting the fundamentals right won’t necessarily instill economic dynamism on its own.

The economic slowdown of the past decades does not need to continue. To change direction, Canada needs to become a more technology-driven economy.

On this, we can draw inspiration from Schumpeterian economics, named after the late economist Joseph Schumpeter, which emphasizes the role of innovation, entrepreneurship, and technological change as the primary drivers of economic growth.

Schumpeter’s theories are encapsulated in his concept of “creative destruction,” which describes how new innovations replace outdated technologies and business models, driving economic progress.

The evolution from Robert Solow’s exogenous growth model to Paul Romer’s endogenous growth theory represents a significant shift in understanding economic growth. Solow’s model, introduced in the 1950s, focused on capital accumulation and labour as the primary drivers of growth, with technological progress treated as an external, unexplained factor necessary to sustain long-term growth.

In contrast, Paul Romer’s endogenous growth theory, developed in the late 1980s and consistent with the Schumpeterian framework, brought technological innovation and knowledge creation into the core of the model, arguing that economic growth is primarily driven by factors within the economy, such as human capital investment, R&D, and policies fostering innovation. This shift emphasized that growth can be sustained by continuous innovation and improvements in productivity.

It is important to understand the interaction between innovation, productivity, and economic competitiveness. Innovation drives productivity gains, which in turn enhance economic competitiveness. New technologies and processes improve productivity and create new industries. Economic growth arises from product innovations (new goods and services), process innovations (new ways of producing goods and services more efficiently), and business model innovations (e.g., Amazon transforming retail through e-commerce).

Competitive pressures foster further innovation, creating a cycle of continuous improvement and growth.

Both technological innovation and adoption are essential for economic progress. Innovation drives the creation of new technologies and solutions, while adoption ensures that these innovations have a widespread and meaningful impact. Balancing the two is key to fostering sustainable development and improving quality of life.

The modern application of science and technology is the new frontier of economic competitiveness. The future main drivers of global economic competitiveness will be a blend of technological innovation, human capital development, strong innovation ecosystems and advanced infrastructure. Countries and companies that can effectively leverage these drivers and adapt to changing global dynamics will be best positioned to thrive in the competitive global economy of the future.

How Canada can lead in advanced industries

Ultimately, the standard of living of Canadians depends on the ability of Canadian enterprises to competitively sell goods and services to the rest of the world, while paying higher wages to employees and contributing significant revenues to governments.

Simply put, if Canada doesn’t produce enough goods and services that people outside the country want to buy, it will be harder to sustain a high living standard and compete globally.

The global financial crisis of 2008 led to a severe downturn in international trade. Canada’s exports dropped sharply, and the country experienced trade deficits as the global economy contracted and commodity prices fell.

Oil and gas have been crucial in mitigating Canada’s trade deficits. Without these exports, Canada would have experienced much larger trade deficits, particularly during periods of low global commodity prices and economic downturns.

Canada must enhance its performance in advanced industries – sectors where leading economies both compete and innovate. This imperative extends beyond advanced manufacturing to include services, especially as the economy becomes increasingly driven by intangibles such as data and IP.

Canada’s competitors are continuously advancing, making it crucial for policymakers to concentrate on the effectiveness of government interventions and foster the right kind of public-private partnerships that will drive economic prosperity for future generations.

The Information Technology and Innovation Foundation (ITIF), a U.S think-tank, has rightly argued “dynamic capabilities” of businesses are key to driving productivity:

“Markets don’t design and produce cars; automakers do. Markets didn’t invent and commercialize biotechnology; university researchers and entrepreneurs did … It is the capabilities of enterprises that are instrumental in achieving what society requires and needs: fast and broad increases in productivity, innovation and competitiveness. This is why a capabilities approach is needed. But it needs to be a dynamic capabilities approach because needed economic outcomes for society are dynamic in nature. New firms. New products. New business models. New production processes.”

The good news for Canada is that other countries have succeeded: Through the DARPA model of innovation, the United States is a technology powerhouse. The Netherlands became an agricultural superpower because of targeted investments in R&D and technological innovation. Taiwan put in place a technological innovation roadmap that led to its dominance in semiconductor design and production in global markets. Germany has led onthe digital transformation of manufacturing through the adoption of technologies such as the Internet of Things and AI.

What is clear in all these examples is the need for a long-term strategy that goes beyond one electoral cycle.   

Five essential actions to elevate Canada’s performance in advanced strategic industries:

1. As a medium-sized economy, Canada must be deliberate about sectors in which it can compete and have comparative advantages.

To measure the potential of a country’s comparative advantage in a specific sector, several forward-looking metrics should be evaluated. These include growth trends, investment levels, innovation and R&D capacity, human capital development, market opportunities, competitive landscape, infrastructure and regulatory environment. These metrics can collectively help identify growth opportunities, future competitiveness, and the ability to sustain and enhance comparative advantage over time.

Based on these metrics, Canada has strengths but unachieved potential in key advanced sectors.

Canada can lead in energy and energy technology through:

• Diverse Energy Resources: Canada is rich in a variety of responsibly produced energy resources, including oil, natural gas, hydroelectricity, nuclear, wind, solar, and biomass. This diversity allows Canada to maintain a balanced and resilient energy portfolio.
• Nuclear: A global leader in nuclear technology, Canada’s vast uranium resources, primarily located in Saskatchewan, supply fuel for both domestic use and international export. As Canada seeks to further its clean energy goals, advancements in nuclear technology, such as small modular reactors (SMRs), present new opportunities.
• Innovation and application of decarbonization strategies: Canada has the potential to be a front-runner in methane reduction and carbon capture and storage.
• Renewable Energy: Canada has vast potential for expanding its renewable energy capacity. With large areas of land suitable for wind and solar farms, coasts for harnessing tidal energy, significant biomass resources and well-established hydro power, Canada can further develop its renewable energy sector to meet future demands and reduce greenhouse gas emissions.
• Natural Gas: Canada has abundant natural gas reserves, which can serve as a transitional fuel as the country moves towards a more sustainable energy future.
• Geothermal Energy: Canada has significant geothermal energy potential, particularly in regions such as British Columbia and Alberta. Developing geothermal energy can provide a reliable and sustainable energy source, contributing to Canada’s energy mix.

Canada can lead in advanced infrastructure: 

Advanced infrastructure includes smart transportation systems (high speed rail), advanced communications (5G networks), sustainable energy systems (smart grids, solar, wind, hydro, nuclear), water and waste management, digital infrastructure (cybersecurity systems, cloud computing), public infrastructure (advanced medical facilities, telemedicine and health information systems).

The advanced infrastructure sector is poised for growth, supported by substantial investments in transportation and digital connectivity. Investments in technologies and sustainable infrastructure solutions are driving innovation. With increasing global interest in sustainable and resilient infrastructure, Canada has opportunities to export expertise and technologies in this field.

Canada can lead in ag tech:

With high global demand for Canadian agricultural products, including grains, livestock, and specialty crops, Canada’s agriculture sector has substantial market opportunities. Canada’s abundant arable land, freshwater resources and favourable climate conditions further enhance its potential. Competitive advantages in several agricultural products, a well-developed infrastructure for transportation and export, and supportive policies promoting sustainable agriculture contribute to the sector’s strengths.

The sector has experienced growth in output and productivity, driven by precision farming and biotechnology. Investments in agricultural technologies and infrastructure are increasing, supported by a strong R&D foundation in crop genetics, pest management and sustainable farming practices. Canada should further leverage its strengths, including in precision agriculture, robotics and automation data analytics and AI, vertical farming, and indoor agriculture.

Canada can lead in advanced materials:

Canada has significant potential in advanced materials due to its resource base and strong research capabilities. The growth in industries requiring advanced materials, such as aerospace, automotive and construction, is driving demand. Investments in the development and commercialization of advanced materials, including nanomaterials and composites, are on the rise. The growing global demand for advanced materials provides market opportunities for Canada to export high-tech materials and technologies. With a rich natural resource base for raw materials, competitive edge in mining and processing, and expertise in material science, Canada is well-positioned in this field.

Canada can lead in biotechnology:

Building on the development of MRNA vaccines, biotechnology will continue to advance personalized medicine through genetic testing, gene therapy, and biopharmaceuticals. It may lead to more targeted treatments for diseases like cancer. It will enhance crop yields and develop drought-resistant plants.

Canada’s biotechnology sector has significant potential due to robust R&D, a skilled workforce, and substantial investment. Growth in medical, agricultural, and environmental biotechnology is driven by strong research institutions.

2. Canada needs a talent strategy that includes high-skilled immigration

It has been observed by economists that humans are unique among species in their ability to create new knowledge, and it is this accumulation of knowledge that propels economic growth.

Education and talent are the cornerstones of economic growth because they foster innovation, increase productivity and enhance a country’s competitive edge. A well-educated and skilled workforce drives technological advancements. Investments in education and talent development create a knowledgeable labour force capable of sustaining and accelerating economic development, ensuring long-term prosperity and resilience in a global economy.

Advanced technology development is a highly competitive and future-oriented endeavor. Two prominent international examples of success in this area are the U.S. Defense Advanced Research Projects Agency (DARPA) and the German Fraunhofer-Gesellschaft. These organizations encourage firms in essential sectors to establish long-term technology objectives through clearly defined roadmaps that outline their vision and strategic plans for critical technological advancements.

Achieving these goals relies on world-leading R&D talent capable of pioneering solutions to significant industrial challenges. This necessitates a comprehensive talent strategy focused on STEM (science, technology, engineering and math) fields, including the creation and expansion of advanced industrial skills training programs and postgraduate excellence programs in research-intensive universities.

Currently, Canada’s immigration policy appears to be overly concentrated on meeting the labour market’s immediate needs, particularly by addressing acute shortages in low-skilled and low-wage occupations that have arisen since the pandemic in sectors such as accommodation and food services. The current federal immigration strategy has increased the labour supply in Canada, but it has been led by a significant surge in temporary residents.

Historically, the Canadian immigration system has worked well by using a points-based mechanism through the Express Entry system to evaluate applicants, prioritizing those with higher education, work experience, language skills, and other factors that contribute to their potential economic contributions. This economic focus ensures that the system prioritizes skilled workers, professionals, and entrepreneurs, allowing newcomers to contribute positively to the labour market and economy.

A recommendation from a recent RBC report is on point:

“The federal government needs to update immigration policies to focus more strategically on immigrant outcomes and the long-term structural needs of the labour market, while keeping in mind the infrastructure capacity to accommodate newcomers. Addressing this will be key to maintaining economic prosperity over the long run, and Canada’s high quality of life.”

To enhance economic growth, it is essential to implement a robust immigration policy. Economic immigration drives innovation and entrepreneurship, contributing significantly to economic dynamism. A well-structured immigration policy is vital for fostering a more dynamic and technology-driven economy.

3. Canada needs a new Science & Technology architecture for the modern era to compete in strategic sectors

Canada’s current Science and Technology (S&T) architecture is not producing innovation at the same pace as peer countries. The Americans, Germans, South Koreans, Israelis and Dutch, to name a few, have long understood the fundamental contribution of their public R&D institutions and the importance of coordination in their ecosystems.

Canada must focus on how, through mechanisms and incentives, to translate intellectual capital (public R&D) into private R&D and ultimately into innovation and economic growth. To do this, the country must create and build bridges and institutions of collaboration between the public and private sectors.

This approach underpins the ARPA model in the United States, which has been successfully applied in sectors like defence (DARPA), energy (ARPA-E), biomedical research (BARDA), and more recently, health (ARPA-H). It also forms the foundation of Germany’s Max Planck and Fraunhofer institutes, France’s LabEx model, and the public-private R&D model in the Netherlands –a country half the size of New Brunswick yet the world’s second-largest agricultural exporter.

Canada needs a modern incarnation of what were once corporate labs in its innovative industries – where industrial research carried out in collaboration with governments, universities and businesses has led to true large-scale innovation in the economy.

A  new advanced research projects agency would drive technological progress, innovation and heighten economic competitiveness.

In a recent study evaluating American industrial policy over the past fifty years, the Peterson Institute for International Economics concluded:

“Support for public and private R&D has been by far the most effective mode of industrial policy. One reason is the strength of the United States, supported by major universities, in research efforts. Another reason is the American tradition of giving leeway and support to scientists to pursue the same goal (missions). A third reason for public R&D is the practice of allowing private companies to commercialize the results, usually with modest or no royalty payments to the government.”

4. Policymakers need to better understand economic rents in an increasingly intangibles economy

As argued in a New North Star, the global economy is increasingly driven by intangible assets, and countries that can harness these assets will be the most competitive. Intangible assets include things like software, patents, brands, and human capital.

In an intangible economy, IP rights such as patents, copyrights, trademarks and trade secrets are crucial sources of economic rents. Companies holding valuable IP rights can earn significant rents by licensing their inventions or creations to others, thereby gaining a competitive advantage and potentially dominating their markets.

Platforms and ecosystems that benefit from network effects – where the value of the network increases as more users join – are also generators of economic rents. Social media platforms, online marketplaces, and software ecosystems can become dominant players in capturing rents by leveraging their large user bases and network effects to attract advertisers, charge fees, or monetize user data. In the digital age, data has become a valuable asset.

Companies that collect and analyze large datasets can derive economic rents through insights that drive business decisions, improve products, or enhance customer experiences. Algorithms and proprietary analytics also enable economic rents.

The value and economic rents in designing an iPhone far exceed those in assembling it. Designing involves high-value activities like R&D, software development and brand management, which capture significant economic rents due to intellectual property, brand power, and ecosystem control. In contrast, assembling an iPhone involves low-value, labour-intensive activities with thin profit margins and limited economic rents. Apple’s ability to capture a substantial portion of the iPhone’s value through innovation, brand strength, and proprietary technologies underscores the significant disparity in economic rents between designing and assembling the product.

Taking the automotive industry as an example, Canada must decide whether to lead in designing the next generation of battery technology or simply provide subsidies for foreign companies to assemble products. Which approach will truly drive innovation, productivity, and competitiveness?

California’s strategy of prioritizing technology development, innovation, and high-value manufacturing has resulted in greater economic prosperity, higher wealth, and higher wages compared to Michigan’s focus on traditional manufacturing. To achieve similar success, Canada should adopt a forward-thinking approach that emphasizes technological advancement and high-value production.

5. Canada’s current innovation policy needs structural reforms

There are four structural challenges to reforming innovation policy:

1. Raising GDP per capita: This is more important than focusing on job creation and retention because it reflects increases in productivity and economic efficiency, which are essential for improving overall living standards. It requires a long-term strategy and technology design and development mapping for advanced industrial sectors.
2. Political capture of industrial policy: The political desire to spread financial resources to all sectors and all regions is not effective given Canada’s relatively small scale. It is not producing the desired outcome of superior economic growth, even at the regional level. Subsidizing firms with limited economic impact is far less cost efficient compared to building talent and R&D strength in advanced industries. When it comes to intellectual property, Canada does not protect the value of its ideas as robustly as competitor countries do.
3. Addressing academic and bureaucratic sclerosis and gatekeeping: The current S&T funding model is outdated and not adapted to the scale and scope of current challenges: climate change, pandemics, technological innovation, and national security. In general, the granting councils funding incentives at the academic level do not incentivize risk-taking and the development of breakthrough technologies. There is no or very little challenge-driven research focussed on solving industrial problems.
4. Lack of coordination: Every “innovation” organization under the responsibility of the federal government – whether it’s the Canadian Foundation for Innovation, Mitacs, the Business Development Bank of Canada, Export Development Canada, regional development agencies, granting councils, or the National Research Council – work independently of each other. Their impact is limited in the areas where they are most needed – in strategic and advanced industries.

Conclusion

Per capita economic growth its not an end in itself, it is a means to other ends. It is a vehicle to raise workers wages, lift living standards and fund social programs, including taking care of the most vulnerable people in our society.

But we can’t redistribute what we don’t produce, which is why Canada must ignite the engines of growth.

Canadian policymakers cannot continue to put forward tentative, short-term and ineffective measures that tilt the economy towards more consumption and less production.

Even more importantly, fiscal policy needs to be used judiciously to foster productive capacity in advanced sectors, not to provide corporate subsidies or conduct a rent-seeking industrial policy. A modern S&T architecture, with targeted investments in talent, R&D and technological innovation and adoption in advanced and strategic industries could yield more productivity outcomes with much less money than is currently being spent on politically motivated innovation programs and structures.  

Canada cannot borrow its way to prosperity. Higher deficits and debts will inevitably lead to program cuts and higher taxes. These will have to be shouldered by future generations, whose governments will need to service a larger and burdensome debt at the expense of all the important missions of government.

A true partnership is required between the public and private sectors to advance economic growth. Businesses and investors need to have confidence in the macroeconomic fundamentals of Canada, including on regulatory simplicity and steadfastness. Governments need to understand they can’t micro-manage a market-driven economy and businesses need to accept the new era of political economy is here to stay. National security and climate change are now an integral part of the economic story.

Lastly, there is a direct link between innovation, productivity and competitiveness. At a moment of heightened geopolitical and trade tensions, choosing not to compete at scale in advanced industries will exacerbate innovation and productivity deficits. This will result in lower wages and declining living standards for Canadian workers and families. Policymakers ought to acknowledge that technology design and development in advanced industries will always deliver superior economic output than a branch plant low-value manufacturing strategy.

The stakes are high, and progress is a policy choice.

Canada is a country of unlimited economic potential and opportunities. It has a generational opportunity to ignite the engines of growth for the benefit of all Canadians.

17 concrete recommendations to the federal government

Productivity initiatives:

1. Place GDP per capita growth and productivity at the top of the government’s agenda and direct key federal institutions – such as the Finance Department and the Privy Council Office – to make them central parts of their mandates.
2. Initiate a comprehensive cross-departmental review of all industrial policy programs to assess their effectiveness in raising productivity and GDP per capita growth.
3. Undertake a comprehensive review of the tax system to better incentivize private sector investments and boost wages.
4. Streamline infrastructure funding and establish an advanced infrastructure fund focused on productivity-enhancing projects like ports, electricity generation, and climate adaptation.
5. Establish a National Asset Recycling Program, drawing from Australia’s successful model, to identify and privatize suitable public assets. The proceeds should be strategically reinvested into high-priority infrastructure projects to drive economic growth. This program should ensure transparency and robust stakeholder engagement at all levels, and safeguard public interest and maintain service quality.
6. Implement a harmonized federal-provincial environmental assessment process for projects of national strategic importance.
7. Reform the Scientific Research and Experimental Development (SR&ED) program to offer preferential rates to sectors with a high concentration of R&D and provide ongoing incentives for innovative firms to invest in long-term R&D.

Competing in advanced industries:

8. Conduct comprehensive industry analyses and develop a long-term innovation strategy for advanced industries where Canada has a comparative advantage, such as energy and energy technology, ag-tech, advanced infrastructure, and biotechnology. The government should develop a detailed competitive analysis of these industries.
9. For each targeted sector, craft a ten-year public-private partnership roadmap focusing on talent, R&D and technology design, development and adoption. Implement specific strategies tailored to the needs of each critical industry.
10. Ensure that all federal policies, programs and practices are strategically aligned to support and enhance Canada’s innovation, productivity and competitiveness in these vital sectors.

Science and technology (S&T) architecture and development:

11. Establish a Canadian Advanced Research Projects Agency (CARPA) modeled after the U.S. ARPA, with dedicated streams for energy, ag-tech, biotechnology and advanced infrastructure. This agency should advance and commercialize research critical to Canada’s advanced-industry capabilities, ensure that the research is strategically aligned with the industrial challenges of Canadian industries and establish a dedicated procurement framework specifically tailored to CARPA’s mission of fostering high-risk, high-reward R&D. This specialized procurement function should focus on acquiring innovative products and technologies that emerge from CARPA-supported projects, thus ensuring a transition from innovation to market application.
12. Transform key institutions like the Department of Innovation, Science, and Economic Development and the National Research Council (NRC) into cutting-edge S&T organizations. This should involve a significant streamlining of organizational structures to focus on technological innovation and enhancing industry collaboration.
13. Implement a robust coordination mechanism that aligns and integrates the efforts of entities such as the Canadian Foundation for Innovation, Mitacs, the Business Development Bank of Canada, Export Development Canada, regional development agencies, the granting councils, and the NRC. By ensuring these organizations operate synergistically under a central framework, the effectiveness of Canada’s innovation efforts in key sectors will be enhanced.
14. Replace the Office of the Science Advisor by a new Privy Council Science and Technology Policy Office modeled on the U.S. White House Office of Science and Technology 

Talent development:

1. Working with provincial governments, support initiatives that maintain and strengthen a STEM talent pipeline, including expanding graduate programs in fields like microelectronics, AI, engineering, computer science and genomics.
2. Working with provincial governments, broaden educational and training programs to include advanced industrial skills, preparing students and workers for modern manufacturing roles.
3. Design immigration policies to prioritize long-term economic growth over short-term labour needs. This strategy will sustain the supply of high-skilled talent essential for productivity growth.

The post Engines of growth appeared first on Business Council of Canada.

In her first Fall Economic Statement (FES) as Finance Minister in 2020, Chrystia Freeland introduced a new fiscal “guardrail.” It aimed to anchor government spending to labour market outcomes. The “guardrail” would inform the government when to scale back post-COVID stimulative spending. When the job market recovered much faster than expected, the anchor quickly disappeared. 

In Budget 2022, the declining debt-to-GDP ratio was reintroduced as the government’s fiscal anchor. But in 2022-2023 the ratio went up, not down. This is likely to be again the case for 2023-2024.  

In last November’s FES, the federal government announced it will now be focused on the following fiscal objectives in preparing for Budget 2024: 

• Maintaining the 2023-24 deficit at or below the Budget 2023 projection of $40.1 billion.
  
• Lowering the debt-to-GDP ratio in 2024-25, relative to the 2023 FES and keeping it on a declining track thereafter.
  
• Maintaining a declining deficit-to-GDP ratio in 2024-25 and keeping deficits below 1 per cent of GDP in 2026-27 and future years.

Fiscal implications of meeting the one per cent GDP target in 2026-2027

According to FES 2023, nominal Canadian GDP is forecasted to be $3.2 trillion for 2026, which would imply a deficit figure that would not exceed $32 billion to meet the 1 per cent target set out by the government. 

To assess whether the 1 per cent of GDP deficit figure is a realistic fiscal target for 2026, we offer ten observations: 

1. Between 2017 and 2022, the federal government ran deficits averaging 1.4 per cent of GDP when adjusted for swings in economic activity.
   
   
2. From budget 2016-2017 (the first budget of the Trudeau government) to budget 2023-2024, spending projections have gone from $291 billion for 2016-2017 to $496 billion for 2023-2024, or from 14.6 percent of GDP to 17.3 percent of GDP.
   
   
3. In the 2016-2017 budget, the gap between revenues and expenditures projections for 2016-2017 was 0.2 percent of GDP (revenues at 14.4 percent of GDP versus expenditures at 14.6 per cent of GDP). This differential grew to 1.4 percent of GDP for 2023-2024 in the 2023-2024 budget (revenues at 15.9 per cent versus expenditures at 17.3 percent).
   
   
4. In the post-Second World War era, the federal government has managed to record a deficit of less than 1 per cent of GDP only twice when spending exceeded the 17 per cent threshold. That was between 1996 and 1998 at the very start of a decade-long period of fiscal consolidation. In fact, deficits have averaged more than 4 per cent of GDP in years when spending has surpassed 18 per cent of GDP.
   
   
5. Spending projections by this government have been extremely unreliable over the five-year forecast horizon. While the government keeps showing a declining deficit both in nominal value and in debt-to-GDP terms, the reality is more complicated.

Spending Projections (Billions $)

As this table shows, $319.8 billion of new spending was added to the fiscal framework over four fiscal years from the April 2022 budget to the November 2023 fall economic statement.  In less than two years spending projections increased considerably.

This amount would be much larger if we look back further in time.

For example, in Budget 2019, the government forecasted $429 billion in overall spending for 2024-2025. However, in last November’s fall economic statement the projected spending for 2024-2025 changed to $522 billion — a difference of $93 billion.

6. The government is facing significant spending pressures going forward. First, the Liberal/NDP supply and confidence agreement includes a commitment to a national pharmacare program with an annual price tag that could be as high as $18 billion. Second, Canada is facing significant demographic headwinds which will have an impact on Old Age Security and health care costs. To this list we can add real pressures on defence spending, the energy transition and industrial policy, public R&D, as well as Indigenous reconciliation. It is unlikely the government can ignore any of these big policy issues. In addition, let’s not forget the production tax credit provided to automakers for new EV manufacturing. Once production ramps up in a few years, billions of dollars will be paid out on these credits.
   
   All things being equal, the relative costs of government will be higher as we move forward.
   
   
7. Debt servicing charges will continue to be prohibitive for some time. Debt servicing is already taking 10.2 per cent of the government’s overall revenues. It is worth noting this is for past debt. This fiscal year the government is projected to spend more than $46 billion just to service its debt. To put that in perspective, debt servicing this year is just $3 billion less than the amount the government is sending to provinces and territories in health care transfers.
   
   
8. The economic forecast is gloomy. Canada has avoided a recession so far in large part due to population growth through immigration. But a recession is still a possibility. The economic limitations ahead are not trivial: real GDP per capita is set to decline for the sixth consecutive quarter and productivity continues to be an Achilles heel for Canada. The likelihood of higher revenues for the federal government as a function of better-than-expected economic growth is not a high probability for the five-year economic forecast horizon.
   
   
9. Canadians should know that the government’s ability to meet its new promise to keep deficits below 1 per cent of GDP in 2026-27 and future years would require a significant change of course and difficult decisions.  Right now, the deficit is 1.4 per cent of GDP. Assuming the government does not introduce new taxes, and economic growth remains low as estimated by the Bank of Canada and international organizations, a 0.4 per cent reduction implies spending cuts of at least $12 billion per year, or around $50 billion over four years. Keep in mind that since the Trudeau government came into office, expenses have grown more than 5 per cent per year.
   
   
10. Unforeseen events are always a big risk for fiscal planners. Over the last few years, we have experienced a global pandemic, extreme weather events, two wars and various geopolitical threats. Fiscal prudence is essential to help Canada prepare for the unexpected.

Conclusion

The Trudeau-Freeland record on fiscal guardrails or anchors speaks for itself. Since 2020, the federal government has never met a fiscal target it imposed on itself.

For the reasons enumerated above, it is very improbable it will meet its new anchor of 1 per cent deficit-to-GDP in 2026 and future years.

The post Analyzing the federal government’s fiscal anchors appeared first on Business Council of Canada.

Political and public policy discourse in Canada is seized with debates on various approaches to the transition away from burning fossil fuels towards alternative sources of energy. There are different views on the timeline of doing so, and how to balance reliability, affordability and sustainability as we adapt our energy systems.

Yet whether it is reducing emissions by 2030 or reaching net zero by 2050, nuclear power will need to play a bigger role in the Canadian and global energy mix of the future. Uniquely, it provides non-emitting baseload power, can be located almost anywhere, is able to generate industrial heat, and is incredibly energy dense with low resource and land requirements. This is very good news for Canada, a country that is poised to capitalize on the global renaissance in nuclear energy, both as a producer and as a consumer.

Canada has world-class deposits of high grade uranium; is home to a globally significant provider of uranium fuel in Saskatchewan-based Cameco; enjoys a comprehensive domestic nuclear supply chain; is already the sixth largest producer of nuclear power in the world; and is one of a handful of countries with intellectual property in nuclear reactor technology, through its CANDU design. Emerging third (Gen III+) and fourth (Gen IV) generation nuclear technologies have additional promise for Canada’s geography and economic base, promising low carbon, off grid heat and power for remote communities, mines, oilsands, and energy intensive industries such as petrochemicals and fertilizers. 

In addition to these practical considerations, Canada has two intangible advantages. One is that nuclear power currently has support from the federal government (Liberals) and the opposition (Conservatives), several provincial governments (in particular Ontario, New Brunswick, Saskatchewan and Alberta), and a majority of Canadians – 57 per cent according to a January 2023 poll by Angus Reid. Notably, that support is at 70 per cent in Ontario, where the majority of Canadian nuclear power is produced. In a fast-moving and growing sector, this is a huge advantage, as other would-be competitors in Europe and Australia continue to debate the merits of nuclear.

The second advantage is that Canada is a trusted supplier of uranium fuel and nuclear technology, with a highly respected, independent and quasi-judicial nuclear regulator. While agreements with nuclear leaders and geopolitical superpowers Russia, China and even the United States may have political overtones, Canada is generally seen as a reliable, trustworthy and more neutral supplier. That can translate into a competitive advantage for Canada as well as enhanced energy security for its allies.   

The Business Council of Canada supports the further development of Canada’s nuclear supply chain and encourages policymakers to work with the private sector to maximize opportunities and competitiveness in the global nuclear industry. This report explores some of the trends in nuclear energy that Canada could take advantage of with the right combination of policy, ambition and investment. 

The nuclear renaissance

Nuclear energy is a very important source of power, representing 10 per cent of global electricity production, and almost 20 per cent of that produced in advanced economies. It experienced strong growth in the 1970s and 1980s as a response to a succession of energy crises resulting from oil price spikes in 1973 and 1979. However, the incidents at Three Mile Island in 1979 and Chernobyl in 1986 provoked anti-nuclear movements, increased regulatory burdens, and dampened public interest in nuclear energy. The Fukushima incident in 2011 spurred further phaseouts of nuclear energy, especially in Germany and Japan, although the latter has since reversed course. Nuclear power capacity started to plateau in North America and western Europe around 1990, although growth continued in Asia, particularly in China.

Three drivers have led to changing fortunes for nuclear energy in the past few years, leading to what’s often described as a nuclear “renaissance”: energy transition, energy security and technology.  

1. Energy transition

As nations and utilities seek to diversify away from greenhouse gas (GHG)-emitting coal and natural gas for power generation, major alternatives that have emerged include hydroelectricity, wind, solar and nuclear. The advantages of nuclear power have been on full display: it boasts the lowest GHG emissions of all energy technologies, 24/7 availability, operational flexibility, a small land footprint and the ability to decarbonize hard-to-abate activities such as cement and petrochemical production.

Its climate benefits were on full display in Ontario’s successful coal phase-out program in the early 2000s, which stands out as one of the world’s largest and most successful GHG and pollution reduction policies. To achieve its clean energy transformation, Ontario added 35 TWh of low GHG-emitting sources of generation to its supply mix; 91 per cent of that new energy supply was derived from nuclear power generation. As Canada and the world transition to a cleaner electricity grid, nuclear energy is set to play a leading role.

2. Energy security

The security aspects of nuclear energy took on additional significance in the wake of Russia’s invasion of Ukraine in February 2022. Europe, imposing sanctions on Russian pipeline gas, has desperately sought alternatives, and spikes in prices for LNG globally have made nuclear energy appear more cost competitive, less volatile, and less reliant on authoritarian regimes.

Whereas renewable energy depends heavily on goods manufactured in China and critical minerals sourced from unstable or authoritarian countries, and global oil supply depends to a large extent on OPEC+, the nuclear energy supply chain can be sourced from western and democratic countries and allies. In Canada, the nuclear supply chain is almost wholly domestic.

Some allies continue to depend on Russian enriched uranium, a market in which that nation leads. This has spurred the United States to pass bipartisan legislation to enhance the security of its nuclear fuel supply, and led to an alliance between the U.S.A, Japan, United Kingdom, France and Canada to collectively enhance nuclear fuel security, announced on the sidelines of the G7 in Sapporo, Japan in April 2023.

3. Technology

The main objections to nuclear energy have been that they pose unnecessary safety risks and that they are too expensive. These statements have been negated by decades of safe performance with jurisdictions using nuclear energy having stable, affordable electricity prices. The latest generation of nuclear technology – known as Gen IV designs – is further revolutionizing nuclear technology to address these concerns. Central to this latest wave are SMRs: small, modular reactors. While larger reactors will remain the preferred option for many situations, especially where power density is required for the electrification of cities and major industries, SMRs introduce greater flexibility to the nuclear energy mix.

According to the International Atomic Energy Association, small modular reactors (SMRs) are advanced nuclear reactors that have a power capacity of up to 300 MW(e) per unit, which is about one-third of the generating capacity of traditional nuclear power reactors. SMRs are: (1) small – physically a fraction of the size of a conventional nuclear power reactor (2) modular – making it possible for systems and components to be factory-assembled and transported as a unit to a location for installation; and (3) reactors – harnessing nuclear fission to generate heat to produce energy.

Due to these features, advanced SMRs are anticipated to be cheaper to build than traditional reactors. Modularity allows reactors to be prefabricated and then assembled on site, saving in construction time and costs. A sub-category of SMRs, the microreactor, is generally less than 20MW(e), and small enough that it can be safely transported as a plug-and-play unit on a truck, train or cargo plane.

As smaller units, SMRs require less footprint than traditional reactors, making them more flexible in siting. Because most SMRs are not water cooled, they can also be placed in locations without a significant water source. This can reduce the time and money associated with transmission build and opens up reliable energy options in rural and remote areas. In addition, they are often meant to be scalable, with multiple units co-located depending on specific MW needs. This includes the four GE Hitachi BWRX-300 MW reactors planned for Darlington in Ontario, or the twelve Xe-100 80MW reactors planned in central Washington state.

Gen III+ and Gen IV models are also being designed using passive and inherent safety features, requiring no human intervention to shut down. This dramatically limits and even eliminates the potential for serious incidents such as meltdowns. In addition, some models can go years, or even a decade, without being refuelled.

New nuclear technologies are also opening up advanced energy uses. While traditional reactors were almost always developed to produce grid-scale power, emerging reactor models are being developed for industrial decarbonization. Many industries require process heat at levels between 100-1500°C, for example in manufacturing chemicals, cement, steel and other metallurgical processes. Fossil fuels are excellent at generating high temperatures for process heat and are hard to replace through electrification. However, the highest-temperature Gen IV reactors, known as very-high-temperature reactors (VHTR), can generate a temperature in the order of 1000°C, making them useful for a number of industrial applications. New reactor models can also be optimized for creating hydrogen or for desalination, two energy-intense applications which are expected to become increasingly important to support future low carbon energy and clean water supply needs, respectively.  

Advanced reactors thus provide not only the reliability and low carbon characteristics appreciated from the current nuclear reactor fleet, but promising new applications that will help guide the future of energy for both community and economic development.

Canada’s nuclear pedigree

At the heart of nuclear fission is uranium, a metal with the highest atomic weight (92) of any naturally occurring element. In the Athabasca Basin of northern Saskatchewan lies the world’s richest uranium deposits. While many of the world’s largest mines have uranium ore grades in and around 0.10 per cent, some deposits in Saskatchewan are up to 20 per cent average grade. Cigar Lake, the world’s highest grade and largest producing uranium mine, has an average grade of 17.21 per cent U3O8, the compound created when uranium ore has been mined and milled.   

Saskatchewan uranium fuelled American and British nuclear programs in the Cold War, and then supplied the first CANDU reactors. Canadian Nuclear Laboratories (CNL) in Chalk River, Ontario, has been designing, building and experimenting with nuclear reactors since the Second World War.

CANDU, short for Canada Deuterium Uranium, is a nuclear reactor that uses heavy water as a moderator and coolant and natural uranium as a fuel source. The development of the first CANDU reactor began in 1954 through a partnership between Atomic Energy of Canada Ltd., Ontario Hydro and the Canadian General Electric Company, and the first full scale generating station commenced operations in 1968 in Ontario. Canada has produced 47 CANDU nuclear reactors, with 34 of those operating internationally. Domestically, CANDU reactors were built in Ontario, Quebec and New Brunswick. Quebec’s Gentilly nuclear power station was decommissioned in 2012. Ontario continues to have three nuclear plants – Bruce, Pickering and Darlington – and New Brunswick has a plant in Point Lepreau. Nuclear power produces 15 per cent of Canada’s electricity and 60 per cent of Ontario’s electricity. Canada’s 81 TWh of nuclear production in 2022 made it the world’s sixth largest nuclear power producer.

Current advances in CANDU nuclear energy

There was no further construction of CANDU reactors in Canada following the completion of Darlington 4 in 1993, due to a drop in electricity demand and concerns about predictability of construction costs. However, the CANDU supply chain has remained active, and is witnessing its own revitalization. Major refurbishments are ongoing at both the Darlington and Bruce power plants, and so far have come in ahead of schedule and on budget. The refurbishment program has also injected about $30 billion into the Canadian nuclear supply chain, a robust network of over 250 supply chain companies and suppliers. With 90 per cent of Bruce Power’s and OPG’s spend on the project in Ontario and 98 per cent in Canada, the refurbishment program is truly a Canadian infrastructure project.

That active supply chain will help support the next wave of nuclear power in Canada. Not only is Bruce Power proposing to build Canada’s first new large scale nuclear site in three decades, but the country is also preparing to see OPG construct the country’s first four SMRs at the Darlington site.

CANDU technology continues to progress and its defining features – the unique ability to use unenriched uranium and other fuels, on-power refuelling, and a number of active and passive safety features – remain very attractive. Romania is building two new CANDU-6 reactors at its Cernavodā nuclear power plant. In September 2023, Natural Resources Canada announced $3 billion in export financing to support the project, which will flow to Canada’s nuclear supply chain.

The CANDU Owner’s Group, which includes CANDU operators from Ontario, New Brunswick, China, South Korea, India, Argentina and Romania, continues to collaborate to pool resources for innovative research, development and joint projects.  They have invested hundreds of millions of dollars in research and development to advance CANDU technology, much of which involves process innovation: improving the efficiency, economics, safety, and performance of CANDU reactors.

CANDU reactors are also able to produce nuclear isotopes that are then used to sterilize medical devices, in medical imaging and diagnostic procedures, and in medicine and new drug development. Ontario’s CANDU reactors produce 50% of the global supply of Cobalt-60, and are developing production of molybdenum-99, helium-3, tritium and deuterium. This is unleashing growth and innovation in nuclear medicine, and positioning Canada at its centre. Beyond medicine, isotopes are also being used in neutron research, border security, food preservation, and quantum computing.

Current advances in Canadian SMR nuclear technology

The effort to realize the potential of SMRs in Canada has been concerted. As early as June 2017 CNL invited expressions of interest in SMRs. But political coordination began in earnest when Natural Resources Canada developed an SMR Road Map in 2018, followed by an SMR Action Plan in 2021, in close collaboration with Alberta, Saskatchewan, Ontario and New Brunswick, as well as Indigenous stakeholders, the private sector, crown corporations, research institutions and civil society. Those four provinces also put out their own interprovincial strategic plan for the deployment of SMRs in 2022, building on their provincial power utilities’ SMR feasibility study of March 2021. The Canadian Nuclear Safety Commission (CNSC) has been facilitating SMR developments through pre-licensing to identify fundamental barriers to licensing a new design in Canada and assure that a resolution path exists.

Nine models have been submitted to CNSC for pre-licensing: Terrestrial Energy’s Integral Molten Salt Reactor; Ultra Safe Nuclear Corporation’s MMR-5 and MMR-10 microreactors; ARC Nuclear’s liquid sodium ARC-100; Moltex’s stable salt reactor; SMR, LLC’s pressurized light water SMR-160; U-Battery’s high temperature gas U-Battery; GE Hitachi’s boiling water reactor BWRX-300; X-energy’s high temperature gas Xe-100; and Westinghouse’s eVinci microreactor.

A number of projects are advancing or planned in Canada. These include:

• The Darlington New Nuclear Project, which aims to deploy four GE-Hitachi BWRX-300, a 300 MW SMR, at OPG’s Darlington site in Ontario for on-grid power. The first is planned to be constructed by 2028, with commercial operation beginning in 2029.
• A 100 MW liquid sodium-cooled fast reactor, the ARC-100, at NB Power’s Point Lepreau site in New Brunswick, for on-grid power by 2030.
• Another ARC-100, at the Port of Belledune’s Green Energy Hub in New Brunswick, to produce clean hydrogen for export in collaboration with Cross River Infrastructure Partners in the mid-2030s.
• The GE-Hitachi BWRX-300 in Saskatchewan for potential deployment by SaskPower for on-grid power in the mid-2030s.
• The Ultra Safe Nuclear Corporation’s commercial demonstration project of its Micro Modular Reactor (MMR) at Chalk River Laboratories in Ontario, for operation by 2028.

Early and meaningful engagement and consultation with Indigenous peoples is ongoing for these projects. Indigenous peoples will be involved in the nuclear renaissance in three primary ways: (1) consultation on the nuclear regulatory process; (2) consent for siting of new nuclear reactors and waste storage on their territories; and (3) economic participation through equity ownership, construction, component manufacturing, workforce development, and other elements of the supply chain. One promising development was the announcement in September 2023 that the North Shore Mi’kmaq Tribal Council and its seven First Nations members are investing in the proponents of the SMR projects in New Brunswick, resulting in $2 million in share value from Moltex and $1 million in share value from ARC; a first of its kind agreement in the SMR sector.

While much of the attention on SMRs in Canada has been on forthcoming grid scale projects, a lot of the SMR potential for Canada is in industrial decarbonization, given the nature and geography of our economy. In addition to the Belledune project for hydrogen production, oilsands, mining, petrochemicals and fertilizers all offer compelling use cases. The Pathways Alliance of the six major oilsands companies are actively exploring SMRs as a means to reduce the emissions intensity of their barrels, using nuclear energy to produce steam for extraction of oil from Alberta’s northern oil sands deposits rather than using natural gas. Terrestrial Energy is headquartered in Oakville, Ontario but announced in March 2023 that it would open an office in Calgary to support commercial development of its model for industrial co-generation, and X-energy and Invest Alberta announced an MOU in January 2023 to develop economic opportunities supporting the deployment of its model. The Government of Alberta announced in September 2023 that it would contribute $7 million towards an SMR feasibility study being led by Cenovus, a large oil sands producer.

To the south, the Inflation Reduction Act has spurred new nuclear development projects with demonstration projects funded and being advanced by NuScale, X-energy, Holtec, and TerraPower. Dow, for example, has entered into a partnership with X-energy to build four Xe-100s at an industrial site at one of its Gulf Coast locations to decarbonize its chemical production. And Microsoft is implementing a global Small Modular Reactor (SMR) and microreactor energy strategy to power its energy-intense Artificial Intelligence business.

Remote mines in Canada are another logical use case. Energy costs are a huge deterrent for development in off-grid locations, and diesel is generally the only option, which poses its own logistical, economic and environmental challenges. One diamond mine in NWT uses up to 80 million litres of diesel a year. Leveraging SMRs to support remote mining operations promises to open up more deposits for development as global demand for critical minerals grows. The Government of Yukon commissioned an SMR feasibility study released in September 2023 that concluded that SMRs had a lower Levelized Cost of Electricity (LCOE) for off grid mines than comparable systems of diesel; wind and diesel; solar and diesel; wind and battery; solar and battery; hydro; and liquified natural gas.

Beyond the Arctic, a use case for very small, or nano, reactors exists as far afield as the moon. The Canadian Space Mining Corporation is developing a model for this very purpose. The sky is not the limit for nuclear development.

Nuclear waste

Concerns about waste are a common source of hesitancy to nuclear energy. The CNSC is responsible for the regulatory oversight of the management of radioactive waste, but the waste owners are responsible for its management, via the Nuclear Waste Management Organization (NWMO). The NWMO is implementing the Adaptive Waste Management approach that was selected by the Government of Canada for the long-term management of Canada’s used nuclear fuel, and will be constructing a deep geological repository in Ontario for that purpose. One element unique to the nuclear sector is that its operators have always, and continue, to both fully capture and pay for the long term costs of waste management as part of their ongoing production.

The NWMO plans to choose the final site in 2024, and has short-listed the areas of Wabigoon Lake Ojibway Nation-Ignace and Saugeen Ojibway Nation-South Bruce, based on their geology and willingness to host the depository. It is a significant economic undertaking in its own right: the cost of the multi-generational project is estimated at $26 billion (in 2020 dollars) over its approximately 175-year life cycle. The depository will be designed to account for the anticipated waste generated by SMR applications in Canada. The NWMO has developed an interim plan for transporting radioactive waste that considers regulatory requirements; potential vehicles (trucks vs rail); representative routes; nuclear security and escort arrangements; emergency management; logistics and scheduling of shipments; as well as operational aspects such as communication, monitoring and tracking of shipments.

Canada’s nuclear business opportunity

Nuclear has excellent applications that can provide the tailored, low carbon power and process heat that Canadian industry needs to compete and thrive. But in addition to the energy itself, there is a tremendous opportunity for Canada to become a major player in the global nuclear energy market. Canada has many inherent advantages: its high-quality uranium reserves, nuclear supply chain, nuclear fuel processing capacity, long record of safe nuclear power production, and large domestic market. It can leverage these to both grow CANDU’s global market share, and capture new market share as the emerging SMR sector reaches an estimated global market of $150 billion/year by 2040. It’s an exciting and dynamic time to be in the space as new private sector entrants to the nuclear industry, beyond large utilities and traditional vendors, bring fresh ideas and perspectives.    

Three main opportunities stand out: expertise, supply chain and uranium fuel.

1. Nuclear expertise

Having engineering and operational expertise in both CANDU and SMRs is highly marketable. As a first mover in the advanced reactor space, Canada could develop a competitive advantage. Its nuclear regulator, the CNSC, is respected, flexible and politically independent, with high technical and scientific competence. Licenses approved under the Canadian regime lend credibility for other markets. That helps make Canada attractive for First-of-a-Kind, or FOAK, models. The Belledune hydrogen project, for example, will see NB Power accept higher costs associated with a FOAK, but position it to build local expertise and then capture consulting fees elsewhere.     

Nuclear projects in Canada can also lock in research and intellectual property in critical areas of innovation such as engineering and construction methods, robotics, materials science, fuel testing and qualification, advanced manufacturing, control systems, cybersecurity, and remote operation.

2. Supply chain opportunities

The current Canadian nuclear industry, which is made up of 200+ suppliers, has developed around nuclear engineering, advanced manufacturing, and services, and primarily services CANDU heavy water reactors. As it expands into the SMR market, the creation of new facilities specialized in serial manufacturing and modularization will be needed. The SMR market is quite different, and much more reliant on serial manufacturing and modularization. The existing Canadian nuclear supply chain will need to grow to seize emerging opportunities. This will allow existing suppliers to expand, and for new entrants to enter the market. Main opportunities for the SMR supply chain include (1) technology vendors (2) system integrators (3) equipment manufacturers (4) sub-component suppliers and distributors (5) processors and fabricators and (6) raw material suppliers and miners (see figure 1).

Uranium fuel

As an energy dense, clean, reliable source of both power and heat with tremendous opportunities for technological advancement, nuclear energy is likely to grow in importance in the global energy mix. Just as oil and natural gas are highly strategic commodities today, nuclear fuel is likely to be so in the future, even more so than it is now.

By its nature, the market for nuclear fuel is much more concentrated than that of fossil fuels and has high barriers to entry, which bestows political and economic benefits to suppliers. The nuclear fuel fabrication industry is dominated by four companies serving international demand for light water reactors: Framatome and ORANO (France), Global Nuclear Fuel (United States, Japan), TVEL (Russia) and Westinghouse (United States). Canada does not enrich nuclear fuel, not least because its CANDU reactors use natural uranium.

Canada has a significant advantage to expand into nuclear fuel enrichment given that it is a very significant miner of uranium, the raw material for most nuclear fuels, and has decades of experience and a well-established international customer base for fuel services through Cameco. In addition, Westinghouse was acquired by a Canadian partnership between Brookfield Renewable and Cameco in 2022.

The development of large reactors like the Westinghouse AP1000 and new SMRs will change the landscape of nuclear fuel supply. Advanced reactors are being designed to require enriched fuel, including in some cases high-assay, low-enriched uranium, or HALEU, a product that currently only Russia supplies commercially. Enriching uranium means increasing the concentration of the U-235 isotope. In natural uranium, which CANDU reactors use, U-235 is found in concentrations of about 0.7 per cent. Traditional reactors use nuclear fuel enriched up to 3-5 per cent. But HALEU is enriched up to 5-20 per cent by definition, and usually to 19.75 per cent. This allows the reactors to be physically smaller and require less refuelling.

The United States is putting resources into addressing the issue of Russian HALEU dependence. A bipartisan bill, the Nuclear Fuel Security Act, has made its way through Congress and is intended to increase domestic production of both the low-enriched uranium and HALEU. Cameco itself is developing enrichment capacity in the United States through a partnership with an American firm in a facility in North Carolina; it is the commercial lead for Global Laser Enrichment (GLE) which is the exclusive licensee of the proprietary Separation of Isotopes by Laser Excitation (SILEX) laser enrichment technology, a third-generation uranium enrichment technology. Enrichment services supplier Urenco is also expanding its existing enrichment facility in New Mexico, and nuclear fuel supplier Centrus is bringing online a new domestic U.S. technology at its facility in Ohio.

While the United States will be essential for supplying nuclear fuel that replaces Russia in the early stages of advanced reactor development, there is a strong case for Canada to do so as well, at least in the medium term. Foremost among them is economic: enriching nuclear fuel is a high value-add process. But another reason is security related. It is not desirable to be overly reliant on any one or two countries for energy security, perhaps especially when those two are global superpowers – the United States and Russia. Canada’s unique attributes would support diversity of supply in a way that would not undermine global non-proliferation efforts, while also enhancing its own domestic energy security as it builds more SMRs. However, entrance into that highly controlled and costly sector will require significant government support and political will.

In the interim, CANDU will remain an attractive technology to many jurisdictions where the ability to use unenriched uranium is seen as an asset, especially if demand for western sources of enriched uranium start to exceed supply.

Recommendations

The political environment in Canada is not always seen as an advantage in energy development, but in the case of nuclear there are reasons for optimism. Provincial governments both in the West and in the East have been working with the federal government on nuclear development; Liberals and Conservatives have both supported development of the nuclear sector; unions and the private sector both see opportunity for growth; and Indigenous communities and stakeholders are being engaged early and meaningfully in the newest wave of nuclear development in Canada. The global political environment is very favourable too, as many customers seek to reduce their dependence on the Russian nuclear supply chain and find alternative, friendly suppliers.

The federal government has provided significant support to nuclear development in the past two years, including:

• incentives through the Clean Electricity Investment Tax Credit, Clean Technology Investment Tax Credit and Clean Technology Manufacturing Investment Tax Credit;
• large investments in the Darlington SMRs through the Canada Infrastructure Bank;
• funding to increase efficiencies with regulatory reviews and approvals, including for the Canadian Nuclear Safety Commission;
• increased funding for the Strategic Innovation Fund, which has supported SMR development;
• funding to better engage Indigenous nations and businesses in the nuclear sector; and
• export financing for Romania’s new CANDU-6 projects.

The advanced SMR sector is in its early stages and will benefit from continued supportive government policies to position Canadian industry favourably. As the sector moves from the technology phase to the project phase, it faces challenges such as affordability of capital, regulatory burdens, high project risk profiles, nascent supply chains, lack of harmonized international standards, and public nuclear safety concerns. Governments can help de-risk private investments at various stages to ensure the sector can develop at pace.  

In order to promote the development of a globally competitive advanced nuclear sector in Canada, stakeholders should:

• Ensure competitive financing is available. Nuclear energy is capital intensive and FOAKs can affect investor confidence and defy standard financing models. Investment tax credits and low interest loans are very important to building up the sector in its early stages. Nuclear energy has often been excluded from clean energy funds and subsidies, including Canada’s own Green Bond Framework announced in 2022. Wind and solar energy have enjoyed far greater subsidies on a per MW basis. Financial institutions and government programs should be technology-neutral when it comes to supporting low carbon energy investments.
• Ensure regulations are clear and predictable, and approvals and licenses are allocated on a timely basis. Due to its inherent characteristics, the nuclear sector is highly scrutinized. While this is indeed important, the regulatory process must still be responsive, flexible, and efficient, or else the nuclear industry will remain slow and expensive. The Canadian Nuclear Safety Commission is generally viewed positively, and must be supported to continue its work as new technologies and logistical and regulatory puzzles arise from advanced designs. It also has a role to play in ensuring that harmonization of standards for advanced nuclear models takes place at a global level, and that Canadian technologies and suppliers gain access to customers around the world. To that end, a new joint report from the World Nuclear Association, the Nuclear Energy Institute and the Canadian Nuclear Association was released in September 2023 that proposes regulatory steps which can be taken to minimise the time and cost for large-scale deployment of a fleet of standardised reactor designs.
  
  The Impact Assessment Act, as with so many industries, has hampered efficiency in nuclear project timelines and must be improved. Often, existing sites are considered as new areas even though they have hosted nuclear facilities for decades. These sites should be exempted.

• Ensure strong coordination of Canadian nuclear policy. A national body composed of federal and provincial governments, Indigenous stakeholders, owners and operators, end-users, and suppliers should be established to guide and oversee the development of the sector, proactively communicate and address problems, and implement strategies to take advantage of emerging opportunities. The group would also bolster and support an integrated pan-Canadian nuclear supply chain, including Indigenous suppliers. Canada’s SMR Action Plan group, involving the federal government, interested provinces & territories, industry, Indigenous stakeholders, labour, and civil society, provides a good foundation for this approach.

Canada has all the advantages to become a major player in the emerging nuclear and SMR landscape; now we just need ambition and execution. The opportunities economically, geopolitically and environmentally are all compelling and merit a strategic approach going forward. The business community is an essential and willing partner on this journey. 

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In May 2023, Quebec Minister of Finances Éric Girard launched a consultation to seek the opinions of experts in academia and business on the issue of the wealth gap between Quebec and Ontario. I thank the minister for giving me the opportunity to take part and contribute to this important initiative. I welcome his personal commitment, and that of his government, to taking a fundamental issue for Quebec’s future head on.

Regaining productivity is a necessity and a central issue for Quebec. The financing of the social programs that are so dear to Quebecers is not guaranteed for the generations to come. What’s more, the headwinds represented by population decline are likely to be painful in the long term.

Rather than dwelling at length on the causes of the malaise in productivity, which, it seems to me, has already been the subject of a number of largely consensual analyses over the years (including by the Ministry of Finances), I have chosen for the purposes of this exercise to mainly concentrate on potential solutions.

First, I would note the singular context in which we find ourselves. Though the problem posed by the lack of productivity poses is neither new or easily solved, it is arising at a critical juncture, one in which many governments, first among them the U.S., are embarking on a major reindustrialization exercise in favor of the ecological transition. This inevitably brings industrial policy to the center of debates and government action.

The collapse of consensus in Washington in the 1980s was, in economic terms, one of the most consequential events of the last 20 years.

The new imperatives of political economy are now being manifested and engendering a more marked state interventionism. These imperatives—first among them the energy transition and national security—are neither trivial nor transitory.

The post A more innovative, productive, and prosperous Quebec appeared first on Business Council of Canada.

Canada’s national security is dependent on the economic vitality and resiliency of our nation. It is only through our enduring economic prosperity where we find the talent, resources, and innovation necessary to achieve our national ambitions, protect the lives and livelihoods of Canadians, and play a positive and influential role on the world stage.

The converse is also true. Absent a strong national security environment, it is impossible to have a healthy and productive economy.

Many of Canada’s closest allies recognize this “mutually reinforcing link”¹, and have developed integrated approaches to economic and national security that seek to enhance their prosperity, safety, and sovereignty in a period of heightened geopolitical risk.

Canada has not. For decades now, successive Canadian governments have overlooked, taken for granted, or simply ignored the principle that economic security is national security.

This neglect has made us vulnerable. In an era of renewed geopolitical rivalry, where countries’ ability to foster economic growth is the foundation upon which military, economic, and cultural power now rests, Canadian companies of all sizes are increasingly finding themselves in the crosshairs of strategic threat actors² seeking to advance their national interests in ways that can, and do, undermine Canada’s national and economic security.

These threats have the potential to wreak large-scale havoc on Canadians’ daily lives. The impacts include mass layoffs caused by the theft of intellectual property, disruptions to Canadians’ ability to heat and power their homes due to paralyzing cyberattacks, and skyrocketing cost of everyday household products because of weaponized supply chains.

Defending Canada’s economic security is too important an undertaking to be left to either the public or private sectors working alone. Both must work together seamlessly to detect, deter, and disrupt a broad range of emerging and evolving threats.

That is why this report calls on the Government of Canada to work with Canadian businesses to develop and implement a national security strategy that, for the first time, establishes economic security as a central pillar.

Based on in-depth consultations with the leaders of Canada’s most innovative and successful companies, security experts, and former government officials, this report examines the threats facing Canadians, explores the consequences of inaction, and recommends measures to address the most glaring gaps in Canada’s economic security posture.

The paper’s recommendations are organized around three themes:

Strengthening Canada’s economic security architecture, including by creating a legal framework allowing the Canadian Security Intelligence Service to proactively share timely and actionable threat intelligence with companies targeted by attacks;  

Bolstering Canada’s economic and innovative capabilities, including by incentivizing high-risk, high-reward research in disruptive and emerging fields which are foundational to spurring economic growth and are strategic from a national security perspective; and

Expanding and reinvigorating Canada’s international security partnerships, including by spearheading measures to collectively counter weaponized supply chains, such as a “NATO for trade.” 

In a world where security is a prerequisite for prosperity, and prosperity a prerequisite for security, Canada will be unable to sustain a healthy and prosperous society without a national security strategy that safeguards our economic security. Now is the time for Canadian policymakers to recognize this reality and to come together with Canadian companies to protect the economic vitality and resiliency of our nation.

Strategic threat actors are advancing their national interests at our expense

Canada now finds itself in the midst of the greatest, most complex, and unpredictable security environment in a generation.

The free, open, and relatively stable unipolar order that prevailed following the conclusion of the Cold War – and which provided Canada with unprecedented levels of safety, security, and prosperity – is giving way to a new, more turbulent, multipolar reality marked by geopolitical rivalry.³

The splintering of the global commons into rival camps struggling for strategic superiority has sharpened competition and confrontation among states in wide-ranging areas. This is no truer than in the fields of business, economics, and technology.

As in past eras defined by heightened geopolitical competition,⁴ countries’ ability to foster economic growth – especially through the invention, diffusion, and adoption of emerging and disruptive technologies – is the foundation upon which military, economic, and cultural power now rest.⁵

Recognizing this reality, strategic threat actors have shown both a capacity and willingness to steal, sabotage, and disrupt their way up the economic ladder to strengthen their geopolitical might and to unilaterally reshape the existing international order into something more favourable to themselves.⁶

New technological advances, especially in cyberspace, have enabled these actors to both broaden and tailor their tactics to better penetrate our defences and achieve their revisionist aims.

The result: Canadian companies, in almost every region and sector of our economy, now face unprecedented dangers. They are operating on an increasingly skewed playing field in which traditional private commerce is always at a disadvantage.

Canada’s lacklustre economic performance is adding to this threat.⁷ Canada underperforms its global rivals in a range of areas essential to spurring innovation, scaling companies, and capturing global market share in advanced industries vital to our prosperity and security.⁸ Indeed, Canada leads in none of the forty-four advanced technology categories – such as artificial intelligence, quantum, or advanced cybersecurity – identified by one think tank as being essential to a country’s economic and national security.⁹

Economic security threats represent serious risks of substantial harm to our society

To be clear, not all attacks directed against Canadian companies represent economic security threats requiring a national security response. Most threats today can be countered by conventional tools, such as civil litigation.

Economic security threats are distinct. They represent serious risks of substantial harm to our country as a whole – to our sovereignty, values, economy, and people. As such, they are well beyond the capacity of conventional tools to address alone and require a coordinated national response.

Canada faces a series of interconnected economic security threats that erode Canada’s economic competitiveness by tilting the playing field to others’ advantage. The list is long. It includes mercantilism, weaponized trade, espionage, cyberattacks, malign foreign influence, and co-opted academic research.

State-sponsored actors are the primary perpetrators.¹⁰ The Government of Canada regularly identifies the disruptive activities of countries, such as China, Russia, Iran, and North Korea, as posing the “greatest strategic threats” to Canada’s security.¹¹

Mercantilism: competing against “State, Inc.”

Canada and its allies adhere to a common set of market values – such as the rule of law – that ensure that economic competition takes place on a level playing field.¹²

Strategic threat actors reject these globally recognized rules. They are increasingly adopting mercantilist practices aimed at giving their state champions the advantages necessary to replace imports with domestic production, climb global value chains, and seize dominant global market share in strategic sectors.¹³

The catalogue of predatory practices is lengthy. It extends well beyond generally accepted support for home-grown industries, to include manipulating local currencies to give their state champions an unfair price advantage in foreign markets, requirements for foreign firms to transfer advanced technology to state champions as a prerequisite to access their markets, and the showering of massive industrial subsidies on state champions that allow them to engage in unprofitable activity that wipes out foreign competition.¹⁴

These mercantilist interventions mean that Canadian firms are not competing with a typical commercial company. Instead, they are operating on a skewed playing field, competing with the full strength and resources of a foreign state.¹⁵ In other words: “State, Inc.”

Mercantilism undermines Canadian society by introducing into our economy uncompetitive and inefficient enterprises that can accept significant financial losses to outbid and undercut Canadian businesses because they are governed by state interests and not shareholders.¹⁶ This, in turn, destroys domestic industries and gives Canada no choice but to rely on state champions for critical economic inputs.¹⁷

That reliance is especially problematic. The blurred lines between state policy and private pursuits means that even ostensibly private firms often have no choice but to support their government’s national security objectives. This includes providing support, assistance, and cooperation to intelligence agencies.¹⁸

Weaponized trade: turning a positive sum activity into a zero sum game

Canadians’ prosperity relies on a fair, predictable, and open international trading system. This system creates good, well-paying jobs for Canadians; promotes competition and product choice; and lowers consumer prices.

Our reliance on international trade also makes us vulnerable. Strategic threat actors seek to expand their global influence by weaponizing Canada’s dependence on trade to pressure, induce, or influence the Government of Canada into taking actions that conform with their national priorities.¹⁹

Strategic threat actors use diverse tactics to coerce the Government of Canada. They can restrict the movement of critical goods for which there are no substitutes, withhold reciprocal access to domestic markets, and subject Canadian goods to onerous import inspections and conditions.²⁰

With Canadian exports supporting more than one out of every six jobs in the country,²¹ weaponized trade can directly threaten the livelihoods of Canadians. Indeed, between 2019 and 2020, China’s targeting of the canola sector cost Canadian farmers upwards of $2.35 billion in lost exports and lower prices.²²

Weaponized trade may also have broader societal costs.²³ As Russia’s unprovoked invasion of Ukraine has highlighted for our European allies, overreliance on a strategic threat actor for critical economic inputs, especially one with systemically divergent values and interests, can prove both costly²⁴ and deadly²⁵ for society during a crisis.

Canada is dependent on strategic threat actors for a broad range of commodities vital to Canadians’ safety, security, and prosperity. Using data compiled by the United Nations, a recent study found that Canada is strategically dependent upon China, a country with a history of weaponizing trade, for at least 367 categories of goods.²⁶ Eighty-three of these categories service the critical infrastructure that Canadians rely upon daily to heat and power their homes, move their products to and from international markets, and communicate with their loved ones across our vast nation.²⁷

Espionage: using Canadian ingenuity against Canadians

As an advanced, free-market economy home to many of the world’s most successful and innovative companies, Canada has become an attractive target for states seeking to advance their domestic industries through espionage.²⁸

Strategic threat actors use a wide range of methods to covertly steal commercially valuable information, such as confidential business plans, proprietary manufacturing processes, and intellectual property.

They include the use of intelligence officers and state-affiliated hackers, corporate insiders with legitimate access, as well as seemingly benign joint ventures and university research partnerships.²⁹

Businesses are typically targeted directly. The 2022 arrest of a power utility employee for allegedly stealing trade secrets for China’s benefit provides an example.³⁰

However, corporate information will be targeted wherever it may reside.³¹ In 2014, it was discovered that a Chinese state-sponsored cyber actor had compromised the digital systems of the National Research Council.³² The actor stole more than 40,000 files, including “intellectual property and advanced research and proprietary business information” from the government agency’s private sector partners.³³

The theft of Canadian ingenuity is used to build or enhance state champions’ products. Without having to make decades worth of costly investments, such as in research and development, state theft gives these companies a leg up over Canadian businesses.³⁴

Stolen information is also used to give state champions insights into Canadian companies’ business dealings, such as in bids for large overseas procurements.³⁵  As one expert notes, “[i]f the bottom line of a Canadian firm is already known, it will be easy for the other side to outbid or negotiate around them.”³⁶

These tactics collectively destroy the incentive for Canadian businesses to enter new markets, innovate and grow.³⁷ Over time, they may permanently hollow out Corporate Canada.³⁸

While no precise estimate of the cost of economic espionage currently exists in this country, based on studies from the United States,³⁹ the cost to Canadians is likely tens of billions of dollars annually.

Cyberattacks: disrupting the backbone of Canadian society

Just as the Industrial Revolution brought about enormous benefits for society, the unfolding digital revolution⁴⁰ has the potential to do the same. It can help companies reach new buyers and markets; make products faster and more efficiently; and improve consumer convenience, choice, and value.

However, as international interactions shift into cyberspace, we have seen skyrocketing levels of cyberattacks directed at Canadian businesses.

Canadian companies represent more than half of all known cyber victims in this country and are the most frequent focus of geopolitically inspired cyberattacks against Canada.⁴¹ To give a sense of the problem’s scale, two out of every five companies in this country were the victims of a cyberattack within the last two years.⁴²

The impact is staggering. Attacks often result in reputational damage, lost revenues and business opportunities, legal repercussions, as well as lasting damage to business infrastructure and operations. By one estimate, ransomware⁴³ alone cost the Canadian economy US$4.3 billion in paid ransoms and lost productivity in 2021.⁴⁴

Cyberattacks against critical infrastructure – such as electrical grids, telecommunication networks, and natural gas pipelines – are particularly troubling, given their potential to wreak large-scale havoc on Canadians’ everyday lives.

Critical infrastructure operators will continue to be at high risk from cybercriminals, including those affiliated with nation states, because of operators’ “deep pockets” and the “impact of operational downtime on the customers [operators] serve.”⁴⁵ State actors are expected to continue to target critical infrastructure “to pre-position in the case of future hostilities, and as a form of power projection and intimidation.”⁴⁶

Recent incidents in Canada involving critical infrastructure include:

• In May 2022, a “Russian-speaking cybercrime group” disrupted the operations of a Canadian aerospace company providing engineering and research and development services to the Canadian Armed Forces. The firm had recently been selected to participate in the modernization of the CH-146 Griffon helicopter fleet.⁴⁷
• In April 2023, a “pro-Russia” hacker group engaged in a string of distributed denial-of-service attacks during the Ukrainian Prime Minister’s visit to Canada. The attacks caused the websites of major Canadian businesses in the utility, transportation, and banking sectors to crash.⁴⁸
• In April 2023, leaked intelligence revealed that “Russian-backed hackers” gained access to and control over a Canadian natural gas distributor’s digital systems.⁴⁹ The Head of the Canadian Centre for Cyber Security asserted that the hackers “had the potential to cause physical damage” to the distributors’ pipeline network.⁵⁰ 

It is difficult to overstate critical infrastructures’ importance to Canadians’ safety, security, and prosperity. While not resulting from a cyberattack, a power outage in August 2003 that lasted less than a week caused an estimated $2.3 billion loss to Ontario’s economy, contributed to a 0.7% decrease in Canada’s GDP in August, and very likely led to loss of life.⁵¹ Given the growth of the Canadian economy in the 20 years since then, the impact of a similar cyber-induced outage would be several orders of magnitude larger.

Malign foreign influence: eroding Canadians’ trust and confidence

Foreign states seek to influence Canadian society. Most of this activity is perfectly legitimate. It is both lawful and appropriate for foreign states to have views of Canada’s domestic affairs and to express those views with Canadians.⁵²

However, foreign states veer from diplomacy into unacceptable malign foreign influence when their activities are covert, deceptive, or threatening.⁵³

The current narrative surrounding malign foreign influence is rightly focused on the integrity of democratic processes and the safety and security of targeted ethnic or cultural groups.

However, strategic threat actors actively target all aspects of Canadian society to advance their strategic interests to our detriment.⁵⁴ This includes the use of third parties wielding deceptive tactics online to damage strategically important sectors of the Canadian economy.

In June 2022, a malicious actor with possible links to China deployed thousands of inauthentic social media accounts to carry out a coordinated disinformation campaign against a Canadian company developing a rare earth mine in northern Saskatchewan.⁵⁵ 

Shortly after the miner announced its project, inauthentic social media posts began to target locals with false claims regarding the project’s environmental and labour record.⁵⁶

A post from “Ashely Wilson” stated: “[t]he protection of the lake, everyone’s responsibility, if once mining, how to ensure the health of workers, firmly resist.”⁵⁷ Another user, “Farrah”, stated: “[i]t’s not exciting, our lakes will be destroyed.”⁵⁸ “Brown Emily” and “Gonzales Bonnie” were equally appalled, respectively referring to the discovery as “terrible” and “terrifying.”⁵⁹

The plan of attack was clear: whip up local opposition against the project, force the stoppage of the miner’s operations, and undermine a sector essential to Canada’s security and prosperity.⁶⁰

In an era of heightened geopolitical rivalry, these attacks are increasingly becoming the norm. Other recent attacks targeting the Canadian economy include Russian and Iranian disinformation campaigns advancing narratives critical of energy pipelines and the Government of Canada’s immigration policies.⁶¹

Co-opted academic research: exploiting Canadian openness and collaboration

Open and collaborative academic research is indispensable to pushing the boundaries of Canadian science and technology. However, strategic threat actors exploit this feature of our academic institutions to advance their priorities at our expense.⁶²

They may deploy visiting faculty, private sector collaborators, or not-for-profit organizations to gain unauthorized access to valuable information, expertise, or technology.⁶³

In some scenarios, the co-opting of Canadian-led research can lead to advancements in foreign states’ strategic, military or intelligence capabilities.⁶⁴

For instance, instead of strengthening Canada’s defensive capacities through the domestic development and commercialization of cutting-edge technologies, we have repeatedly seen Canadian academic institutions enter into partnerships that support foreign states’ military ambitions.

From 2018 to 2023, academics at ten of Canada’s leading universities published more than 240 joint papers on advanced research topics, including quantum cryptography, photonics, and space science, with military scientists working out of China’s top military institution.⁶⁵

Failure to address growing threats puts our country at risk

Canada’s new geopolitical reality means that economic security – repeatedly taken for granted, overlooked, or simply ignored – is now central to the preservation of our national security.

Therein lies the challenge for the country.

Our decades’ long neglect of economic security issues has made us vulnerable. To use the Canadian Security Intelligence Services’ own words, Canada has become an “attractive and permissive target.”⁶⁶

Failure to address this challenge with urgency and ambition will have serious, long-term consequences for Canadians. The Chief of the Communications Security Establishment explained it this way: “Cyber security is not abstract. Cyber systems, digital systems, they do not exist in a vacuum. They exist in relation to people with real-world implications for their privacy, their prosperity, their wellbeing.”⁶⁷

If left unchecked, attempts to degrade our economic capacity will result in the loss of secure, well-paying jobs for Canadian workers; forgone tax revenues to pay for essential public services, like health care and public transit; as well as lost leadership in advanced industries vital to the country’s national strength and long-term economic health.⁶⁸

This point takes on increased significance as the Government of Canada spends tens of billions of dollars annually to promote Canada’s transition to a net-zero economy.⁶⁹ If economic security considerations – such as measures to tackle espionage – are not baked into the Government of Canada’s investments in industrial capacity, taxpayers’ hard-earned money will likely end up subsidizing others’ net-zero industries .

Attacks directed against Canadian businesses also erode the beliefs we cherish most as Canadians. This includes the principle of free enterprise and fair competition; the tenet that all persons are accountable to the law, equally enforced and independently adjudicated; and the values that our laws promise, such as Canadians’ rights to privacy or security of the person.⁷⁰

The threat of punitive cyberattacks against critical infrastructure is illustrative. Russian-aligned cyber actors have targeted Canadian energy companies for its “psychological impact,” including to “weaken Canadian [military and humanitarian] support for Ukraine.”⁷¹ By creating consequences for challenging illiberal behavior on the international stage, punitive cyberattacks complicate Canada’s ability to independently assert its values.

We also must be mindful that Canada’s closest allies are moving fast in this era of heightened geopolitical risk to improve their abilities to identify and mitigate economic security threats.⁷²

If Canada fails to move in lockstep with its closest allies in building out its economic security capacity, it risks being perceived as a “weak link.” This would jeopardize the country’s relationships with its closest allies at a pivotal moment when the global order is being reshaped and partnership matters most.

There are already troubling signs that Canada’s closest allies are taking note of our reluctance to seriously confront growing security threats. Some argue that has resulted in the country increasingly sitting on the sidelines when it comes to vital conversations around security.⁷³

The Prime Minister’s former National Security and Intelligence Adviser has written that “[t]he glacial pace at which Canada appears to be adapting to the realities of modern great power competition has left it far behind the curve, with consequences for…Ottawa’s reputation among its allies.”⁷⁴

This likely contributed to Canada’s exclusion from AUKUS, a security partnership between three of Canada’s closest allies intended to align member states’ defence and technology sectors to develop the next generation of military capabilities.⁷⁵

The time for after-the-fact policy patches is over

The Government of Canada has been responding to our new geopolitical reality. But its actions have been slow, modest, and piecemeal.

This approach stems largely from a mode of governance that responds to immediate and pressing issues that arise without sufficient long-term planning for dealing with strategic threat actors which think well beyond the length of an average Canadian political cycle.

Canada’s efforts to combat foreign interference demonstrates the weakness of this approach. According to the National Security and Intelligence Committee of Parliamentarians, “Canada’s ability to address foreign interference is limited by the absence of a holistic approach.”⁷⁶ In the Committee’s view, Canada’s “[r]eactions to foreign interference remain ad hoc and case-specific, rarely putting them in their broader context.”⁷⁷

The lack of information-sharing powers provided to the Canadian Security Intelligence Service offers another example of the approach’s pitfalls. While the Minister of Public Safety tasked the Director of the Canadian Security Intelligence Service in May 2022 with ensuring that “organizations working in sensitive domains are aware of current and emerging economic security threats,”⁷⁸ the agency remains without the legislative powers to proactively share threat intelligence and advice with such organizations.⁷⁹

This in no way represents a coherent approach to tackling strategic threat actors that think long-term and operate in sophisticated and pervasive ways. The time for after-the-fact policy patches is over.

Canada must catch up with its closest allies

Canada must fundamentally alter the way it approaches issues of national security. This will require an over-arching national security strategy that takes an eyes wide open approach to the complex ways strategic threat actors seek to undermine Canada,⁸⁰ while explicitly recognizing that economic security is central to a broader national vision of a more secure country.

Only by doing so can the Government of Canada take full advantage of all facets of its national power – including its diplomatic, defence, financial, economic, technological, and intelligence capabilities – to effectively safeguard our economic security and ensure our shared prosperity, safety, and sovereignty in this period of heightened geopolitical risk.

Canada’s one and only national security policy – Securing an Open Society⁸¹ – is not up to the task. Released almost two decades ago, when terrorist attacks, weapons of mass destruction, and the SARS outbreak were the preoccupation of the day, the policy makes almost no mention of the economic security threats now facing the country.

Securing an Open Society therefore falls significantly short of the modern national security strategies of Canada’s closest allies:

The United States’ 2022 national security strategy clearly articulates the principle that economic security is national security. The American strategy considers economic security from a broad, multi-faceted perspective, including trade and commerce, industrial strategy, and rules governing cyberspace. The strategy notes that “if the United States is to succeed…, we must invest in our innovation and industrial strength, and build our resilience, at home.”⁸²

Reflecting on “changes in [global] power balances and intensifying geopolitical competitions,” Japan’s 2022 national security strategy asserts that “issues not necessarily deemed as security targets in the past, such as supply chain vulnerabilities, increasing threats to critical infrastructures, and leadership struggles over advanced technologies, ha[ve]…become a major security challenge.” Japan’s security strategy thus argues that “the scope of security has expanded to include the economic sector, making economic measures even more necessary to ensure security.”⁸³

Germany’s 2023 national security strategy, suitably entitled Integrated Security for Germany, follows the same logic. It states: “in the 21^st century, security…means making sure our heating works in winter,…[h]aving smartphones that work because supplies of the necessary microchips are reliable,…[g]etting to work safely because our trains are not paralysed by cyberattacks.”⁸⁴

Even Australia’s 2013 national security strategy identifies key economic imperatives, such as the protection of intellectual property, critical infrastructure, and supply chains, as being essential to its national security. Australia’s strategy notes that “there is a mutually reinforcing link between our national security and our economic wellbeing,…[a] healthy economy underpins our stability and security, which in turn is conducive to the pursuit of our personal and national economic goals.”⁸⁵

Canada requires a national security strategy that establishes economic security as a central pillar. That strategy should describe current and anticipated economic security challenges, the role of economic security in advancing Canada’s national security, the objectives of economic security policy, and the ways and means by which Canada can deliver on these objectives over the short, medium, and long run.    

The strategy must also be balanced. While it must be capable of tackling the threats facing Canadians at home and abroad, it must also remain consistent with Canada’s democratic values as well as ensure that the domestic and international environment remains conducive to beneficial cross-border activities, such as trade and economic immigration, which are central to our national interests.

In other words, protecting Canada’s economic security should not be used as a veiled excuse for the Government of Canada to undermine Canadians’ rights, adopt protectionist trade and investment rules, or decouple its relations with certain foreign states altogether.

This point cannot be overlooked. Some of Canada’s closest allies have responded to our new geopolitical reality in ways that do not always live up to their commitment to the rules-based international order.⁸⁶ In rare cases, these actions could prove to be equally damaging to Canada’s economic prosperity as the threat posed by strategic threat actors.

Recommendations for an integrated national security strategy

To address the most glaring vulnerabilities in Canada’s economic security posture, we urge that a new national security strategy adopt measures to:

Strengthen Canada’s economic security architecture,

Bolster Canada’s economic and innovative capabilities, and

Expand and reinvigorate Canada’s international security partnerships.

Strengthen Canada’s economic security architecture:

Strategic threat actors have no intention of undertaking the structural reforms needed to level the playing field for Canadian businesses. A latticework of new and interconnected laws, policies, and programs will therefore be required to improve Canadian companies’ ability to deter, detect, and disrupt the threats facing our nation.

Recommendations:

1. The Government of Canada should comprehensively review and amend the Canadian Security Intelligence Service Act to align the agency’s legislative mandate and powers with expanding expectations for it to identify, analyze, and disrupt threats to Canada’s economic security.
   Among other things, an amended Canadian Security Intelligence Service Act should enable the agency to proactively share timely and actionable threat intelligence with stakeholders outside the federal government, including companies, where it is in the public interest and subject to all necessary safeguards and oversight.
2. The Government of Canada should provide the Canadian Security Intelligence Service with the resources necessary to launch a new division with an express mandate to provide training and advice to a broad range of private sector entities on how to defend themselves against economic threats. The agency should look to models established in allied countries, such as MI5’s National Protective Security Authority.
3. To reduce risks to security of supply, prevent dependencies with respect to critical infrastructure, and counter the problematic transfer of sensitive technologies, the Government of Canada should move forward with amendments to the national security provisions of the Investment Canada Act to more precisely target and screen out malicious foreign investments. An amended Investment Canada Act should include a requirement for the Government of Canada to formally incorporate Canadian companies’ unique perspectives on new and emerging national security threats within the investment review process.
4. To improve law enforcement’s ability to thwart economic security threats, the Government of Canada should strengthen the Security of Information Act’s economic espionage offence. Alongside this initiative, the Government of Canada should develop a new legal regime that allows the use of intelligence as evidence in the prosecution of criminal activities, while remaining compliant with the constitutional principle of the accused receiving a fair trial.
5. To enhance the cybersecurity and resiliency of critical infrastructure, the Government of Canada should:
   • Follow the United States’ lead and legislate safe harbour protections⁸⁷ that eliminate legal obstacles that prevent companies from working voluntarily with each other and governments to address cyber challenges,
   • Explore new legal mechanisms to encourage developers of digital goods and services used by critical infrastructure operators to take all reasonable precautions to secure their products, and
   • Establish a centre of excellence within the Canadian Centre for Cyber Security to:
     • Bring together public and private sector partners to unify their defensive actions through synchronized cybersecurity planning, preparation and response, like what is done by the Joint Cyber Defense Collaborative of the United States’ Cybersecurity and Infrastructure Security Agency;
     • Encourage more meaningful, two-way information sharing within and between government and critical infrastructure providers, including on emerging threats to critical cyber systems, the safety record of current technologies, and the relative benefits of different security measures;
     • Convene and support regular tabletop and threat hunting exercises where critical infrastructure providers and government stakeholders work through simulated events to improve their collective responses to major cyber incidents;
     • Establish a systemized process to review major cyber intrusions to capture and share lessons learned as well as make concrete recommendations for improving cybersecurity and resiliency; and
     • Offer onsite incident response services to critical infrastructure providers that require immediate assistance.
6. To safeguard our continued access to critical economic inputs, while strengthening the Government of Canada’s capability to act independently on the global stage, the Government of Canada should work with sectors vulnerable to economic coercion to strengthen the depth and resilience of critical supply chains. This should include conducting vulnerability reviews, sharing threat information, developing robust mitigation strategies, curbing excessive dependence on strategic threat actors, and increasing the availability of commercial free-market alternatives.
7. To blunt the impacts of mercantilist practices, the Government of Canada should create new legal mechanisms to block the import of foreign goods and services that have benefitted materially from unfair economic practices. The Government of Canada’s initial focus should be on blocking strategic threat actors’ market access to critical industries where they are using illegal means to catch up and surpass Canada.
8. To deter, denounce, and discipline those actors who threaten the integrity of critical infrastructure systems, the Government of Canada should follow the United States’ lead and amend the Criminal Code to expressly criminalize willful or negligent acts that materially interfere with critical infrastructure through financial penalties, imprisonment, or both.
9. To prevent Canadian-led academic research from furthering strategic threat actors’ interests at our expense, the Government of Canada should, in duly justified circumstances, ban entities linked to these states from participating in, or benefiting from, Canadian academic research.
10. To enable the earlier and more effective disruption of malign foreign influence, as well as to increase the public’s awareness of the nature, scale, and extent of foreign activities in domestic affairs, the Government of Canada should move forward with the enactment of a foreign influence transparency regime. Like existing regimes in the United States, Australia, and the United Kingdom, Canada’s scheme should require entities acting on behalf of a foreign state to publicly declare their activities intended to influence government decision-making or public opinion. The adoption of any registry must be consistent with the values we share in our democracy, including our commitment to be an open, free, and welcoming place to study, work, and invest.

Bolster Canada’s economic and innovative capabilities:

We must abandon the notion that it is possible for Canadian businesses to compete on a level playing field with state champions in developing and commercializing emerging and disruptive technologies. They simply do not play by established rules.

To prevail in these circumstances, the Government of Canada will need to complement the economic and innovative capacity of Canadian companies with a modern industrial strategy. That strategy must increase our country’s ability to systemically translate intellectual capital into world-leading technologies and internationally competitive businesses.  

The Government of Canada must identify and support advanced technologies that are foundational to spurring economic growth, strategic from a national security perspective, and where companies on their own are not yet able to make the investments needed to develop and commercialize such technologies. The goal should be to help Canadian companies do what they do best – innovate, scale, and compete globally.

Together, these investments will support millions of secure, well-paying jobs by encouraging billions of dollars of economic activity. They will also increase our ability to act autonomously on the international stage by reducing Canada’s vulnerability to economic coercion, and boost the country’s economic clout, thereby providing the means to invest in our security.

Recommendations:

1. The Government of Canada should modernize its science and technology architecture to reward high-risk, high-payoff research in emerging and disruptive technology fields essential to our economic and national security. In modernizing programs, special attention should be made to displacing problematic foreign sources of financing for academic research, as well as retaining and commercializing more advanced research at home.
2. The Government of Canada should stimulate Canadian innovation in emerging and disruptive technology fields essential to our economic and national security, while integrating new technologies into the Canadian government, through the strategic use of public sector procurement. In doing so, the Government of Canada should look to agile and challenge-based models used in allied countries, such as the United States’ highly successful Defense Advanced Research Projects Agency. 
3. To strengthen Canada’s intelligence capabilities, support academic institutions, and create new economic opportunities for businesses, the Government of Canada should partner with trusted academic researchers and businesses to co-develop and deploy advanced security solutions across the Canadian intelligence community. The Government of Canada should emulate the approach adopted by the United States’ Intelligence Advanced Research Projects Activity. This specialized government agency invests in high-risk, high-payoff research that pushes the boundaries of science and technology to empower the American intelligence community to do its work better and more efficiently.
4. Canada must invest in the input that lies at the core of economic growth and innovation: talent. The Government of Canada should:
   • Refocus Canada’s economic-class immigration programs to ensure that sectors essential to Canada’s economic and national security have quick and reliable access to the trusted, specialized, and high-skilled international talent they need to drive innovation, scale, and compete internationally;
   • Scale organizations with a proven track record of advancing the recruitment and training of underrepresented groups in fields of security, such as Rogers Cybersecure Catalyst;
   • Incent post-secondary institutions with leading security programs, such as the University of New Brunswick and Durham College, to increase enrollment rates and offer students more experiential learning opportunities; and
   • Increase Canada’s ability to attract, cultivate, and retain world-class security talent by creating greater opportunities for personnel exchanges between trusted academic institutions, businesses and government departments and agencies, such as the Canadian Armed Forces, Communications Security Establishment, Royal Canadian Mounted Police, and Canadian Security Intelligence Service.

Expand and reinvigorate Canada’s international security partnerships:

Canada’s international security partnerships – including participation within the G7, Five Eyes, NORAD, and NATO – are some of the country’s most important strategic assets. By providing a platform for security cooperation, Canada’s international security partnerships act as a force multiplier, amplifying Canada’s capacity to respond to shared economic security challenges that affect Canadians at home and abroad.

Canada must expand and reinvigorate its network of security alliances and partnerships to uphold and strengthen the principles, institutions, and rules-based international order that have enabled so much stability, prosperity, and growth. The end goal for Canada should be a world in which responsible state behaviour is the norm, and where irresponsible behaviour is isolating and costly.

Recommendations:

1. The Canadian military remains the guarantor of the country’s peace, stability, and prosperity, as well as our commitment to allied nations. The Government of Canada should recommit to meeting the defence investment target of two percent of GDP set out under NATO’s 2014 Wales Summit Defence Investment Pledge. Considering the most recent NATO summit in Vilnius, Lithuania, this pledge should be viewed as a “floor” and not a “ceiling”.
2. To better monitor, mitigate, and respond to threats to Canada and the United States’ heavily integrated cross-border infrastructure, the Government of Canada should work with the United States to create a formal bilateral public-private sector working group. Composed of a cross-section of public and private sector leaders, the goal of this group would be to facilitate the free, frank, and confidential exchange of strategic information about the evolving threat environment as well as the ways and means by which governments and businesses on both sides of our shared border can work together to build a stronger, more secure North America.
3. Given the importance of international trade and commerce to the security and prosperity of Canadians, the Government of Canada, in partnership with other like-minded allies, should reinforce the rules-based economic order by:
   • Strengthening the multilateral trading system with the World Trade Organization at its core;
   • Strengthening or joining international frameworks promoting free and fair international trade and investment among market-oriented countries, such as the Comprehensive and Progressive Trans-Pacific Partnership and the Indo-Pacific Economic Framework; and
   • Creating and enhancing plurilateral measures to collectively deter, withstand, and counter economic coercion and other unfair trade practices, such as through a “NATO for trade” whereby allied nations agree to come to the aid of each other when they are economically threatened. As a part of this initiative, Canada should leverage its economic advantages, such as in the production of energy, food, and minerals, to help reduce our allies’ trade dependencies on strategic threat actors.
4. The Government of Canada should work closer with its Five Eyes partners and other like-minded allies to undermine malicious cyber actors, including by:
   • Jointly deterring, attributing, and responding to cyberattacks which breach global rules and norms in cyberspace;
   • Shutting down illegal online markets for cyber tools and services, which lower the start-up time and threshold of sophistication necessary for malicious actors to target and sabotage Canadian companies;
   • Better regulating crypto assets and exchanges, which are used by malicious actors to conceal their identities and obfuscate their activity from national security and law enforcement agencies; and
   • Increasing pressure on countries with lenient or non-existent laws and law enforcement related to cybercrime and other malicious cyber activities.
5. To build upon Canada’s capabilities in cybersecurity, artificial intelligence, and quantum, the Government of Canada should pursue admission to AUKUS, the trilateral security and technology co-operation pact between the United States, United Kingdom, and Australia. The Government of Canada’s initial focus should be on AUKUS’ second institutional pillar, which focuses on advancing these and other important technologies.
6. International technical standards have a direct bearing on Canada’s national security, including by curbing the abusive use of emerging and disruptive technologies that could threaten Canada’s economic security. The Government of Canada should ratchet up its collaboration with Canadian businesses to support the development and implementation of international technical standards for next generation technologies that reflect our national interests as well as free-market and democratic values.
7. To enhance Canada’s diplomatic influence, foster greater collaboration with like-minded nations, and advance Canada’s economic interests, the Government of Canada should pursue a program of “economic diplomacy”, whereby the country’s industrial capacity is leveraged to help address global security challenges.

Execution and review will be critical

A new national security strategy is not the end of the road but the start. The strategy will only fulfill its purpose when its contents are fully executed. Measures included in a new strategy must therefore be implemented in a timely and effective manner.

Further, as much of the battleground that the Government of Canada needs to contest lies outside of its direct control, deep and sustained partnership with Canadian businesses, from the strategic to the tactical level, will be required to achieve success. Consultation will not suffice.

Lastly, to stay relevant in a rapidly evolving threat environment, a new strategy should be viewed as a “living document.” It must be regularly and systematically evaluated, such as every three years, to ensure that it is satisfying its objectives. The Government of Canada should make necessary revisions to the strategy should it expect any material changes.

To ensure that these measures are taken and given adequate priority, we urge that:

1. The newly created cabinet committee on national security and intelligence – the National Security Council – be chaired by the Prime Minister and staffed by all relevant ministers and senior government officials with a security mandate, so as to provide the sustained and forward-looking leadership and decision-making needed to implement the new national security strategy;
2. The role of the National Security and Intelligence Advisor be established in legislation and enhanced to better organize and coordinate the intelligence community as well as consult, engage, and partner with Canadian businesses;
3. The Prime Minister amend the mandate letters of all relevant ministers, including public safety, foreign affairs, defence, industry, and finance, to ensure that economic security considerations are incorporated into each of their priorities;
4. A dedicated economic security division be established within the Privy Council Office and that economic security units be created or enhanced within all major ministries, such as public safety, foreign affairs, defence, industry, and finance, to better plan and coordinate economic security policies in partnership with Canadian businesses;
5. The Government of Canada release annual implementation plans setting out the specific measures that the government intends to carry out within a given calendar year to implement the new strategy; and
6. Within eighteen months of the roll-out of a new national security strategy, the National Security and Intelligence Committee of Parliamentarians initiate, and the Government of Canada respond to, a special study of the Government of Canada’s framework for tackling economic security threats with a view to:
   • Identifying gaps that exist in legislation, policies, or governance mechanisms;
   • Strengthening ministerial accountability; and
   • Improving transparency, including helping businesses better understand the roles of the government organizations responsible for serving them.

As a part of this study, the Committee should launch an economic security “roadshow”, like the bi-partisan roadshows employed by the United States’ Senate Select Committee on Intelligence, to gain insights from companies on the frontlines of attack. 

Canada’s most innovative and successful companies are ready to do their part

Every year, Canada’s most innovative and successful companies spend billions of dollars to defend Canadians against a growing list of economic security threats. This includes investing in measures to detect, mitigate, and respond to attacks; establishing partnerships with post-secondary institutions to train security professionals and develop defensive technologies; as well as sharing threat intelligence, expertise and best practices with governments and industry peers.

For instance, in critical infrastructure sectors, like energy, transportation and telecommunications, most Business Council of Canada members individually invest well over $100 million per year in Canada on measures to prevent, detect and respond to cybersecurity incidents. A sizable number of these members individually invest over $500 million annually.

Drawing on their deep experience and expertise, Canada’s most innovative and successful companies are ready to work constructively with the Government of Canada to develop and implement a new national security strategy. This includes, but is in no way limited to:

1. Strengthening Canada’s economic resilience by increasing the amount they invest annually on measures to detect, prevent, and disrupt economic security threats to Canada;
2. Sharing more with the government about what threats they are seeing on the ground to better inform government policy, as well as improve national security agencies’ ability to investigate, analyze and disrupt threats;
3. Increasing their investments in Canadian academic research to help displace problematic foreign sources of funding and to retain and commercialize more advanced research at home; and
4. Better supporting their large and diverse supply chains, including through education, capacity building, and relationship brokering, to increase awareness of the threats facing small and medium sized businesses, as well as roles and responsibilities of the government organizations responsible for serving them.

Conclusion

The free, open, and relatively stable unipolar order that provided Canadians with extraordinary levels of safety, security, and prosperity is now consigned to history.

In our new geopolitical reality, Canadians face a turbulent, multipolar landscape that poses an unprecedented national security threat to their economic well-being.

With the economic health of Canadians now intertwined like never before with questions of national security, the time has come for the Government of Canada to take bold steps to protect Canadians.

That is why this report calls on the Government of Canada to create a first-of-its-kind national security strategy that establishes economic security as a central pillar.

The recommendations contained in this report offer a path to help government and businesses successfully navigate this new, more turbulent world together.

The post Economic Security is National Security appeared first on Business Council of Canada.

Climate change is one of the greatest challenges of our time. Canada will not be able to achieve its ambitious climate change goals, however, unless it has a comprehensive energy transition plan. Immediate action and substantial capital investment are required to meaningfully lower emissions and invest in lower carbon energy solutions that will position the country for long-term success. Yet much of that required capital is currently sitting on the sidelines as corporations face an uncertain regulatory and policy environment which discourages investment in the energy systems that will allow Canadians to thrive in a lower-carbon future.

Canada urgently needs a coherent climate and economic policy agenda to ensure a rapid deployment of low-carbon capital and technology. Our companies and policy makers proved during the pandemic that they could react with speed and dexterity, and that effective programs could be set up quickly and adapt to changing conditions and new information. We need that drive and nimbleness now more than ever.

Canada’s role in bolstering global energy security

The war in Ukraine has put an additional spotlight on energy security, as many countries struggle to cope with a rapid run-up in energy prices and — in some cases — to keep the lights on. Our climate ambitions cannot be separated from the domestic and global need for secure sources of affordable energy. As Deputy Prime Minister Chrystia Freeland has noted, energy security is now clearly tied to national and economic security. We believe there is both an economic and moral imperative for

Canada to use our resources to help our most important allies in their time of need.
Canada can be a leader in contributing responsibly produced energy to global markets in the form of liquefied natural gas (LNG), uranium/nuclear and in time, hydrogen. This could both ease short-term energy security challenges for our allies and reduce global reliance on higher-emissions sources of power.

The federal government must clearly articulate its intention to have Canada make a significant contribution to global energy security and outline specific measures it will undertake to expedite the approval of further development of Canadian LNG, other low-carbon energy sources and related infrastructure.

Maintaining a level playing field with our largest trading partner

While governments at all levels have advanced foundational pieces to support Canada’s energy evolution, what is missing is a sense of urgency. Other countries are moving faster to attract the technologies and investments that will power the coming economic and energy transformation. With the tectonic shift that is the Inflation Reduction Act, the U.S. has signaled that climate policy is also economic security policy. And they have opted for market incentives for investment in climate solutions rather than prescriptive regulation. Without an adequate Canadian response, we risk standing by while valuable human and financial capital moves to greener pastures south of the border.

Budget 2023 must respond effectively to the competitive challenge of the U.S. Inflation Reduction Act with commensurate measures to support industries and technologies that will enable domestic decarbonization and position Canada for international success.

Policy clarity and predictability

Financial and market certainty. We have a mere seven years to reach the ambitious federal 2030 target for greenhouse gas (GHG) reductions. Without a coherent policy agenda aimed at deploying capital at speed and scale, Canada may fall short of our climate targets and miss out on the emerging net-zero economic opportunities. This could in turn weaken the country’s competitiveness and ability to create the highly skilled and well-paid jobs of the future. The policy focus should be on incenting higher levels of investment and identifying ways to improve project economics rather than developing new regulations or taxes, which add complexity and delay final investment decisions.

The federal government must:

• Create policy clarity, certainty and longer-term predictability for the industries leading the net-zero transition.
• Ensure carbon pricing policy is attuned to the competitive realities of Canada’s emissions-intensive and trade-exposed industries and build a robust market for carbon credits.
• Develop a broader suite of investment and production tax credits to incent investment in major emissions reduction projects.

Regulatory coherence. Given the scale of the net-zero challenge, we urgently need to restore Canada’s reputation as an attractive place to invest in low-carbon solutions and as a country that can get big projects built. The Prime Minister, Deputy Prime Minister and Minister of Natural Resources have all recognized the need to shorten the timelines for approval of low-emissions projects. This should include projects that are in the national interest and meet one or more of the following criteria:

• Increase Canada’s contribution to global energy security;
• Ability to substitute Canadian products for more GHG-intensive options in importing countries;
• Low-carbon fuel production (e.g. hydrogen, renewable natural gas, biofuels and uranium);
• Electricity transmission within and between provinces resulting in a net decrease in GHGs.
• Low-carbon electricity generation (e.g., renewables, nuclear, storage, pumped hydro);
• Critical mineral mining and processing facilities; and
• Projects which are Indigenous-led, have an Indigenous ownership component, or have Indigenous support based on early engagement by the proponent.

The federal government must use Budget 2023 to enhance the efficacy and efficiency of the assessment process and shorten the timelines for approval of projects that will make a demonstrably positive contribution to Canada’s climate and economic goals.
The federal government should empower the Privy Council Office with a mandate to ensure ongoing coordination amongst relevant departments and the Impact Assessment Agency in order to maximize efficiencies and quickly address barriers to completing assessments for major projects.

A supportive innovation ecosystem. Technological change is the key to addressing climate change without compromising economic growth and living standards. However, catalyzing breakthrough ideas and technologies and then transforming them into commercial opportunities requires a shift in policy focus. The federal government recently added the $15 billion Canada Growth Fund to the existing array of funding and technology progams (SIF, NZA, CIB, SDTC, etc.) as well as financial commitments associated with specfic sector strategies (critical minerals, hydrogen, SMRs, etc.). It also is creating a new innovation agency to help commercialize research and advance new economic opportunities. The sum total allocated for clean technology is signficant, but what is lacking is a coherent overall strategy.

The federal government should rationalize existing clean technology support programs, pool resources and make bigger bets on a smaller number of key innovations that have the best chance to maximize climate benefits and/or return on investment.

The government’s new innovation agency should be independent and given a mandate that parallels that of U.S. ARPA-E, i.e., bringing together the best public and private research, as well as pursuing the most promising opportunities to scale up/commercialize low-carbon technologies and products.

Empowering Indigenous economic reconciliation

Indigenous communities understandably want a larger voice regarding economic development that takes place on or near their communities and how they can share in the benefits. Canada’s business leaders recognize this, and many are building stronger relationships/partnerships to expand opportunities for Indigenous Peoples. However, barriers remain to enabling Indigenous communities to partner in development projects, most notably their access to risk capital and traditional lending.

The federal government should establish a national loan guarantee program to support Indigenous access to capital for equity partnerships in natural resource projects.

Building the electricity grid of the future

The federal government has set an ambitious goal of a net-zero electricity grid by 2035 and net zero emissions nationally by 2050. That suggests at least a doubling of current electricity capacity. In addition, it must be done in a way that maintains grid security, reliability and affordability. That can only be accomplished by recognizing provincial jurisdiction, creating incentives for grid modernization and working with electricity providers on new technologies such as hydrogen and energy storage. The required expansion of electricity capacity cannot be accomplished by public dollars alone; governments will have to encourage much greater private sector investment.

The federal government must work cooperatively with the provinces to support the build-out of grid capacity and through facilitating substantially greater private sector investment in electricity generation and transmission.

The federal government must deliver a predictable and technology-neutral set of investment tax credits to encourage the investment required to generate, transmit, and distribute, the scale of clean generation necessary to meet Canada’s climate goals.

Critical minerals

Canada has impressive reserves of several critical minerals that will power the net-zero transition. But the global race is heating up and other countries are not standing still. The federal critical minerals strategy is an important step. But it needs to transform into a truly national strategy focused on mining and processing of minerals and establishing strong linkages to North American and global supply chains.

The federal government must work with the provinces to develop a national strategy to capitalize on our world-class reserves and mining expertise and position us to be a key global provider of critical minerals. This includes a plan to develop the infrastructure to support mines and processing facilities in remote locations and a commitment to fast-track the approvals for such projects.

Low-carbon oil and gas

All credible scenarios suggest the world will need fossil fuels for several more decades. With its ESG credentials and commitments to invest in GHG-reducing technologies, the Canadian energy industry can compete to retain, and even expand, its share of that market. The proposed cap on the sector’s emissions must be designed with flexibility to ensure it actually stimulates new emissions reduction projects and does not merely curtail oil and gas production. The current uncertainty over the specific cap and the design of the policy risks delaying needed investment and puts our climate targets at risk.

The federal government must work cooperatively with the oil and gas industry to establish a downward emissions trajectory to 2030 and 2050 that is economically and technically feasible. They should also agree on a policy framework that would support the required technology investment.

Electric vehicles

Canada must solidify its position in the rapidly expanding North American electric vehicle (EV) industry and ensure an integrated continental supply chain for EVs, from critical mineral mining and processing, to battery elements and vehicle assembly and parts. Current EV policy is largely driven by a sales mandate to have 100 per cent of vehicles sold be zero-emission by 2035. But other policy drivers are urgently needed for the country to have any chance of meeting that target.

The federal government should work with the provinces to enhance purchase incentives for EVs, expand publicly funded charging infrastructure as well as create incentives for installation of home and commercial EV chargers. In light of the IRA, the federal government should review incentives and develop an overall strategy to attract domestic production of battery cells, modules and cathodes.

Introduction

Climate change is one of the greatest challenges of our time. Failure to act decisively will create significant long-term issues for our economy, our communities, and the quality of life for future generations. A coherent and effective response to the challenge can unleash significant economic opportunities that will position Canadian companies to compete in the low-carbon transition, create highly skilled and well-paid jobs and improve the prospects for reconciliation with the Indigenous Peoples of Canada.

A successful strategy to combat climate change requires a true partnership between the public and private sectors. Companies are designing their strategies to meet climate goals, encouraged by shareholders, regulators, employees and customers to demonstrate their societal responsibility and ensure their products and operations come with a lower carbon footprint. Many are ready to invest significant sums in transforming their business, but they face an uncertain policy environment and conflicting signals from all levels of government.

Estimates have put the scale of investment to achieve Canada’s net zero transition at $2 trillion, much of which will come from the private sector. In addition to companies reorienting their business plans toward a low-carbon future, immense amounts of capital are available through pension plans, financial institutions and private equity. But much of that capital is currently sitting on the sidelines, as investor uncertainty delays emissions reduction projects and blunts the incentive to develop sustainable technologies for export.

Time is not on our side – we have a mere seven years to reach the ambitious 2030 target for greenhouse gas (GHG) reductions set by the federal government. To their credit, governments at all levels have put some foundational pieces in place, but what is missing is a sense of urgency. Investors and project proponents do not have the policy clarity and longer-term predictability they need to confidently make the multi-billion-dollar investments that will be required. Other countries are quickly adopting policies to attract and deploy the technologies and investments that will power the coming economic and energy transformation. The U.S. Inflation Reduction Act is a game-changer. Without an adequate Canadian response, we risk valuable human and financial capital moving south of the border.

Our climate ambitions cannot be separated from the domestic and global need for secure sources of affordable energy. The war in Ukraine and the lingering effects of the global pandemic have put the spotlight on energy security. Countries around the world are struggling to cope with a rapid run-up in energy prices and – in some cases – to keep the lights on. This has in turn brought renewed attention to Canada’s global responsibilities. As Deputy Prime Minister Chrystia Freeland has noted, energy security is now clearly tied to national and economic security. We believe there is both an economic and a moral imperative for Canada to use its resources to help allies in their time of need.

The Business Council of Canada has long supported carbon pricing as an essential part of the climate toolbox. Likewise, we see an essential role for fair, responsive and efficient regulation to build public trust as we develop new infrastructure to support Canada’s energy transition. But the time has come to ask whether creating more and increasingly complex regulation is the right approach to further reduce emissions. An efficient regulatory system could be a competitive advantage for Canada. But it is long past time for a policy framework that is clearly set up to drive capital deployment with speed and scale.

A clean electricity grid can be a powerful competitive advantage and is key to the growth and decarbonization plans of many of our industries, including manufacturing, automobiles, steel, aluminum and critical minerals. Recent estimates suggest that Canada will require two to three times more electricity capacity to fulfill its net zero ambition by 2050.

Canada can be a leader in fueling the world with more sustainable forms of energy while also developing leading-edge climate solutions for domestic and global markets. But we face a very real risk that we will fall short of our climate targets and miss out on the economic opportunities from the net-zero transition. Canada urgently needs a coherent climate and economic policy agenda to ensure a rapid deployment of low-carbon capital and technology occurs over the next few years. Our companies and policy makers proved during the pandemic that they could react with speed and dexterity, and that effective programs could be set up quickly and adapt to changing conditions and new information. We need that drive and that nimbleness now more than ever.

As noted above, 2022 witnessed two fundamental shifts – global attention to energy security and the renewed focus by the United States on its domestic economic security – that greatly affect the choices Canada must make to navigate the clean energy transition. This paper outlines how we think Canada needs to respond to those two new drivers of change, and then outlines where urgent action is needed in a few areas that are critical to Canada’s economic, energy and climate security future.

Responding to new drivers of change

Canada’s role in bolstering global energy security

Energy price spikes and fears of rationing and blackouts have become headline news in some countries. European gas prices have eased somewhat recently, thanks in part to an extraordinary effort to obtain supply and the ramping up of LNG facilities in record time. But prices are still four to five times higher than what would normally be expected. This experience reminds us that energy systems are complex and attempts at rapid transformation can be painful when not coherently planned or in the face of unintended consequences. Indeed, they can impact climate goals, as some countries have had to resort to higher-emitting fuel sources in the short-term to prevent blackouts and/or contain public anger over spiking prices.

Canada could have been in a position to help its European allies with responsibly produced LNG. In August 2022 German Chancellor Olaf Scholz visited Canada with that request. But our failure to get government and industry alignment on building East Coast gas infrastructure meant that the Chancellor went home empty-handed. Most Canadians would agree that we have a moral obligation to help our allies. Accordingly, what is the appropriate role for Canada in strengthening global energy security and in ensuring a successful international response to the climate challenge? We believe Canada has the resources, the financial ingenuity and the human and technological capital to be a key player in the transition.

Even in a scenario where countries are aggressively pursuing decarbonization efforts and the world is on track to net zero emissions in 2050, the International Energy Agency (IEA) estimates that the world will still need fossil fuels. Their ‘Net Zero Emissions’ scenario suggests global demand of 77 million barrels of oil equivalent in 2030 and 24 million by 2050, down from about 100 million today. Natural gas demand is also likely to be strong for the next two decades as countries transition from higher-emissions sources of fuel. In addition, it plays a role as a necessary complement to renewables in electricity generation. As a world-leading sustainable producer of affordable natural gas, Canada should continue to compete for global market share. Canada already produces some of the cleanest natural gas in the world and has stringent regulations for methane. As well, major players in the oil sands have committed to net zero. They are making aggressive plans for carbon capture and are examining other decarbonization technologies, such as small modular reactors, to drastically reduce their emissions.

“The EU set a powerful example during the COVID pandemic, when European vaccine makers honoured their contracts with non-European allies. Canada must – and will – show similar generosity in fast-tracking, for example, the energy and mining projects our allies need to heat their homes and to manufacture electric vehicles.”

Hon. Chrystia Freeland, Speaking to the Brookings Institution, October 11. 2022

The investments we make today in natural gas infrastructure can become the flexible energy infrastructure of tomorrow. As countries around the world look to increasingly utilize clean-burning hydrogen, Canada is already one of the largest hydrogen producers and can capture more of this nascent market by ramping up investment in low-carbon hydrogen production and export. Our existing and emerging nuclear technologies, robust supply chains and uranium reserves also position us well to help countries develop zero-emissions electricity. And Canadian firms are eyeing significant investments in other low-carbon solutions, such as biofuels and renewable natural gas.

With aggressive investments in clean energy solutions, Canada can be a key player in the global energy transition, lowering global GHG emissions while powering new industries and resilient supply chains and creating a highly skilled work force. Our emerging clean energy advantage could also yield geopolitical influence, help create a more sustainable planet and assist the more than one billion people living without basic energy services. As other major energy suppliers – such as the United States, Australia and Norway – have demonstrated, there is no contradiction between contributing to global energy and economic security and the desire to reduce GHG emissions.

Several federal ministers have rightly pointed out that Canada needs a new strategy to ensure its economic and energy security. The concept of “friendshoring”, coined by U.S. Treasury Secretary Janet Yellen, reflects a desire to ensure supply chains, including energy and critical minerals, are more closely aligned with like-minded allies. Recent actions by Russia and China have demonstrated the wisdom of reducing reliance on autocratic countries seeking dominance in parts of the energy and materials supply chain in a way that is contrary to Canada’s interests.

Closer to home, we can work closely with the United States and Mexico to build on our diverse resource base and bolster continental energy security. Canada and the U.S. have world-leading nuclear technologies producing emissions-free baseload power and Canada has some of the lowest-emissions natural gas anywhere in the world. Together we can capitalize on growing global demand for lower carbon intensity energy and manufactured goods. Our countries can also benefit from close cooperation in developing innovative technologies – CCUS, hydrogen, biofuels, energy storage and small modular reactors.

Canada’s recently released Indo-Pacific Strategy recognizes the desire of countries in the region to obtain Canadian LNG, expand natural resource ties and mutually support the clean energy transition. Japanese and Korean government officials have made clear that their inability to source lower-emissions gas supplies threatens their domestic energy and climate objectives. And yet the Indo-Pacific Strategy says nothing about expanding Canadian energy export infrastructure to meet this growing demand. Also missing is any mention of nuclear power, notwithstanding our significant reserves of uranium, our nuclear and SMR technology and our expertise that could support Asia’s transition to cleaner electricity. Building the successful partnerships and trade relationships around Canadian LNG can strengthen Canada’s ability to export emerging low-carbon fuel sources and technologies in the future once they have evolved and matured.

Recommendation
The federal government must clearly articulate its intention to have Canada make a significant contribution to global energy security and outline specific measures it will undertake to expedite the approval of further development of Canadian LNG, other low-carbon energy sources and related infrastructure.

Maintaining a level playing field with our largest trading partner

Through the recent passage of the Bipartisan Infrastructure Act, the CHIPS and Science Act and the Inflation Reduction Act (IRA), the United States has committed more than $1 trillion (U.S.) to the creation of a “modern industrial strategy”. They have clearly signaled an intention to focus on manufacturing, clean tech, advanced computing, infrastructure and related workforce skills, all aimed at bolstering American competitiveness and countering China’s attempts to dominate certain critical market segments. They also are looking to work proactively with democratic allies in “friendshoring” critical supply chains. This is an important opportunity for Canada, but our privileged position in the continental market does not guarantee success if we are slow to act or fail to recognize the competitive implications of U.S. domestic economic realignment. And it is not just investment capital that may shift. The talent and technology that we need to prosper in the low-carbon economy could be drawn southward as well.

With the tectonic shift that is the IRA, the U.S. has clearly chosen the path of market incentives for investment in climate solutions rather than prescriptive regulation. Given the unlikely prospect of a meaningful national carbon price anytime soon in the United States, Canadian policy must be sensitive to the competitiveness implications for our most energy-intensive and trade-exposed industries. Business leaders continue to support a national carbon price in Canada, but we are price takers in the global market and Canadian firms must be competitive to be able to invest in low-carbon solutions.

We were pleased to see in the Fall Economic Statement (FES) that the federal government will consult with industry on the relevant portions of the IRA and how they could affect the competitive position of Canadian industry sectors. U.S. industry is already moving to take advantage of the IRA. For most sectors the IRA rules are simple and clear, offer more financially attractive incentives and over a longer period, than what is being planned or currently available in Canada.

One area of Canadian strength is hydrogen. The FES offers an investment tax credit of at least 40 per cent for the least carbon-intensive form of hydrogen production, compared to 30 per cent in the U.S. But the IRA also includes a production tax credit of up to $3 per kilogram for green hydrogen.

Both countries also have incentives for CCUS. Canada is proposing an investment tax credit of 50 per cent, beginning in 2023, but which is cut in half after 2030. The U.S. created a production tax credit for CCUS several years ago and the IRA increased it to $85 per tonne of carbon sequestered ($180 for direct air capture) and extended eligibility to 12 years.

Canada’s announced incentives and some of the investment tax credits lack the detail necessary for companies to make informed, long-term investment decisions. As well, several of the incentives disappear entirely or are sharply reduced post-2030, which will curtail investment since many of the biggest projects will take until 2030 to complete engineering and secure regulatory approval. We would not argue that Canada should attempt to match every aspect of the IRA. Rather, the strategy must focus on industries and technologies needed to meet Canada’s climate goals and — where Canada has obvious advantages abroad — ensure comparable incentives to maintain or strengthen that advantage. Given that most of the IRA incentives took effect January 1, 2023, it is critical that a targeted and effective Canadian response to the IRA be fully laid out in the 2023 federal budget.

Recommendation
Budget 2023 must respond effectively to the competitive challenge of the U.S. Inflation Reduction Act with commensurate measures to support industries and technologies that will enable domestic decarbonization and position Canada for international success.

A call for urgent action

Providing policy predictability for business

A. Financial and market certainty

The federal government’s goal of significantly reducing GHG emissions by 2030 and net zero emissions by 2050 will require a radical transformation in the way Canadians produce, transport, and consume energy. Research completed by the Royal Bank of Canada estimates that the total investment needed for Canada to transition to a net-zero future is $2 trillion. Budget 2022 estimates that between $125 and $140 billion of investment per year in green innovation and technologies will be required between now and 2050. However, current levels hover between $15 B to $25 B per year.

To its credit, the federal government has developed several important programs designed to incent higher levels of investment in Canada. The Strategic Innovation Fund’s Net Zero Accelerator, investment tax credits for CCUS, hydrogen and clean technologies, and a more pointed role for the Canada Infrastructure Bank are examples of federal efforts to accelerate such spending. While these programs are helpful, Canadian firms and investors need long-term policy predictability to support investments in emission reduction projects, which are typically capital intensive and involve payback periods that can span decades. Policy clarity also is critical to companies if they hope to maintain their global competitiveness in the low-carbon transition.

Canada’s carbon pricing regulation provides guidance up to 2030, but firms and investors require certainty over a much longer timeframe. Business leaders continue to support a national approach to pricing carbon emissions. However, complexity and uncertainty increase when new supply-side policies are introduced for specific industries. Of particular note are the Clean Fuel Regulation and forthcoming regulations designed to reduce emissions in the electricity and oil and gas sectors. Canadian firms and investors must wait and see how these requirements interact and influence their ability to attract capital. The net effect is to delay final investment decisions at a time when large-scale investments are urgently needed for Canada.

The government can also improve investment certainty by ensuring that its policies are aligned across multiple departments and portfolios. For example, Canada’s Greenbonds Framework excluded nuclear technology yet federal investments are flowing towards SMR projects in Canada. Further, differing eligibility requirements for investment tax credits and government grants create an unlevel playing field across technologies. The government can ensure the most efficient use of capital by creating a level playing field and allowing the most competitive solutions to emerge. The work currently being led by the federally appointed Sustainable Finance Action Council should focus on unlocking higher levels of investment in sustainably-produced energy of all kinds, including natural gas production and infrastructure.

To avoid carbon leakage, Canada’s carbon pricing regime must recognize that many other countries with which Canada competes in resource-intensive materials do not have correspondingly stringent GHG regulation, nor commitments to establish or enhance pricing mechanisms to close the gap. Additionally, the cost curves for Canadian low-carbon resource products, such as steel, cement, aluminum, uranium, and potash, remain high even as the carbon intensities of these products are world-leading. To date, it is unclear whether the market will pay a premium for low-emitting products.

Canada’s business leaders are committed to helping the government achieve its emissions reductions goals for 2030 and 2050 and are poised to invest billions over the coming decades. These investments require a deeper level of collaboration between the federal government and the private sector to improve investor confidence and scale up Canada’s most promising clean growth opportunities.

Our view is that policy makers need to urgently turn their attention to the following items:

Create fiscal instruments that support capital investment and operating expenditures in low carbon technologies of strategic significance to Canada

Recent decisions to create investment tax credits (ITCs) for clean energy and technology projects are positive and should be extended to a range of promising emission-reduction technologies. However, the design of the ITCs is narrowly focused on incenting upfront capital investments and not operating expenditures. A shift to creating revenue streams and supporting operational expenditures would improve project economics and maintain the competitiveness of Canadian firms. As well, credits currently focus predominantly on technology type, with some technologies being excluded (e.g., large-scale hydro power). An expansion in scope – taking an “all tools on the table” approach to decarbonization technologies – is needed to for Canada to achieve clean-economy and emissions-abatement objectives.

Through the Canada Growth Fund, the government is proposing a range of investment instruments to reduce both the risk created by carbon price uncertainty as well as costs for emerging clean technology projects. While details are lacking at this time, our view is that additional investment instruments will be necessary to incent investments in nascent low-emissions technologies which are high cost but have the potential to significantly lower greenhouse gas emissions. These instruments should be used to improve the ability of Canadian firms to compete in a global low-carbon economy.

Production tax credits are also important fiscal tools that can generate predictable revenues for major projects over a predetermined time frame. These tax credits are a cornerstone of U.S. climate policy but have yet to be explored in Canada. Doing so could help Canada level the playing field with the U.S. and improve the conditions for Canadian and foreign firms to invest in Canada. Used strategically, production tax credits can help firms make the investments necessary to reach climate goals as well as grow their market share in areas where Canada has comparative advantages: clean hydrogen production, carbon sequestration, critical minerals, manufacturing, and heavy industrial processes.

The Business Council agrees with the IEA that the transition to a low-carbon economy will require the use of all energy sources to be successful. Strong fiscal policies are required to develop and support technologies that are of strategic significance to Canada, using a technology-agnostic approach.

Ramp up Canada’s carbon credit market capacity

Canadian policy needs to evolve quickly from producing carbon credits to creating markets for credits. Without a robust market for both the demand and supply of credits, governments may be forced to increase stringency for emissions-intensive, trade-exposed sectors to maintain market balance. This can rapidly erode trade protection for key industries and reduce Canadian competitiveness. Companies with ambitious GHG reduction obligations require access to credible and reasonably priced domestic offsets as well as to the international emissions credit market.

Canada’s carbon credit market is still in its infancy and has been slow to mature. The federal government should move swiftly to develop protocols for generating offset credits for investments that reduce emissions produced by industrial processes in Canada. Federal and provincial governments can work together to assess the capacity and competitiveness of their respective offset systems and explore innovative ways to increase the pool of eligible credits for purchase by companies in Canada. The federal government also should work with allies internationally to ensure Article 6 of the Paris Agreement is implemented to secure a robust global trading system in carbon credits and that such system is transparent, economically efficient and environmentally credible.

Develop sectoral roadmaps and capital plans

As noted, Canada maintains several important programs and incentives to support clean growth opportunities. However, they are largely based on one-off applications by firms which can take months to be reviewed and approved by government officials. More fundamentally there is little evidence to suggest that they work within a coherent strategy designed to unlock the country’s most promising emissions reductions opportunities. Part of the solution is broad-based, technology-neutral support through ITCs and PTCs that allow companies to calibrate the level and duration of corresponding government investment.

A useful illustration of sector strategies is the recent “Roadmap to Net-Zero Carbon Concrete by 2050” signed by the federal government and the Cement Association of Canada. It will combine a focus on R&D, government support for major decarbonization projects, standards and skills development, as well as market development for Canadian low-carbon cement and concrete internationally.

Our view is consistent with the recommendations put forward by the Expert Panel on Sustainable Finance and numerous think tanks committed to ensuring a responsible transition in Canada. The country’s decarbonization efforts can be fast-tracked by developing sectoral roadmaps and policy instruments that support capital investment at critical junctures in the roadmaps. Such strategies could assess major economic and emissions-reduction opportunities, including a realistic timeline for significant decarbonization of the specific sector and competitive realities in global markets. They could serve to identify where business and government can co-invest in clean growth opportunities. They can be used to build a supportive policy environment for new market opportunities for clean technologies such as offshore wind. They can also be used to assess the potential for decarbonizing supply chains through new technologies and the low-carbon movement of goods.

B. Regulatory coherence

We sense a growing consensus amongst leaders in business, public policy and the environmental community that Canada’s regulatory approval processes have become unduly long and cumbersome. Federally appointed bodies, such as the Barton Growth Council, the Economic Strategy Tables and the External Advisory Committee on Regulatory Competitiveness, have repeatedly referred to the benefits of ensuring that our regulatory system is stringent, predictable, flexible and efficient. Regulatory “business-as-usual” means that many positive decarbonization efforts will take far too long to get built. This will compromise the country’s ability to meet the ambitious 2030 GHG reduction goal and realize the economic opportunities associated with clean energy and innovative decarbonization technologies.

Prime Minister Justin Trudeau, Deputy Prime Minister Chrystia Freeland and Natural Resources Minister Jonathan Wilkinson have all committed to shortening approval times for resource development and infrastructure projects. There is a case for fast-tracking projects that are in the national interest and meet one or more of the following criteria:

1. contribution to global energy security;
2. ability to substitute Canadian products for more GHG-intensive options in importing countries;
3. low-carbon fuel production (e.g., hydrogen, renewable natural gas, biofuels and uranium);
4. electricity transmission within and between provinces that would lead to a net decrease in GHGs;
5. development of low-carbon electricity (e.g., renewables, nuclear, battery storage, pumped hydro);
6. critical mineral mining and processing facilities;
7. projects which are Indigenous-led, have an Indigenous ownership component, or have Indigenous support based on early engagement by the proponent.

The FES announced further resources for the Impact Assessment Agency (the Agency) and other federal departments with oversight responsibilities. That is positive but inadequate. The government should use Budget 2023 to establish a comprehensive plan to improve the efficacy of the assessment process and shorten the timelines for approval of demonstrably beneficial projects. Given the multi-billion-dollar scale of the net-zero challenge, we need to restore investor confidence in the attractiveness of Canada as a place to invest in low-carbon solutions and as a country that can get big projects built.

To be clear, we are not arguing for a wholesale repudiation of the Impact Assessment Act (IAA). We recognize that major development projects need to undergo a rigorous assessment process which minimizes the potential for deleterious effects. And it must include robust engagement with Indigenous communities and consideration of the project’s impact on their rights and interests. But the time has come to find creative solutions to maximize efficiency. Pending the possibility of more fundamental reform, there are several practical steps that should be taken immediately to improve predictability, timeliness and efficiency:

• Delivery on the commitment by the federal and provincial governments to the principle of “one project, one assessment” is still lacking. A formal cooperation agreement or MoU is needed between the federal government and each province setting out how the two levels of government will work together, including alignment on Indigenous engagement. Such an agreement could lead to the federal government recognizing the provincial agency as the lead on the environmental assessment of specific projects (substitution).
• The federal government should specify that the Minister’s power to designate a project under the IAA would only be exercised in exceptional circumstances and clarify the criteria governing that decision.
• A strategic assessment could be undertaken for specific types of projects that could be replicated – e.g., a particular SMR design – to eliminate the need for an entirely new environmental assessment each time a similar project is proposed. Ontario’s class environmental assessment provides a model for consideration.
• Development of Indigenous consultation guidelines that clearly articulate the respective responsibilities of the project proponent and each level of government; how UNDRIP is to be applied and how key obligations such as free, prior and informed consent are met; illustrating best practices in Indigenous consultation; addressing capacity issues for communities to effectively participate in the process; as well as guidance on the scope of consultation efforts for directly affected communities versus those less so.
• Within the planning phase of impact assessments, ensure tailored guidelines are designed for each project that allow efforts to focus on key potential impacts and create clear Indigenous engagement and partnership plans.
• Consideration of expedited regulatory approval processes for brownfield sites and sites served by existing infrastructure.
• Strengthened governance mechanisms to improve coordination amongst high-ranking officials across federal departments and agencies and with provincial and territorial governments.

Undoubtedly, some other countries with which Canada competes for investment also suffer from cumbersome approval processes. All the more reason for Canada to act now. Success in developing a clear, efficient and predictable regulatory process for energy transition projects could be a new and significant competitive advantage for Canada.

Recommendations
The federal government must use Budget 2023 to enhance the efficiency of the assessment process and shorten the timelines for approval of projects that will make a demonstrably positive contribution to Canada’s climate and economic goals.

There should be a dedicated office within the Privy Council Office with the mandate that was envisioned for the former Major Projects Management Office. That is, to ensure ongoing coordination amongst senior officials in relevant departments and the Agency aimed at maximizing efficiency and quickly addressing any barriers to timely completion of major project assessments.

For major projects which involve federal and provincial jurisdiction, a “Clerk-to-Clerk Table” should be established between the Clerk of the Privy Council and the Executive Council of a province or territory to instill disciplined coordination on regulatory decision-making for specific projects.

C. Building a supportive innovation ecosystem

Accelerating the pace of technology and innovation will be critical to meeting Canada’s net-zero objectives. However, pursuing clean technology projects comes with many challenging headwinds. Opportunities are typically capital intensive and relatively high risk, while adopting clean technologies may create environmental premiums for products that customers are unwilling to pay. Governments have an important role to play in de-risking private investment.

Research recently published by the Canadian Climate Institute estimates that “safe bet” technologies such as electric vehicles and energy-efficient equipment can contribute at least one-third of the reductions required to meet Canada’s net zero target. “Wild card” technologies–high-risk but potentially high-reward solutions that are in early stages of development– will need to make up the rest.

Canada has a robust research ecosystem. However, we do relatively little industrial research and we rank poorly relative to most OECD countries on spending and scaling up innovative technologies and companies. As a percentage of GDP, Canada’s combined public and private expenditures on research and development have been declining since 2001. The United States currently invests 2.9 per cent of its GDP in research and development while Canada invests just 1.57 per cent, below the OECD average. If Canada is serious about reaching its emissions targets, a dramatic increase in investments in R&D will be required.

The arms-length science model Canada adopted after the Second World War does not provide an adequate framework for today’s economic paradigm. Under this model, it was assumed the transfer of public research to private firms would be automatic. Today, we know that funding foundational research is not a sufficient precursor to better innovation outcomes or enhanced productivity. The translation of scientific knowledge generated in universities to productivity-enhancing industrial progress has proved to be more difficult than expected.

Governments and policymakers around the world have recognized that technological change is the key to addressing climate change without compromising economic growth and living standards. We believe that Canada has significant potential to be an exporter of innovative, sustainable products and services. However, catalyzing breakthrough ideas and technologies and then bridging them across the innovation process to commercialization requires a shift in policy focus and a more intentional approach. It’s too simple to equate R&D with innovation. From R&D to development through production, application and diffusion, the road to innovation is long and hard. A modern industrial policy requires a new institutional infrastructure to support the application of science and technology in highly competitive and advanced industries, and an approach focused on mandated missions.

The federal government recently added the $15 billion Canada Growth Fund to the existing array of funding and technology portals, from institutional (EDC, BDC, CIB, SDTC) to stand-alone funds (SIF, NZA) as well as financial commitments associated with specfic sector strategies (critical minerals, hydrogen, SMRs, clean fuels, renewable electricity, etc.) The sum total of funds allocated for clean technology is signficant, but lacks overall direction. And the various mechanisms reflect a scattershot approach rather than a well-considered and coherent overall strategy. As well, many companies find them confusing and slow to access, with objectives and criteria that are not clearly stated. Plus, questions remain even as to which fund is appropriate for any particular project, and whether specific large projects might be able to access more than one funding mechanism.

The 2022 FES also saw the government commit $1 billion over five years to establish a new innovation and investment agency to help firms turn their research into commercial opportunities. Few details are available concerning its mandate, areas of focus or its ability to work in concert with the numerous government programs already in place. But a new agency whose mission is to provide subsidies across various sectors of the economy will fall short of creating the public-private partnerships that can facilitate the radical innovation required to reduce emissions in the decades ahead.

Our view is that the U.S. DARPA and ARPA-E models continue to be best-in-class and have the most consistent track record of radical invention over the past several decades. They present a compelling alternative for Canada to consider given their ability to bring together world-class experts from industry and academia to create clear missions aimed at solving problems such as climate change. Critical to their success is the ability to operate independently and outside of government.

Recommendations
The federal government should rationalize existing clean technology support programs, pool resources and make bigger bets on a smaller number of key innovations that have the best chance to maximize climate benefits and/or return on investment.

The government’s proposed new innovation agency should be independent and given a mandate that closely mirrors that of ARPA-E in the United States, i.e., a forum to bring together the best public and private research and pursue the most promising opportunities to scale up/commercialize low-carbon technologies and products.

The federal government should work with the private sector to dramatically increase Canada’s investments in research and development. The key is to strengthen the connections between publicly funded research and the Canadian companies that can commercialize those ideas.

Empowering Indigenous economic reconciliation

Indigenous communities increasingly are benefiting from resource and infrastructure development through employment and skills training, fostering Indigenous-owned businesses and support for community development. Successful partnerships have been built when the community has a voice in how development is undertaken and how they can share in the benefits. As they have noted, the country’s path to net zero goes straight through Indigenous communities. Canada’s business leaders recognize this reality, and many are building stronger relationships to ensure cleaner energy projects also create expanded opportunities for Indigenous Peoples.

There is a need to increase capacity within communities to allow adequate assessment of project benefits and risks, to determine what kind of partnership is best for the community in question and the role it will have in ensuring Indigenous rights and traditions are respected.

Many Indigenous communities would prefer to have an ownership stake in projects on their traditional territories. But they often lack the resources to make such a significant investment and face barriers to accessing sufficient capital due to lack of collateral or lack of a financial track record that satisfies traditional lenders. Also, as non-taxable entities, Indigenous communities cannot access investment tax credits for CCUS and those recently announced in the Fall Economic Statement. Overcoming barriers to accessing capital is key for improving Indigenous participation in clean energy projects. Interesting new approaches are emerging – the Alberta Indigenous Opportunities Corp. recently provided low-interest financing that was instrumental in allowing a number of First Nations to secure an equity interest in several Enbridge pipelines. We suggest there is a need for a more focused strategy nationally to enhance Indigenous access to capital.

A key challenge is that Indigenous communities often do not have the security to offer to traditional lending institutions. A federal loan guarantee program for Indigenous financing should free up more private funding, especially through Canada’s major financial institutions. It’s worth noting that the Prime Minister’s December 2021 mandate letter to his natural resources minister tasked him with developing a National Benefits Sharing Framework. A loan guarantee program and business capacity funding could be housed within such a framework to fast-track these policy advancements. As noted elsewhere in this paper, we believe there is a compelling case for expediting approval processes for Indigenous-led energy projects. In turn, this should make financing more readily available to Indigenous communities.

Recommendation
The federal government should establish a loan guarantee program to support Indigenous access to competitive capital for equity partnerships in natural resource projects. It should also make available funding for Indigenous groups to engage in commercial due diligence and business capacity building necessary to support successful partnerships with the private sector.

Building the clean electricity grid of the future

The federal government has an ambitious goal of a net-zero electricity grid by 2035. But the current focus on the Clean Electricity Regulation is insufficient and does not provide the basis for a national conversation about how best to expand electricity supply. Delaying this discussion could erode Canada’s longstanding ability to provide its resource and manufacturing industries with access to clean and competitively-priced electricity. As well, an overly prescriptive approach may lead to unintended consequences related to resource adequacy, grid reliability and affordability.

As S&P Global notes through its credit rating process, regulatory independence is one of the key attributes that underpins the credit quality of the utility industry. Political intervention in independent regulatory processes undermines investor confidence, leads to credit downgrades and creates higher costs for borrowers and ultimately consumers. As Canada seeks to grow and green its electricity grid, it is paramount that its regulatory systems remain independent and can act judiciously and in ways that build and balance public confidence.

The U.S. and other competitors are moving quickly to decarbonize their energy infrastructure in the wake of the energy crisis triggered by Russia’s war in Ukraine. For example, the Inflation Reduction Act earmarks $100 million US for a process to bring together state governments, regulators, utilities, generators, transmission developers and civil society to further develop a national transmission grid – one that is built on renewable energy and other clean power technologies, such as nuclear energy.

The Pan-Canadian Grid Council and the Regional Energy and Resource Tables are promising ideas, but the federal government needs to recognize the primary responsibility of the provinces, work cooperatively with them to accelerate investment in low-carbon solutions and help build out grid capacity quickly. That starts with an agreed vision of the electricity grid of the future and a common understanding of the best options in each region, inclusive of costs and potential implications to consumers. That vision is critical to ensuring timely investment in clean electricity generation and transmission.

A key consideration is ensuring reliability and affordability through the transition, to maintain consumer support and business competitiveness. A grid that is twice as big by 2050 will require major upgrades as more Canadians aim to electrify their homes, vehicles and businesses. Longstanding industrial processes powered by coal and natural gas are poised to be powered by clean electricity, while promising new technologies related to hydrogen also will drive up demand. A recent study by the Trottier Institute found that central and eastern Canada are looking at a significant electricity shortfall to meet the carbon neutrality objectives for 2035 and 2050.

Growing the grid of the future will require an “all hands-on deck” approach. Substantial investments in clean energy generation sources such as renewables, traditional and advanced nuclear (e.g., small modular reactors) and hydrogen should be encouraged, particularly as price points for wind and solar continue to fall. But natural gas must continue to play an important role in meeting the electricity demands of Canadians. Used strategically, and as the industry ramps up the use of new abatement technologies, it can supplement intermittent renewables, deal with high-demand scenarios and ensure reliability and cost-competitiveness in regions without large-scale hydro or nuclear. Canada should also rapidly develop and deploy new energy storage technologies to support grid reliability, just as the US has done through the Inflation Reduction Act and strategic initiatives such as Li-Bridge.

Such a significant expansion of electricity capacity cannot be accomplished by public investment alone. There is a large pool of capital in pension funds and private equity that is looking for the stable returns that rate-regulated electricity can provide. But only Alberta, and to a lesser extent Ontario, have a competitive marketplace for electricity supply.

The federal and provincial governments should begin an immediate discussion about market liberalization and the necessary conditions for higher levels of private investment in electricity.

Increasing the supply of affordable electricity will also require policy makers to identify new ways to extend the life of existing assets through refurbishments, retrofits and the re-powering of clean energy facilities. Incentives such as tax credits should be developed to drive investment towards existing assets and new electricity generation opportunities.

The Atlantic Loop is a proposed regional clean energy transmission project that, in the near term, will help displace coal-fired generation in Nova Scotia and New Brunswick. In the longer-term, it can expand Canada’s stock of clean energy by supporting the deployment of additional onshore and new offshore wind, green hydrogen for domestic and export markets, and broader electrification of the economy.

The federal government has given the Canada Infrastructure Bank an expanded role in stimulating electricity investment, but the results have been slow to materialize. Ensuring that electricity is a higher priority for the Bank should be central to federal efforts to support regional development opportunities.

Recommendations
The federal government’s ambitious goal of a net-zero electricity grid can only be accomplished by recognizing provincial jurisdiction, working cooperatively with the provinces to support the build-out of grid capacity and through facilitating substantially greater private sector investment in electricity generation and transmission.

To reduce cost to consumers, the federal government should deliver a predictable and technology-neutral set of investment tax credits that encourage investment in the new technologies that can generate, transmit, and distribute, the scale of clean generation required to meet Canada’s climate goals.

The federal government should use its funding instruments and leverage its convening power to help ensure that regional transmission projects such as the Atlantic Loop can be developed in a timely and cost-effective manner.

Focusing on Canada’s comparative strengths

Canada has exceptional potential to respond to global energy security challenges and accelerate its ability to achieve net zero by 2050. There is an immediate need to develop industrial policies in three critical areas where we can grow the country’s economic capacity and reduce global emissions. These should include broad engagement with the private sector and stakeholders to establish clear goals related to capturing market share. Industrial policies also can be a vehicle to discuss issues critical for success, such as skills and training, infrastructure, and supply-push and/or demand-pull policy tools.

Critical minerals

The transition to a clean energy economy is projected to increase the global demand for critical minerals by 400 to 600 percent by 2050, with the demands for EV and battery materials projected to account for nearly half of this increase. Canadian mineral and manufactured metal products are among the lowest carbon intensity in the world and are poised to play a growing role as essential inputs in low-carbon technologies such as wind turbines, solar panels, small modular reactors and batteries. However, much of Canada’s potential remains untapped. Many other countries have access to these resources, and some are moving expeditiously to seize relevant opportunities. Long-term supply deals are being negotiated today.

There are challenges to reaching Canada’s full potential to be a supplier of the minerals required to support the energy transition here and abroad. These include yet-to-be built infrastructure to access mineral deposits and transport them to market, weak linkages to clean and affordable electricity, and insufficient battery-grade manufacturing capacity. Further, Canada’s rare-earth supply chain is even more nascent than our battery supply chain. And Indigenous participation is paramount.

In December, the federal government made a major step with the country’s first critical mineral strategy, securing several important fiscal policies for the sector. Next steps should include ensuring that it becomes a truly national strategy by working with the provinces and Indigenous nations to carve out Canada’s most promising opportunities, including mining and processing of critical minerals and establishing strong linkages to North American and global supply chains. In the lead-up to Budget 2023, careful attention should be given to what complementary tax policies and measures are needed to achieve the same outcome in the critical minerals space as is being achieved in the downstream electric vehicle supply chain. After all, climate success and security of supply for the downstream OEMs is contingent on expanding upstream extraction and metal manufacturing production.

The federal strategy focuses on developing six minerals (lithium, graphite, nickel, cobalt, copper and rare earths) where Canada has a clear edge and that are essential to seizing emerging economic opportunities, while also strengthening Canada’s ability to be a global supplier of uranium, potash and aluminum. The federal government should move quickly to work with relevant governments, Indigenous communities and the private sector to develop an action plan that signals to the global market that Canada wants to be a supplier of choice for critical minerals. That includes clarifying the process, timelines and engagement requirements for critical mineral projects in Canada.

Recommendations
The federal and provincial governments and Indigenous leaders should work together to develop a national action plan to capitalize on our world-class reserves and mining expertise and position Canada to be a key global provider of critical minerals. This should include a plan to develop the infrastructure to support mines and processing facilities in remote locations and a commitment to fast-track the approvals process for such projects.

The federal government also should champion further development of world-class existing uranium assets and seek to enable nuclear energy deployment across Canada and globally. This could both support long-term energy security in developed and developing countries and contribute to reducing global GHG emissions.

Low-carbon oil and gas

All credible scenarios offer a portrait of a world which will still need fossil fuels for several decades, although debate continues as to when and how quickly demand may lessen. There is a strong case for Canadian oil and natural gas retaining, and even expanding, its share of the global market, regardless of how demand evolves over time. Canadian energy can compete on the basis of its ESG credentials, regulatory standards, community and Indigenous engagement and high labour standards. Nonetheless, current GHG emissions are a challenge that the industry is committed to addressing.

Oil sands make up by far the biggest portion of Canada’s oil production (and GHG emissions) and major players in the sector have committed to net zero. The end goal is not up for debate, but rather the trajectory of declining emissions — how quickly can emissions be reduced and at what cost to jobs, investment and the economy? As noted elsewhere in this paper, the current policy environment is neither sufficiently clear nor predictable to incent the scale of investment needed to put sector emissions on the necessary downward trend, short of curtailing production.

The government is currently consulting on two options to put an overall cap on GHG emissions from oil and gas. One would impose a unique cap-and-trade system on the sector. The other option would impose a higher carbon price than applies to other parts of the economy, set at a level that would prompt energy firms to implement sufficient emissions reduction effort to meet the cap. To the extent that either option makes Canadian energy uncompetitive in the North American or global markets, the ultimate effect could be a loss in market share and/or curtailment of production. That is not a desirable outcome, given the contribution that the industry makes to Canada’s economy, job creation and government revenues. Moreover, it is inconsistent with a key pillar of the Carbon Pricing Leadership Coalition championed by the federal government – carbon pricing should be broadly applied in the economy and treat all sources of emissions equally.

Whichever of the two options is chosen, achieving the required legislative amendments and developing the detailed regulations is likely to take another two years. This would compound the uncertainty facing the energy sector and delay much-needed investments in emissions-reduction technologies. A better approach would be to work with the industry on defining a downward emissions trajectory that is economically and technically feasible. It would also require an enhanced policy framework that would add certainty and incent early investment in the most promising GHG reduction technologies, including CCUS, new extraction methods and electrification of operations. The approach would have to be flexible to allow for the fact that some large GHG reduction projects, such as CCUS, will take several years to be approved and built and accordingly, the emissions decline rate will not be linear from current levels. A true public-private partnership is necessary and would provide a superior outcome to an overly prescriptive regulatory approach untethered from economic and technological realities.

Recommendation
The federal government should work cooperatively with the oil and gas industry on laying out a downward emissions trajectory for the sector to 2030 and 2050 that is economically and technically feasible. They should also agree on a policy framework that would incent the scale of investment in technology necessary to meet that trajectory.

Electric vehicles

Canada can build on its long-established position in the North American vehicle industry to create a larger footprint in the zero-emissions vehicle space and the related battery supply chain. The U.S. Inflation Reduction Act gives a competitive advantage to North American sourced and assembled vehicles, as well as for critical minerals and battery components. Canada must be all-in to take advantage of this growing opportunity, ensuring Canadian value-added at each stage of the electric vehicle (EV) supply chain.

Canada’s EV policy is currently driven by a 100 per cent zero-emissions vehicle sales target for 2035. Our view is that the country needs a coherent mines-to-wheels strategy that embraces all elements of the EV supply chain – critical minerals mining and processing; sourcing of battery components; auto parts and vehicle assembly; recycling – as well as the clean electricity infrastructure to power each element.

In terms of EV market penetration, Canada lags the performance of several other countries, notably in Europe. Nonetheless, sales volumes in the past year reflect a noticeable increase in Canadians’ appetite for EVs. But it is concerning that Canada is falling behind in putting the pieces in place that will support widespread adoption of these vehicles. The annual EV readiness index, developed by global accounting firm EY, shows Canada in 13th place out of 14 countries measured, down from 8th place last year.

The policy focus should be less on sales mandates, which are beyond the capacity of the vehicle industry to guarantee. Instead, we need an overall strategy that ensures Canadians will have a choice of affordable ZEVs that can be delivered in a timely and efficient manner. Not surprisingly, EV sales in Canada are highest in the two provinces, Quebec and British Columbia, which have provincial purchase incentives on top of the $5,000 rebate offered by the federal government.

Conclusion

Canada is uniquely positioned to achieve its climate goals for 2030 and 2050 while also expanding its supply of cleaner energy sources and innovative technologies that can help the world solve today’s energy security challenges and tomorrow’s net-zero transition needs. But urgent action is needed.

It will require a true partnership amongst various levels of government, the private sector and Indigenous leaders and a laser focus on the country’s most impactful opportunities. It undoubtedly will mean vastly larger public and private investment and a coherent policy framework that will encourage sustained levels of investment over the coming decades. And it will require an industrial strategy that pushes Canada’s innovation capabilities and allows it to compete with other countries also seeking to secure national advantage in the coming clean energy transition.

This paper has laid out what we think are the essential elements for Canada to innovate, compete and win.

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In 2020, the Government of Canada dramatically increased spending in an effort to protect Canadians from the worst economic effects of the COVID-19 pandemic. Important as these measures were at the time, this expansionary fiscal policy resulted in a massive deficit of $328 billion in fiscal year (FY) 2020-21 and a net debt/GDP ratio that ballooned to 52% – the highest level this century and dramatically higher than the roughly 35% ratio achieved on average since the Great Financial Crisis of 2008. According to the 2022 Fall Economic Statement (FES), the federal government debt is projected to reach $1.177 trillion on March 31^st 2023 (Table A1.5, FES), from $685.5 billion three years earlier (Table 1, Debt Management Report 2018-19).

When preparing budgets, the government must consider fiscal sustainability and debt servicing. In this context, the government’s current fiscal plan may not tell the full story of the country’s financial path.

The importance of fiscal anchors

Fiscal anchors serve as notional ceilings or caps to the levels of public spending, deficits, and debt that governments are prepared to reach in their fiscal policy. They serve many purposes including: 

• Retaining the confidence of lenders and global markets (i.e., credit access at favourable rates); 
• Establishing a positive investment climate for businesses; 
• Providing a measure of fiscal discipline inside government;
• Ensuring that the government can respond to future economic shocks and unforeseen crises. 

The Debt-to-GDP anchor versus the Interest Cost-to-Revenue anchor

Two different ratios – net debt/GDP and interest cost/revenue – provide useful indicators of the future economic and political sustainability of a government’s access to capital markets and hence the sustainability of its public finances.

There is no precise number for either of these ratios above which the government’s public finances become unsustainable and access to capital markets problematic. A common assumption about deficits is that as long as interest rates (i.e. bond rates on rollover debt) stay lower than GDP growth, the debt-to-GDP ratio won’t get out of control and overall debt will continue to be manageable. The problem, of course, is that when interest rates rise, debt servicing costs become significantly more expensive to finance.

An interest cost/revenue ratio above 10% and a federal debt/GDP ratio that is not declining steadily from close to the 50% where it currently stands signal risks of unsustainability. At the same time, to be useful, these indicators must be calculated on a forward-looking basis grounded on realistic assumptions. If we’ve learned anything from the past few years, it’s that the future is unpredictable and fiscal plans must consider the uncertain evolution of changing economic and geopolitical circumstances.

The purpose of this paper

The paper “Assessing the Potential Risks to the Sustainability of the Government of Canada’s Current Fiscal Plan” explores the way two fiscal anchors – the debt/GDP ratio and the interest cost/revenue ratio – are likely to evolve from now until 2032-33.  Using five plausible economic scenarios the paper assesses the implications of these two anchors as a guide to sustainable fiscal policy actions.

The analysis begins with a base scenario which incorporates the spending and tax policies as well as the economic assumptions set out in the federal government’s 2022 Fall Economic Statement (FES 2022).

The paper then examines the evolution of the two fiscal ratios under four alternative scenarios:

1. Increased spending relative to the base scenario from 2024 onwards;
2. A full-blown recession in 2023;
3. Lower supply resulting in permanently higher interest rates;
4. A combination of these three scenarios: a recession in 2023 with lower supply in the medium term and increased spending all the way through.

The risks to the federal government’s current fiscal and economic assumptions

As the different scenarios suggest, there are three main risks to the current fiscal and economic assumptions of the federal government:

1. A risk that the government’s current planned spending assumptions, on a per capita basis, are being underestimated to deliver the policy goals it has set out. The authors estimate that to maintain real program spending per capita at the 2023-24 level until 2027-28, $60 billion of additional program spending relative to FES 2022 would need to be added to the fiscal framework;
2. A risk that it will not be possible to get the inflation rate down to 2% by the end of 2024 without higher policy interest rates in 2023 and hence a deeper recession that year,
3. A risk that supply constraints become a permanent feature of the global and Canadian economies, implying higher interest rates on an ongoing basis.

The authors observe that not one of these three risks to the base scenario is likely to occur alone without one or both of the other risks also emerging.

Debt/GDP versus Interest Cost/Revenue under five federal budget scenarios

The implications

The analysis suggests there is a significant risk that both the debt ratio and the interest cost ratios exceed comfortable levels over the remainder of this decade, both because economic conditions will turn out to be more difficult than assumed in the FES 2022 and because the spending budgeted will turn out to be insufficient to achieve the policy goals promised. In all four alternative scenarios the authors put forward in this paper, the 10% interest cost/revenue anchor gets reached over the next decade.

All things being equal, the more the government takes from its revenues to finance its debt, the less it has to finance crucial services and social programs for Canadians, or transfers to provinces for programs such as health care and education.

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During the inaugural meeting of the Canada-Mexico High-Level Economic Dialogue
(HLED), Mexico’s Secretary of the Economy, Canada’s Minister of International Trade, Export Promotion, Small Business and Economic Development, and Canada’s Minister of Innovation, Science, and Industry asked the BCC and the CMN to produce a joint study which contained actionable recommendations identifying priority sectors for pilot programming and potential partnerships.

The CMN and BCC welcomed the request and, to that end, respectfully submit this report for further consideration at the next meeting of the Canada-Mexico HLED. In summary, the Mexican and Canadian business communities believe it is time for far greater focus on strengthening the bilateral economic relationship between our two countries. Moreover, business leaders believe there is significant unrealized potential and sizable economic opportunities that we can pursue.

In that spirit, and as this report was being prepared, the CMN and BCC have launched a Canada-Mexico Business Summit – an annual forum designed and dedicated to increasing bilateral trade and investment. The Summit will convene business leaders from both countries, serving as the private sector counterpart to the government-to government HLED. The first meeting of the Canada-Mexico Business Summit will take place in Mexico at a date to be determined in Q1 2023.

CUSMA has further demonstrated the importance and potential of the Canada-Mexico bilateral economic partnership – it’s a potential which is yet to be fully seized.

The Canada-Mexico trading relationship

A generation ago, the North American Free Trade Agreement (NAFTA) catalyzed Canada-Mexico trade. Between 1994 and the onset of the COVID-19 pandemic, total Canadian imports from Mexico grew nearly 10-fold from $3.7 billion to $36.9 billion.¹ NAFTA not only provided preferential market access through the reduction or elimination of tariffs it also reduced barriers and uncertainty for businesses seeking to enter our respective markets. It was a solid foundation.

Today, NAFTA’s successor, the Canada-United States-Mexico Agreement (CUSMA) builds on that solid foundation by strengthening continental competitiveness and ensuring a high level of predictability for businesses and investors in all three countries. In the first two years since coming into force, CUSMA has further demonstrated the importance and potential of the Canada-Mexico bilateral economic partnership – it’s a potential which is yet to be fully seized.²

As is clear from the chart below, bilateral trade between Canada and Mexico has consistently trended upwards save for two intervening events, the 2008-2009 global recession and the 2020 global pandemic. The resilience and robustness of the economic partnership is evidenced by the fact that trade rebounded quickly and significantly in the years since those two events. This proves that the strength of the underlying fundamentals of the economic partnership are strong.

Figure 1: Mexico-Canada Trade 1993-2021 ($ million u.s.)

Given the highly integrated nature of the North American continental economy, we must consider our common neighbour, the United States. The U.S. is the number one trading partner for both Canada and Mexico, accounting for more than 75% of each countries’ international trade. Not only is the current trading relationship between Canada and Mexico underdeveloped in comparison to their respective trade with the United States it also lacks the same diversity.

Canada-Mexico trade is largely dominated by the automotive sector, which accounts for 35% of all Canadian imports from Mexico ($12 billion annually). Canada’s exports to Mexico are somewhat more diversified, spanning agri-food, motor vehicles, and consumer goods, but the total value is significantly lower than the value of Mexico’s exports to Canada. Fortunately, there are significant complementarities between the two economies which are ready to be seized.

More specifically, Mexico has a far higher working age population with more than 38.8 million citizens aged 20-40 – which is greater than the entire population of Canada. Mexican workers have proven invaluable to the Canadian economy as skilled immigrants, temporary foreign workers, and seasonal agricultural workers. Where Canada is currently dealing with a growing labour shortage, increased cross border workforce mobility could have an immediate impact.

Canada, in turn, has considerable expertise in areas where there is growing Mexican demand including aerospace, financial services, green technology, and energy infrastructure. To cite one example, it was recently announced that TC Energy would build a $4.5 billion Southeast Gateway Pipeline – a vital energy infrastructure project to transport natural gas. Further investments in export-enabling infrastructure are desperately needed in both our countries.

Moreover, the Mexican and Canadian governments have rightly prioritized efforts to ensure greater participation in our integrated continental economy from women, Indigenous peoples, and other underrepresented groups. For bilateral economic growth to be inclusive, sustainable, equitable, and diverse, it is essential that our respective public and private sectors identify innovative and imaginative ways to harness and leverage the full potential of all our peoples.

Recommendations

Recommendation 1: Promote bilateral investment in priority sectors 

Mexico and Canada should promote and prioritize bilateral trade and investment in key innovation sectors including agri-tech, clean-tech, med-tech, and advanced manufacturing, including through government-led trade missions. In addition, investment in trade-enabling infrastructure – energy export infrastructure, expanded seaport capacity, and modernized land border crossings for road and rail – would improve supply chain resilience, facilitate increased nearshoring, and strengthen commercial ties between our two countries and higher competitiveness for our shared continent. An agreement among securities regulators and exchanges could also help companies access capital markets in each country.

Recommendation 2: Streamline cross-border workforce mobility 

Canada and Mexico should work together to expedite the approval of temporary work permits and ensure the recognition of workforce credentials/certifications in priority sectors by relevant professional and regulatory bodies. Streamlined workforce mobility between Mexico and Canada would increase continental competitiveness as well as strengthen bilateral economic ties. Among the priority sectors experiencing urgent need for skilled labour, and identified in Canada’s expanded Temporary Foreign Worker Program, are agriculture, health care, forestry, construction, hospitality, fisheries, as well as mining.

Recommendation 3: Develop a joint strategy to bolster the competitiveness of our manufacturing sectors

A joint strategy would focus on identifying shared Mexican and Canadian interests relating to trade and investment policies, with a special emphasis on manufacturing and innovation that support the green energy transition. A key objective of this work will be to ensure that such policies strengthen North American competitiveness. The strategy could be a permanent workstream of the Canada-Mexico High-Level Economic Dialogue.

Recommendation 4: Prioritize greater engagement between Mexican states and Canadian provinces 

The Canada-Mexico bilateral relationship is almost always discussed as being between two entities. Given that significant economic development activity falls within the jurisdiction of Mexico’s 32 states and Canada’s 10 provinces and 3 territories, efforts should be made to promote greater engagement between and among those governments. One such effort could be to establish an annual conference modeled on the SEUS-CP (Alliance of Southeastern US States and Eastern Canadian Provinces) gathering which brings together U.S. states and Canadian provinces to identify trade and investment opportunities at the sub-federal level.

Recommendation 5: Increase collaboration between the public and private sectors to safeguard integrated infrastructure from cyber attacks and other threats 

Mexico and Canada must work together to enhance the resilience of our integrated supply chain, transportation, and energy infrastructure in the face of increasing and evolving cyber attacks and other threats. Increased information and intelligence sharing between governments with businesses would better protect critical infrastructure from those who want to disrupt or disable key cross-border networks. Canada and Mexico could also consider creating a High-Level Security Dialogue to complement our newly established bilateral High-Level Economic Dialogue (HLED).

Recommendation 6: Explore the establishment of a bilateral virtual centre of excellence for women and minority-led businesses 

Both Canada and Mexico are committed to expanding opportunities for women, minority and Indigenous entrepreneurs and business leaders. A bilateral virtual Centre of Excellence could provide information to underrepresented groups on such things as market development and export/import regulations and supply-chain management. It could also offer training on accessing investment capital, developing supplier diversity programs, and securing government assistance. Potential models for such an initiative include UPS Canada’s Women Exporters Program and CMN’s Mexican Center for Competitiveness. Like those two programs, the Centre of Excellence could perform a valuable service by facilitating business-to-business networking and mentoring opportunities.

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