Canada’s path to economic growth

June 2, 2016

Guglielmo Mattioli

Canada, the United States first economic partner, has all the cards to attract manufacturing businesses and outperform the States. But despite its strengths Canada it’s not capitalizing on its opportunities.

A weak Canadian dollar facilitates exports making Canadian products cheaper for importers and buyers in US and across the word. The northern country has also lower business taxes compared its southern counterpart and its labor workforce is highly skilled and productive. If this wasn’t enough Canada is about to sign a free trade agreement with Europe and is a strong supporter of the TPP.

Canada ranks 2nd among the 10 most industrialized countries in the world when it comes to business friendly environment according to KPMG April’s Competitive Advantage report,.

Yet, the country has relied for decades on its resource economy and its automotive sector, keeps on losing manufacturing jobs as it struggles to find a strategic vision for its economic future. It is also concerned about the US presidential campaign outcomes that could have a tremendous effect on its own economy.

“Canada right now is in a real shifting mode, we have all the raw ingredients but we don’t have the horses to take advantage of the opportunities right now,” said Dan Ciurak, director of Ciuriak Consulting.

One of the raw ingredients is currency. In the early 2000s manufacturing companies banqueted on the favorable rate exchange and the NAFTA trade agreement. They were able to boost exports with US and Mexico but ended relying too heavily on this single competitive advantage. When the Canadian dollar rose sharply to almost equal the American currency and when US entered in recession mode, most of Canadian  manufacturing companies got deeply hurt.

“The fluctuation can leave you with diminished capacity, it damages your economy.

because it impacts your investments,” said Ciuriak, “A realistic proposition would be a policy around the exchange rate to regulate the ups and downs.”

In the last 16 years one Canadian dollar went from 0.63 cent US dollar in 2002 to basically match the US currency in 2012. Today one Canadian dollar buys 0.74 cents of a US dollar.

This time around companies are more cautious and a favorable exchange rate doesn’t seem appealing enough to invest or move north.

“The manufacturing lost in North America is gone. I don’t see it flocking back,” said Jeffrey Philips, of Dawson Strategic. Moving an industrial plant it’s a long term investment, two or three years of favorable rates are not enough to justify plants relocation. “Manufacturing doesn’t move overnight,” said Philips.

The lion share of the manufacturing sector in Canada is accounted for the automotive industry located in south Ontario at the border with US. The region lost thousands of jobs in the last decades.

One in ten manufacturing jobs were cancelled from 2004 to 2008 in Canada. The largest drop occured in Ontario, where 198,600 jobs, almost one in five, disappeared in that same period. Since then, the loss slowed down but kept on going. Another 94,000 jobs were lost from 2011 to 2015 country wise. And the future doesn’t appear much better.

GM recently said is reconsidering investments on its Ontario plant because of labor and electricity costs and might stop production in the next years.    

This manufacturing diaspora is even more frustrating for economic development agencies because the actually the business environment has greatly improved in Canada in the last years.

KPMG’s 2016 report on Competitive Advantage, ranked Canada number 2 among the ten most industrialized countries in the world in terms of businesses competitiveness.

Stephane Tremblay who worked on the report says that Canada although more competitive than US, is still more expensive than Vietnam or Mexico when it comes to large scale manufacturing plants. Nevertheless it has a strong competitive advantage for advanced manufacturing and niche tech industries.

“Montreal has lower operating cost than New York, has skilled labor and better logistics to ship products across the world,” said Trembly. “We did a research for Industry Canada and we found that 16 to 18 companies recently moved to Canada for competitive reasons.”

Trembly couldn’t share more details on the companies but said that, “to continue to be attractive Canada has to offer more than just lower operating costs.”

To attract businesses the new government promised to invest in innovation and advanced manufacturing.

“We are a country that until few months ago thought that the Keystone Pipeline XL was going to be our economic future,” said Philips. “We don’t have a Silicon Valley, but only little pockets like the video game industry in Montreal and we have to capitalize on that.”

Together with advanced manufacturing and tech pockets able to compete with their US counterparts and attract companies another sector that many see as a strategic assets for Canada’s economy is trade and logistics.  

“The key is to diversify our markets not only our products, that should be our priority,” said Michael Moffat an economic advisor of Canada’s new Prime Minister Justin Trudeau and professor at Ivey University in London, Ontario.

Moffatt in a recent trip to China noticed that he couldn’t find Canadian food products in a high-end grocery store despite the food processing industry is one of the few manufacturing industry doing fairly well in Canada. “I could find lots of products from Australia, New Zealand and even the UK but not many from Canada,” he said.

Canada is about to ratify a free trade agreement with Europe and is a strong supporter of the TPP. Moffatt said that trade is so crucial for the future that if the United States won’t pass TPP, Canada is ready to initiate bilateral agreements with Japan and India.

“If you set an industrial plant in Canada you get free trade deals with Europe, US and Mexico and potentially with the Pacific region. Canada could become a global trade hub,” said Moffatt.

Progress can be seen In the Calgary region. “Calgary is the inland port of Vancouver and it is actually more convenient to rail track freight to Calgary and disperse it from here,” said Tristan Choi, economic development officer of the city of Airdrie in the Calgary metro area. “We have been marketing the region as a logistic hub and some US companies and distribution centers are moving satellite offices to take advantage of logistics,” said Tristan Choi.

The same is happening in the Winnipeg area. “If you want access to the North American market, well Canada is the right place,” said Greg Dandewich, vice-president of the Economic Development agency in Winnipeg. “We are the soft landing for Asian and European companies who wants to access the US. On the flip side Canada is a cost effective, quality platform for US companies to access the European market.

Canada potential is still to be explored and not fully understood by the US and the rest of the world.

“There is really a limited understanding of who Canada is and what Canada does. In a way Canada is still an unknown,” said Dandewich.