The Truth About Canada (15 page)
It’s interesting to note that in the total service sector of the economy in recent years, Canada has outperformed the United States in growth rates. This includes communications, the retail trade, gas utilities, and business services.
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Could one of the reasons for this be that the service sector of the Canadian economy is mostly Canadian-owned and Canadian-controlled?
As we did when we began this chapter, let’s again consider the question of the relative importance of productivity. TD economist Don Drummond wrote in the fall 2006 issue of the
International Productivity Monitor
, “Despite poor productivity growth, Canada remains a wealthy country. But there is ample reason for concern. Unless our record is
turned around quickly Canadians’ quality of life will stand still while other nations move ahead. The recent Canadian record falls woefully short of international results.” A headline in the
Financial Post
warns, “Productivity Slump Could Take Toll on Living Standards.”
In the aforementioned study by Don Drummond and Ritu Sapra, after documenting the poor investment record by Canadian business, the two authors focus on the inevitable results for productivity.
Productivity growth has slowed dramatically over the past several years — a development that threatens the well-being of Canadians.
Looking ahead, productivity will be an increasingly important determinant of economic growth, especially in the face of the demographic crunch that is looming in Canada’s future.
Canada’s abysmal productivity performance has resulted in the widening of the business sector labour productivity gap versus the United States.
Since 1973, Canada has had the third lowest rate of growth in output per hour among 23 OECD countries. This resulted in Canada’s level of productivity falling from the third highest in the OECD in 1973 to 16th in 2006.
So can you blame poor investment and poor productivity on our lack of business profits? Hardly. Can you blame a too-low Canadian dollar? Hardly. Can you blame corporate taxes, as our constant corporate whiners have been doing daily? Hardly.
Drummond and Sapra point out that corporate taxes in Canada have had little effect on the corporate sector’s after-tax profitability. “Also, the marginal effective tax rate on business investment was slightly lower in Canada than in the United States … the corporate tax system can’t be blamed for Canada’s investment shortfall, compared to the United States.”
In fact, as we shall see shortly, Canada’s corporate taxes are now well below the level of corporate taxes in the United States.
Late in December 2007, Statistics Canada reported that R&D growth in the business sector in 2007 was expected to have grown by $416 million. This amounts to less than one quarter of one percent of 2006 net corporate profits.
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MANUFACTURING IN CANADA
“There’s blood on factory floors.”
T
he FTA, NAFTA, globalization, and our much higher dollar have all taken their toll on manufacturing in Canada. But poor levels of R&D, inadequate investment in machinery and equipment, and, of course, competition from increasingly competitive low-wage countries have all been factors.
Employment in manufacturing in Canada peaked in November 2002, but by early 2008 it was down by a huge 348,000 jobs.
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This enormous decline is very significant, because manufacturing jobs are mostly high-paid with good benefits and usually have a big multiplier impact in other areas of the economy. CIBC economist Jeff Rubin has predicted that by the end of the decade job losses in manufacturing might be over 500,000.
The manufacturing industries in all of the following countries contribute a higher share of total gross value-added in their countries than manufacturing does in Canada: the Czech Republic, Finland, Germany, Hungary, Ireland, Italy, Japan, Korea, the Slovak Republic, Sweden, and Switzerland.
In a list of the top 40 countries back in 2005, measured in dollar value, Canada had the eighth largest manufacturing output, behind the United States, Japan, China, Germany, the United Kingdom, Italy, and France, but ahead of such countries as South Korea, Brazil, Russia, Spain, India, and Sweden. In terms of overall industrial output, we were also in eighth place. Note that all the countries ahead of us in these rankings have
considerably larger populations than Canada. But note, too, the devastating decline in manufacturing in the country during the last few years.
Back in 1970, manufacturing jobs accounted for about 22 percent of all jobs in Canada. Now, it’s less than 12.5 percent. While it’s true that the share of manufacturing jobs has fallen in all G7 countries, in Germany and Italy it is still over 20 percent, and Japan and France are both ahead of Canada in this respect. Notably, though, the U.S. manufacturing job share has fallen from about 25 percent in 1970 to only 9 percent. The United Kingdom’s rate fell from 35 percent to some 14 percent.
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Canada has more of its manufacturing industry under foreign control than any other OECD country, over 50.3 percent by 2004, and certainly much higher than that today. Only Ireland, Luxembourg, and Hungary are close. All the other OECD countries have their manufacturing between 5 percent foreign-owned (Germany) and 32 percent (Sweden). In the United States, it’s only 12 percent.
In 1970, manufacturing accounted for about 23 percent of Canada’s GDP. In 2007, it was down to about 15 percent. Current manufacturing employment in Canada is at its lowest level in 10 years, and its share of total employment is at its lowest level since the end of the Second World War. By 2006, Canada had fallen to 25th place in the list of countries exporting manufactured goods, and was down to 65th in terms of manufactured goods as a percentage of all merchandise exports.
There are a few who say, “What’s the worry? National unemployment has been at its lowest level in three decades.” Among the problems with that logic is the fact that a very high percentage of new jobs have been low-paid, part-time, and/or self-employed positions, instead of high-paid, full-time, secure jobs with good benefits.
As a leader in the
Globe and Mail
pronounced, “There’s Blood on Factory Floors.”
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In October 2007, the research and policy firm Informetrica said that Canada’s increasing trade deficit in manufactured goods, some $28-billion in 2006, is unsustainable.
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CARS, TRUCKS, AND AUTO PARTS
THE GOOD NEWS AND SOME QUITE BAD NEWS
T
he good news is that in 2007, Canada had its second best year ever in sales by new vehicle dealers (1.66 million, just below the 1.73 million record in 2002).
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The bad news is that in 2006 Canada had its first auto trade deficit in 18 years, a deficit of just over $1.2-billion.
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Statistics Canada describes it as a “spectacular change” in our trade balance. The projected automotive trade deficit for 2007 was expected to be a record, a huge $8-billion, with offshore imports representing almost a quarter of all sales.
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(In 1999, our automotive trade surplus was just under $15-billion.)
Canadian Auto Workers (CAW) President Buzz Hargrove explains: “It’s both the imports that are coming into North America, and the lack of ability of our vehicle builders to export to China, Asia and the European Community, who all have their markets essentially closed and protected.”
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More bad news is that motor vehicle production in Canada has fallen from a high in 1999 of 2,735,257 units to 2,081,487 in 2006, a huge drop of 653,770, and exports dropped from $97.9-billion in 2000 to $74.7-billion in 2006. In August 2007, Statistics Canada reported that the five lowest levels of exports since the end of 1998 were during the previous five quarters. Meanwhile, 2006 was a record year in Canada for the sale of vehicles that were manufactured overseas.
More bad news. In 1993, Canada was the world’s fourth largest auto assembler, but by 2005 we had dropped down to eighth place, and we will likely have fallen to tenth by the end of 2007. While this has been happening, Honda and Toyota are continuing to take market share from Ford, General Motors, and Chrysler, while Toyota in early 2007 passed General Motors in global sales for the first time and foreign automakers captured over 50 percent of the U.S. market for the first time.
As the “Big Three” automakers — which directly and indirectly support 300,000 Canadian jobs — lose market share, millions of vehicles come into North America from offshore, while at the same time Honda and Toyota are producing even more cars and trucks on this continent. In 2006, Japanese automakers produced just over 900,000 automobiles in Canada, more than double their 1998 production, and their share of the domestic market reached 34 percent. In Canada, overseas brands have outsold cars made in North America every year since 2001, and the gap is growing.
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Many complain about how Asian countries make it difficult to export cars into their countries, but the failure of the Big Three automakers to respond to growing market demands is an even bigger problem than restrictions on sales abroad.
In Canada, productivity had been growing faster in auto production than in other manufacturing, and faster than in other countries. But real wages have grown at less than half the levels of productivity growth. Buzz Hargrove points out that Canadian assembly plants “are about 5% more productive than in the United States, and 25% better than Mexico.”
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While Canada was expected to have an almost $10-billion automotive trade surplus with the United States in 2007, we will likely have a huge deficit of over $17.5-billion with other countries. As the CAW points out, “For every dollar of automotive products we import from Europe, we sell 13 cents back to them in exports,” and “for every dollar we import from Japan, we sell 2 cents back in exports,” and “for every dollar we import from Korea, we sell less than half of one cent back.” And major, very competitive Chinese auto production is certain to become a factor soon.
While imports account for only about 10 percent of auto sales in
Europe, less than 5 percent in Japan, and less than 1 percent in Korea, imports now make up about 25 percent of all North American auto and truck sales. Economist Jim Stanford has shown that in the past five years Korean automakers sold 470,000 new vehicles in Canada and produced not one in this country. As Stanford has written, “For us, there’s no upside from globalization, just the downside.”
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Some estimates put the job losses at 10,000 with 5,000 more jobs in jeopardy. Industry-wide employment is down 15 to 20 percent since peaking in 1991–2001.
Are things going to get better or worse? For years, we have somehow let Asian countries vigorously protect their automakers while we opened up the prosperous Canadian market to them. Incredibly, our federal government was negotiating a free-trade agreement with Korea that would be certain to make matters much worse. Some industry experts suggest that the agreement would increase imports from Korea by between 20,000 and 33,000 units a year.
Moreover, the once-huge automobile assembly cost advantage that Canada had over the United States has been eroded by the big increase in the value of the Canadian dollar and by cuts in health-care benefits for autoworkers in the United States, so that Canadian and U.S. costs are now much closer compared to a one-time $15 (U.S.) an hour advantage.
True, government subsidies of almost half a billion dollars have been a major factor in the decision to locate new plants in this country. But our universal health-care system and our skilled and well-educated workforce are important factors supporting the industry in this country.
While health-care benefits in the United States are being cut back, automakers in that country still spend more on health insurance for their employees than they do on steel. In 2006, the Conference Board of Canada said that health-care and pension costs in the United States added between $1,400 and $1,800 to the price of every new American automobile or truck.
This said, Canadian auto parts manufacturers are being hit hard by growing low-cost competition from China and Mexico that continues to take a larger share of the U.S. market. As some of us forecast before NAFTA was signed, Mexico soon displaced Canada as the biggest supplier
of auto parts to the United States, and it has increased its lead over Canada almost every year.
Some things worth noting. About half the content in a vehicle assembled in Canada consists of imported parts, which create lots of jobs, but not as many as might be thought in this country. This said, jobs in the auto industry in Canada are thought to be responsible for 7.5 percent of jobs in the total economy, reflecting a huge multiplier effect.
Next, while the Big Three have been laying off employees here (perhaps as many as 23,000 union jobs), the Japanese automakers have created roughly twice as many non-union, lower-paid jobs in their Canadian plants.
Unfortunately (and many believe unfairly), the World Trade Organization forced Canada to wind up the Canada-U.S. auto pact, which had worked so very well for us, and which the United States had agreed to with little difficulty because we are such a major market for American vehicles. The pact made sure Canada had a good share of North American auto industry investment and employment. But as Jim Stanford has pointed out, the situation has over the past decade been changing rapidly.
Offshore imports to North America have ballooned 150 percent since 1996, reaching 4.5 million vehicles in 2006, gobbling more than 25 percent of the continental market.… Those 4.5 million imports would keep 14 assembly plants running flat out, and create half a million jobs. Meanwhile, North America exported all of 300,000 vehicles to the rest of the world — barely enough to keep one plant running.…