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Canada clearly has a comparative advantage in natural resources, so it makes sense to allocate capital and labour there. But we don’t need a government policy for that. (Teck Cominco Ltd.)
Canada clearly has a comparative advantage in natural resources, so it makes sense to allocate capital and labour there. But we don’t need a government policy for that. (Teck Cominco Ltd.)

Economy Lab

'Adding value' to our raw materials won't make us rich Add to ...

Stories like this or this pop up quite regularly: calls for governments to adopt policies that will encourage the development of industries that will ‘add value’ to our raw materials before they are exported.



The idea is that such policies would produce more processing jobs in Canada, and they probably would. What is far from clear is whether or not those are the jobs we want to have Canadians working at.

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It’s important to keep in mind that when discussing international trade, exports are costs. The purpose of engaging in international trade is to import goods and services more cheaply than we can produce ourselves; exports are the price we pay in order to obtain those imports. Productive capacity that is devoted to making things that will be exported is productive capacity that is not available for what really matters to Canadians’ economic welfare, namely, domestic consumption.



Reallocating capital and labour to the export sector is sometimes the smart thing to do. When commodity prices fell in the 1990s, we were obliged to increase the value-added of our exports in order to pay for our imports. This shift increased employment in the manufacturing sector, but it didn’t increase Canadians’ buying power: it simply made the reduction less severe. When commodity prices rose again, we were able to shift back to producing more for the domestic market. (See also this parable demonstrating how increases in the value-added of exports can be associated with reductions in economic welfare.)



Canada clearly has a comparative advantage in natural resources, so it makes sense to allocate capital and labour there. But we don’t need a government policy for that; all we need is for investors and workers to respond to the high profits and high wages offered there. It is much less clear that we have a comparative advantage in processing industries. Indeed, the fact that government intervention seems to be necessary suggests that we don’t.



The promise of ‘more jobs’ for resource processing packs a considerable punch in electoral politics. But the next time you hear it, ask yourself how devoting more productive resources to making things for foreign consumption is going to make us better off.



Stephen Gordon's recent posts and Twitterfeed can be viewed here.



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