Could the TPP be the answer to Canada’s productivity problem?

Creig Lamb

It is no secret that Canada has a productivity problem. There is also no denying that if the election candidates continue to sweep this issue under the rug, our collective well-being as Canadians will suffer.

Despite this looming issue, there has been disturbingly little mention of productivity on the campaign trail. However, with the historic signing of the Trans-Pacific Partnership (TPP), it begs the question: can trade policies help to fix Canada’s productivity conundrum?

But before we dive in, let me first explain the issue. Productivity, at its essence, is a measure of the outputs produced for a given unit of input. In spite of the current economic discourse focused on oil prices and the recession, in the long-run, productivity is the key driver of Canada’s economic growth and living standards.

Compared to international competitors, however, Canada’s productivity performance has steadily been declining. From 1995 to 2012, Canada’s productivity growth ranked 26th of 35 developed countries. This poor performance is even more alarming when compared to the United States. As pointed out by the Conference Board of Canada’s Chief Economist Glen Hodgson, studies estimate that differences in productivity have resulted in a per capita income gap between the two countries of nearly $7,000. Some models estimate this gap could grow to $18,900 by the year 2050.

For incoming leaders, addressing Canada’s slow productivity growth will become increasingly important in the near future. Studies show that Canada’s economic success over the past decade is attributed to two factors: (1) rising commodity prices and (2) strong labour force growth. However, as recent trends suggest, these are both in rapid decline. Canada’s population is aging, the labour force is shrinking and there is little hope that commodity prices will grow at the 300 per cent rate they did during the early 2000s.

Using population projections alone, if Canada fails to improve its productivity, by 2050 per capita income will be $24,900 lower than would otherwise be the case without population aging.

To formally address productivity, most federal campaign policies have focused almost entirely on domestic innovation. While Canada does have an innovation problem, policy interventions aimed strictly at domestic innovation are likely far too narrow to substantively address Canada’s lagging productivity.

As a recent report by the Centre for the Study of Living Standards points out, Canada’s slow productivity growth since 2000 is primarily the result of major productivity declines in Ontario’s manufacturing sector. This is largely attributable to demand-side factors–such as slow growth in international exports as result of weak U.S. demand. Another major issue relates to the lack of international cost competitiveness amongst Ontario manufacturers.

Knowing this, can election candidates leverage trade-focused policies to improve the country’s productive capacity?

The obvious place to begin to answer this question is the historic Trans-Pacific Partnership. The TPP, negotiated between 12 Pacific Rim countries, who combined represent close to 40 per cent of global GDP, is the largest trade deal in recent memory. Canada has signed on to the agreement, but the deal must still be put forth to parliament for ratification. A process that could take several years.

So how can the TPP help to improve Canada’s productivity? As a small, open economy, Canada is highly dependent on trade. However, Canada’s trade is focused almost exclusively on slow-growing industrialized countries. This leaves the rapidly expanding economies in Asia relatively untouched by Canadian trade. The result has been a substantial decline in Canada’s overall global market share.

The TPP presents a unique opportunity to increase foreign demand of domestic products, while at the same time helping Canada to reap the productivity gains associated with trade liberalization.

In 2012 the Fraser Institute estimated that joining the TPP would increase Canada’s GDP by $9.9 billion. Studies have also shown that manufacturing firms that export experience much higher productivity than firms focused strictly on domestic markets. This is the result of exposure to international competition, product specialization, and investments in R&D. As a recent Maclean’s article demonstrated, even a modest decrease in the cost of importing goods as a result of the TPP can result in significant productivity gains and lower production costs in Canada’s automotive industries.

Despite the benefits, there is no denying that the TPP raises concerns over supply management concessions, content quotas, intellectual property rights, and job loss. As a result, Mulcair has repeatedly claimed that the NDP would not be bound to the agreement and Trudeau has openly criticized the Harper government for its secrecy during negotiations.

However, from a productivity stand-point, Canada’s leader, new or otherwise, must do all that they can to ensure the successful implementation of the TPP.

Aside from the TPP, election candidates should also commit to making adjustments to the Investment Canada Act (ICA) to attract more inward foreign direct investment (FDI) in Canada. Through the ICA, Canada is very restrictive against inward FDI. Potential foreign investors in Canada are put through the wringer to pass a stringent net-benefits test with little certainty of the result. Harper has even claimed that foreign control of Canadian Oil Sands corporations would take place only on an “exceptional basis”, the definition of which was never provided.

If Canada were to reduce restrictions and increase transparency, there would be drastic improvements in the level of inward FDI in the country. As studies have shown, this too would help to decrease the costs of production and increase productivity in most Canadian industries.

Despite these recommendations, as the TPP talks have illuminated, trade policies are challenging to address during a federal election campaign. Regardless, we need our federal leaders to make firm commitments to improve productivity and accelerate international competitiveness now.

 

Creig Lamb is a Master of Public Policy Graduate, 2015. His award-winning Policy Options paper on improving productivity in Canada will be published by the IRPP this fall. He is interested in arts and cultural policy, the creative cluster, economic development, productivity, small animals making friends with other animals, and being a resident of a baseball winning city (sometimes)!

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