Innovation sector under tariff war needs more protection and diversified trade partners, says business advocates
A trade war with the United States poses an “existential crisis” for Canada’s innovation sector, with experts arguing that mitigation strategies, such as doubling down on intellectual property and increasing trade diversification, will be key to weathering the storm.
“Tariffs are focused very primarily on the tangible economy. The first words out of the [U.S.] president’s mouth are oil and gas, and car and lumber and dairy,” said Alain Francq, director of innovation and technology at the Conference Board of Canada. “However, the intangibles economy—like data and software and services—are harder to tariff, and move far more easily across the borders,” said Francq. “Canadian firms who own their IP for their products and services … can license production to the U.S. and reap the economic benefits for those ideas, sort of tariff-free, back home.”
Canada has been bracing for the possibility of a sweeping 25-per-cent tariff on all goods entering the U.S. when Donald Trump first announced the measures in November shortly after his successful re-election. On Jan. 20, upon his return to the Oval Office, Trump suggested that the tariff could be implemented on Feb. 1.
In an interview with The Hill Times on Jan. 29, Francq said that Canada needs action, but also, “we can’t be shooting from the hip.” If innovation is a primary driver of productivity and competition, Canada needs an innovation economy driven by data and strong policy action, according to Francq.
“We are the ideas economy … [and] we can address tariffs very logically by looking at those sectors putting out the production elsewhere, and then bringing the economic rents back here. That is one strategy which we can do,” he said.
“Even if you just focus on patents, you can find out where Canada has concentration and strength in intellectual property and freedom to operate, and ultimately, you can benefit economically … from the publicly funded intellectual property war chest that we have around here.”
Rather than competing with the U.S. in manufacturing, Canada should prioritize its strengths, such as the adoption of cloud-based technologies and artificial intelligence (AI), according to an article posted on the Conference Board of Canada’s website on Jan. 29.
Francq told The Hill Times that Canada has an “abundance of top AI talent,” as shown in a report by the Conference Board of Canada, in partnership with the Vector Institute and Future Skills Centre published on Oct. 30, 2024. However, businesses in Canada are “somehow unable, or possibly unwilling, to absorb that [talent], and so they go south,” according to Francq.
When considering the threat posed to this country’s innovation sector by a tariff war with the U.S., Francq said his message to industry players is: “hire [AI talent] faster than you need.”
“Companies should invest uncomfortably fast in hiring the highly qualified personnel … that we have in this country. The government should be incentivizing the adoption of those advanced technologies,” said Francq. “It’s talent. We have it. It is what we’re known for in this country. We need to move it into industry so that we can flex that muscle.”
In terms of playing to this country’s strengths, Francq also emphasized applying more IP to Canada’s primary industries, such as in agriculture and mining.
“Could you imagine if we owned and leveraged the intellectual property by applying innovation to primary industries?” said Francq. “Even though I’m talking about intangibles and … the innovation economy of data, I’m still saying, leverage your strength [and] focus on what we’re known for and what we’re good for. Put innovation and drive it into those primary industries, and that’s where Canada can really grow its brand and its competitiveness globally, beyond the U.S.”
The Globe and Mail reported on Jan. 28 that two sources stated that the federal government has plans for a multibillion-dollar, pandemic-style bailout intended to support workers and businesses in the event Trump were to carry out the tariff threats. The bulk of potential spending on new programs intended to support laid-off workers and businesses affected by the tariffs would require legislative approval, and therefore cannot take place until Parliament resumes on March 24, according to the report.
Audrey Milette, the press secretary in the office of Innovation Minister François-Philippe Champagne (Saint-Maurice—Champlain, Que), told The Hill Times that “the government is closely monitoring the situation surrounding potential U.S. tariffs and stands ready to have a robust response if needed. At the same time, our government has introduced measures in recent years aimed at strengthening Canada’s innovation sector, regardless of the tariff situation.”
“We’ve been doing a lot of things in terms of improving Canada’s innovation sector. Investing in artificial intelligence and quantum, [and] investing in semiconductors. There is a lot that we’ve been doing on that side,” she said.
On Nov. 11, 2024, Champagne launched the Canadian Artificial Intelligence Safety Institute, which is intended to bolster domestic capacity to address the safety risks associated with AI. The institute is one component of a broader $2.4-billion investment announced in the 2024 federal budget intended to help researchers and businesses develop and adopt AI responsibly, according to an Innovation press release.
As another example of supporting the innovation sector, Milette also pointed Champagne’s Dec. 5, 2024, launch of the Canadian Sovereign A.I. Compute Strategy. The strategy will invest up to $2-billion to help grow the nation’s AI sector, build transformational public computing infrastructure, and provide affordable access to compute power for small- and medium-sized firms.
“This is to help our start-ups that work specifically in AI; to make sure that they have access to what they need to continue to improve,” she said. “If there’s tariffs or if there’s no tariffs, it’s always good to invest in our businesses. It’s always good to make sure that we’re at the forefront of innovation.”
Alex Greco, the Canadian Chamber of Commerce’s senior director of manufacturing and value chains, told The Hill Times that the situation is very serious, and Champagne is in a difficult position. He said that the Conservatives have talked about actions such as scrapping the capital gains tax and looking at comprehensive tax reform, which are actions the Liberal government could consider.
“On the one hand, I think [Champagne] is trying to navigate a very difficult situation, but at the same time there needs to be more action from the federal government,” Greco said. “Looking at those measures and ensuring that there’s more capital investment or capital in the hands of companies is very important. And then the last thing would be… reductions in corporate taxes and personal income tax rates to improve our competitiveness.”
Liberal leadership candidate and MP Chrystia Freeland (University-Rosedale, Ont.) has plans to scrap changes to the capital gains tax if she were to become prime minister as a way to counter Trump’s tax policies, according to a report by Global News on Jan. 22, citing a source close to Freeland.
Greco said that Canada can’t afford tariffs to destabilize the national economy, and that the government should focus on strengthening key industries, such as manufacturing, and diversifying trade relationships.
“How do we position ourselves as a global leader in high growth industries, but also reduce our reliance on the U.S. while also still trading with them, considering how two-thirds of Canada’s exports to the U.S. are manufactured goods, and 45 per cent of total manufactured sales to the U.S. market are tied to our economy?” said Greco. “Moreover, I think the reality is there are significant challenges for the innovation sector around how we look at identifying different suppliers and markets while looking at expanding services to support rapid export diversification efforts.”
Greco said that companies are currently developing mitigation strategies, and are looking at diversifying their markets for where they can get new goods and services.
“I think the fact is they need to develop the tools necessary because uncertainty is very disruptive. It’s costly and difficult for Canadian businesses. Many of them are [small and medium enterprises], so diversifying their market is important,” he said.
When it comes to supporting the innovation sector, Greco said, the federal government should first assist businesses in identifying alternate suppliers, and secondly should consider measures intended to improve short-term cash flow in order to free up funds for operations, wages and supply adjustments.
“Thirdly would be to help companies increase production capacity, technology adoption, and job creation through an investment in productivity tax credits,” he said. “Then four would be looking at introducing measures to help employers and employees avoid layoffs so they can have some more freedom of capital to do innovation. And then finally would be looking at targeted, strategic retaliatory measures where it relates to countering tariffs.”
Robert Asselin, senior vice-president of policy with the Business Council of Canada, told The Hill Times that the problems created by U.S. tariffs are bigger than Champagne.
“This government has—not really, in my opinion—had a serious innovation strategy. They have focused a lot on electric vehicles and bringing foreign companies here in Canada with very mitigated success, in my opinion,” said Asselin.
“But more importantly, I just don’t think that giving subsidies to corporations is, in the end, what will make them more innovative. I would say that the intent might have been good, but I think the means and the mechanism that were used in the last few years … have not been successful.”
In terms of how to protect against the affects of American tariffs, Asselin said that Canada needs to “create an innovation ecosystem with institutions that translate ideas into economic output.” According to Asselin, Canada should revive the idea of developing an advanced research projects agency, which is a government agency that funds and develops new technologies.
“Innovation should be at the core of our economic policy, and it hasn’t been, frankly,” he said. “I think we need a science and technology strategy, and we need an advanced industries agenda, which is the three to four key sectors where we have high R&D, and we have high-skilled workers such as AgTech, biotech, [and] energy. We should absolutely double down on these sectors and do technology mapping. There will be no progress on innovation if we don’t have technology strategies in these sectors.”
Canada innovation statistics
Innovation activities include all developmental, financial, and commercial activities a business performs with the intention of creating new products or introducing new business processes.
- Overall, the proportion of businesses conducting innovation activities declined to 47.2 per cent in 2022, down from 52.5 per cent in 2019.
- Marketing and brand equity activities linked to innovation recorded the largest decline, down from 25.3 per cent in 2019 to 19.9 per cent in 2022. This decline was countered by two activities that increased over this period, software development and database activities (from 19.9 per cent in 2019 to 24.7 per cent in 2022) and intellectual property activities (from nine per cent in 2019 to 11.9 per cent in 2022).
- Large businesses (66.5 per cent) continued to be the most likely to conduct innovation activities, followed by medium-sized businesses (53.7 per cent) and small businesses (45 per cent).
- In 2022, information and cultural industries (67.8 per cent) had the highest propensity to conduct innovation activities among sectors, followed by manufacturing (64.5 per cent), professional, scientific and technical services (62.7 per cent) and utilities (58.3 per cent).
- Nine in 10 businesses (89.9 per cent) that conducted innovation activities in 2022 introduced an innovation in the 2020-to-2022 period, while this proportion falls to approximately one in two businesses (55.7 per cent) for those that did not conduct innovation activities.
- Filing for intellectual property (IP) protection is a key innovation activity. Businesses that conducted innovation activities in 2022 were more apt to file to protect at least one type of IP during the 2020-to-2022 period compared with businesses that did not conduct innovation activities. More than one in five businesses (20.7 per cent) that conducted innovation activities in 2022 filed for IP protection over the 2020-to-2022 period, compared with 3.5 per cent of businesses that did not conduct innovation activities.
Source: Survey of Innovation and Business Strategy, 2022, released July 31, 2024, by Statistics Canada
Conference Board of Canada Innovation report card info
- In the 2024 Conference Board of Canada report card, Canada scored a C, and was ranked 15th among 20 countries, placing just above Australia and just below Norway.
- According to the report card, Canada does “relatively well” at building innovation capacity, but fails to keep up with peers in innovation activity or in seeing innovation-based economic results.
- Holding Canada back is a “culture of innovation problem,” wherein Canadians are afraid to fail, and therefore do not act on bold ideas, according to the report card. The Conference Board of Canada said that Canada is second only to China in terms of cultural fear of failure. In terms of entrepreneurial ambition and skill sets, Canada ranks among the best countries in the world, but societal and personal costs of failure “put us at the bottom,” the report card says.
- Investments in research and development (R&D) have precipitously dropped since the 1980s, and Canadian business R&D have also been declining for nearly 20 years, according to the report card.
- To improve Canada’s innovation performance, the Conference Board of Canada’s recommendations include making intellectual property and R&D “the key drivers of commercial success” by improving funding and programs, injecting a competitive spirit within the business ecosystem, and improving productivity by adopting new technologies.
Source: The 2024 Innovation Report Card, released by the Conference Board of Canada on April 11, 2024.
LICENSING
PODCAST
ALERTS
