Canada needs to innovate and export, or grow poor

When then-Prime Minister Jean Chretien met financier George Soros at the World Economic Forum in Davos, Switzerland, he was shocked to find Soros dismiss the Canadian dollar as a resource currency and depicted Canada as simply a resource economy.

When then-Prime Minister Jean Chretien met financier George Soros at the World Economic Forum in Davos, Switzerland, he was shocked to find Soros dismiss the Canadian dollar as a resource currency and depicted Canada as simply a resource economy.

But Soros may have been right. Canada has knowledge-based high-tech companies. But our dollar has soared — and that’s because, as far as the rest of the world is concerned, we are still seen mainly as a source of oil, timber, wheat, nickel, uranium, potash and other commodities.

In fact, Prime Minister Stephen Harper likes to talk of Canada as “an energy superpower.”

Now, TD Economics has issued a stern warning that because of our high dollar we are losing our place in world trade, with the potential for job creation from exports declining.

To overcome this, the bank economists say, our manufacturing companies must become more innovative by investing in technology and by raising the skills of Canadian workers. We can only compete in high-value or knowledge-based products or services.

Canadian manufacturers have lost competitiveness and profitability in international markets while our high dollar also makes us a less attractive tourist destination.

Canadian companies have to compete much harder for customers in our own Canadian market as well, because imports are now cheaper.

Our resource exports are not the only reason our dollar is high — our fiscal position is relatively healthy, when compared to the U.S., Japan or the European Union. And in the short run at least, our economy appears to be in better shape.

No matter the cause, the result is that Canada’s share of world exports is falling. As TD Economics points out, “no other country has lost as much market share in the U.S. as Canada.” Exports have also become a smaller share of our GDP — falling from 45 per cent in 2000 to 33 per cent in 2010.

Compounding the problem of the high dollar is our much weaker productivity performance, compared to the U.S. and other countries.

“When you compare Canada on an international scale, the situation seems dismal,” TD Economics says. “Canada’s productivity performance over the last decade ranks third last when compared to 19 developing and developed economies, just behind Italy and Singapore.”

To show how differences in Canada-U.S. productivity growth rates affect competitiveness, TD Economics points out that since 2003, with the appreciation of our dollar and U.S. labour productivity growing four times as fast as Canada, unit labour costs in Canada have increased three-times as fast as those in the U.S.

If Canada’s weak performance on productivity growth continues, the bank economists warn, “Canada’s position as a world leader in trade will continue to deteriorate.”

Regaining lost market share won’t be easy. Although the economists don’t say it, this means we would become a poorer country.

A study by the Export Development Corp. last December came to similar conclusions. It pointed out the value of Canadian exports in 2008, after adjusting for inflation, were the same as in 2000 while imports, also adjusted for inflation, rose by 30 per cent.

Overall, “Canadian export growth has been limited, the number of exporters has fallen, and a handful of sectors have saved the day for Canada’s trade performance,” the EDC study says, notably oil and gas, mining and metals, and fertilizers.

“Canada’s manufacturing exports will continue to be challenged by the strong Canadian dollar, foreign competition and sub-par productivity and innovation rates,” it concludes.

This means we are unlikely to see a “meaningful recovery” in the share of manufactured goods in total exports and that “commodities and resource-based goods will persist in sustaining total Canadian exports as process for these products remain firm.”

What’s important to recognize is that the problems faced by manufacturers began well before the 2008-09 recession. According to Statistics Canada, exports in the transportation equipment industry (mainly autos) fell from $98.6 billion in 2000 to $75.9 billion in 2007, computer and electronic product exports from $25.4 billion in 2000 to $10.5 billion in 2007, paper exports from $20 billion in 2000 to $15.1 billion in 2007 and wood products from $15.5 billion in 2004 to $9 billion in 2007.

In the face of these dramatic changes, we face a huge challenge in rebalancing our economy. The innovation/productivity challenge is our biggest economic challenge. Yet it is something that’s barely been discussed despite the election campaign.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.