Canadian manufacturers are less competitive

The U.S. and Mexico are rising stars when it comes to manufacturing competitiveness. But Canada isn’t.

The U.S. and Mexico are rising stars when it comes to manufacturing competitiveness. But Canada isn’t.

The Boston Consulting Group, which recently analyzed the cost competitiveness of the world’s top 25 export economies, found that while U.S. and Mexican manufacturers have become more competitive over the past decade, Canadian manufacturers have become less competitive.

Given the inflated value of the Canadian dollar and poor productivity performance, that’s no big surprise, says Peter Dawes, a partner in the Toronto office of BCG.

In other areas, such as energy costs and wage increases, Canada is not out of line, he says. It’s the high dollar and poor productivity performance.

The emergence of what Bank of Canada Governor Stephen Poloz calls Canada’s “hot — and not hot — economy” (the West is hot, Ontario and Quebec are not) could pose big problems for Canada.

But how do we achieve a more balanced economy with higher productivity?

It is a huge economic policy challenge and will determine the kind of country we have in the future.

Poloz, in recent testimony to the Senate Banking, Trade and Commerce Committee and in a Saskatoon speech, seems to feel there’s not much we can do or should even try to do. It’s up to manufacturers to adjust and, in his view, they are. “The future of Canada’s manufacturing sector is bright,” he insists.

But is it?

There’s another possibility. Multinationals with operations in Canada can simply close them and consolidate production in other countries. Unilever’s planned closure of its Brampton, Ont., plant, with the loss of 280 jobs and production shifted to the U.S., is the latest of many examples.

And Canadian-owned companies can shift activities out of Canada — as Bombardier, for example, is doing in Mexico.

“One of the most important forces powering Canada’s economy today is the long-term strength in global prices for resources,” and for Canada, Poloz says, “oil stands out.”

In fact, Poloz seems to be betting oil prices will remain high, arguing we are better off as a result despite the exchange rate impact on manufacturing jobs and our ability to attract new manufacturing investment.

Poloz acknowledges that some 9,000 companies that once exported have disappeared and that $35 billion to $40 billion in non-oil exports, and the jobs that go with them, have “in effect, gone missing.”

But “in the long run, we are all better off with a positive terms-of-trade shock” and the resulting higher dollar because it makes imports and foreign travel cheaper.

But the downside is that “if you’re one of the companies that doesn’t sell oil or other resources, your ability to compete with someone else has deteriorated regardless of what your underlying productivity is.”

Not surprisingly, a recent Statistics Canada report showed that manufacturing has suffered huge losses. Between 2000 and 2010, manufacturing’s share of output fell from 29.8 per cent to 20.3 per cent in Ontario and from 30.3 per cent to 22.0 per cent in Quebec, costing several hundred thousand jobs.

And it’s not just a Central Canada issue — all provinces have manufacturing companies.

According to one Bank of Canada working paper — The Evolution of Canada’s Global Export Market Share — “Canadian firms have been facing competitiveness challenges, in large part due to the strength of our dollar and poor productivity,” with Canada’s share of world exports declining from 4.5 per cent in 2000 to 2.7 per cent in 2010 —despite increased oil exports at high prices.

A subsequent Bank of Canada discussion paper — Canadian Non-Energy Exports: Past Performance and Future Prospects — looked at 31 subsectors of non-energy export industries and found about half “to be quite sensitive to persistent movements in the exchange rate.”

The share of U.S. non-energy imports coming from Canada has fallen by about six percentage points since 2000, to about 11.4 per cent in 2013.

The big risk is that Canada is putting too many of its eggs in the oil industry basket.

Energy products averaged 10.1 per cent of our exports in 1990-2000, but 24.7 per cent in 2008-2010. By relying on energy resources, we are extraordinarily vulnerable if prices fall since Canada is a high-cost producer.

A strong economy is a well-diversified economy. While Canada has an economic bonus in its natural resources, we need a more balanced economy, starting with a more productive manufacturing sector.

This won’t happen by itself.

Poloz is sending the wrong message. We need a manufacturing innovation strategy.

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

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