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A geoeconomic tsunami – Economy and ecology – IPS Journal



When tectonic plates shift, the earth shakes. Tsunamis race around the globe in the form of shock waves. The global economy has experienced three such earthquakes in recent years. The Covid-19 pandemic has made us aware of the vulnerability of a globally integrated economy. When important components are stuck in quarantine in China, production lines in Germany come to a halt. Thus, in the organisation of global supply chains – which for decades have been trimmed down for efficiency (‘just in time’) – resilience (‘just in case’) will play a more important role in the future.

After the end of the unipolar moment, larger and smaller powers are vying for the best positions in the new world order. In the hegemonic conflict between China and the United States, the government under Joe Biden has verbally disarmed, but its export controls in the high-tech sector have all the more bite. This politicises the framework conditions for investment decisions. Market access, infrastructure projects, trade agreements, energy supplies and technology transfers are more and more being evaluated from a geopolitical point of view. Companies are increasingly faced with the decision of choosing one IT infrastructure, one market and one currency system over the other. The major economies may not decouple from each other across the board, but diversification (‘not all eggs in one basket’) is gaining momentum, especially in the high-tech sector. As this develops, we cannot rule out the possibility that economic blocs will form.

The experience with the ‘human uncertainty factor’ in the pandemic is also resulting in the acceleration of digital automation. Robots and algorithms make it easier to protect against geopolitical risks. In order to bring these vulnerabilities under control, the old industrialised countries are reorganising their supply chains. It remains to be seen whether this is purely for economic or logistical reasons (re-shoring or near-shoring), or whether geopolitical motives also play a role (friend-shoring).


Bloc formations

China must respond to these challenges. The fate of the People’s Republic will depend on whether it succeeds in charging to the head of the pack in worldwide technology, even without foreign technology and know-how. Anyone who believes that Beijing has no countermeasures up its sleeve will soon be proven wrong. In order to compensate for the closure of the developed export markets, the Silk Road Initiative has been opening up new sales markets and raw material suppliers for years. At the last party congress, the Chinese Communist Party officially approved a reversal of its development strategy. From now on, the gigantic home market will be the engine of the ‘dual circular economy’. Export earnings are still desired, but strategically they are being relegated to a supportive role.

One impetus behind China’s massive build-up of gold reserves serves is the goal of having its own (digital) currency take the place of the US dollar as the world’s reserve currency. Because China benefits more than anyone else from open world markets, it is continuing to rely on a globally networked world economy for the time being. Alternatively, Beijing could also be tempted to create its own economic bloc. The foundations for this have already been put into place, with the Regional Comprehensive Economic Partnership (RCEP), the BRICS Development Bank (NDB), the Asian Infrastructure Investment Bank (AIIB), the Silk Road Initiative (BRI) and bilateral cooperation in Africa, Latin America and the Middle East. The difficulties that Western companies face in the Chinese market should provide just a sample of what is looming if China makes market entry into such a bloc contingent on good political will.

But it is not just China. Generally, for all of Asia as the new centre of the world economy, these geoeconomic disruptions are tantamount to a tsunami. And the disruptions could hit developing countries particularly hard. Whether they are being cut from global supply chains for the sake of resilience or due to geopolitical factors, this brings equally devastating results. Of course, some economies are hoping to benefit from the diversification strategies of developed countries (i.e. the ‘China plus one’ strategy).

As with Europe, most Asian states depend on China’s dynamism for their economic development – and on the guarantees of the US for their security.

But digital automation neutralises what is often their only comparative advantage – cheap labour costs. Why should a European medium-sized company have to deal with corruption and power cuts, quality problems and sea routes lasting weeks, when the robots at home produce better and cheaper? Algorithms and artificial intelligence are also likely to replace millions of service providers in outsourced back offices and call centres. How are developing countries supposed to feed their (sometimes explosively) growing populations if, in the future, simple jobs are to be performed by machines in industrialised countries? And what do these geoeconomic disruptions mean for the social and political stability of these countries?

As with Europe, most Asian states depend on China’s dynamism for their economic development – and on the guarantees of the US for their security. Therefore, to varying degrees, they resist pressure to choose sides. Whether it will be possible to escape the pull of geoeconomic bipolarisation over the long term, however, is still an open question. If the splitting of IT infrastructures continues, it could be too costly to play in both technological worlds. American regulations prevent products with certain Chinese components from entering the market; but those who want to play on the Chinese market will not be able to avoid a steadily increasing share of Chinese components.

Reducing economic vulnerabilities through diversification

This type of global economy would also pose an existential challenge to export nations such as Germany. Even the short-term cutting off of Russian energy is a Herculean task. Decoupling from China at the same time seems difficult to imagine. But burying one’s head in the sand will not be enough. Neither nations nor businesses will be able to escape the pressure from Washington and Beijing. In the future, important economic, technological, and infrastructural decisions will increasingly be subject to geopolitical considerations. Therefore, reducing one-sided vulnerabilities through diversification is the right thing to do.

A geoeconomic tsunami will roll around the globe, crushing old structures in its path.

On the other hand, some of the lessons drawn from the over-reliance on Russian energy before the war seem short-sighted. For decades, the German economy has integrated itself more deeply into the world economy than many other countries, with the goal of avoiding violent conflicts through interdependence. It cannot break out of these interdependencies from one day to the next. Reducing economic vulnerabilities through diversification is therefore the right move, while decoupling for ideological reasons is the wrong one. Germany should therefore beware of sacrificing its economic future to an overly ambitious value-based foreign policy. This is because losses of prosperity translate into fears of the future and social decline at home – a fertile breeding ground for right-wing populists and conspiracy theorists.

The geopolitical race, digital automation and the reorganisation of supply chains according to resilience criteria are mutually reinforcing processes. It is not only companies that have to rethink their business models – entire national economies need to adapt their development models in order to be able to survive in a rapidly changing global economy. The particular difficulty lies in having to make investment decisions today without being able to foresee exactly what the world of tomorrow will look like. Looking into the crystal ball, some think they can see an age of de-globalisation. And in fact, in the wake of the 2008 financial crisis, the peak of globalisation, as measured by the volume of world trade and capital exports has already passed. However, de-globalisation is not synonymous with a relapse into autarkic national economies. A stronger regionalisation of the more networked global economy is more likely. In view of the political, social and cultural upheavals of turbo-globalisation, this need not be the worst of possible outcomes.

In order to prevent the regionalisation of the world economy from turning into the formation of competing blocs with high prosperity losses for everyone, there is a need for new partnerships on an equal footing.

One thing is certain: A geoeconomic tsunami will roll around the globe, crushing old structures in its path. The hope is that out of the ‘creative destruction’ that Joseph Schumpeter spoke of, there will emerge a more resilient, sustainable and diversified global economy. However, without political shaping of the new world economic order, the opposite could also occur. Politically, this means adapting the rule-based world order so that it remains a stable framework for an open world economy because even the organisation of a regionalised world economy needs global rules of the game that everyone adheres to. Therefore, with few exceptions, nearly all nations have a great interest in the functioning of rules-based multilateralism. However, in the Global South, there is already a great deal of distrust towards the existing world order. In reality, according to some, this amounts to the creation of the old and new colonial powers, whose supposedly universal norms do not apply to everyone but are instead violated at will by the permanent members of the UN Security Council.

In order to break through current blockages, such as those of the World Trade Organization (WTO), the emerging powers must be granted representation and a voice in the multilateral institutions that would be commensurate with their newfound importance. Europe will have to accept a relative loss of influence because, as a rule-based supranational entity, its survival and prosperity depend on an open, rule-based world (economic) order.

Instead of morally elevating itself above others, Europe must concentrate all its energies on maintaining the conditions for the success of its economic and social model. In order to prevent the regionalisation of the world economy from turning into the formation of competing blocs with high prosperity losses for everyone, there is a need for new partnerships on an equal footing beyond the currently popular comparisons of democracies and autocracies. In order for new trust to develop, the global challenges (climate change, pandemics, hunger, migration) that particularly affect the Global South must finally be tackled with determination.

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What Chrystia Freeland told CTV News about Canada's 2023 budget – CTV News



Finance Minister Chrystia Freeland says clean energy and green technology spending may not have been the big-ticket items of the 2023 federal budget if it weren’t for the need to compete with infrastructure spending in the United States.

After she tabled the budget in the House of Commons Tuesday, Freeland told CTV’s Power Play host Vassy Kapelos that her government has been “at this for a long time,” campaigning on “the economy and the environment going together.”

Still, she said she doesn’t think it would have invested in a clean economy at the scale of the 2023 budget if it weren’t for the need to compete with the Inflation Reduction Act, which offers billions of dollars in energy incentives south of the border.


“I don’t think we would have done as much, had the IRA not been introduced,” Freeland said, adding the Liberal government has been pushing for clean economy policies for years, and citing the carbon price as an example.

“It’s also true that the U.S. plan, the IRA, is a game changer,” she also said. “They have put a ton of money on the table, and it was really important for us, having been ahead in this race, not to fall behind.”

Freeland discusses the 2023 federal budget in the video at the top of this article.

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Ottawa gives $20.9-billion over five years in tax credits to stay competitive with U.S. on clean economy spending



Deputy Prime Minister and Minister of Finance Chrystia Freeland receives applause as she delivers the federal budget in the House of Commons on March 28.Sean Kilpatrick/CP

The federal government is banking on a suite of new tax credits, a clean electricity grid and the carbon tax to spur the transition to a clean economy and counter vast subsidies rolled out by the United States that risk pulling capital south of the border.

In its budget unveiled Tuesday, Ottawa announced $20.9-billion over five years, the majority of which will go to new investment tax credits for clean electricity, clean hydrogen and clean technology manufacturing. It also expanded eligibility for tax credits for clean technology adoption and carbon capture, utilization and storage (CCUS).

The budget shows Prime Minister Justin Trudeau’s government betting on investment tax credits to compete with incentives rolled out by the Biden administration as part of its US$369-billion Inflation Reduction Act. The spending document also shifts the Trudeau government’s focus from climate change mitigation to the economic incentives required to meet emissions reduction targets.

In her speech to Parliament, Finance Minister Chrystia Freeland said new fiscal measures would ensure Canada’s economy is not left behind during the clean transition, and position the country to benefit from new critical supply chains among allies that cut out unreliable dictatorships.


“We will ensure that Canada seizes the historic opportunity before us,” she said.

The majority of the investment tax credits end in 2034 – lining up with Canada’s goal for a net-zero electricity grid by 2035.

About 83 per cent of Canada’s electricity supply comes from non-emitting sources. To bring that up to 100 per cent within 12 years, the government will implement a 15-per-cent refundable tax credit available to public, private and Indigenous power producers. It can be used to cover large-scale hydrogen and nuclear power projects, some abated natural-gas-fired generation, and equipment for electric transmission between provinces and territories.

The budget estimates the cost of the clean electricity tax credit over the next five years at $6.3-billion. The goal is to encourage electric utilities to build an east-west grid.

On top of that, as promised in the Fall Economic Statement, the budget introduces a clean hydrogen refundable tax credit which will cover between 15 per cent and 40 per cent of eligible project costs. The tax credit is estimated to cost $5.6-billion over five years.

The budget also rolls out a 30-per-cent clean technology manufacturing tax credit aimed at spurring business investment in areas such as the extraction, processing and recycling of critical minerals. It is expected to cost the treasury $4.5-billion over five years.

The clean electricity tax credit is in addition to a previously announced clean technology tax credit that covers 30 per cent of private-sector investments in areas such as wind, solar and small modular nuclear reactors. Eligibility for that program was expanded in this budget and its five-year cost is estimated at $6.7-billion. Companies cannot draw on both tax credits for the same project.

And the budget extends eligibility for the CCUS tax credit, increasing its costs by $516-million over five years to a total of $4.1-billion.

The federal government promised a substantive response to the U.S. Inflation Reduction Act in the budget in large part because of serious concerns in the business community that the Biden administration’s measure would drive investment out of Canada. The American spending also pushes protectionist Buy America policies that Mr. Trudeau’s government is threatening to mirror.

The budget says Canada is considering introducing new tit-for-tat parameters in the tax credits that would only grant foreign companies the equivalent access to tax credits that Canadian companies are eligible for in their respective countries. The move is meant to give Canada leverage as it tries to secure carve-outs from protectionist U.S. policies.

Robert Asselin, a senior vice-president with the Business Council of Canada, told The Globe and Mail that the path charted by Ms. Freeland is “generally good,” in particular the focus on greening the electricity grid.

“It’s foundational to everything else. If we don’t have enough clean electricity, we’ll struggle to decarbonize the economy,” he said, adding that the government got “the big things right.”

He said that investment-based tax credits give the government more predictability for its long-term budgeting and that copying the production tax credits offered by the U.S. would have “blown the bank.”

However, Mr. Asselin said the budget falls short when it comes to incentives to develop new economic sectors. “There’s nothing on research and development, nothing on industrial research,” he said.

Chris Severson-Baker, the executive director of the Pembina Institute, a think tank, agreed that the focus on a cleaner grid is essential to a greener economy. But, he added: “We’re not done.”

“There certainly will be a role for future budgets to keep moving forward to get to net zero by 2050.”

The Pathways Alliance, whose membership covers about 95 per cent of oil sands production, welcomed the expansion of CCUS supports but said it’s still waiting on a better understanding of the government’s intentions for carbon contracts for differences. The contracts, details of which have been promised by Ottawa, would provide a predictable price on carbon pollution and carbon credits, thereby ensuring that businesses can plan long-term investments in decarbonization and clean technologies.

Not yet accounted for amid the billions in new spending announced Tuesday is how much money the federal government paid to convince Volkswagen to build its first overseas electric vehicle battery manufacturing “gigafactory” in Ontario. Government officials told reporters the spending is accounted for within the budget but declined to disclose the cost. A formal announcement is expected in about a month.



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What to expect from budget 2023 as ‘storm clouds’ gather over Canada’s economy



Canada’s Liberal government is in a tight spot heading into the 2023 federal budget.

A year of surging prices and rising interest rates has put fresh stress on Canadian households struggling to make ends meet.

Landmark investments in the green transition from the United States have turned up the heat on the Canadian government as it looks to stay competitive with the economic juggernaut south of the border.

And after years of higher spending and a surging recovery from the COVID-19 pandemic, storm clouds are gathering in the economy, putting new scrutiny on government coffers.


Chrystia Freeland, the government’s finance minister and deputy prime minister, has pledged that the 2023 budget will include “targeted” support to help vulnerable Canadians but will not “pour fuel on the fire of inflation.”

Can Ottawa thread the needle through the competing pressures and economic uncertainty while still meeting Canadians’ ends?

Here’s what economists think.


Budget planning in a ‘challenging time’

The federal budget comes at a “challenging time” for Freeland and Prime Minister Justin Trudeau, says Sahir Khan, vice-president at the University of Ottawa’s Institute of Fiscal Studies and Democracy.

Now in their third term of governing, Khan tells Global News that the Liberals’ second budget of their current mandate is set to arrive amid a “change in context.”

He says the Liberals have had the “good fortune” of inheriting large revenue surprises in previous budgets, which has helped the government spend more while staying fiscally sustainable.

But government revenues are set to dry up with the economy slowing, Khan warns, even as spending priorities mount.

Among the pressures facing the government are commitments already made on a new health-care accord with the provinces, defence spending both at home and in Ukraine and the green energy transition.

“Storm clouds” are gathering for a possible recession on the horizon, Khan notes, and the federal government will feel pressure to “keep some of their powder dry” for emergency spending to resuscitate the economy if the worst-case scenarios come to pass.

Randall Bartlett, senior director of Canadian economics at Desjardins, says that even with the first quarter of the year off to a stronger start than most economists anticipated, the government still finds itself in a bind with uncertainty about how much the economy slows this year.

“It’s a challenging environment to do budget planning overall,” he tells Global News.


How will inflation impact the budget?

A surging economy through the COVID-19 recovery helped push government revenues higher and Ottawa spent much of this money on support for Canadians hit hard by the pandemic.

While those programs have largely wound up, a recent analysis from the Bank of Montreal showed that government spending per capita is still 11.3 per cent higher than in the pre-pandemic era.

Bartlett says that while government revenues generally see a boost amid high inflationary periods, the federal government is about to experience the “insidious” nature of rising price pressures on the downturn.

Government spending supports that are indexed to inflation, such as Old Age Security (OAS), are now costing more, just as subsiding inflation and a cooling economy are set to slow government revenue growth, he says.

“We’re going to continue to see those knock-on effects of high inflation on the spending side, even as those tailwinds to revenues start to fade,” Bartlett says.

But Bartlett adds that the government is facing “a lot of political pressure” to continue to spend to support vulnerable households.

Some economists worry that too much direct financial support from the federal government will end up fuelling inflation, as Canadians use their contributions to buy more goods and services and end up stimulating the economy all over again.

Top officials at the Bank of Canada, which has raised its benchmark interest rate aggressively over the past year to cool the economy and tame inflation, have said that letting up on pandemic-era stimulus sooner could have limited inflation.

In order to avoid driving inflation higher with government support, Ottawa will need to be “well-targeted” in its spending plans, says Lindsay Tedds, associate professor of economics at the University of Calgary.

Rather than sweeping tax cuts, which would lessen the burden on households but could inadvertently spur more spending, Tedds tells Global News that the Liberals could again double the GST credit or top up guaranteed income supplements.

Doing it this way would ensure government spending goes more towards Canadians who need it to make ends meet on the basic necessities, she says.

“We’re talking about just trying to get them through being able to pay rent and buy groceries and things like that. So it doesn’t have an inflationary impact,” she says.

Khan says the government could also “stagger” its promises, with spending ramping up in years three, four and five of its budget horizon. Doing so could allow the Liberals to keep money back to respond to emergencies while also showing Canadians they’re listening to affordability concerns, he says.


Pressure from the U.S. demands action

Economists who spoke to Global News say the federal government is feeling pressure to respond to the U.S.’s Inflation Reduction Act, which rolled out a number of incentives for companies to make investments in the green economy south of the border.

Despite restrictions on the government coffers, the Liberals will need to put a “down payment” on some of the clean energy priorities it has talked about for years, Khan says.

If Ottawa does not roll out its own incentives to compete with the U.S., Canada risks losing jobs and investment from large-scale companies in the green economy, he argues.

“They will suck that capital and those jobs out if we don’t look like we’re doing the same for our industry,” Khan says of the U.S.

“There’s going to have to be something actually quite tangible in this budget. It can’t just all be narrative.”

Tedds agrees and notes that announcements on measures like carbon capture and storage will be attractive in Alberta.

Ottawa can’t necessarily go toe-to-toe with American capital, however, and Bartlett says the government should focus spending on industries where Canada has a “comparative advantage.”

He highlights critical minerals as one such area where Canada could position itself in the green economy.


‘Champagne taste’ and a ‘beer bottle budget’

Tedds says Canadians should “moderate their expectations” for the upcoming budget.

While it’s possible Canada avoids the worst of the economic downturn, the outlook is “too unpredictable” for the Liberal government to offer significant relief or big-ticket items in this budget, she says.

Tedds notes she’d like to see an overhaul of the employment insurance program to ensure that when and if Canada’s jobless rate starts to rise, the government is ready to support Canadians through the downturn.

“We really should be recession-ready. There are some sectors that are really hurting, tech being one of them. We’ve seen massive layoffs, especially here in Calgary. And so there are people hurting,” she says.

Despite all the pressures facing the Liberals in their third term in office, Khan says the Trudeau government will need to demonstrate that it’s still “got some fire in its belly” and can deliver results for Canadians.

“I think this time it’s going to be less about aspiration and more about perspiration,” he says.

As opposed to a newly elected government delivering a budget of change in its first spending plans, the Liberals will have to prove they still have ideas and can make progress on projects that matter to Canadians, Khan says.

He expects the Liberals will devote a fair bit of the budget text to the already announced health-care spending announced in February as a “victory lap” of sorts.

If the government wants to hit every spending priority while maintaining the federal debt-to-GDP ratio — a key fiscal guardrail watched not only by the government but by credit rating agencies and international observers — it may have to find new sources of funding.

Bartlett says that with the revenue sources drying up and the Liberals under pressure to maintain their fiscal guardrails, tax hikes could be on the table, likely aimed at corporations or higher-income earners.

Otherwise, he says the Liberals might have “champagne tastes,” but they’re working with a “beer bottle budget.”

“They’re not going to get everything on their wish list,” he says. “And so they need to they need to be mindful of that and exercise some genuine prudence.”

— with files from Global News’ Touria Izri


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