Studies show Canada's manufacturing woes aren't easily solved

Time for the campaign to get serious on economic policy

Is Canada is doing enough to hold its own as manufacturing jobs are shed around the world?

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If there’s one notion about Stephen Harper’s economic policy that’s taken firm hold as conventional wisdom, it’s that he’s been monomaniacal about oil. His rivals play off it on the campaign trail, with the NDP’s Thomas Mulcair bemoaning billions in subsidies to the fossil fuel sector and Liberal Leader Justin Trudeau saying Harper “bet everything on the price of oil.”

That’s looked like an awfully bad bet since the oil-price plunge of 2014, although the winnings sure were rolling in for a few years there. Harper undeniably came into office in 2006 talking up Canada’s future as an “energy superpower.” But has his economic strategy amounted to wagering all the federal policy chips on the black of Alberta crude, while neglecting, as his critics particularly charge, the Ontario manufacturing sector?

If oil is all that really matters in the economic story of the Harper years, I’m not sure how to fit certain staggering sums into the narrative. He presided over the creation of a $950-million fund to subsidize auto industry innovation, plus another $100 million for the sector’s suppliers. A cool billion went into something called the Strategic Aerospace and Defence Initiative. The Tories even set up a regional development agency for southern Ontario—paralleling those long-established distributors of largess in Atlantic Canada and the West—with $920 million to dole out, including $200 for “advanced manufacturing.”

The wisdom of any or all of this is wide open for debate, but it doesn’t support the notion that oil has monopolized the Tories’ attention. Still, the opposition parties have some damning stats to toss around, starting with the frequently cited one that 400,000 good Canadian manufacturing jobs have been lost.

The number isn’t wrong. Total manufacturing employment declined in Canada to 1.7 million in 2014 from 2.1 million in 2006. It’s troubling, but not easily traceable to Harper’s policies. When he took over in 2006, his government inherited a trend line. According to Statistics Canada, manufacturing employment in Canada grew in the late 1990s, then stagnated from 2001 to 2004, before a “clear downward trend” began around 2005.

    Yet laying blame at the feet of the former Liberal government doesn’t work, either. Manufacturing employment is declining in many countries. An Organization for Economic Cooperation and Development report a few years ago concluded that “a key cause of the underlying fall in manufacturing employment everywhere is rapid productivity growth, whether by restructuring inefficient plants or deploying skills, knowledge, technology and new processes to boost efficiency.”

    So the fair question is whether Canada is doing enough to hold its own as manufacturing jobs are shed around the world. Western University’s Lawrence National Centre for Policy and Management conducted a study for which executives at export-oriented firms in agri-foods, auto parts and diversified manufacturing were interviewed in depth about their situation in Canada. They saw a lot to like about the policy environment here.

    “Canada was identified as a best-practice jurisdiction,” the report, called The Future of Canadian Manufacturing: Learning From Leading Firms, “because of its low corporate tax rates, research and development tax credits, accelerated capital cost allowance and duty-free imports of capital equipment. Canada received high marks for its high-quality labour force and its immigration system that has historically attracted skilled and industrious workers.”

    That makes the situation sound great. It’s not, though. The Conference Board of Canada released a study just last week (reported here by my colleague Chris Sorensen) ranking Canada a lacklustre ninth out of 16 comparable developed countries on innovation. “Insulation from competition, high resource prices, generally good trade with the U.S., and other conditions have meant that Canadian businesses have not had to innovate as much as businesses in other countries in order to be profitable,” the board found.

    That sense of a troubling complacency among Canadian business owners turns up again and again in research into Canada’s unimpressive overall productivity. Bill Currie, vice-chairman and Americas managing director at the professional services giant Deloitte, which has studied the problem, says governments can’t be faulted on any fundamental level. “Other than literally going out and buying machinery and equipment for Canadian businesses, they’ve certainly made it attractive for Canadian business, and business hasn’t really stood up,” Currie says.

    So the problem of Canadian manufacturing seems to amount to a mix of a long-term decline in jobs globally and an indigenous lack of risk-taking verve among Canada’s business owners. It’s hard to see how the ideas proposed so far on the campaign trail directly address these deep challenges. For instance, all three parties emphasize infrastructure (with Trudeau even saying it’s worth going into deficit to pay for public works). That might be sound policy in its own right, but infrastructure doesn’t pop up in the reports I’ve read as the core concern when it comes to lacklustre Canadian competitiveness.

    The experts I have asked about this don’t propose any convenient silver bullets. Still, Paul Boothe, director of Western’s Lawrence Centre, points to some intriguing ongoing research he’s overseeing into Ontario’s manufacturing sector, which strongly suggests Canada could be making it far easier for foreign companies to sort out the wide range of federal and provincial programs and policies that might lure their investments.

    Boothe admires ProMexico, the Mexican government’s export industry promotion agency, which he says offers “one-stop shopping for investment in Mexico.” By comparison, he says a company looking at setting up a plant in Ontario has to navigate an often confusing array of federal and provincial departments and agencies, assessing everything from what tax breaks and subsidies are on offer, to what potential workers and sites might be available.

    And Boothe says it’s a myth that Mexico’s main edge comes from cheaper labour and bigger handouts. Indeed, he said other jurisdictions, notably Hong Kong and Utah, also offer more streamlined entry points for investors than Canada does—without relying at all on the typical cost advantages of a developing economy. “The first thing they have that we don’t have is a really clear strategy that’s based on a great understanding of what their strengths are,” Booth says. “They don’t sit and wait. They identify firms they want to partner with and they go after them.”

    That sounds like a starting point for a strategy that might make a difference, at least when it comes to attracting foreign manufacturing investment. But, as Boothe points out, any serious move in that direction would demand seamless co-operation between Ottawa and the provinces—not historically a source of Canadian competitive advantage.

    Proposing an invitingly simplified way for investors to find out about Canada’s advantages doesn’t have quite the same ring as a potential campaign message, as does promising billions for new construction projects or selective tax cuts. Or suggesting all that’s needed is a prime minister who cares about something beyond his home province’s oil business.

    Elections tend bring out dumbed-down descriptions of the problems at hand and sound-bite solutions to match. But that doesn’t mean we can’t, in the six long weeks of this campaign still ahead, including an economic policy debate among the leaders next week, demand better.