Canada’s 30% minimum wage hike, rocketing electricity costs and the U.S. tax cuts to corporations have undercut the former advantage of locating manufacturing plants in Canada

From Bloomberg/Toronto Star

The brass at Martinrea International Inc. ran the numbers, and they added up to a no-brainer. The new technical centre would be built across the border in Michigan, not in its home province of Ontario.

For a company with manufacturing and engineering facilities in eight countries, it wasn’t necessarily surprising that Canada’s third-largest auto-parts supplier would make such a decision. But the reasoning was harsh.

“Canada’s advantage is in the process of going out the window,” chairperson Rob Wildeboer said in an interview before the ribbon-cutting on the research and development complex in Ann Arbor that employs about 160 people.

Wildeboer reeled off his evidence, including rocketing electricity costs and changes to Ontario’s labour rules, which include a 30-per-cent hike to the minimum wage. While national economic growth is projected to slow this year, the U.S. economy is accelerating, getting a boost from tax cuts that he said put his country in the shade.

Sure, Michigan offered some tax abatements, but Wildeboer said that wasn’t the biggest draw. The U.S. is just more business-friendly, he said. “Be competitive, or you’re going to kill the goose that laid the golden egg.”

An arsenal of disincentives driven by ‘hipster economics’

Around the country, business owners and corporate executives are grumbling. Quebec, Alberta and British Columbia are also boosting minimum wages. The federal government is requiring provinces to put a price on carbon emissions to help fight climate change in a program that could push power bills up further. Railroad bottlenecks threaten Canada’s standing as a major commodities exporter. There’s insufficient pipeline capacity for the oilsands boom.

But, according to Wildeboer and others, what threw the competitive challenges into stark relief were the U.S. tax changes championed by U.S. President Donald Trump. For years, Canada boasted much lower corporate levies. That edge has vanished. The U.S. rate tumbled to about 26 per cent from 39 per cent — including what states take — compared with Canada’s combined rate of roughly 27 per cent.

The U.S. move sparked an intense bout of reassessment of what is disparaged by some as hipster economics. After years of focus by provincial and federal Liberal governments on issues such as income inequality, diversity and the environment — with Prime Minister Justin Trudeau winning international plaudits for his efforts in these areas — a chorus is demanding that more attention be paid to old-fashioned economic growth.

Canadians have to answer some tough questions, said Don Walker, chief executive officer of Aurora, Ont.-based Magna International Inc., North America’s largest auto supplier. “Do we want to be a capitalist country, where you’re attracting the capital and you’re building businesses and hiring people? Or do we want to be more socialist, where the government gets bigger, spends more money, puts us into this huge debt, which is going to burden future generations and makes it less competitive to do business here?”

The answer, he said, should be obvious. He has a fair number of backers, such as Ron Mittelstaedt, CEO of Waste Connections Inc., which acquired Progressive Waste Solutions Ltd. for about $8 billion (U.S.) in 2016 and moved its headquarters from Texas to Vaughan — part of a wave of so-called tax inversions executed to take advantage of Canada’s then-lower tax bill.

While Mittelstaedt has no intention of moving the company back, he said high capital gains taxes on families selling businesses have killed 10 to 12 deals for Waste Connections in the past 18 months and are a major inhibition to deal activity. Canada, he said, is “effectively a socialized nation.”

That’s hardly considered a slam by everyone in the country. In Trudeau’s view, certainly, progressive policies such as open immigration and environmental protection are advantages that many investors recognize. U.S. tech companies, including Amazon.com Inc. and Alphabet Inc.’s Google have recently boosted hiring in Canada. Toyota Motor Corp. is putting $1.4 billion (Canadian) into two plants west of Toronto so it can build hybrid sports utility vehicles, with the federal and Ontario governments each contributing $110 million to the program.

The economy is, in many ways, doing just fine. Unemployment has held at 5.8 per cent for three straight months, the lowest in records stretching back to 1976. The central bank has raised interest rates three times since July, citing an economy close to its capacity. Crude oil climbed to $70 a barrel, boosting incomes in such provinces as Alberta and Newfoundland.

For all that, foreign direct investment plunged last year to its lowest level since 2010, mostly because companies that include Royal Dutch Shell Plc and ConocoPhillips pulled out of the oilsands. The merchandise trade deficit stood at a record $4.1 billion in March. And the federal government had to step in Tuesday to buy Kinder Morgan Canada Ltd.’s Trans Mountain pipeline-expansion project from Alberta’s oilsands to British Columbia’s west coast for $4.5 billion after the company walked away amid fierce bickering in the country over its environmental impact.

In the economic heartland of Ontario, weariness with liberalism is lifting the prospects of Doug Ford, a Trump-like populist who is leading in some polls to replace incumbent Kathleen Wynne as premier of the most populous province.

Ontario recently executed the biggest overhaul to its labour code in years, extending vacation and emergency leave and tightening rules governing shift work and casual pay. The minimum wage will jump to $15 in 2019; it’s $9.25 (U.S.) in Michigan.

Kimberly Long, CEO of Reprodux Ltd. in Toronto, called the wage hike a “massive” problem. “The speed at which it went up was extremely hard,” said Long, whose printing company employs about 120 and can win or lose contracts over a half-a-cent difference per unit. “Not only that, but all your suppliers and vendors, they have increased their prices because of their wages.”

For others, the cost of power is the issue. The Ontario Liberal government shut the province’s coal plants in 2014 in the largest single reduction of carbon emissions on the continent, and sunk billions into refurbished nuclear plants and subsidized wind and solar power. Large industrial users in Toronto and Ottawa saw prices rise 53 per cent and 46 per cent, respectively, from 2010 to 2016, according to the Fraser Institute, a public policy research institute.

That’s ridiculous, according to Patrick Bruder, president of Exhaust Direct Ltd. in London, Ont. He said he’s paying attention as states in the American South court him to relocate. “Whether I run it here or down there, it doesn’t matter to me,” he said. “My business, it’s worldwide.”

And there’s the rub for Canada: Trudeau’s upbeat attitude — what he called “sunny ways” — are increasingly being pushed aside by stark economic calculations.


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