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Aerospace’s benefits for Canada transcend the free-market critics

Jim Stanford is Harold Innis Industry Professor of Economics at McMaster University.

Bombardier Inc.'s request for an equity investment from the federal government to support its C Series airliner has sparked a familiar policy debate. Market-oriented commentators oppose government intervention in private companies on principle, invoking well-worn complaints about "wasting taxpayers' money," "subsidizing failure" and "distorting markets."

But far from a "failing" industry addicted to handouts, Canada's aerospace industry is actually a remarkable industrial success story. That Canada even has a significant aerospace sector, given our small population, is extraordinary in its own right. And Canadian producers have significantly expanded their output, employment and exports in recent years. Aerospace now ranks as Canada's most important high-tech industry, and our most successful high-tech export.

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This perspective is confirmed by a range of statistical indicators. Total shipments from Canadian aerospace producers have soared 60 per cent in the past five years – an encouraging source of growth in an otherwise stagnant macroeconomic environment. And since more than three-quarters of Canadian-made aircraft and parts are exported, the industry's expansion contributes directly to Canada's foreign trade performance. Aerospace exports have grown faster than any other major category of Canadian exports, a record $25-billion last year. Strong global sales of Canadian aerospace products are thus helping offset the contraction in energy and mineral exports.

In fact, aerospace is the only non-resource industry where Canada enjoys a trade surplus. That helps offset the enormous trade deficits we incur every year in every other high-tech sector, including machinery, automotive products and electronics.

Aerospace's economic reach extends far beyond the 700 companies producing aircraft, parts and related services here. There are several concrete channels through which important spinoff benefits flow:

Good jobs: Aerospace manufacturing employs nearly 50,000 Canadian workers; an additional 30,000 work in high-tech aircraft maintenance and services. Aerospace is the only major manufacturing sector that added net jobs in the past decade; employment is up 20 per cent since 2004 (in contrast to overall manufacturing, which shed 400,000 jobs). And aerospace jobs generate average earnings 50 per cent higher than the economy-wide average.

Skills and productivity: Those superior earnings are justified by the industry's highly skilled labour and its intensive use of technology and machinery. Labour productivity (value added per employee) is two-thirds higher than the Canadian average.

Innovation: Aerospace is one of the most important sources of innovation activity in Canada. The industry plows back more than 20 per cent of its total gross domestic product into new research and development spending. Remember, Canada's overall business innovation record is abysmal, so aerospace's outstanding research and development effort is essential.

Export intensity: Since most of its output is sold to foreign customers, a stronger domestic aerospace industry automatically improves Canada's international balance of payments. In the overall economy, we suffered our worst merchandise trade deficit ever last year. But aerospace is a crucial exception, an industry where we punch above our weight.

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From a broader cost-benefit perspective, it's clear that aerospace isn't just another industry. It's a strategic and connected economic anchor, generating superior productivity, employment, income, trade and innovation outcomes for the entire economy. So Canada has a clear interest in maintaining a healthy ecosystem. That interest is bigger than the private business interests that guide individual corporations.

These broader spillover benefits provide an entirely legitimate economic argument for the policy interventions that are a normal feature of aerospace in all countries. It isn't a coincidence that national governments everywhere actively try to win a larger share of investment, production and jobs in this vital sector. Those governments have made the same calculations outlined above – that the spinoff jobs, scientific benefits and trade numbers associated with aerospace make it a worthy policy target.

Current policy interventions reflect a huge diversity of strategies and levers. In the United States, support for domestic aerospace is delivered through at least 34 different government departments. In Europe, state support for Airbus Group SE and its associated suppliers comes in many forms: direct state equity, technology subsidies, targeted government procurement. Japan's suppliers receive state development capital, technology subsidies and export support. State-owned companies built domestic aerospace industries from the ground up in Brazil, Russia and China.

In short, governments have tried just about every method imaginable to support their aerospace industries. Except one: laissez-faire reliance on the market. There is no country in the world that has built a successful aerospace sector leaving it entirely to private firms. Canada's industry exists only because of past policy interventions: pro-active public procurement and "offset" programs, cash subsidies for research and capital spending, outright public ownership. The good jobs, vibrant exports and superior productivity demonstrated by Canada's aerospace sector today are the legacy.

So the arguments of market fundamentalists turn modern aerospace reality on its head. Government isn't being asked to "bail out" an economic loser; it's being asked to support the continued success of a proven winner. It isn't "distorting" normal economic mechanisms; it's using policy levers that are a universal feature of this industry around the world.

And it isn't throwing taxpayers' money down the drain. By investing in future jobs, incomes and exports, a renewed aerospace strategy will help strengthen Canada's fiscal health for decades to come.

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