An Expensive Folly or Foray: Canada’s EV Battery Infant Industry
On September 28 2023, Swedish battery manufacturer Northvolt announced plans for a new electric vehicle (EV) battery factory in the outskirts of Montreal. Valued at $7 billion CAD, it is projected to create 3000 new jobs and 30 GWh of battery power annually.
However, the real news is the eye-watering amount in subsidies promised to ensure that Northvolt chose Canada. To match the subsidies available in the United States through its Inflation Reduction Act, the federal and Quebec provincial governments together pledged to pony up $2.7 billion towards the construction of the facility, which is expected to be completed by late 2026. The facility would also be eligible for an additional $4.6 billion in government incentives.
These generous new subsidies are part of a general return to industrial policy in the West to protect existing industries, and particularly in the Canadian context, to nurture an “infant” EV industry. Employing industrial policies such as subsidies and tariffs to foster newly emerging domestic industries is known as the “infant industry” argument.
Even Canada industrialized following these guidelines, under Prime Minister John A. Macdonald, the “National Policy” prescribed high tariffs on imported manufactured goods and active federal intervention in the infrastructure sector. Industries affected by the National Policy saw faster growth in output and productivity as well as greater returns to scale and faster learning rates.
However, the infant industry argument, and industrial policy fell out of favour after 1945. While some nations continued to try and protect their domestic industries, most moved in lockstep with the idea that freer trade would result in a world of comparative advantages that would make everyone better off. With the rise of neoliberalism in the 1980s and the resulting Washington Consensus, massive free trade agreements like NAFTA in 1994 became the new norm and trade protectionism retreated.
So why are the currents of industrial policy reversing now?
The promised gains from global trade never materialized for everyone. Offshoring relatively low-value manufacturing to countries like China massacred blue-collar manufacturing jobs in the West. Once a part of thriving and bustling cities, they now formed rust belts seething with contempt for the globalized world order. The return of populism in the Western world can be directly linked to the loss of manufacturing capacity in those countries and has forced governments to respond.
The return of great power rivalry between America and China added a national security element to the calculus of offshoring. Under the leadership of President Xi, China has taken a nationalist turn, and is bent on taking what it sees as its place in the sun. Canada’s access to crucial goods such as semiconductors, EV batteries, and processed rare-earth minerals are now threatened by any potential conflict between the superpowers, especially given its geopolitical importance as a close American ally and rising tensions with China. Similar sentiments in the US led to a trade war and the passage of industrial policy bills such as the CHIPS Act which the Economist has dubbed “homeland economics.”
This vulnerability was further highlighted by the war in Ukraine. With the Western world reeling from high inflation, caused by the breakdown of supply chains during the COVID pandemic, the embargo of oil from Russia and the loss of grain exports from Ukraine pushed inflation to its highest level in decades, while threatening food security across vast swathes of the world.
The increasing urgency of the climate crisis has also brought scrutiny on the world’s dependence on fossil fuels. Many governments have started taking the lead in organizing a green transition as the private sector alone cannot price in the social cost of carbon (at least the governments that believe in man-made climate change). Much of the shift away from free trade has been due to the implementation of green industrial policy by governments.
Given the general trend back towards the usage of industrial policy, is Canada’s investment into an infant EV battery industry a wise move? As the United States, our biggest trading partner, is trying to disengage its supply chain from China and simultaneously move towards more green solutions, perhaps it makes sense for Canada to use its position as a centre of auto manufacturing to capture parts of the emerging EV market. However, the price tag of this one EV battery factory at $2.7 billion seems excessive, especially when it is projected to create only 3,000 jobs and likely comes at the expense of other investments and a cost-of-living crisis that is sweeping the nation.
The basic economic concept of comparative advantage cannot be staved off by simply throwing money at it with Brazil offering us a cautionary tale. In the 1980s, its military government placed strong restrictions on the import of personal computers and granted generous subsidies to protect their own young computing industry. In the end, while the quality of Brazilian-made computers was equivalent to those produced in the US, they were priced much higher, making them uncompetitive in the global market. It is possible that our own foray into EV battery manufacturing will meet a similar end.
Another point of concern is that a Swedish company is receiving taxpayer money, which means most of the profits from this largely Canadian funded venture will be funnelled into Sweden. While Canadian jobs will be created, perhaps it would have been a wiser investment supporting a Canadian business instead. That way both the fruits of capital and labour would both remain in Canada. If we are to build an infant industry, we should at least be supporting Canadian businesses, not Swedish ones
Whatever the long-term effects of this new factory are, it is obvious that the era of industrial policy has arrived in Canada. A perfect storm of national security concerns and the ever-impending climate crisis will for the near future override any proponents of the old order of free trade and comparative advantage.
Canada should take this opportunity to instead utilize industrial policy to cultivate Canadian infant industries, not Swedish ones. The government should redirect its subsidies away from industries that require a costly competition with American subsidies and instead to sectors where we are currently weak but ready to take advantage of relatively cheaply. Those are the infant industries we should be nurturing.