GLOBERMAN: For this reason the government should avoid mutual subsidy wars

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Ontario will “put more money on the table” to keep the Stellantis electric vehicle (EV) battery plant in the province, in addition to the $500 million already promised, according to Prime Minister Doug Ford.

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This adds to Ontario’s overall taxpayer commitment to EV battery production, as Volkswagen previously received a financial commitment to build an EV plant in St. Thomas. In the meantime, taxpayers across Canada will depend on federal government subsidies for the two electric vehicle battery plants, including a staggering $13 billion pledge to Volkswagen.

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The obvious justification for this corporate welfare spree is that the Biden administration is offering hundreds of billions of dollars in state subsidies to companies that focus on green technologies like electric vehicles and the batteries that power them.

So unless the federal and Ontario governments double US government subsidies, Canada will be locked out of the green technology value chain and high-paying jobs in Canada’s auto industry will disappear. As Prime Minister Ford said, the main purpose of the subsidies is to create good-paying jobs and give the people of Southwestern Ontario the quality of life they deserve.

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There are several problems with the approach.

First, even if it were beneficial to Canada’s economy as a whole, Canada probably couldn’t afford to increase US government subsidies to any sector, including green technology. However, if attracting green technology manufacturing assets through government subsidies accelerated Canada’s economic growth, the subsidies would ultimately expand the government’s tax base and borrowing capacity, making the “affordability” question obsolete.

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Given that Canada’s gross federal debt was around $1.6 trillion in 2021, capital markets would hardly notice anyway that an additional $30 billion in corporate welfare is being funded by government loans.

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But the main economic argument against governments in Canada engaging in subsidy wars with other governments is essentially the same argument against governments not retaliating against export tariffs. Such measures will make the economy of the Vengeanceland less efficient and thus poorer.

Government subsidies and tariffs encourage increased output in subsidized or sheltered sectors of the economy at the expense of other sectors, as the former must deprive the latter of labor and other inputs (such as machinery and equipment). In economic terms, if an increase in output requires tax subsidies or tariff protection, the actual economic cost of the inputs used will likely exceed the economic value of the increase in output.

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That other governments are implementing policies that make their economies less efficient is not a reasonable justification for the Canadian government to duplicate those policies. As the famous British economist Joan Robinson (a colleague of John Maynard Keynes) said: “Even if your trading partner throws stones at his port to obstruct incoming cargo ships, throwing stones at your own doesn’t make you any better throw port.”

Surely the shareholders of companies that receive welfare and some of the workforce will benefit – or at least avoid economic damage. And some local workers will suffer from the protectionist policies of foreign governments.

But instead of taking indifferent retaliatory measures, governments should improve the investment and employment environment in all industrial sectors and locations.

In Canada, that means making corporate and income taxes more competitive, reducing the cost of over-regulation, especially for small and medium-sized businesses, improving housing affordability through changes in zoning practices, and removing inter-provincial barriers to trade and labor mobility.

Steven Globerman is a Senior Fellow at the Fraser Institute