The Automotive Sector of Canada - Essay Example

Is the emerging picture in the Canadian auto industry (including auto parts makers) universally bleak What is the evidence International trade makes up a large part of the Canadian economy, particularly of its natural resources. The United States is by far its largest trading partner, accounting for about 85% of exports and 59% of imports as of 2004. The largest component of U.S.-Canada trade is in the automotive sector. Under the 1965 Canada-United States Automotive Agreement (also known as the Auto Pact), which provided for free trade in cars, trucks, and auto parts, two-way trade in automotive products rose from $715 million in 1964 to $104.1 billion in 1999. Auto Pact benefits are incorporated into NAFTA. Wikipedia, (2007). Canadian Economy, available at http://en.wikipedia.org/wiki/Economy_of_Canada Change in Trade Balance, 2002- 03 ($ bil) During the first half of 2003, a rapidly appreciating currency cut deeply into net exports in most Canadian traded goods industries. The auto industry was among the hardest-hit sectors. Automotive products have traditionally generated an important trade surplus for Canada, offsetting continuing large trade deficits in most other high-value and high technology manufacturing products. Already, however, the appreciating dollar has reduced Canada's automotive trade surplus by 50 percent (compared to the first half of 2002). Short-run impacts of a higher dollar include both reduced real shipments and shrinkage in the domestic value of Canadian exports (most automotive exports are priced in U.S. dollar terms). Even more important longer-run impacts could include the relocation of new investment to alternative jurisdictions, as Canada's relative cost competitiveness is eroded. If the exchange rate stays at current levels or higher on a longer-run basis, Canada could feasibly become a net importer of automotive products within 5 years. On average, hourly labor productivity in Canada's manufacturing sector is approximately 15 percent lower than in U.S. industry. Given the current differential in nominal hourly compensation costs between the two countries (hourly total compensation costs in Canadian manufacturing average just over $25 Cdn., whereas total hourly compensation costs in U.S. manufacturing are about $21.50 U.S.), this creates a nominal unit labor cost disadvantage (measured in national currencies) that must be offset by the exchange rate between the two currencies. When the Canadian dollar trades at approximately 72 cents U.S., average manufacturing unit labor costs in the two countries are equalized. If the dollar is above that level, therefore, Canadian manufacturing (on average) faces a unit cost disadvantage that will spark the long-run outward migration of investment and employment (the opposite of what occurred in the late 1990s when the Canadian dollar traded for less than 72 cents U.S.). The Rising Canadian Dollar and its Impact on the Canadian Auto Industry, Testimony of Jim Stanford Economist, Canadian Auto Workers Before the Standing Committee on Foreign Affairs, Senate of Canada, October 8, 2003 http://www.caw.ca/visual&printlibrary/speeches&briefs/briefs/senatetestimonyonthedollar.pdf Is Canada now at risk of catching the Dutch disease What is the evidence When it gains ground against the U.S. dollar, for example, Canadian exporters lose ground because their products become more expensive for U.S. buyers. It's simply harder to compete. Since 2002, Statistics Canada says 189,000 manufacturing jobs have disappeared in Canada. The agency places the blame squarely on the soaring loonie. But some economists say the difficulties of adjusting to a higher loonie will help exporters in the long run, because they've had to take measures to improve efficiency. The days of relying on a cheap loonie to help them sell in the U.S. are long gone. Cheaper U.S. dollars also provide Canadian companies with an opportunity to invest in U.S.-made tools that make them more competitive. Much of the software and machinery Canadian companies buy to run their operations are bought from the U.S. A more favourable exchange rate means those companies can invest more in those tools of efficiency. For some companies, including those that have been reporting weaker American sales because of the loonie's gains, there can be yet another silver lining. As the Canadian dollar rises, the cost of repaying U.S. dollar debt falls. Many Canadian companies have debt that is denominated in U.S. dollars. Those debt payments become cheaper when the American dollar falls. Snowbirds and other Canadian visitors to the U.S. are finding that their money goes much further these days. In 2002, Canadians had to pay $1.62 for each U.S. dollar they bought. In 2006, those U.S. dollars were costing just $1.12 each. Conversely, U.S. visitors to Canada are finding that their money is buying less than it used to. In early 2006, Statistics Canada reported the number of same-day cross-border vehicle trips made by Americans to Canada fell to their lowest level on record. The Canadian dollar What's behind the soaring Canadian dollar Last Updated May 2, 2006 CBC News http://www.cbc.ca/news/background/dollar_cdn/ The economic prosperity and quality of life of every Canadian depends on the competitiveness of Canada's manufacturing industries. Manufacturing is the most important wealth- generating sector of the Canadian economy. It is the largest single business sector in Canada. Manufacturing directly accounts for 17 per cent of the country's GDP. Manufacturers employ over 2.1 million Canadians. They account for two-thirds of Canada's goods and services exports and three-quarters of all private sector research and development activity in Canada. Every dollar in value generated in manufacturing adds an estimated $3.05 in total economic activity. Manufacturers are an important source of demand for resources, energy and services from all other sectors of the Canadian economy. Manufacturing is a knowledge-intensive business. Every year, manufacturers invest more in research and development, new technologies, machinery and equipment, and new production facilities than any other business sector in the country Manufacturing is a global enterprise. Canadian manufacturers sell into markets around the world - over $400 billion worth of goods in 2006. They also source raw materials, products, services, skills, knowledge and technologies on a global basis. Many companies have investments and production facilities in other countries as well as in Canada. And more and more international business partnerships are being formed among manufacturers, services, sales and distribution companies in order to deliver high-value, competitively priced products to customers in Canada and around the world. A prosperous manufacturing sector is critical to Canada's economic future and to the lives of each and every Canadian. Our standard of living depends on the wealth-generating capacity of manufacturers on their ability to innovate, continuously improve productivity, deliver customer value, and to compete with the best in the world. At the Cutting Edge of Global Competition Canada's manufacturers are at the forefront of global competition. Our industries face unprecedented challenges and change. Today, customers, suppliers and competitors are located around the world. The competition for market share, investment, knowledge, technology and skilled workers is intense. Over the past three years, manufacturers have had to respond to the rapid appreciation of the Canadian dollar, soaring energy and commodity costs, widespread labour shortages in western Canada, and more recently to weakening demand in our major market, the United States. They also face significant long-term challenges and opportunities in the form of new industrial superpowers like China and India, an ageing workforce, accelerating technological change and more demanding customer and stakeholder expectations. The emergence of new market opportunities and disruptive low-cost competition, the rapid development of new technological capabilities, more demanding customers, a more demanding public and intense bottom-line pressures are changing the nature of manufacturing in Canada and around the world. (What is the role of the government is sustaining industries that are suffering from the high Canadian dollar- is there a model from other countries that Canada can use Is there a need for new policies to protect those industries or make them more sustainable What should existing businesses And individuals do How can Canada remain competitive in the rise of its Canadian currency) As Canada is experiencing high inflation and the government states that it is going to restrict the money supply to cure the inflation. The restriction of the money supply means interest rates are going to be 'high' for the next year or so. Suppose foreign investors believes the government. They decide to invest their funds in our financial markets. That means an increase in demand for Canadian currency and a potential appreciation of Canadian currency on foreign exchange markets. Now suppose other foreign speculators believe foreign fund managers are going to invest in Canada because of the interest rate differential and prediction of appreciation in Canadian dollar. They may transfer funds into our financial markets, not because of the interest rate differential per se but because of the expected appreciation of Canadian currency. And all of this has been caused by the announcement by the government of its intention to cure inflation by restricting the money supply. Of course, if they don't believe Canadian government and/or they think the policy will not work, they may divert their funds to other financial markets. Now suppose if the Government wants to correct the situation through lower interest rates and make business and mortgage holders happy. With interest rates about to come down, the Canadian economy will not such an attractive haven for foreign funds and they will look to other countries. At the same time, investors might think that other fund managers will be thinking along similar lines and so the quicker they withdraw funds from Canadian Economy the better. If every fund manager is thinking along the same lines, the withdrawal of these funds, i.e. a shift to the left of the demand curve for Canadian currency, is going to cause the currency to depreciate. Thus the expected decrease in interest rate caused by an increase in money supply will cause the foreign demand for Canadian currency to shift to the left and could result in a dramatic depreciation of the currency. Economists and politicians are sharply divided on the solution. Those who believe in the efficacy of the market mechanism argue that a flexible exchange rate mechanism is the only answer and that if governments were to embrace 'sensible' economic policies, flexible rates would enhance world trade and lead to a globally efficient allocation of resources. Their opponents argue that a fixed exchange-rate system is necessary to produce worldwide economic efficiency and that the leading world economies - the USA, Germany, and Japan should stabilise international exchange rates. They further argue that the smaller trading nations, essentially the rest of the world, should tie their currencies to one of those major partners and enact policies to ensure exchange-rate stability. A made-in-Canada manufacturing strategy that takes full advantage of the growth prospects of our resource-based industries by encouraging the development of value-adding supply chains, products and services. Invest in New Technology - Ensure that taxes on capital investments in Canada are the lowest among industrialized countries. Provide a two-year write off or investment tax credit for investments in machinery and equipment and information technologies. Reduce the corporate income tax rate. Eliminate capital taxes. Harmonize sales taxes with the GST. Invest in Innovation - Enhance the innovation capacity of Canadian industries. Improve the SR&ED tax credit system. Strengthen collaboration between industry and academic and government researchers. Ensure that Canada has an internationally competitive regulatory environment that encourages innovation. Ensure that government support for industrial innovation is competitive on an international basis. Invest in Workforce Capabilities - Ensure that skills and capabilities meet the needs of modern manufacturing. Provide tax credits for industrial training. Increase investments in technical education and skills development. Ensure immigration requirements reflect the skill requirements of industry. Eliminate interprovincial barriers to labour mobility. Increase Regulatory Efficiency - Ensure regulatory processes are internationally competitive, simplified, coherent, coordinated, streamlined, efficient, low cost and effective. Effective accountability and timely decision-making are essential elements of competitive regulations. Enforce the federal User Fee Act. Streamline regulatory approval processes. Implement and expand the Smart Regulation Agenda. Eliminate unnecessary regulatory differences across Canada and with our major trading partners Invest in Infrastructure - Ensure a world-class logistics and energy infrastructure. Enhance the security and efficiency of Canada's borders. Improve transportation systems connecting to Canada's trade gateways. Strengthen the competitiveness of Canada's transportation, telecommunications, and financial services sectors. Ensure a reliable and cost-competitive supply of energy. Open Markets Around the World - Ensure trade policies and programs work for manufacturing, enable real access into international markets, and afford Canadian businesses adequate safeguards against foreign protectionism. Negotiate trade agreements that reduce industrial tariffs, eliminate non-tariff barriers to trade and facilitate international investment and trade in services. Enforce rules prohibiting unfair trading practices. Ensure trade support programs are more effectively aligned with the international activities of Canadian business. Manufacturing directly accounts for 17 per cent of the Canadian economy. Every dollar of manufacturing output in Canada generates $3.05 in total economic activity. More than 2.1 million Canadians are employed in manufacturing - about 15 per cent of the Canadian workforce. Canadian manufacturing shipments exceeded $600 billion in 2006. Manufacturing has grown 16 per cent faster than the Canadian economy as a whole since 1990. Manufacturing accounts for two-thirds of Canada's total exports of goods and services. Manufactured exports have more than doubled since 1990. Over 95 per cent of employees in manufacturing have full-time jobs. Manufacturing wages are 22 per cent higher than the national average. Manufacturing accounts for two-thirds of all business investment in research and development in Canada. Manufacturing generates over 30 per cent of the tax revenues paid by businesses to all levels of government in Canada. Manufacturers have reduced greenhouse gas emissions by 7.4 per cent since 1990. Competitiveness Starts at Home For Canadian manufacturers, the competitive challenges are daunting. New business opportunities are immense. And, the need for action is urgent. Investments in new technologies, innovation, and workforce capabilities are essential to ensure competitive success in today's global marketplace. But, world-class manufacturing companies also depend on a globally competitive business environment that will enable them to invest, innovate and grow. Canada must keep pace with other countries in order to secure the investments and the high-value, high-paying jobs associated with manufacturing. Our governments have an important role to play in building a competitive manufacturing advantage for Canada. So do our schools, our research centres and our supporting financial and business services sectors. Read More