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Why the rebirth of manufacturing is bypassing Canada

The footwear industry has always been hypersensitive to labour costs.

In the hunt for savings, manufacturers are forever scouring the planet for the next best place to produce shoes and boots.

That's why it's notable that Merchant House International Ltd., which makes boots for Wal-Mart Stores Inc. and Sears Holdings Corp., announced last month that it will open its first U.S. plant in Tennessee early next year. Until now, the Hong Kong-based company has made its footwear exclusively at factories in China.

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The so-called reshoring phenomenon is now spreading to industries that experts long ago gave up for dead in North America, including clothing, textiles and footwear.

But it isn't just clothing and textiles. More than half of U.S. executives at manufacturers with sales of at least $1-billion (U.S.) say they are planning to repatriate some production to the United States from China, according to an August survey by Boston Consulting Group. Respondents cited factors such as proximity to customers, product quality and lower transportation costs, competitive wage rates and skilled labour.

So far, the manufacturing renaissance appears to be bypassing Canada. The spoils are going mainly to the United States.

The bottom line is that Canada is not a competitive place to make things at the moment. And the comparison to the U.S. doesn't look good.

In a speech last week, Bank of Canada senior deputy governor Tiff Macklem lamented that Canada is losing competitiveness and, as a result, its share of global trade.

Most troubling, Canada is ceding ground to its main trading partner. Between 2000 and 2012, Canadian unit labour costs increased 75 per cent compared with the U.S. The main factor that's sapping competitiveness is the rise in the value of the Canadian dollar, but Mr. Macklem also blamed weak productivity growth. And that lack of competitiveness is costing the country more than $70-billion (Canadian) a year in exports.

The country's share of global trade has fallen to 2.5 per cent from 4.5 per cent in 2000. Canada's share of the U.S. market, which buys more than 70 per cent of the country's exports, has sunk to 15.4 per cent from 20 per cent since 2000.

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The worry is that Canada may not have a solid manufacturing base left when – and if – the currency and other factors turn in Canada's favour.

Mr. Macklem and newly installed Bank of Canada Governor Stephen Poloz have fretted in recent months about the destruction of Canada's productive capacity in recent years. Thousands of companies have disappeared since the Great Recession, particularly exporting manufacturers. Most have not come back, hobbling the manufacturing base.

"Creative destruction results in the net creation of new firms," Mr. Poloz said in June. "But since the onset of the recession, there has been limited net creation of businesses."

Manufacturing was already in sharp decline in Canada in the years before the recession. The factory sector's share of total business activity dwindled to 15 per cent in 2008 from nearly 25 per cent in 2000, according to Paradox Lost, a new report on the country's innovation performance by the Council of Canadian Academies.

The report also laments the lack of research and development, particularly by manufacturers who have relied too heavily on playing a supporting role in U.S. supply chains. "Acquiring needed innovation from the United States has simply been easier and cheaper," the report pointed out. The result is that Canada has too few companies at the cutting edge of technology.

That is now proving to be a liability because the U.S. manufacturing renaissance is happening thanks mainly to technology, not labour. Investments in technology and equipment are enabling manufacturers to produce more with fewer workers. It's why companies such as Merchant House can afford to make things in the United States.

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The downside is that reshoring is a largely jobless phenomenon. So far this year, the U.S. manufacturing sector has gained a modest 2,000 jobs.

Canada, meanwhile, is continuing to shed manufacturing jobs at an alarming rate. There were 53,400 fewer manufacturing jobs in August, compared with the same month last year.

Technology, it turns out, is the great equalizer. But Canadian companies are investing too little in the things that would make them globally competitive.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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