Semiconductors: The Oil of Canada's Digital Era

By: Fred Cheung, Research Analyst, and Professor Ann Fitz-Gerald

Date: November 25th, 2025

Executive Summary:

Canada’s semiconductor dependency emerged as a serious concern during the COVID-19 pandemic. Vehicle production dropped to 1.1 million units in 2021- down 19 percent and the lowest since 1985 as the global chip shortage disrupted assembly lines. The lesson which emerged became clear: semiconductors are not just components; they are one of the most important parts of the hardware backbone of Canada’s economy, and anything that impairs their supply lines could freeze the Canadian economic system within days. 

However, current political tensions with Washington threaten something worse than a supply chain crisis. The US Commerce Department’s April 2025 Section 232 investigation into semiconductor imports could trigger tariffs or quotas that disrupt the Canada-US chip trade. Combined with US dominance over the global supply chain, this creates a de facto chokepoint: the ability to restrict Canadian access to chips employing US-origin items, technology, and capital. This reveals a long-ignored reality that we have treated semiconductors like a procurement line item when, in truth, they account for critical infrastructure. This mismatch leaves Ottawa continuously reacting to other countries’ semiconductor policy agendas. 

With uncertainty hanging over its bilateral relationship with the US, Canada must bolster its domestic semiconductor sector. The “Nortel trap”, which taught us that world-class talent without home-field control ends in foreign dependency. Canada cannot afford to make the same strategic misstep when it comes to semiconductors. 

Canada's Digital Achilles' Heel:

Semiconductors are the oil of the digital era, powering a wide array of devices, from smartphones and laptops to automobiles, spacecraft, and warplanes. In recent years, the AI boom has also fueled the demand for Graphics Processing Units (GPUs) and other cutting-edge chips, the very hardware foundation of AI systems, providing the computational power needed to train their models. 

As for Canada, it has positioned itself as a global leader in AI research and talent development. As the first country in the world to adopt a national AI strategy, Canada saw its relevant patent filings surge by 57 percent between 2022 and 2023, second only to the US among G7 nations. AI is widely expected to be the remedy to Canada’s worrying productivity slump since the 1970s. Empirical studies estimate potential productivity gains of 0.35–1.13 percent annually over a 10-year horizon. Yet these gains hinge on the uninterrupted inflow of cutting-edge chips. 

The hard reality is that Canada does not have a strong semiconductor base commensurate with its AI ambitions. Most of its strength lies in niches, such as Advanced Packaging and Test, Photonics, and Compound Semiconductor Foundry and Chips, rather than Semiconductor foundry manufacturing. In 2024, Canada exported only $210 million worth of semiconductor devices – a tiny fraction of Malaysia’s MYR37.4 billion ($12.3 billion), despite the latter’s GDP being half the size of Canada’s. More worrisome, Canada’s fabless semiconductor chip design firms have been increasingly absorbed into the US semiconductor ecosystem following the frenzy of foreign takeovers between 2000 and 2015. According to Statistics Canada, in 2024, over half of Canadian companies in computer, electronic, and electrical equipment manufacturing were American-controlled, and US entities accounted for 45 percent of all patent applications filed in Canada in 2023. 

Such a deep dependency leaves Canada’s digital sovereignty at the mercy of decisions made beyond its borders – a vulnerability which is most starkly visible in Washington’s sweeping semiconductor export controls. 

Because of the de minimis and Foreign Direct Product rules in the US Export Administration Regulations (EAR), Canadian semiconductor-related items and services can fall under US jurisdiction if they incorporate more-than-threshold US-origin content or are produced with specified US technology or software. In addition, the Bureau of Industry and Security, under the Department of Commerce, imposes “US persons” restrictions that limit certain support to Chinese chip makers, which can constrain Canadian firms organized under US laws or controlled by US firms. 

The case of the Ottawa-based pioneer in semiconductor optical interconnects, Ranovus, serves as a case in point. The company had to shutter its Thailand manufacturing operations – which were planned for production to fulfil its Chinese customer demand – in 2018 after US export rules flagged a restricted US chip in its devices, even though Ranovus is a Canadian company. After this incident, Ranovus reshored and reconfigured its supply chain to North America and Europe. Its Ottawa headquarters now manufacturers the final products, drawing on lasers from Canada’s National Research Council and chips made by GlobalFoundries in Malta. N.Y. 

Caught in Geopolitical Crossfire:

As Washington and Beijing escalate their chip war, Canada’s semiconductor supply resilience is under severe strain. In particular, Washington is continuously tightening its chip export controls on China, seeking to strangle the country’s semiconductor industry. 

Yet this has done little to blunt China’s ambition for semiconductor self-sufficiency. Instead, Beijing has been making steady progress in advanced chip production by pushing the limits of its inventory tools. A Huawei-led, self-reliant high-tech ecosystem – free from Western semiconductors – is emerging in China. Meanwhile, Washington is ramping up its efforts to localize chip manufacturing, urging overseas manufacturers, especially those located in East Asia, to reshore, while seeking tighter integration between chip design and manufacturing at home. Both powers are preparing for potential chip supply disruptions in a future conflict. A de facto digital decoupling is already underway and the once-integrated global semiconductor supply chain is fracturing in real time. 

This split has put Canadian fabless semiconductor chip companies, heavily reliant on overseas suppliers, in a bind: should they align with one bloc, or completely reorganize their supply chains? Initially, the Liberal government and businesses alike were betting on further integration into the US-centered North American Semiconductor Supply Chain. This move was expected to help Canadian fabless semiconductor chip firms snatch up secure access to US technology, items, capital, and talent, while dodging geopolitical flashpoints in East Asia. The cross-border semiconductor corridor spanning Quebec, Ottawa and New York is a prime example of this strategy, with facilities in Bromont, Quebec, providing critical assembly, testing, and packaging services to US chipmakers and Nortel’s ex-compound semiconductor foundry (Canadian Photonic Fabrication Plant) in Ottawa building laser wafers for AI, automotive, communication and sensors. 

However, what once appeared as a safe hedge now shows cracks as the Trump administration increasingly signals its intent to keep other countries out of the US semiconductor ecosystem. For example, Washington’s tariffs on components shuttling across the border has laid bare the uncertainties of the cross-border model, and even of the entire North American semiconductor supply chain. In an escalating scenario, Washington could exploit its dominance in Canada’s chip sector, using export controls to narrow Ottawa’s policy latitude. To preempt this, Canada has little choice but to shore up its own semiconductor sector. As François-Philippe Champagne, then Canada’s innovation minister, stressed, it is imperative to ensure that “we have the full value chain here in Canada.” 

A Call for State Leadership:

Canada, however, faces a deep-seated structural weakness to revitalize its semiconductor sector: a laissez-faire innovation ecosystem. Ottawa currently offers tax credits when competitors pour in billions of subsidies. It stays “neutral” as rivals boldly pick winners. Although this system worked when global supply chains were stable and borders were friendly, neither is no longer the case. 

In Canada’s semiconductor sector, this has translated into the absence of a dedicated public fund, a preference for tax credits, and limited use of public procurement. Unlike forerunners such as China, the US, or Malaysia, Canada lacks a dedicated public fund to support homegrown chip firms. Local companies are left with only two options: compete with applicants from other sectors for limited catch-all funds like the Strategic Innovation Fund (SIF), or embrace foreign venture capital. Instead, the government relies on tax credits such as Scientific Research and Experimental Development (SR&ED) to reward business-led R&D – a measure that provides limited relief for firms with longer commercialization cycles and tight operating budgets. While Ottawa has been a generous sponsor of academic research in semiconductors, it has been far more restrained in supporting commercialization through large domestic orders or helping firms secure local customers. 

The path forward requires a more assertive state leadership in semiconductor innovation. As Laura Tyson, who directed the National Economic Council during the Clinton administration observed more than three decades ago, “the semiconductor industry has never been free of the visible hand of government intervention. Competitive advantage in production and trade has been heavily influenced by policy choices.” If this was true in the 1990s – the heyday of neoliberalism – it is all the more non-negotiable today, an era marked by escalating geopolitical rivalries. Nor should the role of military procurement in Silicon Valley’s early development be overlooked; it locked in the region’s future prosperity. In light of this, Ottawa must take bolder action to bolster its domestic semiconductor sector. 

An initial recommendation would be for Ottawa to designate chips as critical infrastructure by: 

• Establishing a national semiconductor roadmap, with fast-track permitting, that creates a strategic reserve of chips and guaranteed power access in preparation for another major supply chain disruption.  

• Tying semiconductors to the framework outlined in Bill C-8 (Critical Cyber Systems Protection Act), currently before Parliament and Emergency Management protocols.  

• Proposing a ‘Semiconductor Essential Services List’ with allocation triggers for the grid, hospitals, payments, and defence to keep vital services protected during supply shocks. 

Second, lock Canada’s core intellectual property (IP) and equity ownership at home to avoid the “Nortel trap” by: 

• Establishing a Semiconductor Sovereignty Fund and adding an IP-domicile covenant and foundational-patent escrow for firms receiving public funds. 

• Implementing a new inbound investment screening mechanism, referencing the national-security review and net benefit tests of the Investment Canada Act, to avoid any single country having an outsized influence over Canadian chip firms. 

Third, use tax and procurement incentives as an anchor for investment and demand by: 

• Reducing the capital gains tax on investments in Canadian semiconductor and systems companies to zero for a ten-year period. This would encourage experienced Canadian talents with financial resources to leave multinational branches and start their own homegrown companies. 

• National Defence committing to multi-year contracts for home grown chip firms. Health Canada should pre-purchase medical imaging semiconductors. Utilities consortia should guarantee offtake – a long-term purchase commitment made by utility companies to buy a certain number of components) for grid-hardening components. Structuring these as bankable offtake agreements that lower financing costs will give domestic suppliers predictable revenue. 

Linking procurement to SIF funding and withholding public subsidies in the absence of public purchase commitments. 

Lastly, recalibrate Canada’s semiconductor ties with the US while diversifying strategic partnerships with other forerunners in their areas of strength by: 

• In the short run, preparing practical and mutually beneficial trade-offs – such as providing access to critical minerals – to avoid further escalation with Washington and maintain cross-border chip inflows. In the longer run, securing greater adjudicatory authority over homegrown core IP under CUSMA, while benchmarking and replicating the expertise and models of US venture capital and incubators in fostering robust commercialization and innovation ecosystems. 

• Establishing joint ventures and talent pipelines with the EU in photonics and tools through Important Projects of Common European Interest  (IPECI), with Japan in materials and packaging through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and with India and Malaysia in Outsourced Semiconductor Assembly and Test (OSAT). 

• Ensuring that every deal includes Canadian-domiciled IP, dedicated skill-visa lanes, and reciprocal export-assurance clauses. 

Semiconductors are the invisible foundation of digital sovereignty. Canada can either rent its future or build it. The choice is political, not technical. And the cost of inaction is already being invoiced – in shuttered factories, constrained AI labs, and dependency that deepens with every procurement cycle. We learned from Nortel that brilliance without control equals vulnerability. We cannot afford to learn this twice. 

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The authors thank Mr. Hamid Arabzadeh, the Chairman and CEO of RANOVUS, Prof. Barry Appleton, and Prof. Dan Ciuriak for valuable feedback. All views expressed are the authors own.