Deputy Prime Minister Chrystia Freeland with CNN’s Fareed Zakaria, NATO Secretary General Jens Stoltenberg, Polish President Andrzej Duda, Deputy Prime Minister Yuliia Svyrydenko of Ukraine and US DNI Avril Haines in Davos, Switzerland, January 18, 2023/Reuters

 

John Stackhouse

January 25, 2023

In 2016, fresh from election victory, Justin Trudeau took Davos by storm with a new values-based foreign policy sparkling with generational change and the slogan, “Canada’s back.”

A year later, Xi Jinping used Davos to trumpet a global leadership role for China and a defense of globalization two days before and Donald Trump’s “American carnage” inaugural address.

Today, both Trump’s worldview and Xi’s have lapsed, Canada isn’t back as much as it had wanted, and Europe is reeling from Russia’s invasion of Ukraine. The Xi regime has turned inward, and Joe Biden has the US back on the world stage as a rational actor, including via the NATO response to Russia’s invasion of Ukraine and in leading the multilateral management of a global economy struggling to absorb the shocks of the COVID pandemic and inflation.

Despite those challenges, Canada remains better positioned than most for this new age of uncertainty. And yet, judging from this year’s World Economic Forum (WEF) at Davos, we are still the ambivalent globalist.

The momentary, perhaps uncharacteristic, Canadian swagger that Trudeau and his senior team brought to Davos in their rookie year was nowhere to be found this year. Amid a broader wartime optics boycott that left Germany’s Olaf Scholz the only G7 leader in attendance, the federal government cancelled the annual Canada Party, choosing instead to devote its Davos promotion budget to a daily glossy wrap of the Financial Times, handed out for free on the town’s main street. Deputy Prime Minster Chrystia Freeland, a longtime Davos participant and member of the World Economic Forum board of trustees, flew in briefly, largely to express support for Ukraine. But it was left to Trade Minister Mary Ng to carry the rest of the week for Canada.

The world’s most recent economic and geopolitical shifts may require Canada to adjust our foreign policy footing on several fronts:

1. Energy security is reshaping climate strategy.

The hottest topic at Davos was the US Inflation Reduction Act, with its $380 billion of subsidies for clean energy, and a promise of easy regulation for US firms helping the world’s biggest energy user get to Net Zero. The European Union showed up to Davos determined to launch its own wave of subsidies, while acknowledging that they will have to do something far more challenging: cut regulation.

Both the US and Europe have a revised view of their climate strategies in light of energy shortages caused by the Ukraine war. Their view today is that energy security is essential, even if it means quietly adjusting climate priorities.

Canada is facing the same challenge — to balance climate and energy objectives. And that may require even greater fiscal and regulatory commitments, especially to ensure that the slow federal-provincial approach to approval of projects can achieve warp speed. Canada will also have to make strides to ensure that our trade advantage, as part of NAFTA, isn’t lost to other American allies, notably in Europe, who are now pushing for preferential treatment in the name of economic growth rather than climate cooperation.

2. New blocs are forming

The status of economic security as an element of national security has been reinforced as we witness a clear rise in economic nationalism in virtually every region of the globe. We may even see the advent of a “Climate Club” to foster a renewable energy cartel to rival OPEC, and new democracy-based trading blocs to challenge China’s influence over supply chains, including through its ownership of more than 100 international ports.

That conflation of economic and national security could carry a heavy price, especially for smaller trading nations like Canada. The World Trade Organization (WTO) warned that deglobalization could cost the world $US 7 trillion of lost output if it goes too far. At Davos, there was no sign of backtracking. When asked about deglobalization, European leader Ursula von der Leyen chafed at the word, preferring to call this a new era of “de-risking.”

If this shift away from early 21st century globalization continues, Canada may need to be clearer with its commitments to allies, and focus trade on the most valuable and friendly markets rather than chasing new frontiers.

3. Monetary divergence may return

There is one Matterhorn-sized risk in 2023: interest rates. Central bankers used Davos to stress that they’re not tempted by the slowing economy to cut rates; they recognize it will be much harder to get from 4 percent to 2 percent than from 6 percent to 4 percent. If inflation remains stronger in a more robust US economy, we may see Canadian rates fall first and farther, pressing downward on the Canadian dollar. Would the Bank of Canada be comfortable with that divergence? And how would business respond to the opportunIties, in 2024, of easier money and a possible currency advantage in the US? Would they invest for growth and expand? And what more would Ottawa need to do to see that happen?

4. A new Asian dynamic

The most notable low profile at Davos was China. Its neighbour, India, could not have been more different.

India showed up with trade showcases, reception spaces and a large ad campaign featuring Prime Minister Narendra Modi. Outside of Davos, India has overtaken China in economic growth, and will overtake it as the world’s most populous country this spring.

India is also aiming to be a leading tech supplier to the world by committing $10 billion to subsidize a semiconductor industry that employs 50,000 engineers, and reorienting post-secondary education to accommodate a doubling of production, with 500,000 new engineers a year. That is just a taste of its ambitions displayed at Davos.

For Canada, relations with India have been mixed, but rarely have they been more strategically important. Canada can make key investments in India to build its digital infrastructure. We can also partner with India on implementing and scaling climate technologies that can help both countries reduce emissions. And because of its growth, India can provide Canada with economic balance against a more diplomatically volatile China.

5. A new developing world challenge

The world’s poorest countries always get a seat at the table at Davos. They just don’t always get a voice. This year that started to change as the spectre of low economic growth, high interest rates and stiff competition for energy, food and advanced technologies brought into stark relief the challenges for developing countries.

Some 60 of the world’s 80 low-income countries were listed as “distressed” in terms of their ability to pay their debts. If interest rates remain high, that stress will mount, and worsen. And if the US dollar remains the world’s safe haven, it will make imports of food, oil and other essentials for those countries even more expensive.

Any debt crunch will be harder to resolve amid global power realignments. Today, most emerging market debt is spread across a panoply of creditors, from sovereign wealth funds to commercial banks to hedge funds and the biggest new creditor, China. How China would approach a multilateral debt restructuring is a great unknown, made more difficult by its tensions with the US. Some Davos regulars, led by Canada’s Mark Carney and former US Treasury Secretary Lawrence Summers, are pushing for reform of the World Bank and International Monetary Fund at their annual meetings this spring, in part to avert future debt crises while also accelerating climate finance. According to the WEF, those institutions, along with regional development banks, need access to $3 trillion a year in capital if they’re to finance developing countries through a socially just transition to Net Zero.

6. Soil as the new gold

Davos showcases a range of multinationals — Nestle, Unilever, Lilly Cafe — as well as farmers, land groups and scientists to advance the cause of sustainable agriculture, investing in soil as a carbon sink that can both swallow emissions and reward farmers for stewarding their land.

It’s among Canada’d biggest opportunities, too.

Agriculture lands are considered one of the leading assets for climate action since, properly managed, they can absorb the emissions of entire sectors. They can also offset the carbon, methane and nitrous emissions that come from the fertilizing, production and consumption of food. What’s more, soil degradation has become a serious consequence of climate change, albeit less noticed than hurricanes and floods.

For Canada, agriculture is critical to advancing our ambitions globally and one area we can look towards is under our very own feet. To finance the Next Green Revolution we can lead by rewarding farmers and landowners not only to produce food, but to protect and preserve their soil. At Davos, the talk was around programs like “inset” models that certify and pay farmers directly for sustainable practices such as low-till planting, or low-emissions fertilizers.

These programs are also exploring the potential for food companies claiming emissions on their climate accounting books as an asset or liability. Scaling this practice can also help investors and consumers better measure progress.

Investing in our soil can help Canada establish a greener agriculture sector and a more rewarding one for Canada’s farmers.

7. Ensuring spending is targeted

Canada’s next federal budget needs to signal to the world how serious we are about addressing the biggest challenges facing us – especially climate change. That will require long-term investments and incentives for business. There will be a political temptation to help Canadians with the higher cost of living, as “affordability” contends for Word of the Year with “fragmentation”. Few actions would be more dangerous for inflation, even as it comes down, than a budget that boosts consumption. There were plenty of warnings at Davos about that risk of fiscal policy colliding with monetary policy. Remember Britain’s Liz Truss and her disastrous economic policy? Voters may be okay with more handouts. Markets won’t.

Davos 2023 ended with some notes of optimism, and a general sense that after a year of war, inflation and cyber attacks, “it could have been worse.” Relief, however, is not a strategy, and there was no shortage of countries with evolving strategies for a world in flux. None has a better chance of strengthening old alliances and building new bridges than Canada. But it will take even more determination and focus to reap the benefits of change.

John Stackhouse, Senior Vice President in the Office of the CEO at Royal Bank of Canada, is also a former Editor-in-Chief of the Globe and Mail. He is a Senior Fellow of the C.D. Howe Institute as well as the Munk School of Global Affairs and Public Policy.