This article originally appeared in the Ottawa Sun.
By Jerome Gessaroli, May 11, 2023
In late 2022, Finance Minister Chrystia Freeland gave a series of speeches stating that Canada needs a “real muscular industrial policy” or a “robust industrial strategy”. Her muscular industrial policy vision became evident with the announcement last month that the federal government will give Volkswagen a $13.2–billion subsidy to build a factory in St. Thomas, Ont., that will produce batteries for electric vehicles.
The government’s justification for the largest single subsidy in Canadian history is not just the facility’s 3,000 jobs transferred from, say, Michigan to Ontario, but also the economic spinoff opportunities it will generate elsewhere. No doubt a large part of those spinoff opportunities will besupplying the factory with the critical minerals, such as cobalt, lithium, and nickel used for producing batteries.
There are two major problems justifying spending $13–billion in government revenues on this plant. One is the Canada-United States-Mexico Agreement (CUSMA), which allows for the free trade of goods and services, including minerals, between Canada and the United States. Having a factory based in Michigan or even Alabama would not change the fact that Canada could still supply a factory south of the border. Canada and the United States already have a high level of integration in their auto sectors. The United States also sees Canada as important in securing a safe supply of critical minerals, and recently signed a “joint action plan on critical minerals”.
The United States military has also offered to fund Canadian mining projects. The Pentagon sees Canada as a partner is reducing American dependence on other foreign sources of raw materials that are considered strategic to U.S. security.
Based on the above points, the evidence strongly suggests it is unlikely that locating the battery plant in Canada or the United States would make a significant difference to supplying the plant with Canadian mined and processed minerals.
The second problem is not the battery plant’s location, but the current regulatory system in Canada, which is impeding any new mining projectsfrom being developed. The government’s 2019 revisions to the federal Impact Assessment Act are seen to have worsened this regulatory uncertainty.
In 2020 Teck Resources, Canada’s largest diversified mining company, put forward a new project that would sustain coal production at an existing operation. While this type of project is normally reviewed by provincial regulators, the federal Environment Minister used his authority to force a federal review as well. Pierre Gratton, President of the Mining Association of Canada, stated that the federal government “…has just injected a huge amount of uncertainty into the system”.
A Canadian mining project takes between 12 to 15 years from exploration to production. Even Natural Resources Minister Jonathan Wilkinson realizes this timeline needs to be shortened by reducing regulatory burden.A study by the Canada West Foundation found that, of 24 projects undergoing the federal government’s impact assessment process since 2019, not one has been completed. None has even moved past phase twoof the four–phase process.
The federal government recently announced several hundred million dollars in financing and incentives to the minerals sector, including a more attractive flow-through tax credit to help secure private capital, as part of their critical minerals strategy, but throwing more money around does not address the regulatory obstacles that are stopping new developments.
When we consider the massive federal subsidy for VW’s battery factory, one can point to the 3,000 workers the plant will employ. The London-St Thomas region is vibrant, boasting an unemployment rate of 4.8%, which is lower than Toronto’s rate of 5.3%. According to the Conference Board of Canada’s three-year forecast, the London-St. Thomas unemployment rate is expected to remain below the Canadian average, Ontario’s provincial average, and that of Toronto. This region has not been experiencing any economic crisis or decline, so there is little apparent cause for the government to pay Volkswagen billions of dollars to locate there.
It is likely that the federal government has made a $13.2 billion error with taxpayers’ money. Because the benefits of using this money for other purposes cannot be observed, we won’t directly feel the consequences of this specific mistake.
However, if Canadians had kept the $13.2 billion which is rightfully theirs, it could have prevented many Canadians from being burdened with debt to pay for college education, allowed them to have a more comfortable retirement, purchase their first home, or simply meet their daily expenses.
Jerome Gessaroli is a senior fellow at the Macdonald-Laurier Institute, and leads “The Sound Economic Policy Project” at the British Columbia Institute of Technology.