Transcript
Transcript: Economic Security in an Era of Global Disruption Series: The Global System of Production – Highlights
[00:00:00 Video of planet Earth seen from space. Title page: Economic Security in an Era of Global Disruption Series; The Global System of Production: Highlights.]
[00:00:10 Animated video of Earth, as seen from space. It rotates quickly, then slows to a stop. Overlaid text on screen, as described.]
Narrator: On June 5, 2023, the Geopolitics and National Security Learning Program of the Canada School of Public Service held an event titled the Global System of Production as part of the Economic Security in an Era of Global Disruption Events Series. Speakers Rohinton Medhora, and Heather Exner-Pirot spoke to how competition and technological advances are transforming global trade, value, and supply chains and how Canada can protect and advance its prosperity and security in this context of rapid change.
[00:00:47 Overlaid text on screen: The Role of Emerging Technologies.]
[00:00:51 Drawing of a stylized lightbulb. Text on screen: Innovation.]
[00:00:54 Slide titled "A Supply Chain". The Innovation lightbulb is joined by images of an eye looking through a magnifying glass titled Sourcing; a mining dump-truck titled Raw Materials; a factory titled Manufacturing; a large cargo truck titled Fulfillment; a group of people titled Customers.]
[00:00:58 Split screen: Rohinton Medhora, and the above images. A line appears around the Sourcing, Raw Materials, Manufacturing, and Fulfillment images. Text on screen: Rohinton Medhora, Centre for International Governance Innovation.]
Rohinton Medhora: Innovation has to do with the pre-sourcing stage. Before you know that you want to build something or sell something, you have to know what that something is. And it has to have been developed. It has to have been invented somewhere. And so, that broad set of issues – and I'll talk about that a bit more in a few seconds – is innovation and it precedes the supply chain. At the other end, beyond fulfillment, we have to think about why did someone buy a certain product? What was it that made it attractive? Is it branding? Is it packaging? Is it its quality? Is it reputation? Where are the customers? So, there's a series of issues that add value to a product based on the relationship that the product has with clients.
Why is all this important? A few ways to look at this. Effectively, once you bring in innovation and customers into the mix, we're in the realm of intangible assets.
[00:01:55 Slide with pie graph titled "The Average Smartphone", as described.]
Rohinton Medhora: The average smartphone materials stuff makes up about 22% of the value of a smartphone. Labour, 5%. Distribution, and retail packaging, all of that is about 15%.
[00:02:14 Split screen: Rohinton Medhora, and the pie graph titled "The Average Smartphone", as described.]
Rohinton Medhora: But the large majority of the value of a smartphone is almost 2/3, slightly less actually, is the intangible assets. It's the intellectual property and the branding and all these other things that go into modern electronics. This is a smartphone. But frankly, if you look at the electric car or most appliances that we use, most things that are now produced, even if it's not this [INAUDIBLE], the trend is in this direction. The labour share of things is decreasing dramatically. One might say that's because of the nature of wages in countries where things are made. And that's one of the tensions in globalization. But it's also because the value that we give to intangibles has increased massively. And technology, which is a major intangible, matters much more now in almost everything we use and consume, than was the case previously.
[00:03:14 Split screen: Rohinton Medhora, and Heather Exner-Pirot appear in video chat panels.]
Rohinton Medhora: I think just in the last couple of months, what you've seen with ChatGPT and all the other things that have come on board tell you that this is a wave, it's going to be a gusher.
[00:03:25 Rohinton Medhora appears full screen. Text on screen: Rohinton Medhora, Centre for International Governance Innovation.]
Rohinton Medhora: And you can use all the clichés you want. But the fact is that data is going to almost become a distinct factor of production. And so, as a country, we generate data, and we use it. We don't really have a national position, much less a national policy position, on that data. We can look up to the GDPR of the European Union for it. We are troubled by the American system, where the data is effectively owned by private operators. Equally troubled by the Chinese data sphere, where data is effectively owned by the state, or by state run enterprises. And so, we want something like a GDPR in this country, but we're not there yet. How we gather, store, organize, and use data is going to be the next public policy adventure. And it, in turn, when you multiply it by 160, whatever, countries in the world, it is going to transform the way we do things. So, if you combine the data revolution with things like 3D and home printing, it's quite possible that the shape of supply chains is going to change greatly over time.
[00:04:49 Split screen: Rohinton Medhora, and Heather Exner-Pirot appear in video chat panels.]
Rohinton Medhora: And how we manage that is going to determine how prosperous and how safe and secure we are. There has to be a driven national conversation, number one.
[00:05:01 Rohinton Medhora appears full screen.]
Rohinton Medhora: Number two, understand that we're behind the ball and some countries are about five or 10 years ahead of us. And number three, there's lots of countries now catching up with us as well. So, it's an uphill challenge. It's not about winning that game, it's about being in it because there's enough for everyone, as I keep saying, if we participate wisely. But those, I think, are the fundamentals that lead to prosperity.
[00:05:28 Slide titled "The Importance of Location".]
[00:05:32 Split screen: Rohinton Medhora, and slide titled "Does Location Still Matter?" Text on slide:
- Sources of Value Are Mostly Immutable
- Can Anyone Fill-In for China? Hint: No, but alternative chains via...
- "Friendshoring",
- Old-Fashioned Protection ("new" industrial policy), and
- Technology, especially Digital Trade & 3D Printing...
- Aided by Tracking Provenance Via Biotech and AI
- Provided we understand the costs.]
Rohinton Medhora: If you wanted to replace China in any of this, can you? The short answer actually is no. If you look at the inward investment capabilities of all the other countries in the region that are touted as substitutes for China: Vietnam, Burma, increasingly India, they simply don't have the capacity or the infrastructure to compete for it.
The other indication about the centrality of China in global value and security is that even through Covid and through all the controversies around China, trade and investment between China and the west has actually been pretty solid. What little disinvestment we've seen has been more than made up by fresh investment from other countries. And the investments that are increasing in countries like Burma and Vietnam are actually net investments. No one's kind of closing factories in China and saying, let's open one somewhere else. That's happening slightly, but not in any appreciable way.
If we wanted this trend to accelerate, what could we be doing? I think the current phrase is "Friendshoring". I think friendshoring is a way of saying, that's still offshore because we know that we in Canada, or we in the west, are not competitive particularly manufacturing processes. But let's offshore to countries that we consider allies with whom we share values.
A second way to sort of get around the China conundrum would be what I call old fashioned protection, sometimes called new industrial policy. There are very fancy names given to it, but at the end of the day it's saying let's produce something at home, even if it's more expensive to do so, because then we are gaining security, and security comes with commercial value as well. And then the last feature, that I think perhaps has the most promise, is technology. And by this, I mean digital trade, 3D printing, which is slowly coming up and taking off, is going to give us a measure of production in our own borders like we've never had before. And this is all going to be aided by technology. I think sourcing and the idea of understanding how a product is made is greatly enabled by Biotech and AI.
[00:08:08 Slide titled "Adjusting to the Energy Transition".]
[00:08:13 Graph titled "We need 6x more minerals to reach net zero." Text on slide: Total mineral demand for clean energy technologies by scenario, 2020 compared to 2040.]
Heather Exner-Pirot: Keep in mind in the next couple of slides this fact. The IEA says that to reach net zero, we need six times more mineral production in the entire world. Some particular elements, like lithium or nickel, we need actually multiples 5, 8, 10, 20 times of that. But in general, minerals in general, six times more. That is because if you replace fossil fuels with renewables or electricity, you're moving from a fossil dependent energy infrastructure to a resource intensive energy infrastructure.
[00:08:44 Split screen: Heather Exner-Pirot, and graph titled "We need 6x more minerals to reach net zero." Text on slide: Total mineral demand for clean energy technologies by scenario, 2020 compared to 2040. Text on screen: Heather Exner-Pirot, MacDonald-Laurier Institute.]
Heather Exner-Pirot: You still need the transmission lines, you need the turbines, you need the panels, you need the magnets, all these things are very resource intensive. Next slide.
[00:08:53 Split screen: Heather Exner-Pirot, and two graphs titled "Oil spending is in decline."
Text on slide:
Over a Barrel. Oil industry spending in production and exploration, in billions of dollars.
- 305 Current annual spending
- 486 Annual spending under climate current policies
- 382 Annual spending under climate pledges
- 302 Annual spending for net-zero 2050.
Source: Bloomberg based on data from the International Energy Agency.
Note: Spending needed for the 2022 to 2030 period.
Global E&P Capex to Year-End 2022 ($B)]
Heather Exner-Pirot: If you want to get rid of fossil fuels, you'll be happy to see this slide is that oil spending is absolutely in decline. Since the peak of the last commodities boom, since 2012, 2013, oil spending in new exploration production is absolutely declining. It's almost at half. And so, if we were to reach net zero, in the [[IEA]] scenario, what we should be spending is 302 billion a year and what we are spending is 305 billion a year. So, from an oil perspective, we are reducing oil and gas, oil especially, at the amount that you would want us to, to reach net zero. Next slide.
[00:09:34 Split screen: Heather Exner-Pirot and graph, as described, titled "But minerals are not keeping up." Text on slide: Capital Expenditure of 20 leading miners, 2010-2022.]
Heather Exner-Pirot: The problem is we are nowhere near keeping up on the mineral side, so there's going to be a huge gap. We are reducing fossil fuels, but we are not increasing minerals. So, I like to say far from 6x more mineral production, we're not even at 1x mineral production. And in fact, the peak of mineral production was 2019. In 2022 we still have not recovered from Covid, and the investment is not there to even begin to increase mining. We're barely maintaining it. And so, you had the boom in capital expenditures in 2012, 2013. It declined kind of in the pit. And it's making a slow recovery, but not nearly enough to compensate. In fact, we are, for your cell phones and for your laptops and for your microwaves and for your electric vehicles, we are taking from investments that were made by China 10 years ago.
So, even to maintain our current lifestyle without an energy transition, there's not enough investment in mining.
[00:10:34 Slide titled "Protecting and Advancing Canada's Interests".]
[00:10:38 Split screen: Heather Exner-Pirot and map, as described.]
Heather Exner-Pirot: What is our potential to actually fulfill some of our allies' needs in oil, gas and minerals. And it is incredible. So, this particular one is the Montney Reserve. That is where the LNG, the natural gas, is going to go that can feed LNG to Asia. A world class reserve. Two quadrillion cubic feet. That's the only time I get to say the word quadrillion. So, about 1,995 trillion cubic feet, 500 trillion of which are economic at today's prices. And this is the cheapest natural gas in the world only because we have no way to export it, so it kind of just sits there. Next slide.
[00:11:12 Split screen: Heather Exner-Pirot and map, as described.]
Heather Exner-Pirot: This is northern Saskatchewan. This is the Athabasca Basin of uranium. And from an energy density perspective, going down the spectrum, you have to think that we're just going to do more and more nuclear and in fact many reactors are getting announced, and we're having bigger energy security deals with partners all around the world, especially in Eastern Europe. But this is the richest reserve of uranium in the entire world. That some of the grades are 20, 30, 40%. The biggest uranium mine in the world is Cigar Lake, which is in there. They have grades of 16%. From a mining perspective, a grade of 16% is preposterous. Usually your grade will be 0.5%, 1%, 2%.
So, Cigar Lake is not only the most valuable uranium mine in the world, by value per tonne, it is the most valuable mine in the world of any kind of ore because it is so rich. This Athabasca basin uranium could supply our allies' energy security needs if they went to nuclear for centuries. And the good news is the other two top producers, Kazakhstan and Australia. So, between Canada and Australia we will never run out of uranium. We'll be mining the moon for helium 3 for fusion before we run out of uranium in northern Saskatchewan for nuclear. Next slide.
[00:12:37 Split screen: Heather Exner-Pirot and map, as described.]
Heather Exner-Pirot: That's the Athabasca Basin. The other Athabasca is the Athabasca oil sands. That blue area is the world's third largest reserves of oil. So, we have the oil, we just don't have the ability to export it.
[00:12:50 Split screen: Heather Exner-Pirot and slide titled "Can Canada Step up?". Text on slide:
- There has been a sense in Canada that resource development was a 20th century economic sector, and that we need to move on to a knowledge economy.
- We have been reminded that we will always need reliable, affordable raw materials; and that Canada is a preferred supplier.
- Canada can meaningfully contribute to global economic security by increasing its production of responsible energy, mineral and food goods.]
Heather Exner-Pirot: There has been a sense, and it was easy in a commodities down-cycle to think that resource development was over, that you need to diversify away from that. And of course, it is a boom-and-bust cycle, and it is good to diverse away from that. But we will always need raw materials. We will always need reliable and affordable raw materials. And Canada can be a preferred supplier for that. It's an incredible opportunity for us economically, that will also provide economic security for our allies.
[00:13:20 Heather Exner-Pirot appears full screen. Text on screen: Heather Exner-Pirot, MacDonald-Laurier Institute.]
Heather Exner-Pirot: Canada has 40 million people. Our obvious competitive advantage is our resource capital, our land. And people think, oh, we're just hewers and haulers, as if it's an easy industry or a simple industry. In fact, oil and gas is by far the most productive industry in the country by almost an order of magnitude by hour of labour. And so, oil and gas extraction, if you look at the NAICS codes, the North American Industry Classification System, they're getting $1,000 an hour is their productive value.
[00:13:50 Split screen: Rohinton Medhora, and Heather Exner-Pirot appear in video chat panels.]
Heather Exner-Pirot: Whereas the Canadian average is about $55. So, an incredibly productive sector. Mining comes in at a couple hundred dollars, so also very productive, not as productive as oil and gas. These are complicated. There is a lot of knowledge and a lot of engineering that goes into these things. To compete in this global market, you actually need excellent engineering, excellent technology, excellent labour. And that's an advantage for Canada, not least in agriculture, where we are a huge exporter of grains, of oil seeds, of pulses, and that we can get more acreage, more yield from our acres because we are so smart, because we are incorporating things like artificial intelligence and GPS and soil science testing and everything.
[00:14:33 Heather Exner-Pirot appears full screen.]
Heather Exner-Pirot: So, the idea that we have that these are simple, or low value sectors, I think needs to be challenged. I think will be challenged in the next few years. And then that we can export that expertise, and that we do that. The Canadian mining industry, I think half of the world's mining companies are listed on the TSX. We finance, we know the business of mining better than any other country. And so, you see that we're in Latin America, you see that we're in Africa, you see that we're in other jurisdictions because the mining business in Canada is very sophisticated.
So, Canada has a tremendous opportunity here. But I think it's also a moral or ethical obligation to provide affordable, reliable goods to our allies that, I think as we go into this next commodity, super cycle, energy will go up, materials will go up, food prices will go up, and the bottom billions of this world will be suffering from it. And that will create political instability. It will probably feed terrorism, probably create some wars. When people are hungry and starving, they have nothing left to lose. And so, it is very important for our own security, but also out of a moral obligation to others, to provide to the extent that we can, these responsible raw materials.
I think we've become very complacent in Canada because we have so much energy and because we have so much food and because these will not be crises in Canada until they've been crises in other parts of the world for a very long time. But I think we need to have less of a navel gazing – kind of what is happening in Alberta, what is happening in Quebec, or what is happening in the oil sands – and more of a global perspective on what is the role of our resources in maintaining this economic and political security for others.
[00:16:21 Slide titled "The Importance of Resilience".]
[00:16:26 Rohinton Medhora appears full screen. Text on screen: Rohinton Medhora, Centre for International Governance Innovation.]
Rohinton Medhora: When things get really bad, everyone's in it for themselves. And we saw that, by the way, with the vaccine rollout. In fact, a phrase was created, vaccine nationalism. Countries were using vaccine production and supplies to enhance their power rather than to fight what was a global bad. Resilience and diversification does not come from having fewer countries in the fold. It comes from having more countries in the fold. It's interesting that, in the last two or three decades, the thrust of public policy has been to wean Canada away from its dependence on the North American chains and to trade more with parts of Asia, Latin America, and so on.
[00:17:19 Split screen: Rohinton Medhora, and Heather Exner-Pirot appear in video chat panels.]
Rohinton Medhora: So, I think the sense that diversification is the way to go is the right one. However, diversification without trust simply doesn't work. And so, what global rules of the game do is they enhance trust, or at least they try and enhance trust. There will always be some countries that can opt out of that just because they're too big. The US is one and China is the other. And so, it's not as if one country does more of this than the other. We have to recognize that large countries will always have a bit of a veto power on global arrangements.
But for a small country like Canada, small but important – influential, prosperous, well-meaning, all the rest of it –
[00:18:05 Rohinton Medhora appears full screen.]
Rohinton Medhora: our interest surely is in global rules of the game that work, not regional rules of the game that work. Because there'll be other points in history when those can come back to haunt you as well.
[00:18:17 Animated video of Earth, as seen from space. Overlaid text on screen, as described.]
Narrator: The Canada School of Public Service hosts exciting and insightful events, workshops and courses on geopolitics and national security. To learn more, contact the following email address.
[00:18:28 Overlaid text on screen: nationalsecurityprogram-programmedesecuritenationale@csps-efpc.gc.ca.]
[00:18:37 The CSPS animated logo appears onscreen. Text on screen: canada.ca/school.]
[00:18:44 The Government of Canada wordmark appears, and fades to black.]
