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Canada’s industry policy is perfect – for the 1950s

Canada's severe lack of competitiveness relative to Mexico, and the resulting loss of foreign investment, could blunt the positive effects of a weaker domestic currency. The IMF chimed in Monday with a report on Canada's competitiveness, and an official telling the Wall Street Journal that "low productivity and a very high exchange rate over the last 10 years may have done some structural sort of damage" to our economy.

The question for Canada is, what do we do now?

In truth, Canada's industrial policy makers are in a miserable, Catch-22 spot. The fact that global auto makers would rather invest billions in Mexico – a country where the BBC estimates 60,000 people have been killed since 2006 in a military crackdown on drug gangs – is a damning indictment of our country's export growth potential.

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Yet the solutions to Canadian manufacturing's woes are far from obvious. Canada's deteriorating trade deficit – the driving force behind the recent decline in the loonie – will only improve through major investments in efficiency and productivity.

The problem is that these improvements are harmful to employment growth. Productivity is measured by output per hours worked. With global market share declining, the route to higher productivity is almost certainly fewer hours worked, which is not something policy makers want to necessarily encourage given our unemployment rate.

Canada's steady loss of auto production business has occurred despite considerable government subsidies. In 2013, Ontario and Ottawa committed $140-million in taxpayer funds to Ford Motor Co. to retool their Oakville, Ont. facility. The Prime Minister also pledged another $250-million to extend an auto industry "innovation fund" for another five years.

Canadians expecting the weaker loonie to provide a big economic tailwind need to recognize that the Mexican peso is also falling against the greenback. Mexico is also becoming more competitive for global investors.

To stem the tide of job losses – one of General Motors Co.'s two Oshawa, Ont., plants is set to close in 2016 – would require a significant uptick in government handouts to the industry. In the short term these subsidies would be economically sound, but they're still unfair. Taking tax dollars from Canadians who make the average wage and giving them to auto workers that make considerably more than the average, is a redistribution of wealth from poor to relatively rich.

Out of habit, Canadian policy makers are likely asking the wrong question. Instead of "how much more will it cost to maintain the status quo?," we need to re-examine the economy's commitment to Old Economy jobs.

Globalization and the economic development of Asia, eastern Europe and Latin America has made the global manufacturing industry dauntingly, viciously competitive.

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But starting with Japan in the 1970s, economic development resulted in new, stronger competition for car-buying dollars as Toyota, Honda, Nissan, Hyundai, and Tata Motors joined the fray. And it won't be long before China's new auto manufacturers SAIC Motor Corp., and Dongfeng Motor produce a vehicle cheap enough to compete for market share in North America.

The question is not whether Canada can compete with foreign manufacturers – we can, although it will require technology that will cause major job losses – but whether it's worth it to do so.

It would be economic suicide to let the auto industry and general manufacturing wither and die. We are too wealthy a country to let Windsor and Oshawa become Detroits. Government support at current levels is necessary and prudent. Almost every country that makes cars hands out subsidies to maintain business, and Canada should, too.

But only to a point. When government steps in to help the economy, the traditional beneficiaries are manufacturing, and construction companies building roads and bridges. Some of this work needs to be done, but to focus solely on these areas is to ignore the fact that the modern digital economy is far different from the economy of the 1930s.

Now, government support should extend to New-Economy businesses where, as a highly educated society, we have the ability to compete successfully with Mexico, China and other low-wage developing countries.

True, it's harder to create mass employment by expanding telecommunications networks, for example, but that doesn't mean it shouldn't be done. We have a lot of smart people in Canada, so let's prove it.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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