THAT chill breeze you feel blasting down from the Arctic just may
be the wheeze of Canada's ice-cold economy. Like that of the U.S.,
seemed to be easing out of recession last spring -- but since then
has been unable to mount a robust recovery. To make matters worse,
structural flaws have appeared that won't easily be cured. The
country also faces arguably the most serious threat yet of secession
by French separatists.
Canada's multiplying troubles are also bad news for Americans.
no other country does U.S. business have a bigger stake. Some $200
billion in goods and services flow between Canada and the U.S. --
biggest trading relationship ever between any two nations. Canada
takes 20% of American exports (almost as < much as the 12-country
European Community) and supplies the U.S. with vital energy and
natural resources. Many American companies, including General
Electric and IBM, use their Canadian operations as major global
suppliers of some of their products.
Americans have more invested in Canada ($68.4 billion) than in
other foreign land. A longstanding common market for autos enables
U.S. companies to gain greater economies of scale in North America.
And the U.S.-Canada free trade arrangement, which began phasing in
nearly three years ago, is creating a continental market for most
U.S. investors also hold much of Canada's $230 billion foreign
debt. Canadian bonds and notes have yielded very handsome spreads
with little apparent exchange risk. That may well change, though,
separatist sentiment grows in the province of Quebec, which has a
quarter of Canada's 25 million people. As Lloyd C. Atkinson,
executive vice president of the Bank of Montreal, says, ''The
inevitable question in the mind of the foreign investor would be:
I really want to play in the traffic while Canadians sort out these
Canada's internal political turmoil could also jeopardize the
creation of a North American free-trade area -- including Mexico -
with a population of 360 million. Such an alliance partly aims to
deter the European Community from erecting trade barriers against
North America. No wonder Canadian Prime Minister Brian Mulroney
pleads with his countrymen to ''get our act together'' so that Canada
can survive intense global competition.
Assuming Canada does hold together, it still faces formidable
economic difficulties. Its gross domestic product has been on a
roller coaster this year. In the first quarter, the economy shrank
an annual rate of 4.7%, partly because Canadian consumers were in
shock over the new 7% national sales tax that took effect January
Growth ballooned to a 5.7% rate in the second quarter, a cheering
result that proved artificial because the first three months had been
so depressed. In the third quarter, Canada expanded at just a 0.9%
rate. The country has the lowest productivity growth (0.4% per year
over the past decade) among major industrial nations -- and
fast-rising labor costs. Small wonder that unemployment is 10.3%,
compared with 6.8% in the U.S.
The pity is that through most of the 1980s, Canada had real growth
second only to that of Japan. But a new study of Canada's prospects
by Michael Porter of the Harvard business school warns that ''the
core of its economic prosperity is at risk.''
Squeezed by high prices and taxes at home, Canadians pour across
the border to U.S. shopping centers, spending an estimated $4.5
billion this year. Many companies also have fled south to the U.S.
search of a more stable business environment. Those departures, plus
the outright failure of other companies, have taken away some 300,
jobs (out of a total of 12.5 million) in the past few years. Says
Frank Stronach, chairman of Magna International, a Toronto producer
of auto parts: ''Less and less is made in Canada. We're eroding as
ECONOMIC PRESSURES are forcing Canada to resolve 30 years of
constitutional wrangling. Quebec plans a referendum next October on
either accepting new federal arrangements or dropping out of Canada.
The issue that has dominated Canadian politics for so long is simple
enough: Quebec, originally settled by France in the 16th century,
wants guarantees from the central government that its French language
and distinctive laws will be protected.
English-speaking Canadians are weary of the tedious debate and
the often tortuous gestures to placate Quebec. Toronto, for example,
has French-language television and radio stations despite its tiny
French-speaking population. Says W. W. Stinson, chief executive of
Canadian Pacific, the giant transportation conglomerate: ''While
we're dealing with unity issues, the realities of becoming
uncompetitive are pressing hard against us.''
The countdown to the referendum could amount to a ticking debt
bomb. So far, bond-rating agencies give Canada top marks for managing
its debt. But some officials worry that even nothing more than a
verbal civil war could turn international investors against Canadian
bonds and securities. The $370 billion Canadian federal debt --
including the $230 billion of foreign debt -- represents nearly 44%
of gross domestic product, vs. 32.9% for the U.S. If you toss in
borrowing by Canadian provinces, the country's total government debt
comes to over 70% of annual output -- a higher proportion than any
major industrial country except Italy.
Partly because of the political squabbling, Canada has had to pay
a premium to finance that debt. Atkinson estimates the premium to
one percentage point on long-term government bonds and two percentage
points on short-term bonds. Meanwhile, Canada's central bank keeps
interest rates high to dampen | inflation, attract foreign currency,
and bolster the Canadian dollar. The results are punishing for
For all its pride, an independent Quebec would be hard pressed
service its own loans, let alone its share of Canada's national debt.
The province has borrowed just over $15 billion in foreign currencies
and pays even higher interest than does the federal government. Says
Robert Blohm, an American investment banker in Montreal who helps
bring Japanese capital to Canada: ''Quebec cannot do what it wants
unless the international financial community provides support.''
Quebec politicians blithely talk about seceding while maintaining
monetary links with the rest of Canada. Warns Prime Minister
Mulroney: ''Separation means separation. Period.''
Mulroney hopes to hold his country together by focusing on
economic challenges. At the same time, he wants to increase the free
flow of goods and services within Canada. For example, provinces
often impede the sale of beer that is not brewed locally. As a
result, the country has 67 breweries, far more than required for an
efficient industry. Because electric and telephone utilities in
various provinces give preference to local suppliers, there are 31
wire and cable plants. Such practices, designed to create jobs, cost
the economy an estimated $5.3 billion a year, just under 1% of the
Despite Mulroney's efforts, the notion that government can spend
an economy to prosperity is clearly growing in Canada. In little more
than a year, three provinces -- Ontario, British Columbia, and
Saskatchewan, which together have more than half the population --
have elected moderately socialist governments. Ontario already is
planning to help bail out de Havilland, a commuter aircraft
manufacturer that has been losing money over the past five years.
Boeing, which bought the company in 1986, has been unable to turn
around and now wants to sell. Never mind that de Havilland earlier
limped along under state ownership for more than a decade. The swing
to the left is reflected in the approval ratings -- 12%, the lowest
ever -- of Mulroney's conservative government, which came to power
Canada's smokestack industries are just beginning to cope with
restructuring that U.S. companies have been going through for as much
as a decade. While American manufacturers closed obsolete facilities
and modernized others, Canada coasted on cheap currency. Says
Frederick Telmer, CEO of Stelco, Canada's second-largest integrated
steel producer: ''We were competitive without having to change,
now we have to face reality.''
THAT REALITY is grim: The Canadian dollar has appreciated over
in the past five years, mainly because the Bank of Canada's strong
monetary policy has kept inflation down. In the same period, Canadian
unit labor costs rose more than 46% (in U.S. dollar terms), vs. a
decline of 0.3% in American manufacturing.
After a 100-day strike last year, Stelco found that many of its
customers had folded or moved to the U.S. To survive, the company
raised more than $220 million by floating new stock and is
restructuring operations to raise productivity. Says Telmer:
''Adversity tends to focus the mind on the need to accept change.'
New labor contracts peg compensation partly to the performance of
plant in which an employee works. Stelco has also teamed with
Mitsubishi to make zinc-coated steel for Japanese auto plants in
Michael Porter's $1 million study, underwritten by the government
and by Canada's equivalent of the Business Roundtable, warned that
Canada is ''in many respects ill equipped to respond to a rapidly
changing competitive environment.'' Exports represent over 25% of
Canada's GDP, more than those of any major industrial country except
Germany. Mostly Canada exports relatively unprocessed natural
resources, which are vulnerable to low-cost Latin American rivals.
Canada has seriously shortchanged investment in research, worker
training, and new machinery. As Porter put it to the Canadians, ''
need a new mode of competing.''
A few smart Canadian companies that have long followed Porter's
prescription are thriving in global markets. Inco (with $3.1 billion
in sales last year) supplies one-third of the world's nickel. By
investing heavily over the past decade in new mining techniques --
billion in the past two years alone -- Inco has cut its Canadian work
force in half, to some 9,500. At one experimental operation, miners
operate giant hauling vehicles a mile below ground from a control
center on the surface. Says Inco Chief Executive Donald Phillips:
''We cannot control prices, but we can control costs.'' Labor
contracts peg pay partly to the price of nickel and the cost of
living. And the company adds significant value to ores by producing
nickel alloys, turbine blades, and mining equipment largely for
Another promising Canadian company, SHL Systemhouse, sells
computer services to such American clients as Motorola, the
California Department of Motor Vehicles, and Los Angeles
International Airport. On the strength of its work with the Canadian
post office, Systemhouse has been awarded a $270 million contract
build a system to track U.S. Express Mail at 16,000 locations. An
phone number will allow customers to check the delivery time of any
CAE, a world leader in flight simulation and training devices,
spends 16% of its nearly $1 billion annual sales on research and
development. Says President David Race: ''We've succeeded by finding
niches.'' Several years ago CAE abandoned a successful foray into
auto parts to focus on what it does best. To win U.S. government
contracts, it acquired Link, the American pioneer of ground-based
pilot-training devices, from Singer. Digesting Link has been
troublesome, but the company now provides training devices for U.S.
manned spaceflights. During the war with Iraq, American pilots
rehearsed for precision bombing missions on CAE simulators using
satellite photos taken just hours before.
Clearly, many Canadians can compete. As Race puts it, ''It's
almost a cultural problem. We have traded on our resources for so
long, and now we've got to get down to work.'' So do Canadian
government leaders. The last thing the U.S. needs is the creation
one or more new (and insolvent) nations on its border.
Louis Kraar REPORTER ASSOCIATE Stephanie Losee, CANADA: WHY
CANADA CAN'T GET MOVING AGAIN Not long ago its growth was second
only to Japan's. Now businesses are fleeing to the U.S. and the
economy is stuck. One reason: the rising threat of secessio.
, Fortune, 12-30-1991, pp 122.