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Are billions of dollars in subsidies the new normal for EV production in Canada?

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Ottawa is committed to bringing EV battery producers to Canada. The federal government demonstrated it will spend billions per project to make that happen when it was revealed Volkswagen will receive a $13 billion subsidy from the federal government to set up an electric vehicle (EV) battery plant in St. Thomas, Ontario. 

Stellantis, another EV producer setting up operations in Canada, has threatened to leave the country if it does not receive a similar subsidy. Many economists have slammed the decision as an ineffective waste of taxpayer money, while industry advocates and researchers have praised it. 

However, amidst a rapidly electrifying automotive industry in North America, subsidies for EV producers may have already become the norm in Canada. 

“The federal government has set a benchmark because they’ve been clear, really since the day that the IRA was tabled. They have said that Canada will compete with the U.S.,” says Brian Kingston regarding the $13 billion subsidy. 

Kingston, the Canadian Vehicle Manufacturers’ Association’s (CVMA) President and Chief Executive Officer, says EV battery manufacturers will be expecting a similar subsidy in order to set up new operations in Canada going forward. He says the subsidies are necessary due to the Inflation Reduction Act being passed in the United States, which committed $370 billion to combat climate change. 

The IRA included heavy subsidies for EV battery production, to the tune of $7,500 USD in tax credits per new EV purchased.

“I’d say there are choices the investors have, the carmakers have, the battery manufacturers have,” says Dr. K. Venkatesh Prasad, Senior Vice President of Research and Chief Innovation Officer at the Ann Arbor, Michigan-based Center for Automotive Research (CAR). “It’s less of a competition and more of a pretty rich set of choices.” 

On May 12, the Toronto Star reported that the multinational auto manufacturer Stellantis, which began a $5 billion retooling of its auto-manufacturing plant in Windsor in 2022 to make EV batteries, was planning to halt the project. 

Stellantis has demanded more subsidies from the Ontario and federal governments to continue construction of the Windsor battery plant. Last Friday, Ontario Premier Doug Ford announced the province would pay for part of the demanded new subsidy for Stellantis, while Ottawa announced it was close to a new deal with Stellantis. 

“The government has given billions and billions of dollars in subsidies to Volkswagen and it seems surprised that other automakers want the same treatment,” says Gabriel Giguère, a Public Policy Analyst at the Montreal Economic Institute. 

Having received just $1 billion in provincial and federal subsidies for the Windsor plant, Stellantis stated it was unfair for Volkswagen’s EV battery plant to receive $13 billion. 

“I don’t think it’s reasonable, I think it’s understandable, but at the end of the day, it’s taxpayers’ money,” says Giguère regarding Stellantis’s demands for more subsidies. 

Volkswagen’s plant in St. Thomas is expected to create up to 3000 direct jobs when it opens in 2027, while Stellantis’s Windsor plant promised to create up to 2500 jobs

Giguère says that the Volkswagen plant is more likely to replace existing jobs in Canada’s tight labour market rather than create net new ones. He points out the $13 billion subsidy comes out to roughly $4.3 million per direct job at the future Volkswagen plant. 

Elsewhere in the world, Stellantis has demanded that the British government exempt it from tariffs to keep operating its factories in the United Kingdom. 

Volkswagen cited Ontario’s automotive manufacturing history and proximity to the necessary materials for EV production, as well as the $13 billion subsidy as reasons for locating the factory in St. Thomas. Similarly, an EV tire plant in Bridgewater, Nova Scotia was made possible with over $100 million in subsidies and tax credits from the provincial and federal governments.

“I think you’re seeing a lot of scale here, and so with that, you’re going to see a number of different regional options emerging,” says Prasad. 

Prasad says Ontario’s advantage in attracting EV manufacturing is that it contains all the necessary components within a single provincial jurisdiction, whereas American automotive production is spread across different states.

Kingston says Canada has typically possessed 10 percent of all North American automotive production, and that Ontario is one of the few jurisdictions in the world with five global Original Equipment Manufacturers (OEM).

“When you combine all that together and then add in the wildcard which is critical minerals, it does make a compelling case to put this investment in Canada,” says Kingston. “Again, though, if we’re not on par with the U.S., the Inflation Reduction Act is a giant investment vacuum and it will pull more of the supply chain into the U.S.”

Prasad says EV manufacturers will decide about where to locate their projects based on a region’s existing ecosystem, such as Ontario with its longstanding, highly-developed automotive industry. 

“I think you’ll see these choices being made not just because of a specific component or subsystem, but because the ecosystem around that includes things like logistics and delivery and upstream materials and subsidies,” says Prasad.

Giguère says making Canada a more friendly place to attract investment is a better alternative to heavy subsidies to compete with the U.S. 

“The goal of the government should be to attract private investment by establishing a competitive tax environment to help develop the economy of the country,” says Giguère. “Whether the jobs are in the auto manufacturing sector or elsewhere, well-paying jobs are needed for Canadians.“

A report from the C.D. Howe Institute last August concluded that Canada has uncompetitive corporate income taxes and an uncertain regulatory environment. Canada has also lagged as an attractive destination for foreign investors, with foreign direct investment declining from roughly a quarter to just 8.5 percent of foreign direct investment into the US between 2005 and 2017. 

Kingston says both easing the regulatory and tax environments of Canada, as well as subsidies, are necessary to build an EV battery supply chain in Canada. He commends the Ontario government, which included $780 million worth of corporate income tax credits in its 2023 budget announcement, for its efforts to reduce the cost of doing business in the province. 

Prasad says one fact that is often missing in criticisms of the subsidies is that private firms are very capable of taking calculated risks but are less effective at working with uncertainty. 

“They don’t know when something is going to happen, what that tipping point is going to be, and so some of those things can really be alleviated when there’s a public sector investment or a governmental investment,” says Prasad.

Amidst a swirling tide of new ideas, Canada’s economic institutions remain bastions of orthodoxy

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The fifteen years since the global financial crisis have been marked by economic, geopolitical, and domestic political turmoil. The rise of new ideas and political voices has disrupted long-standing orthodoxies about markets, free trade, and globalization across advanced economies. Donald Trump’s erratic and unpredictable political ascendancy is only one example.

Canada has been touched by some of these developments. The People’s Party of Canada is arguably an expression of some of these global trends. Even the Trudeau government’s pursuit of so-called “industrial policy” is broadly reflective of new and emerging intellectual movements.

Yet there’s a case that the core institutions of Canadian economic policymaking—namely, the Bank of Canada and the Department of Finance Canada—have been mostly resistant to the tides of new ideas and remain bastions of the old orthodoxy.

“I’m sure we could find some individuals in the BoC [Bank of Canada], and some individuals at Finance, who differed from the mainstream, they might have been more extreme in one direction or the other, but I think almost by definition, most of the people there hold mainstream views,” says Christopher Ragan, founding Director of McGill University’s Max Bell School of Public Policy, previously served in advisory roles at both Finance and the Bank of Canada.

The one big exception was the extraordinary fiscal and monetary policy during the pandemic. To finance its COVID relief programs during the pandemic, the federal government sold over $307 billion in bonds to the Bank of Canada in a process called quantitative easing (QE) as part of large-scale fiscal and monetary stimulus.

Yet as novel and large as these policies were, they were driven mostly by the pandemic’s exceptional circumstances rather than new ideological commitments such as Modern Monetary Theory (MMT).

MMT has received a boost of popularity in certain intellectual circles as many activists and thinkers, especially progressive ones, began exploring the possibility of the federal government’s large-scale spending becoming permanent. It theorizes that a sovereign government issuing its own currency can always afford to spend regardless of tax revenue. It argues that so long as a government controls the national currency, it can create as much money as needed to fund new programs and raise taxes as needed to reduce inflation.

Ragan doubts that anyone in Finance or the Bank of Canada is taking MMT seriously, notwithstanding the large-scale deficits and debt accumulation during the pandemic.

“My own take is that MMT is basically a prescription for eliminating the central bank’s independence and subsuming the central bank actions more or less into the Finance authority,” says Ragan. “I would be very surprised that very many people thought that was a good idea in the BoC.” 

Although the Bank of Canada is a nominally independent Crown corporation, Ragan says there is communication between branches of Finance and the central bank, which he encountered during his stint at Finance in 2009. 

Current bank governor Tiff Macklem, as well as Finance Minister Chrystia Freeland, have both poured cold water on the possibility of MMT guiding Canada’s fiscal policy, even though both arguably helped to generate interest in the idea by implementing QE.

With an inflationary spell induced in large by Ottawa’s emergency stimulus programs, resulting in the loonie trading at a two-year low against the U.S. dollar last September, MMT’s run of popularity has slowed considerably. The annual rate of inflation hit 8.1 percent in 2022, before dropping to 4.3 percent in March.

Adding to Canada’s current run of inflation have been persistent supply chain issues due to the slowdown of industry and shipping during pandemic lockdowns. Russia’s invasion of Ukraine in February 2022 added to the world’s supply chain woes. 

Having previously relied on Russian oil and gas, most EU member states began curbing their uses of Russian energy imports in response to the invasion, while economic powerhouses like the United States and Japan imposed severe economic sanctions on Russia. 

In this context, there’s been growing discussion among G7 countries, including Canada, about “reshoring”—bringing industry home—and “friendshoring”—aligning industry with politically-aligned partners, away from authoritarian states like Russia and China. 

Long a favoured source of cheap manufactured imports, China has become an unpopular trade partner for Canada due to Beijing’s increasingly aggressive foreign policy choices. These actions included taking Canadian citizens hostage, alleged electoral interference in Canadian elections, and intimidating Chinese Canadians and their families. 

Calls to cut trade with China have grown louder. Yet former Bank of Canada governor Stephen Poloz says Canada must proceed with caution on this front, and that Canadians cannot maintain their high standard of living without healthy trade relationships. 

“We can’t be cutting off imports from somewhere and expecting them still to buy our exports,” said Poloz in an interview with The Hub. “We should be leading proponents of liberalized trade, and if we’re going to go with friend-shoring for strategic reasons…there are an awful lot of low-cost places that can be our friends in the trade system.” 

Poloz said that Canada stands to benefit further from its close economic and geographical ties with the U.S., as well as Mexico, but that should not mean Canada has to double down on North American trade as part of its friendshoring effort. 

Additionally, Poloz said that while China was always going to become more expensive to conduct business with due to its growing economic strength, nearby countries can provide alternatives, specifically mentioning some that are not considered full democracies. 

“Vietnam, Thailand, Philippines—these are places where you can do exactly what we’ve been doing in China for the last 10 or 15 years,” said Poloz. “We can do it now for the past that we did in China 15 years ago. So it’s a natural process, and we should not be standing in the way of it or trying to turn it into politics.” 

In 2021, imports from the three countries mentioned by Poloz were worth roughly $16 billion, compared to the $86 billion worth of goods imported from China that same year. Canada imported over $100 billion worth of goods from China in 2022, setting a new record.

Ragan says it is also only natural for countries to reorient their trade in the wake of supply chain disruptions, whether it be due to war or political unpredictability. He says that even if Canada may pay a slightly higher cost for a more stable supply chain, he compares it to paying for an insurance policy. 

“I don’t think there’s anything very startling or very new in the concept of friendshoring,” says Ragan. “I would say you want to think carefully about it because you don’t want to throw away the benefits of globalization…it’s not an argument, in my view, for collapsing your supply chains just to North America plus Western Europe.”