Achi news desk-
By Promit Mukherjee
OTTAWA (Reuters) – Canada’s low labor productivity level puts the country at risk of losing billions of dollars in investment to Mexico, as the so-called nearshoring boom prompts companies to move supply chains to North America , economists and lobby groups say.
Mexico is fast becoming a global destination to manufacture products for supply to the United States, where companies are looking for suppliers closer to home to reduce their dependence on China and shorten their supply chain. However, Canada has not seen much benefit from this trend.
If Prime Minister Justin Trudeau’s government fails to take measures to boost production, Canada will lose a historic opportunity to attract money flowing into the region from the “open” boom of US companies that’ n look for suppliers close to home, economists warn.
Annual labor productivity of Canadian businesses fell 1.8% in 2023, their third consecutive year of decline. That prompted Bank of Canada Senior Deputy Governor Carolyn Rogers to sound the alarm about the country’s declining productivity, which she blamed on Canada’s lagging investment in machinery, equipment and intellectual property.
That’s largely because an influx of cheap, low-skilled immigrant labor has offered companies the incentive to replace long-term investment in research, training and innovation. As a result, Canada’s productivity level among the G7 economies is now second to last after Italy and below the average of the OECD grouping of rich nations.
Economists say persistently low labor productivity reduces profits as well as makes Canadian output expensive and uncompetitive globally.
Mexico, on the other hand, finds itself in a sweet spot. Foreign companies have long been attracted to Mexico because of its lower labor and other input costs, said Juan José Gómez-Camacho, a senior fellow at the SAIS Foreign Policy Institute in Washington DC and former Mexican Ambassador to Canada.
Now, “Mexico is benefiting the most” from the wave of new investments driven by US efforts to reduce dependence on China, he said.
Mexico last year replaced China to become the United States’ largest trading partner. Canada lost its status as the United States’ largest trading partner a decade ago.
Mexico has seen foreign direct investment (FDI) into the country reach a record $36 billion in 2023, a 27% jump from a year earlier, with more than half flowing into manufacturing, according to official data.
Mexican President Andrés Manuel López Obrador has doubled down on investments in public projects, which has helped push the country’s gross fixed capital formation – a metric to measure investments in factories and machinery – up 25% in the fourth quarter of last year from the first quarter of 2022 , according to World Bank data.
In contrast, FDI to Canada fell 42% to C$52.4 billion ($38.4 billion) in 2023 from a year earlier. Its gross fixed capital formation fell by 7% between the first quarter of 2022 and the last quarter of 2023.
“The United States and Mexico have taken this big gamble that by having very large domestic public investment, we can have a significant positive return,” said Joseph Politano, a New York economist who publishes the Apricitas Economics newsletter.
“Canada doesn’t do that on a scale like the United States or Mexico,” he said.
‘MISSED THE BOAT’
Mexico, whose sprawling landscape of industrial parks in the north is nearly 100% occupied, is establishing a cross-country rail corridor and its 18 ports have helped drive record FDI, according to economists and government trade data .
In the key auto sector, Mexico already produces 1.5 times more vehicles than Canada and has already reached its pre-pandemic output level. Canadian vehicle production is languishing below 2019 levels and the sector is struggling to compete with Mexico on labor costs due to a unionized workforce.
Mexico is also attracting investments from a variety of automotive supply chain players as part of the transition to electric vehicles (EV), including Tesla.
To be sure, Canada has seen some signs of investment optimism – notably a surge in EV-related investment over the past year, thanks to government tax incentives. That includes plans announced last week for a C$15 billion EV factory and battery manufacturing by Honda Japan, the company’s largest investment in North America.
Last year, Swedish battery maker Northvolt, Ford Motor Co., Stellantis NV and Volkswagen committed billions of dollars in investment in battery manufacturing in Canada.
“Canada is a world-class destination for foreign direct investment,” said Katherine Cuplinskas, spokeswoman for the finance ministry. “The recently announced generation investments by Honda, Dow Chemicals, Volkswagen, Stellantis, and Northvolt are concrete proof of Canada’s attractiveness for global private capital.”
The government has also pledged C$2.4 billion to support activities related to artificial intelligence over five years in this month’s budget, to improve productivity.
In the first three quarters of 2023, Canada saw the most FDI per capita among G7 countries and attracted the third highest global investments in the world, and Cuplinskas said the stock of total FDI grew by C$52.4 billion last year, with the United States accounting for nearly half.
However, economists say the government needs more concerted efforts to take advantage of the imminent opportunity, and a budget proposal to increase the capital gains tax on wealthy individuals and businesses will further drive capital away.
Canada is ultimately struggling to keep up while US manufacturing activity is driven by subsidies in its Deinflation Reduction Act and Mexico enjoys higher productivity levels and lower labor costs, Pedro said Antunes, chief economist at the Conference Board of Canada, an independent think tank.
“Maybe we missed the boat,” he said.
($1 = 1.3657 Canadian dollars)
(Reporting by Promit Mukherjee, editing by Deepa Babington)
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