Manufacturing Competitiveness

In a highly globalized economy, coupled with a high dollar, innovation is the most powerful driver of business competitiveness, improved productivity and economic growth. Ultimately, innovation represents the most important factor in order sustain our quality of life.

Innovation is driven by investments in productive assets: knowledge (R&D), technology (new machinery and equipment), and workforce skills.

In 2009, R&D expenditures in Canada were estimated to have been just over $29.8 billion or 1.95 per cent of GDP. R&D spending accounted for the same share of Canada's GDP in 2006. And that is 18 per cent higher than R&D intensity in 1996. Manufacturers' share of business R&D represented more than half of the total.

Canada however lags behind many other countries when it comes to investments in research and development. Canucks perform just slightly better than the OECD average, but we still rank 12th out of 29 economies in the OECD database on this measure of R&D intensity. This is even more concerning since developing countries like China and India have emerged over the past decade as world leaders in innovation

As the business association representing the biggest sector of the Canadian economy, CME leads a number of initiatives and partnerships with businesses and governments to develop policies addressing these gaps. They can be divided among the following five sectors of intervention:

• Finance and Investment
• Competitive Taxation
• SR&ED and Commercialization Policy
• Regulatory Compliance and Simplification
• Strategic Government Procurement

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Finance and Investment

The global financial crisis has had a direct impact on Canadian manufacturers and exporters, with viable, highly competitive businesses facing difficulties access credit and financing and reporting higher financing costs. As the economy recovers from the recession and interest rates are expected to rise in the near future, a growing number of businesses will need access to financing to increase inventory, add capacity and grow their business.

CME works hard on behalf of its members to ensure the federal government and its financing agencies such as the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) play a leading role in developing innovative and effective solutions to the credit problems experienced by competitive businesses.

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Competitive Taxation

From the globalization of supply chains to the wave of mergers and acquisitions of multinationals in a number of sectors of the world economy, national tax policies play a determinant role in a company's decision to invest in a given country. A competitive taxation system will ensure that foreign direct investment continues to flow in Canada and that our businesses increase their after-tax cash flow, which is widely considered as the most important driver of R&D activities in the private sector.

The federal and provincial governments have made a number of positive changes to their respective business taxation models in the last decade. Corporate income tax rates have declined, capital taxes were eliminated in a number of jurisdictions, and some provinces have harmonized their sales tax to the federal GST. There is still however a number of initiatives that need to take place in order to improve Canada's tax competitiveness with other industrialized and developing nations:

• The Scientific Research and Experimental Development (SR&ED) tax credit is a competitive advantage for Canadian Companies. However, in order to drive the necessary investments in research and development, the program needs to be enhanced in terms of the monetary value and the application process. CME is calling for the application process for SR&ED to be streamlined and for the tax credit to be made refundable.
• Accelerated Capital Cost Allowance: CME has been advocating with great success for the two year write-off as a vehicle for improving productivity and energy efficiency. Companies that can write-off older, inefficient equipment faster, have greater incentive and opportunity to invest in newer, more efficient technology. CME is advocating for making the two year write-off on manufacturing and processing equipment permanent.
• Employer Training Tax Credit: Having a highly skilled workforce is essential to innovation, continuous improvement and manufacturing competitiveness. Yet training programs are often the first thing to be cut during difficult economic times. Margins have eroded in recent years due to the volatile dollar, a soft export market to the south and rising input costs causing employers to make difficult decisions with respect to training. CME has recommended that the government introduce a fully refundable employers' training tax credit creditable against EI premium contributions.
• Taxation of Corporate Groups: Canada is one of the few countries which does not have a formal system to consolidate the tax reporting of corporate groups or to otherwise offset the profits and losses of the members of a corporate group, despite a lengthy history of discussion papers and reports recommending the implementation of a tax consolidation system. Consolidation of tax reporting would lead to a number of policy advantages for Canada, including:
  • Reducing cost: Allowing companies with a common parent greater flexibility with respect to the offsetting of profits and losses within the corporate group – the current ad hoc regime is costly to implement and is highly dependent on CRA rulings which can be unpredictable.
  • Increasing competitiveness of the corporation tax system relative to the US and other jurisdictions (more than 80 countries already either allow for the filing of group-consolidated returns or have some form of loss-transfer mechanism).
  • CME is calling both the federal and provincial governments to implement a new system of consolidated reporting in order to improve the efficiency of our tax system and to make Canada more competitive at the international level. CME believes that all provinces should align with the federal government on common principles, If the provincial benefits are determined to be significantly net negative and create a barrier to implementation, the government should consider a phased approach, starting with changes only at the dederal level or alternatively adjust the transfer payments accordingly which would be transparent to the taxpayers. we do believe that the federal government can still implement the new system even without unanimity among provinces.
  • Corporate Income Tax: The CIT is a tax imposed on corporations. Planned reductions in federal and provincial tax rates will reduce Canada's average combined statutory corporate tax rate from 31 per cent in 2010 to 25 per cent in 2012, the lowest in the G7. Low corporate taxes provide a competitive environment for businesses to compete with their global competitors. Low corporate income tax has a direct positive impact on after-tax business profit, which in turn has a positive and direct influence on Canada's unemployment rate, business investments in R&D and on government revenues.

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SR&ED and Commercialization Policy

Investment in technology is a major determinant of commercialization of innovation. For every dollar Canadian manufacturers spent on research and development between 2000 and 2009, they invested $32 in commercialization activities including the design, engineering, scale-up, production, and marketing of the new and improved goods and services they brought to market.

The problem however is that Canada is lagging behind in commercialization of innovative goods and services. The recent Global Competitiveness Report (World Economic Forum 2007) pointed to Canada's drop 16th from 3rd in 2001 – a change primarily attributed to weaknesses in innovation execution to market.

Tax incentives are another important driver of commercialization of innovation: by increasing after-tax cash-flow of Canadian businesses, it allows them to increase their investments in R&D activities. IT is particularly important since business leaders know that the commercialization of patents, or breakthroughs, are rare and require significant investments to take form.

The Scientific Research and Experimental Development (SR&ED) tax credit is a competitive advantage for Canadian companies. However, in order to drive the necessary investments in research and development, the program needs to be enhanced in terms of the monetary value and the application process. CME is calling for the application process for SRED to be streamlined and for the tax credit to be made refundable.

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Regulatory Compliance and Simplification

Over the last decade, Canada and its trading partners have focused heavily in abolishing trade barriers such as import duties, which has lead to a greater regional economic integration and a stronger economy. Non-tariff barriers however are still a problem. Recently, the Canadian and US Governments announced an initiative to harmonize regulations in economic sectors of strategic importance for the two nations. Regulatory barriers to trade also exist within the Canadian federation: interprovincial trade is sometimes considered by businesses as more complex as trade with the United States.

CME is active on a number of fronts in order to reduce regulatory burdens for businesses:

• Interprovincial trade barriers hurt all Canadians by damaging Canada's productivity and competitiveness. They raise prices for consumers, discourage investment, increase compliance costs and reduce innovative capacity. Internal trade barriers cost Canada's economy as much as $14 billion each year. They harm Canada's international reputation as a place to do business.
• CME has called on Premiers to remove barriers to interprovincial trade and labor mobility. Working with a business coalition, CME has more specifically called for federal legislation establishing a set of open trade principles designed to ensure a free and open market, without discriminatory practices, for the creation of a standing internal trade tribunal that would be accessible to all Canadians as a means of resolving internal trade disputes, for the implementation of all outstanding rulings by panels established under the existing agreement on international trade, and for an agreement that all tribunal orders and existing panel decisions would be subject to enforcement by the courts at the option of the disputants.
• Advanced trade data: Starting in 2012, the Canada Border Services Agency (CBSA) will require importers to submit advance trade data electronically for all goods coming in through the land border at least one hour prior to the goods arriving at the border crossing. Information concerning the consignee, buyer, seller and manufacturer will for example need to be provided accurately within the specified timeframe. In many cases it is impossible for importers to submit the information within pre-arrival timeframes. In other cases, suppliers may not be able or willing to provide that information electronically ahead of time. These costs would only compound the difficulties that businesses already face in moving goods across the border. CME requests the immediate elimination of CBSA's proposed advance trade data requirement. While CME supports CBSA's objectives of expediting cross -order processing, moving towards electronic reporting and better risk assessing goods coming into the country, it supports doing so in a way that is practical, cost-competitive and efficient from a business perspective.
• Chemicals management plan: Under the Canadian Environmental Protection Act, the federal government identified 195 priority chemicals to be assessed through a succession of 12 batches. The government's ultimate goal is to decide if each of those substances should be eliminated from use in Canada. Environment Canada and Health Canada are currently profiling each substance and proceeding through consultations. This is a good example of area where Canada should align its policies and regulations with the US as agreed by both governments under the New Substance Notification regulations. Moreover, CME members have already identified substances that they use as inputs and can only source from foreign suppliers. If these substances are banned, Canadian manufacturers would incur costs and require time to develop alternatives.
• Ontario waste diversion strategy: Ontario is striving for very aggressive waste reduction targets - zero waste. In order to achieve these goals, Ontario is looking at a "cradle-to-cradle" or zero waste approach which focuses on the opportunities that industry has to redesign products and processes to reduce waste before it is made, as well as designing products for greater reuse. Extended producer responsibility is premised on the idea that the producers of products and packaging bear responsibility for ensuring those products and packages are properly managed at the end of their life-cycle. CME believes that the approach that the Ontario government is currently proposing is flawed, is not in line with other jurisdictions and will not result in reducing waste and achieving the goals set out by Ontario. Ontario manufacturers will be paying significantly higher waste reduction costs than their competitors as well as increased administrative burden.
• Ontario Certificate of Approval: In Ontario, a Certificate of Approval (C of A) is required for any emission to the atmosphere. Even installing an emergency generator in a plant requires a company to obtain a C of A prior to installing the generator. In Ontario, this process has been complicated and lengthy, often taking up to two years to obtain a simple C of A. Companies that want to invest in a new plant for example, could face even longer to obtain a C of A. This does not help to make investment in a new plant in Ontario attractive. CME believes that in order to attract new plants to Ontario and to keep existing plants in Ontario, that we must have a competitive jurisdiction while keeping high environmental standards. CME believes that by improving the C of A process to make it less complicated and less lengthy for simple projects, that the environment will also improve as the government would have more time to focus on higher risk projects. As well, pollution prevention equipment requires a C of A and speeding up the time it takes to get a C of A for this activity would also assist environmental improvement. 

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Strategic Government Procurement

Government procurements represent a significant part of the Canadian economy. Every year, governments in Canada spend billions of dollars in goods and services from the private sector. CME strongly believes that public procurement policies should be used to strengthen demand for innovative technologies within Canada and leverage opportunities for the participation of Canadian businesses in international technology development and procurement projects.

Public procurements are also subject to a number of trade barriers across the world and the North American continent. For example, the Buy American requirements represent a major barrier to Canadian companies wishing to sell their innovative products to the federal and sub-national governments. Most particularly, Article 1605 of the American Recovery and Reinvestment Act of 2009 (ARRA), the US's economic stimulus package worth $787 billion US, specifies that all goods procured with those funds must be made in the US. Since most of the infrastructure spending coming out of ARRA is done at the local and state levels, the procurement provisions of the North American Free Trade Agreement (NAFTA) does not apply, hence Canadian manufacturers were barred from bidding on these contracts. Other legislation considered by the US Congress contains similar Buy American provisions that could adversely impact Canadian manufacturers.

CME has taken the lead on behalf of its members to spur Canadian government action to mitigate the adverse consequences of Buy American restrictions on Canadian exporters. Our efforts led to Canada and the US announcing an agreement coming into force on February 16, 2010, that allows Canadian manufacturers to participate in a number of infrastructure projects funded by ARRA, and permanently opens procurement markets in 37 US states. Moreover, this agreement strengthens Canada's hand in fighting Buy American restrictions in the future and commits both governments to pursue more ambitious negotiations in the coming year to further open procurement markets on both sides of the border.

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