The fact that Tesla is now worth a staggering $1 trillion demonstrates once again how much of an impact the automotive sector has on the global economy.
The rise of Tesla is indicative of the fifth major wave of automotive investment since 1900, which is the shift to electric cars (EVs). Canada has profited greatly from each wave despite its lack of automaker ownership because of astute policymakers who have used every opportunity to increase the country's share of the auto market.
How, however, can Canada guarantee its gain from the present expenditure surge while the global industry invests hundreds of billions of dollars to entirely retool for an EV future?
A look at how Canada has adapted economically to secure auto investment demonstrates how a peripheral economy gained a major auto sector—aand how it might hold onto it in the electrified future, in light of the threat of protectionist measures in the United States aimed at keeping American EV investment at home.Ford was there at the start.
From 1900 through 1930, the world was remade by a surge of investment in automobile technology known as "Fordism" (after Henry Ford, founder of Ford Motor Co.).Since Canada levied a 35% tax on American imports and was geographically near Detroit (home to the Big Three automakers, Ford Motor Co., General Motors, and Chrysler), Ford and other American manufacturers set up branch facilities in Canada to circumvent the levy.
Additionally bolstering the development of the American-owned branch-plant industry were British advantageous policies that encouraged U.S. manufacturers to sell to Commonwealth nations. All domestic producers in Canada had died out by the 1920s because they lacked the resources to compete with imports.
Because of these regulations and Ontario's closeness to Detroit, Canada became the world's second-largest manufacturer of automobiles in the 1920s.
The Good Old DaysThe second major wave of car investment, which followed the Great Depression and WWII, occurred in the 1950s and 1960s. Detroit's Golden Age, which was fueled by the postwar baby boom and auto-brokered labor peace in North America, is often regarded as the zenith of American worldwide economic supremacy and foreign investment.
The Canada-U.S. auto accord of 1965 led to a radical realignment of the Canadian auto industry so that it could benefit from this expansion. Although the pact effectively ended Canada's economic relationship with the United States, it did not come without some shrewd interventionist steps on the part of the Canadian government. These policies mandated that American assemblers maintain operations in Canada in return for duty-free commerce across the border.The majority of Canadian output was sent south, sparking a fresh wave of investment that built facilities in Ontario and Québec.
Complications with OPEC
The 1973 OPEC embargo, the environmental movement, and consumer activist Ralph Nader all played a role in bringing about the third wave of regulation in the automobile industry in the 1970s.
As more agile foreign rivals gobbled up North American market share, the Big Three were forced to retool their facilities to produce smaller, lighter cars. Similarly to the current situation, by the mid-1970s, it seemed that they would forego reinvesting in their Canadian branch facilities in favor of updating their American operations.
Canada's policymakers, however, came up with a novel solution: they started offering direct subsidies to factories as an investment incentive. It all started in 1978, when the Canadian government awarded Ford $78 million to build an engine facility in Ontario instead of Ohio.Canadians sought new product requirements (including the enormously popular Windsor-built minivan) in return for government backing in the 1980s, when the sector received its longest period of government funding since the Ford incentive. As a result of favorable health care policies and currency rates, Canada emerged from the 1980s having produced approximately two automobiles for every one it consumed.
Products from AsiaThe 1980s saw the beginning of the fourth wave, which was driven by the influx of low-priced but high-quality imports. U.S. export restrictions compelled Japanese automakers to construct assembly facilities in the country. Ottawa, worried that the Japanese might supply the Canadian market from their new U.S. factories, used incentives and threats to persuade Tokyo to construct equivalent facilities in Canada.
Canadian policymakers blocked ports, lobbied hard, and threatened harsh content requirements before Toyota and Honda finally decided to establish plants in the country in exchange for financial and infrastructural help. Millions of people found work, and billions of dollars were invested.
Completely reinventing the business worldThe fifth major wave of worldwide investment in automobiles has arrived, and it is quite different from the previous four.
To begin with, the transition away from the internal combustion engine involves a complete re-creation of the industry, which will radically alter the current economic landscape.
Electric vehicles (EVs) are a game-changer for the global political economy, impacting everything from transportation systems to jobs, wages, and even international relations.
Second, EVs are a giant leap toward a world without carbon emissions and may help mankind mitigate climate change's harshest impacts. As Tesla has already shown, EV manufacturing is feasible, scalable, and economical, so these developments should set off a cascade of decarbonization throughout the system.Third, assembly manufacturing in Canada, which is currently struggling, may cease if Canadians are unable to obtain continuous EV expenditure. Canada has minimal voice in EV investment choices due to its lack of ownership in any major auto manufacturers and its continuous two-decade reduction in North American manufacturing share.
President Joe Biden's "Build Back Better Act," which provides tax breaks to American buyers of electric vehicles made only by union workers in the United States, adds to this difficulty.Canadian automakers commit to spending millions on electric vehicles.
Despite recent agreements by the Big Three to make EV investments at their Canadian factories, the Buy American legislation threatens to shift future EV manufacturing from Canada.
Canada risks losing its car industry and tens of thousands of direct and indirect jobs if it does not capture a piece of the EV investment boom, which is estimated to be in the hundreds of billions of dollars.
Even so, Canada may be able to secure a piece of the EV future due to its potential as a source for EV battery components (cobalt and lithium from Ontario's Ring of Fire, for example), its excellent production record, the willingness of policymakers to provide incentives, and the willingness of union leaders to bargain production mandates.Important investment commitments have been made to Canada so far, including Ford's $2 billion announcement to build up to five electric vehicles at its Oakville assembly plant beginning in 2024 (with $500 million in Canadian government funding) and Stellantis' (formerly Chrysler's) commitment to build electric vehicles in Windsor by 2025.
However, the Canadian industry is still threatened with extinction. To avoid missing out on the most significant wave of automotive investment yet, Canada will need some bold diplomacy and creative policy-making from governments and stakeholders.