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Ottawa is going all in on 'friendshoring.' Here's what that could mean.

OTTAWA — This year's budget reveals the federal Liberals envision Canada relying more on its allies for trade in the future, economists and geopolitical experts say — even if that could result in higher prices or missed opportunities.
Minister of Foreign Affairs Mélanie Joly rises during Question Period in the House of Commons on Parliament Hill in Ottawa on Monday, March 27, 2023. Economists and geopolitical experts say this week's federal budget is confirmation that the Trudeau government sees the future of Canadian trade as relying more on allied countries, even if it is results in more expensive goods. THE CANADIAN PRESS/Justin Tang

OTTAWA — This year's budget reveals the federal Liberals envision Canada relying more on its allies for trade in the future, economists and geopolitical experts say — even if that could result in higher prices or missed opportunities.

"It's a reframing," University of British Columbia professor Vina Nadjibulla said after the budget's release this week. "It's essentially saying what we've been doing for the last 30 years of engagement is over."

U.S. Treasury Secretary Janet Yellen coined the term "friendshoring" a year ago, saying allies should rely on each other to make supply chains more resilient, and defang hostile actors from taxing or withholding goods.

The Liberals have sent mixed messages in the past year on the extent to which they agree with that approach. Last October, Industry Minister François-Philippe Champagne said Canada was "decoupling" from China, but days later Foreign Affairs Minister Mélanie Joly said she wanted to "re-establish ties" with Beijing.

The language in the federal budget paints a clearer picture. But some experts warn that the us-versus-them language means Canadian businesses will need to adjust in order to avoid losing out on opportunities with the developing world.

Nadjibulla, speaking at a Wednesday panel held by the Canadian Global Affairs Institute in Ottawa, said Tuesday’s budget contains the government's clearest articulation yet of where the world is now.

"The language there is that it is a more dangerous world and a more competitive world. And in that world, Canada needs to deepen its connections with its allies," she said.

Specifically, the document says trading with other democracies prevents "economic extortion" and being "vulnerable to exploitation" by "hostile foreign powers" who are buying up Canada's natural resources.

"Depending on dictatorships for key goods and resources is a major strategic and economic vulnerability," the budget reads, echoing comments U.S. President Joe Biden made during his recent visit to Ottawa.

Nadjibulla, who specializes in international security and the Indo-Pacific region, said the rhetoric marks "a big departure from previous budget documents" in its frankness. 

"Even more so than in the Indo-Pacific strategy, we see the direction of travel," she said.

Mark Warner, a Canadian and American trade lawyer, told a panel that the implementation of "friendshoring" is already raising questions from his clients.

The automotive and textile sectors have asked him how much material they can use from China before Washington labels a product made in Canada, Mexico or Guatemala as including Chinese content, he warned.

He said that question is coming up for electronics and will likely affect pharmaceuticals, too.

"The question of how much Chinese content gets called Canadian is coming," he said. "If we're seen as being the back door for China, or whatever, that's going to be more problematic."

Warner said Canada's geography means it will always make sense to rely on Washington, even if Ottawa needs to tweak how it treats other countries under a "friendshoring" policy.

"If the Americans are serious about this, then we really have to figure out our way to be in that (space) in a way that's coherent. And that's how we'll protect our manufacturers," he said.

Yet Mary Lovely, an American economist with the Washington-based Peterson Institute, said the U.S. has been inconsistent in listing who actually qualifies as a friend.

"The U.S. language and the rhetoric can be interpreted in a lot of ways," she said, adding that this goes back to the Trump administration's steel and aluminum tariffs on Canada, Europe and Mexico.

"We saw some confusion in U.S. trade policy over who's a quote-unquote friend," she said.

For example, on Friday, the U.S. Treasury Department announced an electric-vehicle tax credit that would apply to goods from Canada, Nicaragua and Oman, but not to those from France and Germany.

Canada is already setting the stage for a cross-border salvo with Washington, announcing in this week's budget that Ottawa is considering retaliatory policies if the U.S. doesn’t stop blocking Canadian companies from certain government contracts and green-tech programs.

Still, Washington has successfully been wedging countries against China, such as with language in the United States-Mexico-Canada free-trade agreement that forbids Canada from signing a trade deal with Beijing without U.S. consent. The same language has appeared in recent agreements with Japan and Taiwan.

Last October, the Biden administration announced sweeping restrictions on China's access to semiconductor chips made in any country using U.S. technology, in order to slow Beijing's technological and military rise.

Washington is already talking about similar restrictions on biotechnology and quantum tech, Nadjibulla said. She added that this is causing consternation in Southeast Asia, where countries want to maintain economic links with China, Australia, Europe and the world.

But Lovely said many countries are willing to go along with these rules because they crave American investment and a guarantee they won't be suddenly frozen out of the world's largest economy.

"They fear coming a closure of the American market, and they want to be on the right side of that door," she said.

Lovely expresses skepticism about governments combining "friendshoring" policies with subsidies for their domestic businesses. She said this imposes a necessity to make subsidized companies succeed even when they're inefficient, and positions foreign trade as a threat to local firms.

"We can think of these (partnerships) as secure, like-minded, that speak to our values — however you want. But they are going to be higher-cost," she said.

"We do need to be aware of the fact that closing markets will lead our own economies to be less competitive on the export side."

She said this will further isolate countries and make it harder to rally global investment to counter climate change.

South Africa's high commissioner in Ottawa expressed a similar view.

In an interview, Rieaz Shaik argued that Yellen's term lets rich countries divide the world without acknowledging the realities of developing countries and the need to address the climate crisis.

"It is the most dangerous term in the history of global political relationships, 'friendshoring,' because it's exclusionary. Worse, it says that your non-friend is the other," Shaik said in a wide-ranging interview.

"We know how apartheid South Africa dealt with the other. They dehumanized us and they removed all our rights to exist. As the other, they could do whatever they want. So I detest 'friendshoring.'"

In any case, Nadir Patel, a senior strategic advisor with Norton Rose Fulbright Canada, said Ottawa's simultaneous rhetoric around shoring up trade with allies and developing deeper ties with regions such as Southeast Asia will only come to fruition if corporate Canada follows suit.

"Canadian business needs to step up and do more in other parts of Asia, where we're not active," said Patel, a former Canadian high commissioner to India, during the panel.

"Businesses need to step up and want to leverage that, and not just kick tires once in a while, but really be out there with a presence on a regular basis."

This report by The Canadian Press was first published April 1, 2023.

Dylan Robertson, The Canadian Press