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History has shown that good times foster a complacency that eventually takes a toll on business performance, while tough times foster the sacrifices and adjustments needed to improve. While Canada's economy has weathered the recession far better than that of the beleaguered U.S., the long-standing American productivity advantage has accelerated. Economists estimate that during 2010 American labour productivity grew more than three times faster than in Canada.

The business-friendly policies of the Carolinas together with a high productivity and largely non-union work force have long attracted auto, aircraft and hi-tech manufacturers. Since the recession, their high productivity ethos has spread across the country. Labour costs have dropped dramatically through a combination of investment in new technology and reduced wages and benefits accepted by workers who don't want to see their employer go out of business. This "get better or give up" mentality has driven a dramatic surge in productivity from our biggest trading partner, and our biggest competitor. Meanwhile, Canadian salaries and benefits have remained steady or even grown. These competitive challenges have been magnified by the high flying loonie that has risen more than 50 per cent in value from US $0.64 to near par over the past decade.

Canadian manufacturing jobs have been moving south for some time, but the New Year's Day lockout of workers at the Electro-Motive Diesel plant in London, Ont., resonated like a rifle-shot. The subsidiary of global giant Caterpillar Inc. has tabled an offer with the Canadian Auto Workers Union that would cut wages and benefits by some 50 per cent in order to bring the plant in line with costs at its La Grange, Ill., facility. Management has made it clear that since it cannot maintain a Canadian operation costing twice as much, the alternative is to close the plant and move the jobs south.

Union leaders reacted by calling for government intervention to end the lockout and Canadian Labour Congress President Ken Georgetti demanded new laws preventing foreign acquisitions such as Caterpillar's 2010 takeover of Electro-Motive. But the reality is, whether the company is Canadian or foreign owned, it couldn't have stayed in business facing a 50 per cent cost disadvantage.

We can only hope the Electro-Motive situation will prove to be an outlier in the sacrifices needed to compete with lower cost American factories. But it's clear that, in such head-to-head competitions, workers will continue to face a choice between accepting lower compensation or unemployment. As painful as these choices will be, Canadians must accept the reality that this accelerating cross-border productivity gap is little different than the lower cost competition that has drawn production line jobs to China and India. So how should Canadian businesses respond? Here are three thoughts on that crucial question:

First, focus on producing goods where there are advantages to in-country production. In most cases, this means made-to-order custom manufacturing working directly with local customers, rather than easily moved lower value added large-scale production line operations.

Second, rather than listening to those voices lamenting that so much of Canada's economic buoyancy and growth is driven by our rich resource endowment, we should embrace and make the most of the numerous and diverse country-wide manufacturing opportunities they present. A prime example is the hundreds of billions of dollars being invested in B.C. shale gas, Alberta oilsands and offshore Newfoundland oilfields. Design engineers and contractors work together with custom fabricators across the country, resulting in a major portion of the equipment manufactured right here in Canada. Similarly, our metals mining and processing industries create a large number of custom manufacturing jobs, as does potash production and other components of our massive agricultural complex.

Finally, now is the time for manufacturers to take advantage of our strong dollar to acquire the specialized equipment needed to maximize productivity. This has already been a significant factor in helping many Canadian businesses adapt to foreign competition.

The biggest threat to Canada's privileged living standards lies in the complacency of the comfortable. Both the private and public sectors must take urgent action to deliver more with less. The fact that our American neighbours are facing a more difficult time has led to strong efficiency gains. Unless we capitalize on our strengths with a similar sense of urgency, the tables will soon turn.

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