Ontario’s manufacturing sector falling behind other provinces, U.S. states

The manufacturing sector in Ontario, as in other industrialized economies, has faced many challenges over the past few decades as a result of rising competition from emerging markets. There has been a dramatic global shift in production from western economies to emerging markets with lower labour costs. Although Ontario is not alone in having a reduced manufacturing sector, when compared to other jurisdictions in the United States and Canada, it exhibits the most substantial decline in its manufacturing sector.

In a 2017 study, we compared the manufacturing-sector share of real GDP across Canadian jurisdictions and the U.S. between 2005 and 2016. While the share of Ontario’s manufacturing sector in national GDP dropped 5.1 percentage points, the same metric in the U.S. fell less than 1 percentage point. In fact, many jurisdictions in the American Northeast that are Ontario’s main competitors boosted their manufacturing sector as a fraction of GDP—Indiana by 1.5 percentage points, Michigan and Kentucky by almost 1 percentage point.

Ontario is also falling behind other jurisdictions for the manufacturing sector’s share of employment, which fell by 6 percentage points—from 16.7 per cent to 10.7 per cent between 2005 and 2015—compared to more modest drops in Quebec (4.7 percentage points), Alberta (1.3 percentage points) and British Columbia (1.8 percentage points). Moreover, Ontario’s dramatic decline also dwarfed the national decline in the U.S. (1.7 percentage points), and more specifically, declines among Ontario’s main American competitors Kentucky (1.4 percentage points), Michigan (1.6 percentage points) and Maryland (1.2 percentage points).

Another indicator of the decline of manufacturing in Ontario is its relative inability to attract investment.

Between 2006 and 2016, while manufacturing investment in Ontario declined by 26 per cent, it increased in Quebec (11 per cent), B.C. (15 per cent), Saskatchewan (35 per cent) and Manitoba (5 per cent). The recession in 2008/09 lowered investment in all provinces, but Ontario is the only province where investment never recovered. In contrast, Quebec brought its manufacturing investment to pre-recession level by 2011; similarly, B.C. recovered by 2013.

Clearly, the significant decline in Ontario’s manufacturing sector caused the province to fall behind other Canadian jurisdictions and lose its share of national manufacturing output over time. While Ontario accounted for 49 per cent of all manufacturing output in Canada in 2005, by 2016 this share had fallen to 46 per cent. Quebec maintained its share of almost 26 per cent, while all other provinces increased their share.

What does this all mean?

Apologists in Ontario can’t blame global factors such as world demand, exchange rates and technological change for the poor performance of Ontario’s manufacturing sector because Ontario is faring so poorly relative to other jurisdictions that all face the same challenges. So why has Ontario fallen behind? Simply put, poor policy, including policies that have dramatically increased electricity costs, which have likely placed too large a financial burden on manufacturing and hampered the sector’s competitiveness

Finally, Ontario’s manufacturing sector accounts for almost 40 per cent of Canada’s exports, so its decline is a national concern. We urge the Wynne government to pursue meaningful reforms to significantly lower electricity costs and help Ontario manufacturers regain their competitive advantage.