Smart policy—not selective handouts—will bolster business environment for manufacturing

What’s gone wrong with manufacturing in Canada? A recent report published by National Bank of Canada economists looks at trends in the manufacturing sector’s “capital stock,” which includes the plant, equipment, machinery, computers, buildings and engineering infrastructure that collectively enable manufacturing production to take place.

According to the report, since 2000 the value of Canada’s manufacturing capital stock has declined after accounting for depreciation (the natural wear and tear on equipment and other business assets that occurs over time). In contrast, the manufacturing capital stock in the United States has continued to expand in inflation-adjusted terms, rising by almost 30 per cent over the same period. This means U.S. manufacturers have made significant and ongoing investments in their business operations, while such investment spending has been far weaker in Canada.

The stark and growing disparity in manufacturing investment in the two countries is troubling. It’s also somewhat puzzling. Over the last three decades, both Canada and the U.S. have struggled to sustain economically viable manufacturing sectors amid an onslaught of competition from China and other low-cost jurisdictions. The investment data suggest the U.S. has been successful in this quest, whereas Canada has come up short.

Why does it matter? After all, manufacturing occupies a smaller place in the economies of affluent countries than it did 30 or 40 years ago. As of 2022, more than three-quarters of all jobs in Canada and the U.S. were in service industries—everything from health and education to finance, real estate, professional services, retail trade, restaurants, tourism, transportation, and digital and other technology services. Manufacturing provides a smaller proportion of jobs than in the past.

But manufacturing still packs an outsized economic punch. Canada’s 90,000 manufacturers directly generate 10 per cent of the country’s GDP and employ 1.7 million people. The sector’s overall economic footprint is even bigger thanks to the hundreds of billions of dollars of “inputs” that manufacturers buy from other Canadian industries every year along with the pay-cheques spent by manufacturing workers in local communities. Manufacturing also supplies 60 per cent of Canada’s international merchandise exports.

So, Canadian policymakers should be worried about the erosion of the manufacturing capital stock and sluggish pace of investment in the sector. Unfortunately, the attention of governments seems mainly directed at supporting a handful of specific manufacturing industries—notably electric vehicles and “clean” technologies—rather than on enhancing the business environment for manufacturing in general. This is unlikely to deliver impressive results, in part because the politically favoured sub-sectors represent only a modest slice of manufacturing production and employment in Canada.

Manufacturing is diverse, consisting of about 20 industry sub-sectors that encompass the processing of natural resources (such as lumber and pulp), the production of transportation equipment, metal fabrication, information technology goods, refining and chemicals, machinery manufacturing, plus a mix of consumer goods such as food and beverages, clothing and textiles, furniture and plastics.

Government policies, including energy taxes that are much higher here than in the U.S., have contributed to the problems besetting Canadian manufacturing. Smart policy can help to bolster Canada’s competitive position in manufacturing broadly. This calls for a focus on educating and training a modern manufacturing workforce, reducing the burden of regulation, and tweaking tax policies to attract more investment and accelerate the adoption of advanced process technologies across the sector. This is where governments should focus their efforts to strengthen manufacturing in Canada.