Industry Committee on June 13th, 2006

[Robert Lamy]

One model can show the impact of an increase in the dollar on the manufacturing sector, and another can show a different impact. It's not our role to build models or to assess the impact of a one-cent increase on the manufacturing sector.

As Ms. St-Jacques mentioned a little earlier, the Bank of Canada makes studies that can answer your question available to the public. The fact remains, however, that, as a result of its complexity, it is extremely difficult to measure the impact of an increase in the dollar or in energy prices on the manufacturing sector. It's not up to us to make an estimate or a final evaluation, which is much too complex a task.

[Robert Vincent, Bloc, Shefford, QC]

You have enough information to understand the impact of these increases. The price of gas has jumped 30¢, the dollar is climbing from 80¢ to 90¢ and interest rates have risen 0.5% in the past six or seven weeks... You definitely have indicators that, if there is an increase, such and such a thing will occur. You already have those indicators, because you've experienced it. I understand that it's not up to your department to make that decision or to transpose these charts.

We've previously witnessed plant closings and other repercussions of an increase in the dollar, rising interest rates or higher gas prices. I believe it's up to Industry Canada to tell the minister that, if such and such a thing occurs again, the matter will have to be seriously examined.

[Robert Lamy]

What we can say with more certainty is that the value of the dollar rose roughly 19% from December 2002 to December 2003, approximately 8% from December 2003 to December 2004, some 5% between December 2004 and December 2005 and approximately 5% since the start of the year. We can say that many of the adjustments to the higher dollar have already been made. That doesn't mean there won't be others, but simply that the adjustments that remain to be made will be less significant than those two or three years ago.

[Robert Vincent, Bloc, Shefford, QC]

Are you going to tell the minister that, despite all the information we have, we have to find solutions? What do we do to help these businesses? In view of the data you have and of past increases, what potential solutions will you suggest to the minister? What solutions can save these companies?

[The Chair, Conservative, James Rajotte]

We're over time.

[Renée St-Jacques]

As my colleague Cliff said a little earlier, during the 1990s, it was essentially the manufacturing sector and net exports that drove all of the country's growth. We now have more balanced growth, which isn't necessarily a bad thing. I'm not saying it's a good thing to lose jobs, but I believe we have to look at matters over the medium term.

Our experience in Quebec and Canada is not that different from what is happening in the OECD countries as a whole. Employment in the manufacturing sector is tending downward, and production as a percentage of gross domestic product is also tending to decline in those countries as a whole. That doesn't mean that the government should intervene immediately.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Van Kesteren for five minutes.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.

Thank you, everybody, for coming this morning and for going on into the afternoon.

I have a quick question to you, Mr. Brown.

I'm just curious about the statistics on the history of fuel prices. What happened in Sweden in 1993, where I see a dramatic decrease? Did they do something? Did they drop taxes?

[Howard Brown]

I have to confess that I don't know the answer to that. I'm looking at my technical experts, and they're busy looking at the floor, so I suspect they don't know either.

[Some hon. members]

Oh, oh!

[Howard Brown]

There was a banking crisis in Scandinavia, I think, in the early nineties. There may have been a precipitous exchange rate move or something at the time, but that's speculation on my part.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

We very much appreciated, when we heard about the fuel prices.... I think that our government is doing a fine job in monitoring those. It's just good to know, if there are spikes anywhere, just what happened.

I've seen some amazing things from the report on Canada's manufacturing sector. Maybe somebody can just elaborate on this: import penetration from China is rising, yet the overall manufacturing sector has been the same from 1995 to 2005. That statistic just astounds me. You hear that the sky is falling, yet there seems to be something that's—

[Renée St-Jacques]

The story in the manufacturing sector is not an even one. As I was saying in my opening statement, overall output has been increasing in the sector, but it hasn't been increasing across the board or in some subsectors. Those are covered mostly in the chart on page 6, telling us that China is displacing Canadian producers in the Canadian market in textiles, clothing, leather, computers, etc. That's what this chart tells you. But when you look at the bar at the end, it tells you, okay, in the overall manufacturing sector there is no increased import penetration, meaning that the manufacturing sector overall is holding its own fairly well in the domestic market. That's the way I read this chart.

Do you have something to add?

[Sara Filbee]

I'll just add to that.

I think the difficulty is that there are a number of different factors going on here. I look at it from the perspective of overall manufacturing competitiveness. What we're seeing is actually a transformation of the manufacturing sector. We've had these discussions with the CME, with whom we work very closely, in looking at the issues in follow-up to the CME's Manufacturing 20/20. I hesitate to use the word “definition”, but one way we now have of referring to the manufacturing sector is to refer to processes that create and deliver value by way of tangible goods. There are companies that consider themselves to be in the manufacturing world but may not touch a physical good, yet are very active in terms of the design, the logistics, and other aspects of the manufacturing process overall.

What that means is that it has a lot of implications for the types of skills needed, which we've already talked about. The other thing it means, as you've noted—and I believe David Dodge also made this point—is that it's from individual sector to individual sector. It's not a monolithic sector. We really have to boil it down and look at what happens at sector by sector, at the same time as people making recommendations with respect to policy need to consider the big factors here—and obviously one of those is skills.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Another surprise, of course, is the profit margin. We're staying profitable.

The point I'm making is that there is some real good news when we talk about the economy, even in the manufacturing sector. There are some areas of concern, but we're seeing a shift. The end result in all is that the rising dollar, although we look at it in negative terms, is a good thing. So we're seeing some areas of concern, but the overall picture is that the economy and that segment of the economy look very healthy.

Is that correct?

[Renée St-Jacques]

If I may, living standards basically increase for three reasons: you boost productivity, you work more and have more employment, or you have an increase in the price of the goods you sell to the world compared with the price of the goods they sell to you. Basically we've had all three working for us over the last three years. Overall, that's been good for the Canadian economy, and it shows in the numbers—increased employment and increased GDP.

So I would say you're absolutely right in your assessment. That doesn't deny the fact that this has a required adjustment elsewhere in the economy.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I have one more question, just quickly, on tourism. I'm thinking of the Americans; we've lost a segment there. Americans, if you just look at their lifestyle, like to be amongst themselves. I would suggest they have visited Canada because we are very much like them.

Have we moved away from that, and can we or are we, in tourism, possibly looking at areas where we can show them that we've very much the same? Is that maybe some of the advertising that we're going to portray?

[Michele McKenzie]

Our most recent research suggests that the fact that we're very much the same as them has at certain times been a very compelling reason to travel to Canada. Now it's becoming much less compelling—in fact, of no particular interest. The fact that we're like them is giving them much more of a “so what” attitude, “Why would I want to come there, then? If you're not less expensive than we are, and I'm just going to get the same thing as I can get here, why would I go to Canada?” That's been the focus of our marketing: to give them the reasons to come to Canada.

[The Chair, Conservative, James Rajotte]

Thanks, Mr. Van Kesteren.

We'll go to Mr. Masse now, for five minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

I'll follow up with chart 6 here, with regard to Chinese import penetration.

Has there been any analysis of the difference between Chinese wages and Canadian wages, Chinese benefits and Canadian benefits, and also of oil and other manufacturing costs, and last, of post-end material disposal being an environmental concern? Has there been an evaluation of how a Canadian company has to compete, in the face of the differentials in these, against a Chinese company?

[Renée St-Jacques]

Not that I'm aware of in our group. But we can look into it and see what might be available and come back to you, if you want.

[Brian Masse, NDP, Windsor West, ON]

Okay.

The reason I'm asking this is that if we look at the chart here—say, for example, in terms of oil prices and what not—obviously it's a competitive advantage to have a lower-cost source of those types of resources, and similarly of manufacturing processes if there can be outright subsidies. My concern going forward is whether later on with autos—there are a number of production vehicles slated to potentially arrive in Canada in the next number of years—there is going to be fair competition between the two countries.

Can I at least record that question to the department to find out first whether it's been done in the past for the manufacturing challenges we have now in the industries that are lagging behind Chinese competitors, and second, whether there will be one done for auto?

Ms. McKenzie, what specific things did the cut in your budget pull back from your department? You noted that you're concentrated more on farther markets such as New York than on border markets, which gives me concern, because we're having issues—in Ontario, for example—with cultural changes to a smoke-free environment, WHTI, passport issues, and a whole series of things that are very similar. We have a lot of economic benefit going to the rest of the country, but I don't see any help with promoting return visits. What specifically have you lost?

[Michele McKenzie]

We really see the U.S. market as three distinct markets. There's a drive market that's within driving distance of the border; there's a mid-haul market that will fly or drive, but mostly fly; and there's a long-haul market that will fly to Canada. The fly market coming out of the south of the U.S. is in very good shape; in fact, it experienced some growth last year. The mid-haul market was a bit flat, and the drive market, closest to the border, is where we're experiencing the greatest decline—especially the same day. The same-day numbers are quite bad, as you would know.

We've tried a number of different strategies to address the drive market from a pure marketing point of view, and we have found that even working with a broad number of partners we have not been able to penetrate that market. We compete with different competitors in that market. In the drive market for the U.S., we're competing against domestic U.S. destinations. As we get further away, we're competing with other international destinations.

Competing with domestic U.S. has become fiercer for us. There's been a lot of investment in the U.S. in improvement to cities. They're finding alternatives within the U.S. that they used to come to Canada for. They were very aware of the difference in exchange. Besides that, there's the fact that they don't hold passports at the same rate as people further away and are confused about what's happening at the border.

[Brian Masse, NDP, Windsor West, ON]

Those are some important points.

Let me move to address a question to Mr. Brown. Mr. McTeague raised an interesting point. Maybe you can clarify another observation and the reasons for it.

Let's go to the page on the history of natural gas prices. Unlike the case with oil, Canada has enjoyed a lower price, and industries have enjoyed a lower price than their U.S. counterparts. Why would they be inverse with respect to this issue, given that Canada has an abundance of natural gas and oil, whereas the United States is enjoying lower prices? I think it's an important issue, because even a few cents makes a difference. You just have to talk to manufacturers, especially over the long term. Why is it we're enjoying a lower natural gas price, but we're not getting that advantage in fuel oil end prices?

[Howard Brown]

There are two things. I'll just make a general comment about the data series and what we're actually measuring here.

These are compilations by the International Energy Agency of data from national statistical sources. All those data series will have measurement errors around them, just as polling numbers have errors around them. So it is not the price of a particular transaction; it is confidence in the polling around it. Moreover, there may be differences in the procedures that statistical agencies use. What day of the week do we measure on? Do we measure every day of the month, or are we taking only the end of the month? You would expect, even in jurisdictions where prices are in fact identical, that the series would not be precisely identical. You have to ask whether they are statistically different.