There’s a vital question about where Canada will fit in the future global economy. This directly affects our jobs and living standards.
And how well we are able to do in the fast-changing and increasingly high-tech automotive industry may be a good test case of our ability to succeed in a major global industry.
We will need more than natural resources for a strong economy. But if recent developments in our automotive industry are a sign of things to come, the future is not bright.
Our MPs don’t talk much about it, yet this is Canada’s key manufacturing industry with close to 120,000 employees and, after oil, is our leading exporter.
But Canada is falling behind in retaining and attracting new investment, losing ground to Mexico and the U.S., and is lagging even further in the new technologies that will dominate the future automobile.
According to the Centre for Automotive Research, of US$43 billion invested in the North American auto industry in 2010-2012, only five per cent was invested in Canada, and there are no signs of improvement.
But why are we not attracting more investment? Based on conventional economic theories there shouldn’t be a problem. For example:
l Canadians were told during the NAFTA debates that they had nothing to fear from downward pressure on wages from the U.S. South or Mexico. Our higher productivity would offset any lower-cost labour advantage.
Yet it is Mexican workers, or lower-paid workers in U.S. southern states who are attracting investment and new jobs — despite the fact that Canadian autoworkers have made concessions. Mexican workers are just as capable of being trained to work in automated auto plants as Canadian workers, and for less money.
l Canadians were told that they did not have to worry about loss of competitiveness for investment and jobs because our exchange rate would automatically adjust, restoring competitiveness. If weak competitiveness was costing us jobs, our dollar would decline, making us competitive again.
But that hasn’t happened. Our dollar has soared despite Canada losing significant manufacturing investment and jobs.
l Canadians were told that if we had low corporate taxes, that this would attract investment because tax rates were a key factor in investment decisions.
Today, our government boasts that Canada has one of the lowest corporate tax rates. Yet this has not led to a surge in investment and job creation. Auto companies haven’t rushed across the border from Michigan or Ohio to Ontario because of a lower tax rate here.
l The Bank of Canada and Finance Canada told Canadians not to worry about the high exchange rate — this, they said, would significantly lower the price of imported high-tech machinery and equipment, enabling Canadian companies to modernize, increase productivity and become much more innovative and competitive.
It didn’t happen on any scale. In the auto sector, investment largely dried up.
What has really been happening is that the U.S. and Mexico have made it a much higher priority to attract major auto plant investments.
There’s a reason for this: The presence of a major assembly plant means there will also be a large number of auto parts plants which, in total, may employ many more people than the assembly plant, so the economic benefits outweigh the costs of incentives.
The assembly plants are seen as anchors. It explains why countries dangle incentives to attract such plants. Canada does it as well, but compared to other countries our incentives may be relatively modest.
Like it or not, Canada has to be in the game to attract major assembly investments. But this is only part of the story.
Automotive technology is changing rapidly and what used to be a mechanical vehicle is now an electronic vehicle, a “connected car,” perhaps soon a “driverless car,” and loaded with software. Vehicles are also using new materials such as carbon fibre, and shifting to batteries and fuel cells.
We need to help build competitive companies in many of these fields.
To attract investment and create new jobs in a much more competitive global economy, Canada will need to be at the frontiers of knowledge and skills. This means much more attention to an industry that will depend on much more technologically agile suppliers.
Yet if we are to capture opportunities from new technologies, we will also need the assembly plants. So we cannot avoid the incentives game.
What this means is that we need a much more focused automotive strategy in Canada.
Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.