Freeland warns Washington against ‘race to bottom’ to lure private capital
As Canada gears up to roll out a swath of tax credits designed to support a clean economy, Ottawa cautioned the U.S. against the danger of waging a “corporate subsidy war” while both countries court much-needed private capital.
Speaking at an event in Washington hosted by the Peterson Institute for International Economics (PIIE) on April 12, Finance Minister Chrystia Freeland described U.S. President Joe Biden’s Inflation Reduction Act as policy “that can help save the planet and shore American democracies.”
But with Ottawa under pressure to respond to Biden’s billions in cleantech subsidies — and after unveiling several tax credits aimed at boosting cleantech investment in her own budget last month — Freeland offered the audience several “polite reminders” that building and maintaining a greener economy will require “a lot of capital” to flow on both sides of the border.
“It will be all too easy for us to get drawn into a race to the bottom to attract it,” she told the crowd. “That’s exactly what happened when, in our individual efforts to promote investment and spur economic growth, we drove corporate tax rates down around the world and weakened the domestic tax bases that are essential to investing in the middle class.”
Freeland’s deputy Michael Sabia, who was also in Washington, has calculated Budget 2023 contains about $120 billion in tax credits and “concessional finance” to support the transition to a clean economy.
Global tax harmonization has long been an objective for Freeland, whose most recent fiscal blueprint promises to tack labour conditions onto several tax credits set to roll out in the coming years, prompting Labour Minister Seamus O’Regan to dub the document “a workers’ budget.”
Freeland urges coordination, not competition, to court capital
Freeland emphasized the need to avoid a “mutually sabotaging competition.”
“Just as corporate tax rates may have enhanced bottom lines but impoverished our middle classes, the corporate subsidy war might be good for some shareholders, but it would deplete our national treasury and weaken social safety nets — which are the foundation of effective democracies,” she said.
Her speech picked up on themes echoed in Biden’s remarks to Parliament last month, as well as Prime Minister Justin Trudeau’s reminder that “everything is interwoven” because “economic policy is climate policy [and climate policy] is security policy.”
Freeland continued to push her “friendshoring” mantra, which urges cooperation between like-minded democratic nations that are distancing themselves from China and Russia.
She said North America should heed the lessons of the European Union, which for years has “balanced the need to drive industrial investment in their national economies against the danger of corporate subsidy wars.”
Following her remarks, Freeland sat down for a brief panel with PIIE’s non-resident senior fellow Cecilia Malmström, a Swedish politician who was the European Trade Commissioner from 2014 to 2019.
Malmström asked how Canada can avoid the “risk of a subsidy race” as companies look to invest in the transition, prompting Freeland to tout international bodies like the International Monetary Forum, G7 and World Bank that have the reach to promote the message of cooperation.
More incentives must be rolled out quickly, Freeland said, adding companies need to be open to taking “risks” on new technologies and to doing “big things they otherwise might not do” — with Ottawa promising to back those efforts with public dollars.
“We need to be really, really thoughtful to make sure investments that different countries around the world are putting in place are overall having the effect of driving more private capital into this essential space in the economy, rather than just diverting it from country to country to country,” she said. “I think it can be done, but it will only happen if we are thoughtful and careful.”
Malmström agreed the task will be a tough one, as the “risk is that those with the biggest pockets are the ones who are successful.” She also noted the pair’s conversation comes amid growing recognition of the world’s reliance on Chinese minerals.
Mining’s ‘moment of growth’
Freeland also touted Canada’s critical minerals strategy, unveiled in December, and Budget 2023’s tax credits that aim to back “extraction and processing.” Among the credits in the works are a 15 per cent incentive for clean electricity investments; another for carbon capture, storage and utilization projects; and one aimed at reimbursing companies for machinery and equipment costs linked to lithium, nickel and copper processing and extracting.
Canada’s focus is on beefing up nickel and uranium production among other materials needed to build the “clean economy,” she said, striking a candid tone about Ottawa’s record on the file in recent years.
“We’ve kind of taken our eye off the ball a little bit when it comes to mining and critical minerals,” she admitted, adding Canada must work with “the widest possible circle of willing partners” to usher in a clean economy. “We haven’t always done it so right in the past on mining and processing. There has been a lot of environmental damage done; a lot of the rights particularly of Indigenous people [have been] harmed.”
The minister vowed “do it differently this time around,” noting the stakes are high as Canada embarks on a “new, real moment of growth for the mining sector.”