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“Friend-Shoring” To “Next-Dooring”

Canada holds a strategic position as a critical investment destination in a new era of global supply chains and sourcing.

Location Canada 2022
Canada has invested heavily in Canada-U.S. infrastructure, including the planned Gordie Howe International Bridge.
Courtesy Windsor-Detroit Bridge Authority
Canada has invested heavily in Canada-U.S. infrastructure, including the planned Gordie Howe International Bridge. Courtesy Windsor-Detroit Bridge Authority
U.S. Treasury Secretary Janet Yellen and the Deputy Prime Minister of Canada and Minister of Finance Chrystia Freeland convened on June 20, 2022, where the pair championed a new era of “friend-shoring” as a way to transform global supply chains in the post-pandemic world. In contrast to the predominant current purchasing strategy that attempts to meet quality standards at the lowest cost possible, “friend-shoring” (aka “ally-shoring”), according to Secretary Yellen, “is the idea that countries that espouse a common set of values about international trade [and] conduct in the global economy should trade and get the benefits of trade so we have multiple sources of supply and are not reliant excessively on sourcing critical goods from countries where especially we have geopolitical concerns.”

The U.S. is pursuing this policy in practice. For example, the recent Inflation Reduction Act of 2022 (IRA) signed by President Biden provides preferential tax treatment for electric vehicles and renewable energy (e.g., solar, wind, and hydrogen) produced in North America and restricts using critical minerals or key components from designated countries such as China and Russia. This follows a series of executive and legislative actions ranging from the Section 301 (China) and Section 232 (steel and aluminum) tariffs imposed under the prior U.S. administration; new trade agreements such as the United States-Mexico-Canada Agreement (USMCA) that include stricter content requirements and labor enforcement measures; the Build America, Buy America Act (BABA) as part of the bipartisan infrastructure package; and the Uyghur Forced Labor Prevention Act (UFLPA) that entered into force in summer 2022, among others. These transformative U.S. actions, coupled with Canada’s longstanding trade, talent, and transportation investments, strategically position Canada as the ideal “next door” friendly shore for global investment and sourcing.

Strategic Advantages
Canada has five strategic advantages for companies seeking to navigate “friend-shoring.”

1. Existing Trade, Talent and Transportation Advantages — It is important to recognize that Canada stands on its own as a strong economic competitiveness destination. In a world transformed by natural resources and energy shocks caused by the pandemic and conflicts, Canada provides stability as the world’s 5th-largest agricultural commodities exporter, the 4th-largest aluminum producer, the 3rd-largest oil exporter, the 2nd-largest uranium producer, and the largest source of key fertilizer products such as potash and peat.

Against the backdrop of these advantages, Canada has a strong commitment to clean and reliable energy. Canada obtains 66.6 percent of its electricity (81.6 percent from non-GHG emitting sources) and 18.9 percent of its energy supply from renewable sources — compared to the world’s 13.4 percent average. Canada is also the world’s third-largest producer of hydroelectricity. These natural resource and energy advantages have made Canada a global hub for advanced manufacturing, with 700 automotive parts suppliers located in Ontario alone, with more than 500 suppliers in the highly skilled area of tooling, dies, and molds. Quebec is the 3rd-largest aerospace cluster in the world, with Airbus’s A220 being manufactured in the province.

Canada is the only country with preferential trade deals with all other G7 members, thereby facilitating exports, foreign direct investment, and resilient sourcing opportunities. These superclusters of advanced manufacturing result in a vibrant economy of innovators located countrywide. Canada has one of the world’s most educated and experienced workforces, with more technology-credentialed workers in the Toronto-Kitchener-Waterloo-Ottawa region than Silicon Valley, Austin, and Boston combined. Montreal has attracted more than 250 of the world’s leading researchers in artificial intelligence (AI) and AI innovators span from the St. Lawrence River in Quebec to the Pacific shore in British Columbia.

Canada’s successes are the result of long ranging planning at the federal, provincial, and municipal levels to make Canada one of the Group of Seven’s (G7) most competitive economies. For example, Canada is the only country with preferential trade deals with all other G7 members, thereby facilitating exports, foreign direct investment, and resilient sourcing opportunities. Canada also has implemented multi-decade infrastructure improvements including developing critical ports and gateways to the Asia-Pacific via Prince Rupert and to the Atlantic via the St. Lawrence Seaway and Halifax. Canada meanwhile has invested heavily in Canada-U.S. infrastructure including the planned Gordie Howe International Bridge in Detroit-Windsor, that, along with the existing strong infrastructure assets in that region such as the Ambassador Bridge and down the Great Lakes to Buffalo-Niagara, provide companies invested in Canada with multiple access points to global and continental transportation networks.

2. Investments in the Innovation Economy — Canada’s past investments have made it the present “friend-shoring” destination of choice. For example, Canada is the only country in the western hemisphere that has all of the critical minerals required to manufacture EV batteries. Ontario, Quebec, and Saskatchewan, in partnership with the federal government and First Nations, native and indigenous communities, are devoting significant financial, talent and social incentives to sustainably develop these areas.

The private sector is responding. Automakers currently have invested more than $25 billion in Canada’s automotive manufacturing and research corridors for development and deployment of EVs. Ontario leads the way for the number of connected and autonomous vehicle (C/AV) projects supported by multiple levels of government, and British Columbia, Quebec, and Alberta are global leaders in advanced air mobility (AAM) projects. Canada, meanwhile, is the innovator in hydrogen fuel cell development as more than half of the world’s fuel cell developed buses use Canadian designed and manufactured hydrogen R&D. Furthermore, in the wake of the pandemic, leading pharmaceutical manufacturers are investing heavily in Canada to add necessary supply and resiliency, with Quebec securing the first mRNA vaccine manufacturing facility outside of the U.S.

3. The Talent Advantage — Canada’s successes across multiple sectors largely result from the country’s investments in talent. Canada’s educational institutions, working with industry associations and individual companies, are designing curricular and skills certification programs to ensure that the country’s talent remains best-in-class with transferrable and portable skills. Beyond having one of the world’s most educated populations with best-in-class educational institutions, Canada has one of the most successful immigration programs in the world. Canada attracts talent from across the globe, and immigration officials can safely and securely process visas for highly skilled and in-demand workers in thirty (30) days or less. This provides a vibrant talent pool to address the needs of many in-demand areas for companies and provides a virtuous cycle of talent.

Canada enjoys preferential access to the U.S. in ways that potentially are the envy of other localities across the globe. 4. Navigating the Neighbor — Canada has deployed a “Team Canada” approach across all levels of government, the private sector, and civil society to address the transformative and arguably protectionist impulses of the U.S. For instance, the original USMCA text required 50 percent of all automotive components to be sourced in North America, and the initial EV proposal in the IRA only included incentives for U.S.-made automobiles. “Team Canada,” working with allies in the U.S., was able to address these issues to have more balanced automotive rules of origin in the USMCA and a North American content requirement in the IRA. Perhaps more than any other country in the world, Canada has assisted the U.S. with developing and deploying “friend shoring” in policy and practice. As a result, Canada enjoys preferential access to the U.S. in ways that potentially are the envy of other localities across the globe.

5. “Next-dooring” — The coming months will witness the first strains on “friend shoring” whether through a continued inflationary environment, labor shortages, critical supply chain issues, and important policy and political decisions to be made on issues ranging from Ukraine-Russia, China tariffs, full implementation of the USMCA in the post-pandemic period, forced labor bans, and worker-centric trade policies. There will be a pressing need to adapt “friend shoring” to supply chain constraints and costing realities. The answer to these solutions will be “next door” for the U.S. and Canada as companies operating in these countries will seek to minimize risk and uncertainty through the competitive advantages in each country.

For example, sourcing of critical minerals from Canada will support the advanced manufacturing and renewable energy needs of the continental supply chains rather than risk the policy and practical uncertainty of overseas sourcing. As the need to address talent gaps grows in the U.S., companies will be looking more to Canada. This will not come with ease. Understanding the intersections of USMCA, IRA, BABA, UFLPA, and other “friend-shoring” policies and the underlying politics, will assist companies in developing “next-dooring” projects and people.

Canada and the U.S. have enjoyed several centuries of inextricably intertwined economic prosperity that has benefited their citizens and the world at large. There are no two countries more strategically positioned to benefit and lead the era of “friend shoring” — and it starts with “next dooring.”

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