The Essential Policy Trifecta: Security policy, Economic Policy and Innovation Policy

Par Laurent Carbonneau

If there’s one idea that I’d like more Canadians to be thinking about in the context of public policy and government it’s this: Economic policy is national security policy.

In an increasingly volatile and aggressive geopolitical context, Canada will never be able to secure our interests through raw military muscle. And the last few years have demonstrated quite vividly how vulnerable we are to supply chain shocks and shifting economic dynamics.

The best way to secure our geopolitical interests and ensure our national security is to have a strong and thriving economy that competes and play an important role in global value chains.

Economic policy is national security policy.

And now let’s add another element to this equation: Innovation policy is key to successful economic outcomes in the 21st century.

What’s more, in an economy dominated by intangible assets like data and intellectual property, and in a world dominated by strategically important superstar firms in advanced industries, innovation policy and industrial policy overlap almost completely.

This idea is at the core of a recent policy brief we submitted to the federal government on Canada’s future economic security. National security policy is economic policy, and smart innovation policy is the key to making this happen.

Beyond patent filings and profit shares, another way in which the world has changed is that it’s not as friendly and easygoing a place as it was after the end of the Cold War. The U.S., China and the EuropeanUnion have all realized that the world isn’t as flat as it looked a generation ago, and that there are real costs to letting someone else make all of your stuff – and that consequently, you have to play to win in important areas to protect your sovereignty.

Part of this is getting smart about IP and intangible assets in ways we’ve talked about on the Mooseworks blog in the past. But it also means looking at important building blocks of global commerce like global value chains and figuring out where Canada fits into them. Additionally, it means making use of concepts like economic complexity to chart out our actual industrial capabilities and reverse the alarming decline in our capacity to make things that we’ve seen over the last generation.

At the end of the day, economic security is closely tied to our standard of living. Poor countries accept erosions of sovereignty like IMF packages or foreign-built port infrastructure because they have to, but these things reduce their freedom to act in their citizens’ interests. Canada must realize that innovation policy, industrial policy and security policy are now basically indistinguishable and work to build the winners we need if we’re to remain a relevant economy and country in a new era of geopolitical tension and an innovation-driven global economy.

In our landmark policy report, Building Winners, we took a close look at shipbuilding. In 2006, China embarked on an ambitious campaign to boost its domestic shipbuilding industry – both to support naval expansion and contribute to China’s international trade  – through subsidies for new firms and for ship production as well as investment. This support totalled about $110 billion over 8 years.

Subsidies to help firms enter the market made up about 60% of this, which from the view of the traditional economic playbook looks strange. But this focus on increasing overall capacity meant that the industry eventually consolidated around its proven winners, and the end result was that China went from a 5% share of global shipbuilding at the turn of the century to 50% today. China now has the world’s biggest navy – and that’s not too surprising, because spending a lot of money on building ships usually (but not always) is a good way to make the number of ships you have go up. But producer rents and profits for Chinese shipbuilders are also rising.

This has real strategic implications for other players. The EU once had a globally competitive shipbuilding industry itself that has gradually declined. Now, they’re facing a tough situation. They don’t have the capacity or infrastructure to respond to global demand for over 900 new container ships. If they try to, they’ll undermine their environmental commitments to use their capacity to recycle older ships.

And as they try to navigate this changing landscape, there’s of course the security dimension of being reliant on a rival power for something as important as commercial shipping capacity. Security vulnerabilities don’t stop at the water’s edge – Chinese-built port cranes in the US and Canada were found earlier this year to have unexplained communications equipment built in.

The EU has a job on its hands trying to reconcile multiple conflicting goals for how to use their existing shipbuilding capacity. They also have a tough road ahead in trying to get their shipping firms to buy European ships instead of cheaper Chinese ones. China made a choice to play to win. They did not see commercial returns to their strategic play early on. But now, they enjoy a pretty commanding economic and strategic position and got to create a real headache for their competitors while they were at it. The Canadian and U.S. governments are also now similarly reacting to Chinese EV leadership – subsidies were important there too for getting through the learning curve, but the reality is that the Chinese product is now genuinely very good.

Playing to win in big global industries is all well and good if you’re China, the EU bloc or the U.S. Realistically, Canada can’t expect to have total, top-to-bottom dominance. What we can do is grow competitive Canadian firms that own critical and complex pieces of global value chains that can’t be easily replicated. I had some things to say about this recently in the Globe and Mail, alongside my Building Winners co-author Dan Ciuriak.

Creating this kind of technological and policy “moat” could elevate Canada to a position where we, like Nokia, Ericsson, and Samsung have done for Finland, Sweden, and South Korea, become desirable allies and trade partners. We should be deeply considering how to position Canada strategically in emerging platform technologies—like AI and quantum computing—that will have a foundational impact on the future global economy.

To hear more about these ideas, watch the video of CCI’s launch event for Building Winners: Strategic Procurement in the Age of Innovation.

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