July 16, 2024 – Geopolitical tensions around chokepoints in low-emissions energy supply chains have been raising alarm about their potential disruptions to the net-zero transition. However, before Canada and other governments respond, they must grasp the complex trilemma they face and carefully weigh the trade-offs associated with their decisions, according to a new C.D. Howe Institute report.
In “Strengthening Global Supply Chains for Low-Emissions Technology: The Policy Playbook and the Trade-Offs,” author Ari Van Assche writes that policymakers are facing a “trilemma” when trying to develop policies to strengthen supply chains for decarbonization, because it is difficult to simultaneously achieve three goals: support for national security; promotion of low-emissions energy adoption; and non-discrimination between domestic and foreign firms such as international trade rules might call for. He examines the different strategies governments have recently employed for different supply chain cases – providing policymakers with a playbook that includes the benefits, downsides and unintended consequences of these plays.
“Policymakers face numerous trade-offs as they aim to develop secure and efficient low-emissions energy supply chains for the net-zero transition,” says Van Assche, who serves as an International Business Professor at HEC Montréal. “This presents them with a trilemma where it is difficult to balance the development of policies, and they need to carefully weigh their decisions.”
Van Assche explains that global supply chain policies related to chokepoints generally vary along two dimensions. To start off, they can be either offensive or defensive in nature. For instance, there are defensive de-risking policies, which aim to reduce a country’s dependence on a perceived foreign-based chokepoint. A recent example is Canada’s Critical Mineral Strategy, which is partially designed to reduce our country’s dependence on foreign-mined and processed critical raw minerals by allocating financing to support Canadian critical mineral projects.
On the other hand, offensive dominance-building policies try to ensure a country maintains or strengthens its control over a supply-chain stage. The ban by China – which is the world’s top miner and processor of rare earths – of the export of technology to make rare earth magnets as well as the technology to extract and separate the raw critical minerals needed, is an example of this approach.
Meanwhile, chokepoint-related policies may primarily aim to have a local as opposed to extra-territorial impact. Onshoring policies see government efforts try to directly enhance the local performance of supply-chain stages within their own jurisdiction such as with the Canadian and provincial governments’ subsidies to build electric vehicle battery plants.
Alternatively, friendshoring is when governments pressure firms that operate in their jurisdiction to re-wire their global supply chain extraterritorially by cutting off ties with suppliers in chokepoint locations. The US Uyghur Forced Labor Prevention Act is an example of this as it assumes goods made in China’s Xinjiang Uyghur Autonomous Region are made with forced labour, blocking them from import.
The first trade-off that governments need to consider is between efficiency and national security, according to Van Assche. “The Canadian government needs to acknowledge that efforts to develop onshore capacity or promote friendshoring can generate important cost increases that disincentivize low-emissions energy technology adoption and reduce the competitiveness of downstream firms,” says the author. “The Canadian government’s current mulling over whether or not to impose tariffs on Chinese electric vehicle cars reflects this trade-off.”
Further, he says, governments need to consider the trade-off between non-discrimination and national security as onshoring and friendshoring policies are designed to be discriminatory.
“The existence of the supply-chain policy trilemma raises several critical policy issues that the Canadian government should consider as it aims to address perceived chokepoints in strategic industries,” says Van Assche.
These include the fact that de-risking policies have multiple harmful side effects as they reduce the economic efficiency of global supply chains, drive up geopolitical tensions and undermine global institutions. As a consequence, he says, the Canadian government should rely on de-risking policies sporadically and narrowly. Further, Ottawa must provide concrete evidence that a chokepoint exists and that there are resulting important national security implications.
The author also recommends the federal government engage with the business community to better understand the cost and risk implications of de-risking policies to ensure they do not lead to an unproductive harnessing of firms’ sourcing options at the cost of a desirable mix of flexibility and security known as flexicurity.
Finally, in the limited cases where chokepoints are a real concern, Van Assche says the federal government should explore how to avoid conflict and encourage collaboration with other countries in the development of de-risking policies. For this, he says two things need to be considered: how friendshoring policies are generally less harmful than onshoring policies; and how plurilateral/multilateral initiatives are generally less harmful than unilateral policy actions.
For more information contact: Ari Van Assche, Professor, Department of International Business, HEC Montréal; and Lauren Malyk, Senior Communications Officer, C.D. Howe Institute, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.