What businesses need to know about the opportunities, challenges and strategies to consider when operating in Canada.
For decades, the Canadian economy has been seen as an adjunct to the US market. Canadians enjoyed similar incomes as Americans, and the shared language made Canada a natural market for consumer goods produced in the US. Starting in the 1960s, auto manufacturers began opening factories in the industrialized corridor around the Great Lakes and the St. Lawrence Seaway, taking advantage of lower labor costs and a highly educated workforce. Today, Canada has grown into the world’s 11th largest economy, and it possesses a diversified manufacturing base, a stable political environment, a wealth of natural resources and easy access to the world market.
But as many advantages as there are to opening operations in Canada, the Great White North is not without unique risks: The country’s relatively small population and concentrated export mix presents macroeconomic challenges that are not usually found in larger, more diverse economies.
Included below are some examples of the benefits and risks, as well as a few strategies for success, to consider when making plans to conduct business north of the US border.
According to a 2016 study by KPMG, the comprehensive cost of operations in Canada—taking into account the price of labor, facilities, transportation, utilities, taxes and regulations—is 14.6 percent less than an equivalent operation in the US. This gives Canada a competitive advantage over not only the US, but also other industrialized nations such as the UK, Australia, Germany and Japan.
The KPMG report found that Canada’s greatest comparative advantage is in the low cost of research and development. The Scientific Research and Experimental Development Tax Credit provides Canadian businesses with more than $4 billion in tax incentives annually, pushing the cost of Canadian R&D 27 percent below that of similar research in the US.
As a global trading partner, Canada is opening its economy to the world. The government’s Global Markets Action Plan, adopted in 2007, laid the groundwork for negotiating free trade agreements (FTAs) in the developing world. The plan has resulted in treaties throughout South and Central America, as well as agreements currently under negotiation with Caribbean nations and the parties to the TransPacific Partnership.
Canada may soon enjoy free trade across the developed world. The Canada-South Korea FTA has already eliminated most tariffs between these nations, and the Comprehensive Economic and Trade Agreement awaits ratification by European parliaments to open the eurozone to Canadian goods. Ongoing negotiations with Japan would complete the nation’s tariff-free access to the world’s largest consumer markets.
The World Economic Forum’s comprehensive measure of human capital ranks the Canadian workforce as the world’s second-best educated and the 10th most competitive overall (outranking the US, which came in 16th). The Canadian workforce is also one of the most flexible in the developed world,1 as it lacks many of the restrictions and labor protections that can make on-demand staffing impossible in the eurozone.
The Canadian population enjoys similar levels of educational attainment to those found in the US, with 64 percent of adults holding a postsecondary degree. The nation’s science, technology, engineering and math (STEM) students now account for 18.6 percent of all graduates, for a total of about 2.2 million workers with technical degrees. More than half of all Canadian doctorate degrees are awarded in STEM fields.
Canada has historically been, and still is, a very stable and efficient banking system, with home-grown Canadian banks dominating the landscape and operating nationally. Banking information is exchanged between the domestic banks multiple times throughout the day, which creates a number of efficiencies not available in the US, such as no float being assigned on deposits (i.e., when you deposit a check, you immediately receive value for the deposit). Banking in Canada is still very much paper based, so while electronic payments are on the rise— according to the 2016 AFP Electronic Payments Survey, 70 percent of businesses intend to convert most of their payments from check to electronic within the next three years—checks remain a very popular mode of payment, with many companies taking advantage of the mail float to manage their cash.
The US dollar’s sustained rise has made American operations relatively expensive on the global stage, but the Canadian dollar has declined 21.6 percent against the dollar since 2014, driving down the cost of doing business in Canada.
The Bank of Canada appears to be following a similar trajectory for monetary policy to that of the European Central Bank and the Bank of Japan. While America’s Federal Reserve started to tighten monetary policy in 2016, Canada held its target interest rate steady at 0.5 percent. Core inflation in Canada averaged just 1.5 percent over the past year, alleviating pressure on the central bank to raise interest rates soon.
Canada’s exports have long been dominated by its extensive natural resources and agricultural commodities. Crude oil accounts for a full 20 percent of Canadian exports, with natural gas supplying another 3.5 percent. Metals and agricultural commodities each make up approximately 10 percent of exports, producing almost as much value as the nation’s automotive sector. The abundance of natural resources, combined with a relatively small population, makes Canada an attractive destination for extraction and processing industries.
In November, the Canadian Minister of Environment and Climate Change announced a plan to phase out coal-fired electrical plants by 2030. The proposal calls for investments in clean energy that will shift 90 percent of energy generation to non-greenhouse-gas-emitting sources over the coming decade.
Currently, hydroelectric dams produce 59 percent of Canada’s power, with nuclear and wind adding another 16 and 5.2 percent, respectively. Montreal and Vancouver enjoy the cheapest electricity of any North American cities.2 For companies with climate-conscious consumers, Canada offers the developed world’s least carbon-intensive power.
The Canadian economy is closely tethered to the US. America is the top destination for Canadian exports, and the nation’s large automotive sector is highly reliant on the shared North American market. The Canadian economy is stabilized by its ties to the US—a downturn in domestic consumer demand would likely be blunted by the ease of selling to the larger American market. However, this also brings risks—if America’s appetite for Canadian goods falls, the ripples will be felt throughout Canada’s economy.
Canada’s incoming Liberal government has announced an economic stimulus measure equal to USD $91 billion, which promises to jumpstart economic growth and improve the nation’s transportation, electrical and telecommunications services. The Canadian government’s relatively low debt-to-GDP ratio should allow extensive deficit spending without risking blowback from bond markets.
The Canadian dollar, while more stable than the currencies of emerging markets, is highly sensitive to the demand for exports, which are concentrated in energy and commodities. Currently, this is working in Canada’s favor—the global oil glut has depressed the Canadian dollar, making the country’s other industries more competitive on the global stage. But this effect could someday be reversed; if oil and agricultural commodities recover, the rising balance of payments will put strong upward pressure on the Canadian dollar.
Canada’s abundant natural resources make its economic health dependent on global demand for energy products and other commodities. When the price of oil falls, consumer spending in oil-producing regions softens. The present oil glut has been challenging to the oil boom towns in Alberta, reducing economic activity throughout the province. A prolonged downturn in metals or forestry products could similarly depress communities throughout British Columbia and the Northern Territories.
The Canadian labor market is similar to that of most industrialized nations. While overall costs are lower than in the US, Canada does not enjoy the surplus of available workers that can be found in emerging markets. New operations in Canada will face challenges in recruiting talented workers, and wage inflation could become an issue if the economy begins to overheat.
Years of near-zero interest rates have encouraged Canadians to take out larger mortgages, sending the cost of real estate in large urban areas spiraling. In response, new regulations will raise lending standards nationwide, and Vancouver is imposing tax penalties on foreign buyers. The Organisation for Economic Co-operation and Development (OECD) warns3 that rising rents in Toronto and Vancouver are squeezing out the middle-class workers these cities depend on.
Canada's economy has seen two trends come to light recently:
2Natural Resources Canada, 2016. Reproduced with the permission of the Department of Natural Resources. http://www.nrcan.gc.ca/energy/electricity-infrastructure/about-electricity/7359
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