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Archived - 5. How Well Is Canada Positioned to Compete to Win?

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How well is Canada positioned to create better jobs, more wealth and an improved standard of living in a changing world?

In evaluating Canada's prospects, we look at the strengths and weaknesses in those factors that most directly affect Canada's ability to attract investment and build competitive companies, and thereby produce quality jobs and opportunities for Canadians.

Our country gets mixed reviews from various studies of competitiveness rankings relative to other countries.1 Overall, no simple or actionable conclusion can be drawn from the findings. The following is our assessment of Canada's strengths and weaknesses.

Competitive Strengths

Canada has many strengths. Our primary advantages lie in location, natural resources, a diverse economy, high-quality public education, and institutional and political stability.

Canada's proximity to, and unique relationship with, the US are definite advantages in accessing the large US market. This is bolstered by our trade agreements with the US, which gives preferential treatment for goods and services. Moreover, the location of our ports gives us closer access to key central US regional markets than US ports for both Asian and European sourced and destined goods.

We have abundant natural resource wealth.2 We are the world's largest producer and exporter of uranium, with the world's third largest reserves. Canada is also the world's largest producer of potash. We are the world's second largest generator of hydroelectricity. We are the world's third largest producer of natural gas. Canada is the largest supplier of crude oil, petroleum products and natural gas to the US. As much as $300 billion in private capital investment in Canadian resource projects is under consideration for the next five to ten years.3

As conventional sources of crude oil and natural gas continue to decline, we have the opportunity to develop unconventional sources, including the oil sands. Currently, the oil sands produce 1.2 million barrels per day. By 2030, this has the potential to increase to 5 million barrels per day. The proven reserves in the Canadian oil sands rank second in the world only to Saudi Arabia. The potential goes well beyond the Alberta oil sands. Pipeline projects from the Mackenzie Delta can provide access to large and secure supplies of natural gas for the North American market.

Canada's economic base is diverse. In addition to our mineral and petroleum resources, Canada is among the world's leaders in fisheries, forestry and agriculture. Canada's traditional strengths in manufacturing have been challenged by recent exchange rate shifts. We believe that the appropriate adjustments will be made to pursue greater productivity and that our manufacturing sector will adapt. Our economy derives further strength from its burgeoning services sector. The mix of traditional and emerging products and services is a powerful basis on which to compete.

Canada has a highly educated population. Our students perform well in international skills assessments, and many Canadians possess college and university degrees. Canadians also have high rates of labour force participation, and are skilled and adaptable workers with a strong work ethic. Many Canadians have successfully learned new labour market skills and have seized new opportunities, which are key assets in a value-added, knowledge-based economy. In addition, Canada's cultural diversity, tolerance and high level of acceptance of immigration are important attributes in a global world.

Figure 6 — Manufacturing's Declining Share of Gross Domestic Product in Developed Economies, 1971–2007

Figure 6 — Manufacturing's Declining Share of Gross Domestic Product in Developed Economies, 1971–2007

Source: Department of Finance Canada estimates based on data from Statistics Canada, US Bureau of Economic Analysis, United Kingdom Office of National Statistics, and OECD, as cited in Department of Finance Canada, Budget Plan 2008: Responsible Leadership, p. 41.

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Canada has earned an international reputation for integrity and credibility through strong leadership and diplomacy. This record and reputation as an "honest broker" allows Canada to "punch above its weight" in key political and economic organizations. Canada's linguistic duality enables a strong presence in both La Francophonie and the Commonwealth. Canada is a well-respected member of the G7, and stands out in the world for its prudent fiscal policy (which has generated consistent surpluses), complemented by credible monetary policy. Canada also provides political stability through strong institutions and a commitment to the rule of law, an increasingly important competitive asset for economic and resource development.

Competitive Weaknesses

At the same time, there are factors on the opposite side of the ledger. These can be classified broadly as population density and geography, scale, jurisdictional fragmentation and regulatory burden, taxation and the cost of capital, and insufficient entrepreneurial ambition.

Although Canada's land mass is the second largest in the world, its population and economy are small by world standards. Canada accounts for 0.5 percent of the world's population and 2 percent of the world's economic activity. Canada ranks last in the G7 in terms of population size and share of total world economic activity.

Complicating this is our cold climate and dispersion of a modest population over a large area. Canada's large size imposes high infrastructure costs and places heavy demands on borders, ports and transportation corridors. Our small domestic market means that Canadian firms must look beyond our borders to achieve the scale necessary to compete on a more equal footing with their global rivals. Canada's firms must also overcome the tendency to remain small in a decentralized federation. Compounding these difficulties, Canada lacks effective mechanisms for addressing federal–provincial differences, leading to market fragmentation.

A multitude of internal barriers constrain the mobility of goods, services and people and make a small market even smaller. Canada also suffers from a "tyranny of small differences"4 created by a regulatory approach that puts us at a competitive disadvantage with even our closest trading partner, the United States. For example, Canada exports 90 percent of its manufactured motor vehicles to the US market.5 Nevertheless, a number of automobile manufacturing regulations are not harmonized between Canada and the US. Such unnecessary differences operate as de facto barriers to trade, resulting in higher prices for Canadian consumers for the same vehicle.

Unnecessary regulations and procedures "slow down innovation, frustrate new product launches, operate to protect domestic producers from foreign competitors, and create a drag on competitiveness, productivity, investment and growth."6

There is too little interchange between the public and private sectors. Economic competitiveness is the result of a productive partnership between government and business, and our competitors have a better grasp of how important these types of relationships can be. As SECOR concludes in its analysis of Canada's competitiveness, "Competing jurisdictions have better aligned international business and public policy, and have clear and shared international ambitions."7

A recent study shows that in 2008 Canada's cost advantage over the US in manufacturing was only 0.1 percent, down significantly from 2002 when Canada had a 10 percent cost advantage in manufacturing.8 Mexico has a 16 percent cost advantage relative to Canada. The same study notes the sensitivity of these results to exchange rates.

Our level and system of taxation and the associated impact on the cost of capital for Canadian enterprises are also drags on Canadian competitiveness. There is insufficient harmonization in federal and provincial consumption and business taxes. Canadian taxes on business investment in certain provinces discourage productivity-enhancing investment and reduce the attraction of Canada as a desirable destination for FDI.

A final weakness for Canadian competitiveness is the lack of sufficient entrepreneurial culture and ambition. A Panel research study concludes, "Canada lacks today the 'virtuous cycle' of talent creation that is driven by successful entrepreneurship, which generates positive financial returns which, in turn, generates a healthy risk capital market, which then generates a new round of entrepreneurs."9 While the entrepreneurial spirit exists in certain companies and industries, Canada needs more aggressive and ambitious business leaders with the global mindset necessary to compete to win in the twenty-first century.

The Panel believes that Canada should build on its strengths and take steps to cope with its weaknesses. Having laid the foundation and set forth our analysis of the issues, we now turn to our agenda, findings and recommendations.