A national 'Buy Canadian' strategy for resource developments

How refreshing it was to open Monday's Globe and Mail and actually see good news from the Canadian manufacturing heartland. Greg Keenan reported on the expansion of Hitachi's factory in Guelph, Ont., that makes enormous trucks for mining operations; the plant is doubling output and employment.

Ironically, while the Ontario-made trucks are sold to mining operations across the Americas, Europe and Africa, it doesn't supply trucks to the biggest mining project in the world, right here in Canada: Alberta's oil sands. Those super-sized trucks, unfortunately, are imported -- from companies such as U.S. heavy equipment maker Caterpillar. It's a lucrative business: Caterpillar's Alberta distributor, Finning International Inc., reported record Canadian revenue of almost $3-billion last year (up 30 per cent).

But while Caterpillar makes billions from Canadian resources, the company just closed its only Canadian manufacturing facility: a locomotive factory in London, Ont., that it bought in 2010 from Electro-Motive Canada. Caterpillar is shifting the work to plants in Mexico and right-to-work Indiana. Apart from slashing labour costs, another factor in Caterpillar's location decisions is the "Buy American" policy, which requires high U.S.-made content in federally funded projects (including rail transport).

Now, adding insult to injury, the United States will actually subsidize sales of Caterpillar's American-made locomotives back to Canada. The U.S. Export-Import Bank (owned by the U.S. government) is providing preferential financing for the purchase of Caterpillar locomotives for an iron ore mine in Labrador.

The irony is painful. Canada is an increasingly important resource producer. Companies such as Caterpillar, which profit immensely from those resource developments, are under no compulsion to manufacture anything here. Fuelled by oil prices, our loonie trades 25 per cent above its fair value in purchasing power terms -- making it all the more expensive to buy Canadian-made machinery for our own mines.

Our government, meanwhile, stands idly by while preferential policies in the U.S. and elsewhere reinforce the exodus of manufacturing jobs from Canada -- including jobs in the production of high-tech equipment to extract our own resources.

So the faster we develop our resources, the more equipment we import to do the job. Canada's trade deficit in specialized construction and mining equipment almost doubled over the past two years, reaching $7.3-billion in 2011. Canada should be a leader in mining equipment and technology, given our direct interest in that line of work. But, instead, we let others handle all that innovation and production. The resulting trade deficit represents a massive leakage of income and jobs, squandering much of the value of our non-renewable resources.

We need a national strategy to maximize Canadian content in Canadian resource developments. Canada, for example, could impose a "Buy Canadian" requirement on future mining projects, similar in spirit to the Buy American rules.

Companies wishing to extract Canadian resources would need to give something back to our national productive capacity: through direct purchases of Canadian-made machinery or inputs, or through "offsets" that met equivalent value-added targets. The federal and provincial governments have ample authority to implement such policies, using their powers over development, environment and transportation approvals as leverage. We'd also need a strategy to expand our own machinery industry at the same time.

Would this kind of strategy violate trade rules? That never stops the Americans from supporting their own industries. But, at any rate, trade agreements have loopholes for energy and environmental issues big enough to drive a Hitachi truck through -- but only if governments are willing to use them.

If we limit our national economic ambitions to digging stuff out of the ground, all we'll ultimately have left is a big hole in the ground. But if we're thoughtful and pro-active about leveraging our resource wealth into all-round economic and industrial development, we'll have much more to show after the resources are gone.

Jim Stanford is an economist with the Canadian Auto Workers union, which represents both the workers at the Hitachi factory in Guelph and the closed Caterpillar factory in London. This article was first published in the Globe and Mail.

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