Is Canada losing its competitive edge?

Earlier this week the Globe and Mail’s Barrie McKenna reported concerns from Bank of Canada Governor Stephen Poloz on the competitiveness of Canadian firms.  In particular, Poloz notes growing weaknesses in the ability of Canadian firms to win in the U.S. market, best highlighted by export levels that are $30-40 billion below where traditional levels should leave them.

A quick in-house analysis of U.S. import share capture by major economies shows the following evolution over the past decade – see Figure 1. Canada’s 2.9% decline is second only to Japan, and is perhaps more impactful given the geographic advantages Canada should have vis-à-vis trade with the US. Moreover, while the majority of developed economies have seen decreases in their share of exports to the US, the decrease in Canadian exports is disproportionately large vis-à-vis much smaller, if not negligible decreases in other major advanced economies such as Germany, France and even the United Kingdom. Moreover, given the increase in natural resource exports to the US, this all begs serious questions as to what’s going on in Canada’s goods producing sector.

The upward movement of the Canadian dollar is certainly part of the explanation[1], as Poloz notes. However this isn’t likely the only or core driver given the Euro/USD exchange has similarly appreciated over the decade and yet German, French and UK exports to the US have decreased by far lower amounts.

More pertinent is the decrease in competitiveness owing to dampened investment in productivity-enhancing technology and training (as we write in this report on the competitiveness of Canadian SMEs). OECD data shows that both France and Germany benefit from significantly higher labour productivity levels than Canada (the UK is similar to Canada in this regard). Moreover, over the period 2001-2012, Canada’s labour productivity growth (LPG) is approximately one-third smaller than in those three European countries. In the past recession (2009-2012) period, Canada’s LPG is half of the OECD average, and half of Germany’s (though on par with France and the UK).

In a separate measure of multifactor productivity growth (which supplements labour inputs with capital, technology) over the 2000-2011 period Canada sees no change in its MPG while Germany, France and the UK all experience modest growth.

Together under-investment in the factors that seed these two metrics are driving our economy in the wrong direction. And without increased investment in productivity-enhancing technology and training this trend will continue at the detriment of Canadian export-competitiveness and jobs across the country.