A potential $700 million grant by Ontario to Chrysler sparked a debate about government and business, but it’s only the tip of the iceberg.
Government should not be
Canada was founded on industrial policy—subsidies to the CPR and a tariff barrier against cheap American goods. Over time, this mutated into a branch-plant economy. Today, the branch-plant economy is all but dead.
Industries that were once thought to be in the national interest—railways, airlines, oil production, petrochemicals—have been privatized, some quite successfully.
As for the made-in-Canada substitutes, the blast furnaces in Hamilton have closed—just as they have in Pittsburgh and Sheffield and Dortmund. Canada can no more defy global competition than Canute the tides of the English Channel.
Chrysler has withdrawn its $700 million request to finance a $3.6 billion refurbishment of its Brampton and Windsor plants. The day it did, tech giant Cisco systems picked Toronto as one of its four global R&D hubs, with a promised $100-million investment. This after Ontario promised $220 million in grants for a larger, longer-term $4 billion investment by Cisco.
Chrysler or Cisco, the nationalist chorus goes, if industry can’t or won’t invest, then government must lead the way.
But wasn’t this the thinking behind labour-sponsored venture capital funds, most of which are now in liquidation? Did any investors benefit? Were any jobs created? Who benefited from the tax breaks?
Yes, some subsidies may save some well-paying jobs, but at what cost? Ottawa is promoting the Keystone Pipeline to get bitumen out of Canada and to Gulf Coast refineries already used to processing heavy crude from Venezuela and Mexico. Why not leave it to markets to decide?
Government’s job is to compensate for market failures, not indemnify them at the expense of taxpayers.
Good government means business
Canada is well-launched into a competition for the bottom when it comes to wages and industrial might. Other countries face the same pressures, but have maintained their industrial standing. Thus, the share of GDP held by manufacturing in the German economy is 20%. In Japan and Korea, it is 17%. In Canada, manufacturing accounts for 10%.
Why would Canada give up its gold-medal ranking for industry, but not for hockey?
Free trade and the “Dutch disease” have hollowed out Canadian manufacturing. Industries relocated to low-wage Southern states and then to Mexico in the aftermath of the FTA and NAFTA. The oil sands boom pushed the Canadian dollar to overvalued levels, which encouraged further disinvestment.
Canada needs policies, including grants, to support good jobs that match our skill-set—we are one of the most highly educated countries in the world. When the private sector baulks, government must take the lead. It did in the Second World War, establishing Canada’s petrochemical industry with Polysar. The CN we know today is the result of a government bailout. Public grants to universities contributed to the discovery of insulin.
Business is focused on quarterly results. That’s no way to run a railroad. Prosperity depends on long-term payoffs, not short-term profits. That’s why we protect dairy and egg producers.
If we don’t support our key industries, we’ll lose them, because every other country does, from the U.S. to Europe to Asia, from agriculture to aerospace, even the financial sector.