The international economic order that brought decades of global investment certainty and trade stability is starting to splinter.
The International Monetary Fund refers to this phenomenon as geoeconomic fragmentation. In a course reversal from the free-wheeling liberalism of the 1990s and early 2000s, policy-makers around the world are sensing the dangers posed by unpredictable external economic flows. There is a growing recognition that not all trade is beneficial, and that not all investments are welcome – especially those emanating from non-market economies such as the People’s Republic of China or Russia that distort the rules.
Canada’s failure to engage with economic security as a core national interest leaves a piecemeal approach unfit for the new era and out of step with its closest allies and partners.
The government’s siloed policy in this area has left Canadian businesses and corporations in the lurch. As the Business Council of Canada pointed out in its 2023 economic security report, “our decades’ long neglect of economic security has made us vulnerable.” Faced with unfair competition from state-owned enterprises, harmful industrial subsidies, currency manipulation and economic interference from abroad, the private sector wants a federal champion.
A Canadian strategy should address these concerns. Supply-chain disruptions, physical and cyber protection for critical infrastructure, technology leaks, exports with both civilian and military applications, sensitive information and research, and the weaponization of trade policy are all topics for consideration.
However, Canada’s leadership is reluctant to frame overarching strategic issues using the vocabulary of national security. It has been nearly two decades since the last national security strategy was published in 2004.
At the same time, Canada has a long tradition of industrial policy initiatives and official thinking on “security of supply” issues. Though other countries often paint economic security as a subset of national security, Canadian policy-makers seem more comfortable embracing economic security on its own terms and under its own conceptual logic.
The Canadian government should produce a dedicated economic security strategy by autumn 2024. This strategy should introduce a Canadian definition of economic security while integrating disparate, pre-existing ideas under one label. It should include deep consultation with industry and research institutions and reflect best practices.
The strategy should also incorporate both defensive and proactive components of economic security. One protects the vitality of Canada’s domestic economy amid interconnected systems, while the other uses the country’s economic resources to shape international affairs.
Canada faces an array of economic security challenges
Canada’s handling of economic security issues has been haphazard despite lofty promises from officials to forge a “new economic path that the world’s democracies can chart together.” Ottawa should be viewing economic security as a whole. Instead, the response has been ad hoc.
The Canadian Critical Minerals Strategy, the National Strategy for Critical Infrastructure, Canada’s Indo-Pacific Strategy and the National Security Guidelines for Research Partnerships recognize economic security challenges. Likewise, the passage of Bill C-34 could modernize the Investment Canada Act to manage threats arising from foreign investments. However, these initiatives are housed across departments – meaning slow application and a shortage of solutions at the whole-of-government level.
Co-ordination failures between government departments and a lack of foresight have left Canadians economically reliant on autocratic regimes. Across 367 categories of goods for which Canada is dependent on China, 83 of those categories service critical infrastructure required for heating and power, transportation and communication.
In addition, by stifling the full potential of the resource sector, Canada’s trading partners have been disappointed at a time of urgent demand. A recent case in point occurred when South Korea, Germany and Japan tried turning to Canadian liquefied natural gas as a replacement for Russian gas imports with no success. The inability to meet those new demands demonstrates how the response to supply issues and energy security has atrophied in recent years.
Learning from Canada’s allies
The COVID-19 pandemic, followed by Russia’s war against Ukraine, exposed the vulnerabilities of concentrated supply chains and an overreliance on bad-faith actors with divergent values systems. Since 2022, Japan, Germany, South Korea, the U.S., the Netherlands, the EU and the G7 have addressed economic security with either legislation or strategies. NATO emphasized that national and collective resilience objectives will strengthen “allied preparedness against strategic shocks and disruptions.”
Looking at how others interpret economic security to craft a domestic definition of the concept and orient its relationship with national security will provide insight. The Dutch government lists economic security as one of six core national security interests and defines it as “the unimpeded functioning of [the Netherlands] as an effective and efficient economy.”
South Korea has defined economic security as a state in which “the smooth inflow of essential items for the nation’s economic activities and preventing inappropriate outflow, regardless of domestic and international variables” is ensured.
The EU’s Economic Security Strategy advocates for promoting competitiveness, protecting against risk, and partnering with like-minded countries.
Germany’s strategy prioritizes technological sovereignty and changing the incentive structure for domestic companies to account for geopolitical factors. It also emphasizes the use of trade instruments, investment screening, and export controls to build resilience to interference and protect critical infrastructure.
Countering China’s economic coercion by building on a European initiative
Canada’s national security institutions have fallen woefully behind
Canada needs a better national security policy
Japan’s Economic Security Promotion Act has four main purposes. It secures a stable supply of critical commodities and ensures the safety of key infrastructure. It also supports the development of new technologies and creates a secret patent system.
To curb one-sided dependencies and mitigate the risks of single-point bottlenecks, South Korea has begun stockpiling strategic materials while diversifying its supply relationships.
When it comes to implementation, Canada can also seek inspiration from Japanese and Korean institutional design. The Japanese government convened an economic security unit within its National Security Secretariat with a focus on technology security, cybersecurity and international co-operation. This was followed by the creation of a ministerial position for Economic Security.
In South Korea, an economic security office has been formed to co-ordinate the government’s agenda and to promote collaboration among ministries.
Canada’s deputy prime minister should assume responsibility for an economic security portfolio. In this capacity, cabinet-level economic security deliberations should be convened regularly featuring ministers from Global Affairs Canada, the Department of National Defence, Innovation Science and Economic Development, Natural Resources Canada and others along with representatives from national security bodies and other stakeholders.
A strong link in a stronger chain
Through a dedicated economic security strategy, Canada can face the realities of technological change and geoeconomic fragmentation. An effective Canadian approach will include keeping the private sector as open as possible and safeguarded as required.
Proposed measures such as outbound investment screening should align with international legal obligations and with principles of suitability (better results could not be obtained by other means); necessity (as unrestrictive as possible); and appropriateness (weighing the impact of regulation against hoped-for benefits). Pursuing policy complementarities with like-minded partners can help close enforcement gaps and bring alignment between different regulatory regimes.
To achieve integrated economic security with our network of allies, it’s time for Canada to expand its toolkit – in the process becoming a strong link in a stronger chain.
Source : Policy Options