Title: Will Canada’s manufacturing sector make a comeback?

Sub-title: Globalization has forced significant restructuring on Canada’s manufacturing sector. But experts say that soaring fuel costs could slow that trend.

 

To long-time watchers of the Canadian economy, General Motors’ recent announcement that it would shutter its Oshawa truck plant by late 2009 came as no real surprise. Slumping demand south of the border, stemming from rising fuel prices and a slowing economy, have put pressure on all North American automotive manufacturers.

 

The automotive industry isn’t alone. Many experts have long taken for granted that globalization has pushed the manufacturing sectors of Canada and other Western countries into relative long-term decline. As a result, with the exception of those involved, news that North America’s largest automaker is sending another 2,600 of its employees to the unemployment lines was greeted as “business as usual.”

 

But are North American manufacturers really at the end of their ropes? Two noted economists say no. In a recent text sent to CIBC World Markets’ key clients, two of its top economists Jeff Rubin and Benjamin Tal, even question whether many of the key benefits from globalization may not one day be reversed.

 

“In tariff equivalent terms, the explosion in global transport costs, not the cost of tariffs, has effectively offset all of the trade liberalization efforts of the last three decades,” they say. “Not only does this suggest a major slowdown in the growth of world trade, but a fundamental realignment in trade patterns.”

 

Manufacturing: performing better than many realize

At first glance, Canada’s manufacturing sector looks lukewarm at best. According to data complied by BMO Capital Markets, between 2001 and 2007, real production in the sector increased at a puny average rate of just 0.7 percent. During the same period, average domestic demand in Canada grew by 3.8 percent.

 

Much of the sluggish growth in manufacturing stemmed from major restructuring that the sector was forced to undergo due to the spike of the Canadian dollar that brought it from US $0.63 just five years ago, to near parity.

 

That said, according to one expert, even after all the tough times they have been through, Canada’s manufacturers are doing surprisingly well. “The sector is vast and strong,” says André Jacques, a specialist with Statistics Canada. “For example following the implementation of the NAFTA free trade agreement, which provided Canadian companies with greater access to the U.S. market, the sector grew rapidly (particularly between 1990 and 2000) both in real terms and as a percentage of the total economy.”

 

According to Jacques, many commentators focus too much on sectors such as clothing and footwear, which lost jobs as companies moved production into lower cost jurisdictions. Less talked about though is the fact that many of these jobs were replaced with far higher value-added posts in technology intensive industries.

 

In fact according to a BMO Capital Markets study of Canada’s manufacturing sector released early last year, the country retains significant competitive advantages. “(These) include extensive experience in key industries e.g. motor vehicles, aerospace, telecom, pharmaceuticals, forest products, skilled labour, good synergies between university and industry research, close access to natural resources and proximity to huge markets.”

 

Rising transport costs are reducing the benefits from trade

However if CIBC World Markets’ Jeff Rubin and Benjamin Tal are to believed, more good news for manufacturers may be on the way. “In a world of triple-digit oil prices, soaring transport costs, not tariff barriers, pose the greatest challenge to world trade,” they claim. “Shipping a standard 40-foot container from Shanghai to the eastern U.S. seaboard now costs $8,000. In 2000, when oil prices were $20 per barrel, it only cost $3,000.”

 

The two economists have already noted some changes in capital-intensive manufacturing, such as in the steel industry, where products carry a high ratio of freight costs to final selling prices. Although Rubin and Tal focused mostly on the effect these trends would have in the U.S., in many sectors the results would be broadly similar in Canada.

 

That trend could one day prove to be advantageous to Canada’s automotive companies, many of which are subject to intensive competition from parts and vehicle manufacturers in Asia. True, with the North American economy slumping right now, the effects of those changes may not take effect in time to be much help to those Oshawa workers who will be laid off. But it is a structural trend that could yield big benefits down the line.

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is Bankrate.ca’s economics columnist.

 

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