A recent study by consulting firm AutomotiveCompass LL predicted a 25-per-cent decline in Canadian auto production, setting off the usual hue and cry over government subsidies to the sector. Canadians should remember, however, that it's not just cars that can be made more cheaply overseas – pretty much everything can. The continuing process of globalization implies that the serious economic challenges being felt in the sector will eventually be felt throughout the economy.
Policy makers are seemingly trapped between two options. One, accept that all manufacturing will eventually move offshore and high-wage manufacturing jobs will go the way of the Studebaker. The second policy option is to slam the trade doors shut by erecting trade barriers to protect existing industries.
Neither choice is attractive. Yet, unless a new vibrant industry arises from nowhere to take the place of manufacturing, they are the only two available.
The Canadian auto sector receives an estimated $200-million a year in government subsidies, a figure that does not include the $14-billion crisis bailout. In an important sense, this is socially unfair – taxes collected by low-wage workers are redistributed to auto workers who earn salaries well above the national average.
Addressing this injustice is far from straightforward. The domestic auto industry is uneconomic and uncompetitive without the subsidies, particularly relative to Mexico where the sector is expanding rapidly.
The end of subsidies would be the end of the Canadian auto sector, leaving a giant hole in the economy. The 2 per cent of GDP made up by the auto industry goes away, and there's a further hit to wealth for any business where auto workers used to spend their earnings.
The United States, with its Right to Work state legislation, is much further along the road of business-friendly but worker-unfriendly policies. Unsurprisingly, the U.S. economy now suffers from a lack of consumer demand that economists call the output gap – the country can produce far more in goods than its citizens can afford to buy.
Those advocating Right to Work legislation in Canada risk an American result – a highly productive economy where a large portion of the population has no spending money left after thrice daily trips to McDonalds.
The only proven way to halt the wage-reducing effects of globalization is to enact trade barriers limiting goods manufactured outside the country. (Or increase subsidies further, which indirectly accomplishes the same thing). Protectionist policies protect jobs and wages but at the expense of the consumer and economic productivity. The lack of competition – as anyone buying dairy products in Canada is aware – creates artificially high prices. No competition also alleviates the need for productivity improvement.
For policy makers, eventually it will become a case of pick your poison – trade barriers that create inflation and restrict innovation or the eventual destruction of domestic manufacturing. There are no right answers, just painful ones.