SPECIAL REPORT

THE FLIGHT OF INDUSTRY

A HIGH-COST ECONOMY TAKES THE RAP

PATRICIA CHISHOLM December 3 1990
SPECIAL REPORT

THE FLIGHT OF INDUSTRY

A HIGH-COST ECONOMY TAKES THE RAP

PATRICIA CHISHOLM December 3 1990

THE FLIGHT OF INDUSTRY

SPECIAL REPORT

A HIGH-COST ECONOMY TAKES THE RAP

For Thomas Buckley, it was a rare opportunity to meet the man whose economic policies are causing him financial pain. On an overcast Sunday late last September, the Mississauga, Ont., businessman joined Finance Minister Michael Wilson and two other men for a social round of golf at a country club 10 km west of Toronto. Two weeks later, Buckley, who is chairman of a $30-million-a-year industrial tire business in

Mississauga, met with Wilson in the minister’s Toronto constituency office to vent his frustrations about the deteriorating Canadian economy. His message was blunt. Buckley says that he told Wilson he intends to shift most of his company’s operations, including 200 jobs, to Tennessee or Ohio next year unless interest rates in Canada decline to 11.5 per cent and the Canadian dollar is allowed to fall to about 82 cents by early 1991. “I don’t want to go, but we are just looking to survive,” Buckley said last week. “The crisis is real. And if nothing is done, the exits south will become a tidal wave.” Although Buckley says that Wilson gave no

specific undertakings, the businessman expresses optimism that economic conditions in Canada will soon improve. A growing number of other executives, however, appear to have already given up on Canada. Many are turning their attention to the United States, attracted by lower wages and real estate costs, by a market that is roughly 10 times larger than Canada’s and, frequently, by special incentive programs provided by state and municipal gov-

ernments. In Canada, critics say that one of the major causes of the exodus is the 23-month-old Free Trade Agreement (FTA), under which barriers to trade between the two countries are slowly being dismantled. Some economists, however, say that the southward trend results from a wide range of federal policies, including high interest rates and the increased value of the Canadian dollar relative to the greenback.

There is little doubt that Canadian industry is under severe pressure. In Ontario, the heartland of the country’s manufacturing sector, 97 factories shut down or scaled back their operations during the first half of 1990, according to

the province’s ministry of labor. That was almost twice the number than in the same period last year. And according to the Canadian Manufacturers Association, the number of jobs in the manufacturing sector shrank by 134,000 between July, 1989, and July, 1990—a loss of one in 15 manufacturing jobs. Said CMA president Laurent Thibault: “FTA or no FTA, we can’t compete. It is very costly to manufacture in Canada.”

Among the U.S. cities that have gained from the exodus is Buffalo, N.Y., across the Niagara River from southern Ontario. Civic officials say that out of 90 companies that have relocated or opened new offices in the Buffalo area since 1987, 83 are Canadian. In the first six months of this year, newly arrived Canadian companies created 133 new jobs for Buffalo residents.

According to several recent opinion polls, the vast majority of Canadians believe that the Free Trade Agreement has hurt the country’s economy. In an October Gallup poll, 71 per cent of Canadian respondents said that the United States has gained more from the FTA than has Canada. Only five per cent said that Canada gained more from the deal.

As the country endures the highest levels of plant closures and layoffs since the early 1980s, union leaders and other activists claim that the FTA is draining Canada of jobs that will never return. Said Maude Barlow, who heads the nationalist-leaning, 18,000-member Council of Canadians: “We need to abdicate the agreement right now. Otherwise, we will certainly become a nation of warehouses.”

Severe: Barlow acknowledges that free trade is only one of several factors causing job losses in Canada. But she says that the gradual elimination of Canadian tariff barriers has removed a key incentive for companies to remain in Canada, while exposing those firms that remain to increased competition from foreign goods. She added that the loss of jobs will become even more severe if Canada becomes part of an expanded

free trade area that includes Mexico, where industrial wages are far below those currently paid in Canada.

But many economists and business leaders say that it is unfair to hold the FTA responsible for the loss of Canadian manufacturing jobs. Part of the problem, they say, is that Canadian taxes and wage rates are higher than those in the United States, and worker productivity is lower. Said Richard Lipsey, an economist at Simon Fraser University in Vancouver who was among the FTA’s most vocal supporters: “The frightening thing about the Canadian economy is that costs are out of line and our

productivity is therefore not growing as fast as in the United States.” Lipsey added that, so far, most reductions in tariffs under the FTA have been relatively minor. “An average reduction of two percentage points in tariffs is not enough to cause this problem,” he said. “Antifree traders are tilting at windmills.”

That is an opinion expressed by many business leaders. But they add that the federal government, which waged an uphill battle to introduce the FTA in the first place, has since failed to create the economic conditions that are necessary to ensure its success. Most of the unhappiness focuses on Wilson’s tight economic policies—particularly his insistence on using high interest rates to combat inflation. Besides making it more costly to borrow money, the rates help to prop up the value of the Canadian dollar on foreign exchange markets. That makes it more expensive for foreign customers to purchase Canadian products. Declared Lipsey: “It could not be a less favorable environment for the FTA.”

Worried: One firm that has benefited from the FTA is the Stanley Tools Division of Stanley Canada Inc., which manufactures toolboxes at a factory in Smiths Falls, Ont. Stanley Tools president David Talbot says that, partly because of lower tariffs, the company plans to expand its production and increase its exports to the U.S. market. But Talbot added that he is worried that high interest rates, the high dollar and high taxes will offset some of the company’s gains from the FTA.

But as the list of plant closures and layoffs grows longer, labor leaders are stepping up their challenge to the agreement. Bruce Campbell, an economist with the 2.2-million-member Canadian Labour Congress, says that the removal of trade barriers under the FTA was “directly and indirectly” responsible for eliminating 105,000 jobs between Jan. 1,1989, and April, 1990. And he predicts that the number of lost jobs will likely double by the end of this year. Asserts Campbell: “For every free trade job loss, there is one spin-off job lost—and that is a conservative estimate.”

But even as the debate over Canada’s economic policies intensifies, an increasing number of Canadian-based companies are quietly deciding to shift some or all of their operations to the United States. Business conditions are simply better south of the border, they say. John van Brussel, whose family’s machinery distribution company has operated out of North Bay, Ont., since it began in 1977, opened an office in Buffalo earlier this year to serve his U.S. customers, who account for 70 per cent of the firm’s sales. Lower land prices, cheaper labor rates and less costly office supplies were among the reasons for the move, he said. But another factor, he added, was that the business climate in the United States is friendlier. Declared van Brussel: “It was like a giant welcome wagon when we got there.” For more and more Canadian companies, the warmth of that welcome is becoming hard to resist.

PATRICIA CHISHOLM

BARBARA WICKENS

in Toronto