Implementation of "buy Canadian" will matter
On Friday last week (why always with the big news dumps on a Friday afternoon Government of Canada, why??), Prime Minister Carney announced a new Buy Canadian Policy. It will require that "Canadian suppliers” are prioritized in federal procurement, as well as in any program (grant, loan, contribution, and presumably co-investment) that spends federal money. This means that third parties using federal funds will have to "Buy Canadian” when they use those funds for eligible expenses under their program. When a domestic source can't be found and only an international one is possible (for example, I know of no reliable domestic sources of citrus fruits, and my own baby plants are still years away from cropping), the new federal policy will require some minimum of local content. The policy appears to apply to both goods and services.
The announcement did not mention a minimum spending value to trigger the rule, though presumably the Government will want to introduce one to make this policy feasible to administer. Let me offer an example: My previous work computer was purchased with federal funding from the Social Sciences and Humanities Research Council (no folks, Universities don't always supply computers to faculty, even when they require faculty to work on a computer). I bought a MacBook Pro. I bought it from a Canadian distributor, but I don't imagine that any of the components were Canadian in origin, and I would be surprised if any of the final assembly took place here in Canada. At best, my purchase resulted in some profit to the local distributor and some paid hours for folks working in the courier service that shipped it. But if this same transaction were to take place again under the new Buy Canadian Policy, would the Government of Canada want federal public servants spending their time hounding me for proof of reasonable efforts to ensure "local content” in my foreign-made computer used for research and knowledge dissemination? Let's hope not.
What's "Canadian"?
So, let's agree there are still some details of this Buy Canadian Policy to be worked out, like maybe some sensible de minimis rules. The Government is also going to have to grapple with the question of what it means by "Canadian”.
Patriotic Canadian consumers in grocery stores across the country are already working through the distinctions between "Made in Canada” (98% Canadian content) and "Product of Canada" (51% Canadian content). That's in the rules for accurate labeling of consumer goods, both food and non-food items. However, the Government of Canada has a few different definitions of “Canadian” when it comes to the private sector.
For example, the federal Industrial and Technological Benefits program says any company incorporated and operating in Canada is Canadian, but it then looks at the Canadian Content Value (with a relatively complex but also flexible approach to calculating it) of the goods or services involved. The office of the Canadian Ombudsperson for Responsible Enterprise takes a different approach, based more on ownership and control over the business. By contrast, the Corporations Returns Act covers all businesses operating in Canada, and then uses three different criteria (ownership of assets, flows of operating revenues, and flows of operating profits) to determine the degree of foreign control.
As of 2022, there were 6.6 million enterprises incorporated in Canada, of which about 20,000 were foreign multinationals. Those foreign multinationals accounted for about 13% of private and voluntary sector jobs, 57% of Canadian merchandise exports, and 51% of Canadian commercial services exports (author's calculations using Statistics Canada Table 36-10-0356-01). When it comes to procurement, a "Buy Canadian” policy might be designed and implemented in such a way to favour the 13,000 Canadian multinationals (but maybe only with local content), plus the 3 million Canadian non-multinational firms, plus the 3.6 million private non-profit and charitable enterprises. But then again, the foreign multinationals that are in Canada, presumably employ Canadians and pay taxes on corporate income earned in Canada. Isn't that enough "local content” for policy-making, even if most (about 60%) of the foreign multinationals operating here are American-owned? The politics of this may be tricky, even if the economics of it should be straightforward. But I seem recall a PM who promised to govern in econometrics.
Just as it will make a lot of sense for the Government of Canada to establish a de minimis rule so it isn't policing country of origin on paper clips purchased by immigration settlement agencies, it probably doesn't want to be overly prescriptive in defining "Canadian”. But, I think there's scope for at least two more complimentary measures that could help the "Buy Canadian Policy” succeed in practice. After all, a press announcement is just that. What matters is the implementation.
Make it easy to certify
The economics here are a little messy. To get the best value for money, the Government should probably impose the fewest restrictions possible on procurement decisions made with federal funds. But we're now in a world where geopolitical risks are significantly higher. All forms of Foreign Direct Investment in Canada may not be equally valuable at the moment, and just as the more muscular Investment Canada Act gives the Government room to impose conditions on or wind-down market transactions for security (or other) reasons, there may be some goods and services that are safer to buy at home.
As a complement to a "Buy Canadian Policy", the Government might want to give thought to how it can support domestic businesses through the process of establishing their Canadianness, or validating "local content". Even with an inclusive and flexible definition of "Canadian”, this policy will still likely create a new administrative burden on enterprises, on federal public servants, and on third parties receiving and spending federal funding.
In addition to a de minimis rule, a simple and streamlined way to certify a supplier as "Canadian” or to establish their content as "Canadian” would probably be a wise addition to the policy package. On Friday, the Government announced help for smaller suppliers to access the federal procurement system, but that's not quite the same thing as creating a simple pathway so that companies can show they are "Canadian” for the purpose of this policy. And businesses will have to show this status over and over again, because this policy will apply to the whole of government and government spending, all federal departments and the third parties they deal with (like NGOs doing immigration settlement work, or friendship centres running programs for urban Indigenous youth) will also have to be able to easily distinguish "Canadian” suppliers.
One possibility would be to make use of the tax system. Is there a record that the supplier has registered with the CRA for GST and/or payroll remittances? Want to know if and how many people it employs in Canada as part of “local content”? The payroll remittance system can tell you. Boy, this sure does seem like yet another example where real-time electronic payroll would be a major public asset….
Eyes on the prize - maintaining domestic capacity
A big part of the federal policy goal here is reinforcing domestic sectors that are in trouble due to tariffs, namely auto, steel and aluminum, and softwood lumber. The Government of Canada just doesn't buy or fund the purchase of enough cars to make procurement changes a very meaningful support to that industry. But a government that is about to finance/co-finance a bunch of major national projects and housing will no doubt see important shares of federal tax dollars flow towards goods made of steel, aluminum, and lumber. On top of the workforce adjustment and business liquidity measures that were also part of the PM's announcement on Friday, and in addition to the steel import restrictions that were announced in July, is there something else a national government might do to preserve domestic capacity in strategically important sectors?
The UK government went so far as to nationalize its main steel producer, using emergency powers to take it out of the hands of its Chinese owners. In the US, the Trump administration has taken an equity stake in one of America's major IT firms, Intel, arguably a sector of equal (or better?) strategic value to steel. The Chicago school of economics seems to be taking a nap these days.
To close, I'm going to focus on the steel sector in particular because I think it's a really interesting case.
Trump is fond of musing that “if you don't have steel, you don't have a country” and his administration seems to be operating on that principle. I'm not sure I'd go that far, but there will be lots of reasons that Canadian policymakers want to preserve our domestic steel industry (along with other strategic sectors).
It's not like steel is a scarce commodity. In global terms, there's a problem of over-supply with less than 80% of global production absorbed in demand. The primary source of the over-supply is China, which produces over 1 billion tonnes of crude steel per year, nearly ten times the next highest producing country, India. Canada is a modest 16th in global crude steel production, at just 12 million tonnes per year.
According to the OECD, China's rate of industrial subsidization is about ten times that of OECD countries and this means there is a glut of excess steel looking for buyers in the international market, but also a glut of steel that isn't produced using cleaner, more sustainable technologies. While Canada isn't a top 10 global producer, it is somewhat cleaner with 41% of Canadian steel production using the more sustainable electric furnaces, and that might have some strategic value over the longer term.
What if, as part of the "Buy Canadian” package, and as part of what seems to be a growing effort by the US and its trade partners to curtail the effects of the oversupply of Chinese steel, Canada picked up a new tool from the policy tool-box? Rather than taking an equity stake or nationalizing, and rather than yet more liquidity supports, if the Government of Canada wants to build big and build using Canadian steel (and alumnimum, and lumber), is it time to consider a strategic national reserve?
The US Department of Defense War already maintains a national Strategic Materials reserve, for example. The rationales for strategic reserves are usually made in terms of price stability in cases of supply shocks (like our own maple syrup reserve, the only one of its kind in the world), and as buffer stocks to protect consumers from sellers’ inflation, as Isabella Webber has argued.
The global commodity market for steel is clearly not working as a well-functioning competitive market. Import restrictions and domestic cash subsidies might help at the margin as correctives, but the global market forces are probably too big for Canadian firms to manage on their own. If letting the sector go isn't an option, and if the Government of Canada really wants to make sure that most (?? all??) of the steel going into a new deep sea port, or a new pipeline or pick your favorite project of "national interest", then it could build up a strategic reserve and make materials from that reserve part of its contribution.
I realize this runs counter to most models in economics. But if China doesn't actually operate according to Western, capitalist principles, then this market may not clear anytime soon. Further, more than ratcheting up foreign (Chinese) import limits that China will see as hostile, a domestic reserve has the benefit of being neutral in its treatment of other trading partners.
I'm not totally sure that a national strategic reserve would work in this case, and I haven't been able to think about the math of how large it would need to be or the administrative details of how it would operate. Again folks, this is a free blog written in scraps of time in between the demands of my day job and parenting. But it seems like maybe it's time to start thinking more creatively and I haven't seen anyone, not even the steel industry association, publicly raise these options, so here they are, out there in the ether for others to consider — make it easy for Canadian businesses to comply with "Buy Canadian", and consider building up and carefully deploying strategic buffer stocks of the domestic goods you care about when international markets are clearly so flawed.