Manufacturing Down in Canada but not Out

Manufacturing Down in Canada but not Out

Another week, another round of plant closures, and another volley of headlines proclaiming the imminent demise of MANUFACTURING in Canada. From a polystyrene producer in Montreal to a trailer-hitch maker in Huntsville, Ont., to a Hamilton casting factory on the verge of going belly up, the last week has extended what has become an all too grim tradition of pink slips and layoff notices across Canada's industrial heartland. To hear some talk, at this rate it won't be long before no one's cranking lug nuts north of the 49th.

The outlook for the sector certainly looks bleak. By some estimates, 300,000 manufacturing jobs have been lost since 2004, stoking fears that workers who once held high-paying jobs on assembly lines have been forced to take so-called McJobs, flipping burgers and shilling sneakers. Meanwhile, companies warn that the soaring loonie, which neared US$1.03 this week, has made it impossible for Canada to compete. Manufacturers and unions have never been known for seeing eye to eye, but on this issue, their message is the same: manufacturing is critical to our economic growth, and without it, Canada is in deep trouble. "It's a mistake of historic proportions for the government of Canada to sit back and say manufacturing doesn't matter," says Jim Stanford, an economist with the CAW.

There's only one problem with that scenario. Reality keeps getting in the way. Despite dire predictions that manufacturing is at threat of disappearing, dragging the Canadian economy down with it, the evidence suggests that's not the case at all. Even with so many layoffs, Canada is in the midst of a huge jobs boom. Unemployment has fallen to its lowest level in 33 years, meaning many of those laid-off workers have quickly found new jobs. At the same time, even as the loonie has marched higher, the manufacturing sector has continued to grow, just not as fast as other industries like natural resources, services and the knowledge sector. Manufacturing does matter, as the lobbyists and unions are eager to point out. But the fact is, the sector is shrinking in importance. And some economists say that's a good thing. "The fact is, manufacturing has been declining as a share of the economy ever since the end of the Second World War, yet the economy has done quite well," says Craig Alexander, a senior economist at TD Bank. "The economy can support growing incomes and a good standard of living without manufacturing rising as a share of employment."

No one's saying manufacturers don't have it tough at the moment. The loonie has soared 65 per cent since 2002, driven by the boom in Canada's commodities sector and the declining value of the U.S. greenback. At the same time, companies face higher energy costs and stiff competition from cheap Chinese factories. For workers who've held the same job for 30 or 40 years - for those employed by the Big Three automakers, for example - these are difficult times indeed.

But it's not the case that manufacturing, as a whole, is on its last legs. Out West, manufacturers with ties to the resource sector are booming. According to Statistics Canada, companies there have added 30,000 jobs over the last year and a half. And they're desperate for even more people to man their factory floors. Even in Ontario, many communities are powering ahead. As the Detroit carmakers silence their assembly lines, Toyota and Honda have cranked up production - one report from StatsCan has found that when Toyota opens its new plant in Woodstock in 2008, employing 2,000 workers, Asian producers will make more cars in Canada than the Big Three combined. And earlier this year Ferrero SpA, the Italian maker of Ferrero Rocher chocolates and Tic Tacs, completed its largest North American factory in Brantford.

It's true that manufacturing is shrinking in importance - the sector's share of the economy has fallen to 15 per cent from 20 per cent in the early 1990s. Meanwhile, less than 13 per cent of workers earn a paycheque in manufacturing, down from 19 per cent three decades ago. At that rate, it's conceivable the industry's share of the job market will tumble into the single digits in the not-too-distant future. No doubt that scares Canada's biggest unions, which have seen their membership shrink dramatically. But that also means companies have invested in equipment to allow them to do more with fewer workers. "People completely fail to realize manufacturing is declining because we've become more productive," says Daniel Trefler, an economics professor at the University of Toronto. "

Many economists see a parallel between what's happening today on factory floors and what happened decades ago in farmers' fields. Agriculture was once Canada's biggest employer, but the multitudes of workers who tended crops were ultimately replaced by tractors and harvesters, making farming more efficient. "This is exactly what happened with agriculture," says Trefler. "Today we can produce so much more with just a few workers." Which implies Canadians had better get used to an even smaller manufacturing sector.

That raises the question of whether this country can thrive with a diminished manufacturing sector by relying on retailing, services, the knowledge sector, and most important of all, the resource industry. The answer is, we already are. Years ago the service economy overtook manufacturing to become Canada's largest employer. And regardless of what critics say, not all service jobs entail crummy working conditions and crappy wages. "There's this idea out there that all manufacturers offer glamorous $50-an-hour jobs, but many are low-paying," says Philip Cross, chief analyst at Statistics Canada. "Meat-packing, clothing and textiles are all low-skill, low-wage jobs." In fact, roughly 60 per cent of the manufacturing jobs lost in recent years were in sectors such as textiles and food. The simple fact that wages have increased, even when manufacturing's influence has waned, indicates there are plenty of well-paying jobs in the service sector. Just ask any accountant, technician or teacher.

It's also getting harder to tell the manufacturing and service sectors apart. Research in Motion is a perfect example. The company still assembles its addictive BlackBerry telecommunications devices in Waterloo, Ont., even if many of the components are shipped in from Asia. But the company makes its bread and butter on the monthly fees users fork over so that they can to be tethered to their email.

If there's one corner of the economy doing all the heavy lifting at the moment, it's the resource sector. Huge gains have been made because of soaring oil and natural gas prices, as well as minerals such as copper and gold. This scares a lot of people. Commodity prices aren't exactly known for their stability. They should be, though. A study put out last week by StatsCan on the resource sector turned up some surprising facts. The report, titled the New Underground Economy, found that the resource sector, when measured by annual industry growth, has actually been more stable than manufacturing since 1991. What's more, going back to the early 1970s, earnings from energy exports fell in only five years, putting it on an even keel with manufacturing in terms of staying in the black. What that shows is that Canada's fear of relying on its resources is misguided, at best.

Even if the relative decline in manufacturing isn't cause for panic, though, that doesn't mean Canada should not be doing more to capitalize on the manufacturing base that does exist. "You don't truly need manufacturing for wealth creation if you get everything else right," says Glen Hodgson, chief economist of the Conference Board of Canada, adding that a growing number of developed countries have no manufacturing sector to speak of. "But if you have it, why not make yourself globally competitive by focusing on higher-value niches?"

The high loonie should encourage companies to buy more machinery and equipment from south of the border to boost their productivity. So far that hasn't happened at near the rate economists expected. One thing that could speed up the process would be for Ottawa to extend the two-year accelerated capital cost allowance it introduced in the 2007 budget. The measure acts as an incentive for businesses to invest in equipment. Companies have asked Ottawa to extend it to five years, a proposal Finance Minister Jim Flaherty says the government is reviewing. "We can afford the best technology in the world because our currency is strong," he says. "So there's no reason manufacturing shouldn't survive at the high levels."

As layoffs continue to mount, calls will no doubt grow louder for governments to take even more drastic action. Critics have demanded Canada impose tariffs against goods coming in from countries like China, while others want policies put in place that limit a company's ability to lay off workers. In essence, if Canadian companies can't compete on price, the argument goes, then get rid of the competition.

The immediate result, of course, would be higher prices. Canadian consumers would be asked to shell out more to buy cars, clothes and groceries in order to subsidize the paycheques of those who made them at inflated costs. In the end, though, the argument for more protectionism may not go far. Given the choice between angry consumers and a manufacturing sector that matters far less than it used to, the choice, for political leaders, should be easy to make.

Maclean's October 29, 2007