Beyond the ‘Elbows Up’ Response to the Tariff War: Debating a National Industrial Policy
Canada’s long codependent economic relationship with the United States has abruptly and involuntarily ended. The election of a tariff-obsessed, unpredictable, incompetent, crony capitalist autocratic Donald Trump administration requires Canada to rethink its economic future.
Fortunately, our common history provides guidance on how to deal with such a massive exigency. Given the significance of the isolationist chaos south of the border, the only serious option for Canada is a national industrial policy much like Canada (and the US) had during the Second World War, which transformed this country into a dynamic, advanced industrialized economy that paid dividends for decades.
In 1933, the Canadian unemployment rate was 30 per cent, while 20 per cent of the population became dependent on government welfare for survival. The unemployment rate remained above 12 per cent until the start of the Second World War in 1939. In the six-year period between 1939 and 1945, once Canada entered the Second World War and changed the anatomy of its economy, GNP more than doubled, and the unemployment rate fell to one per cent by 1944, while wages grew nearly 70 per cent.
Taking Control of the Economy
How did this happen? The Mackenzie King government took control of the economy in the form of a publicly funded and a directed supply-side industrial policy. Resources and labour were channelled to produce for the war effort and the core needs of the community. Twenty-eight Crown corporations were established, massive public and private investments meant factories multiplied, corporate taxes were doubled, and excess profits taxed, generating revenue for these investments.
Along with the stick was the carrot of providing special incentives to renovate plants and acquire machinery, as well as infrastructure development, regulations, and research and development support.
The post-World War II Canadian economy from the 1940s through to the early 1970s is referred to as the “Canadian Golden Age.” It was a time of unprecedented prosperity for Canada, characterized by rapid and stable economic growth, rising living standards, improved health outcomes, education-based upward mobility, and Canada’s most income-equal period, thanks to policies that supported broad-based economic growth and strong social programs.
This was also the result of public sector funded and planned growth in expenditures on health, education, social welfare, and infrastructure. It led to a rate of growth of labour productivity and total factor productivity that exceeded by large measure anything that followed after Canadian economic policy shifted to austerity, corporate tax cuts, and the deregulation favoured by its business class. The extraordinary debt-to-income ratio that existed at the end of World War II shrank to a fraction as the Canadian gross domestic product expanded, driven by progressive government supply-side policy. The debt rose again as economic growth slowed after Canadian corporate tax rates were reduced by more than 50% between 1960 and 2020.
US Experience Post WWII
The United States’ Second World War Roosevelt administration ran huge budget deficits, raised taxes, compelled and incentivized industries to produce what the economy needed, imposed wage and price controls and, at times, purchased half of all production.
In the United States from 1941 to 1945, industrial production and productivity doubled as the war economy brought full employment, wage growth of 50 per cent, higher taxes, and therefore, a compressed income distribution. GDP grew at 11 to 12 per cent, and unemployment fell from 14.6 per cent in 1940 to 1.2 per cent in 1944. New technologies, industries, human skills, mass transportation and new sources of raw materials evolved from the ashes of a decade long depression as a result of government funding, planning, and regulation. Women in both countries entered the paid labour force in great numbers.
There is more recent history that echoes the national industrial policies of the war years. In exchange for dropping out of the Democratic presidential primary in 2020 and endorsing Joe Biden, Bernie Sanders and his advisers became part of a Unity Task Force along with Biden’s and fellow candidate Sen. Elizabeth Warren’s policy team, which produced a 110-page set of potential policies in July 2020. These policies focused on reviving American manufacturing by concentrating resources on climate change and infrastructure, and a second plan focused on racial economic equality referred to as the “care economy.”
Gone were the days of dealing with climate change with carbon taxes or cap and trade – the Biden government was going to build a green economy. Gone were the days of relying on redistribution alone in order to create a more equitable society with a program of pre-distribution, requiring union wages to rebuild the green economy.
The US became the envy of the industrialized world with respect to GDP growth, price stability, full employment, real wage increases, and an enthusiastic stock market as it revived its manufacturing sector from one end of the country to the other, building a green economy. And it was just getting started.
Prospects for Made In Canada Industrial Policy
However, what are the prospects for a similar national industrial policy in Canada today, and what evidence is there that the Carney government is moving in that direction?
Only weeks after the April 28 federal election, the newly re-minted Finance Minister, Françoise-Philippe Champagne, indicated that the wartime industrial policies are at least a reference point for the Liberal government:
“When I look at 2025, it reminds me of 1945, where C.D. Howe kind of reinvented modern industrial Canada. It’s one of these moments in history where we’re really rebuilding the nation…” (Politico.)
Champagne was referring to Canada’s wartime Industry Minister, C.D. Howe, who as the Minister of Munitions and Supply implemented the War Measures Act (1939) and the War Appropriation Act to rapidly industrialize the Canadian economy. In Howe’s words:
“If private industry cannot or will not do the job, then the state must step in. The need is too great to wait.” (cited in J.L. Granatstein, Canada’s War, 1975.)
“The demands of war production have brought about the most rapid industrial revolution that Canada has ever known. Plants have been built, techniques learned, and production achieved on a scale and with a speed which a year ago would have seemed impossible.” (Address to the Canadian Manufacturers’ Association, 1941.)
Reminiscences aside, any valid comparison to the wartime national industrial program must measure the scale of government policy and the conditionality imposed to direct investment and achieve clear industrial and sector outcomes. By these criteria, in spite of the rhetoric of nation-building, there has not been comparable ambition or leadership from the Carney government in its first six months.
Arguably, the most significant policy change by the Carney government was on federal procurement policy, potentially to cover over $100-billion annually in federal funding streams. For decades, Canadian jurisdictions were the Boy Scouts of free trade, disavowing Buy Canada policies even while the US pursued Buy-American. That is changing, and by November, there will be a requirement that all government spending must give priority to Canadian-sourced goods and services. In defence and construction procurements, there will be a requirement to use Canadian steel and softwood lumber.
The new procurement policies are connected to national industrial policy goals of reinforcing Canadian industry, with a priority to support those sectors most affected by the trade war with the US. The centrepiece of the response is a $5-billion Strategic Response Fund to support companies disproportionately exposed to US tariffs. This includes the previously announced $2-billion Auto Fund but is in addition to the $1-billion allocated in July to the steel sector.
To put this new fund in context, the Strategic Response Fund replaces the Strategic Innovation Fund, which was also significant – with over $12-billion allocated over seven years to 2024. The largest part of it was the Net Zero Accelerator Fund to assist decarbonisation of heavy industry – clearly an important and strategic purpose. However, in 2024, the Auditor General gave a brutal assessment of that program, finding that “the Net Zero Accelerator initiative was not part of any coherent and comprehensive horizontal industrial policy on decarbonization.”
The new Crown Corporation Build Canada Homes has been created to plan, finance, and partially build affordable housing, purportedly seeding a new modular housing sector. More than $40-billion in financial resources has been allocated over 10 years – but this Fund also replaces an existing CHMC fund. And compared to the post-war veterans housing program and the 1970s when federal housing programs were at industrial scale at about 1% of GDP, and as a share of federal program spending, Build Canada Homes is a much, much smaller venture.
In addition to scale, there is a large gap between the purpose and conditionality of the wartime industrial policies and Canada’s new program of nation building by fast-tracking major energy, resource, and infrastructure projects. In 1941, Howe told Parliament, “This is no time to quibble about theories. We tell industry what we want; we provide the means; we expect results.” In July 2025, Carney said that government will not take a “top-down approach… saying we want this, we want that.”
The interim list of 32 “national projects” leaked to the Globe and Mail are mixed.
More than half of the proposals are oil, gas, and mineral export oriented, but there are also hydroelectric projects and transmission grids, critical minerals processing, high-speed rail, and other transportation projects that potentially have significant benefits for the Canadian economy. About half of these projects are likely to have strong public-sector leadership or involvement, including public energy utilities, ports corporations, and direct public investments, although problematically mixed with Public Private Partnerships. Some projects, like a new oil pipeline to the BC North Coast, will meet strong opposition particularly if it involves lifting the oil-tanker moratorium.
Can we see a CD Howe moment in history when we are rebuilding the country? Not yet. There is a lack of ambition, a continuing emphasis on resource exports, and not yet a coherent national industrial policy that would be transformative of the whole economy by adding value and meeting social and environmental goals.
But neither is Canadian business stepping forward with the scale of investment or purpose to break Canada free from dependence on the US. Canada’s private for-profit sector is a notorious laggard when it comes to research, development, and investment compared to our G20 and OECD counterparts. Canadian companies are currently holding (Q3 2024) $727-billion in cash deposits. For these reasons, in addition to the preoccupation of Canadian Conservatives and their policy tanks to salvage what they can from the failed free trade and US deep integration model, there is a continuing window of opportunity to influence a state-led, national industrial policy.
Moreover, the national industrial policy tools that were wielded by the wartime government still exist today. Two notable tools are the Defence Production Act and the Investment Act, which provide the authority to declare national security interests in industries and sectors, to direct production and supply chains, as well as ordering, where needed, disinvestment and securing Canadian ownership and control.
What would it take for Canada to become a leader in green energy, sustainable agriculture, green transportation, biotechnology, a resilient and digitalized high-value-added processing economy? Faced with national emergencies, the wartime government transformed Canada in five years. The five-year mandate of the new Canadian government will be played out in a trade war with the US, a shifting geopolitical order that threatens our sovereignty, and a race against time to meet our 2030 climate goals. We simply can’t wait for private-sector proposals to provide the jobs, justice, or sustainability to meet this moment. •
