The Role of Government

Tariff elimination, free trade, and investment in innovation are keeping Canadian manufacturing strong

November 16, 2011

Governments encourage sector growth through innovation.

Challenges are still present in the North American manufacturing sector. The recent recession has lingering effects, and the entire sector will require invention and innovation to meet these challenges.

Ongoing economic jingoism is threatening the stability of the euro and the trade balance of many European countries. The fragility of Greece's economy, and more recently Ireland's, has shown how codependence on other nations can rescue beleaguered local economies. Closer to home, improving our bilateral economic and security relationship with the U.S. continues to be a goal of the federal government.

At the recent Canada-U.S. Manufacturing Summit held in Montreal, Minister of Industry Christian Paradis spoke at length about the challenges facing the North American manufacturing industry.

"The world is a very different place than it was in 2008," said Paradis. "We have experienced a global synchronized recession… one that affected both of our economies, and one from which we continue to feel the effects."

The sector in both countries faces challenges both short- and long-term. It's the manner in which these obstacles are overcome that will dictate how this part of our economy rebounds.

"The answer, I would argue, lies in leveraging our business know-how and leadership in research and development to become even more competitive and, especially for manufacturers, to commercialize that innovation," said Paradis. "Governments can encourage it by offering incentives and investing strategically."

Twenty years after the signing of the North American Free Trade Agreement (NAFTA), Canada remains the largest market and trading partner for 34 states. Also, more than 8 million American jobs depend directly on trade with Canada.

However, today's economic realities mean that even more government support is needed in order for the manufacturing sector to thrive on both sides of the border.

Canadian companies need the latest technology to compete in the global marketplace. To help them meet that need, the Canadian government eliminated tariffs on all manufacturing imports and on machinery and equipment. This was designed to encourage businesses to spend money on machinery and equipment. The availability of accelerated capital cost allowances for clean-energy work was also expanded.

"We introduced a work-sharing program to help businesses and their employees cope with slowing demand, by allowing them to still work together while avoiding the gut-wrenching decision as to whether layoffs were necessary," said Paradis.

In addition, a $4 billion Infrastructure Stimulus Fund was created to provide funding to provincial, territorial, and municipal construction-ready infrastructure rehabilitation projects.

External Factors

Economic growth in Canada paused slightly in the second quarter, due in large part to external factors, such as the Japanese earthquake and tsunami. However, the country's domestic economic data remains largely positive. According to Statistics Canada, nearly 600,000 more Canadians are working now than when the recession ended in the summer of 2009. Canada is also the only G7 country to have regained more than all of the output and jobs lost during the downturn.

According to Paradis, the road ahead will involve moving away from new stimulus and toward measured and prudent action in key areas such as trade, taxes, regulation, R&D investment, and innovation.

Another part of the government's solution is to remove the obstacles to the flow of trade, investment, and people between Canada and the U.S.

In February Prime Minister Harper and President Obama announced a joint effort designed to help expedite cross-border trade and travel by harmonizing both regulatory and security requirements.

In addition, the Canadian government has been active in negotiating new trade agreements around the world. These pacts should give Canadian businesses access to new markets.

"To break into these markets, innovative R&D and its commercialization will be absolutely key," said Paradis. "We are not going to compete with emerging economies on wages or in the assembly of low-cost, low-skill goods. Rather, we will compete by increasing productivity, by developing more value-added products and services, and by being the first to tap into new niche markets."

While the government can provide funding and create a level playing field with the rest of the world, the private sector still needs to take a leadership role in order for manufacturing to grow.