Low Canadian Labor Productivity May Divert Investments to Mexico
As companies look to reposition their supply chains closer to the United States during the nearshoring trend, Mexico is emerging as a favored manufacturing hub. Now, Canada risks missing out on significant investment opportunities to Mexico as Canadian labor productivity continues to falter. Read on to learn more. Canada risks missing out on significant investment opportunities to Mexico as Canadian labor productivity continues to falter.
With companies looking to reposition their supply chains closer to the United States during the nearshoring trend, Mexico is emerging as a favored manufacturing hub and trade partner. This shift is primarily driven by an aim to decrease reliance on Chinese suppliers and to shorten logistics chains. In contrast, Canada has yet to capitalize on this shift.
Economists and industry advocates caution that Canada could lose millions of dollars during a critical period of trade investment redistribution without proactive steps from Prime Minister Justin Trudeau's administration to enhance productivity.
In 2023, Canadian labor productivity declined by 1.8%, marking its third consecutive year of continuous decrease. It had declined by 0.5% in 2022 and by a staggering 6.2% in 2021. This has raised concerns at high levels of economic governance, including from the Bank of Canada's Senior Deputy Governor Carolyn Rogers. Rogers has attributed this downturn to insufficient investment in essential areas such as machinery, equipment, and intellectual property.
In 2023, Mexico surpassed China as the largest trade partner of the United States, while Canada's top trade partner status with the U.S. shifted away a decade ago. Reflecting its increasing economic influence, Mexico recorded a historic high in foreign direct investment (FDI) surpassing $36 billion last year, marking a 27% increase from the previous year. Notably, over half of this trade investment was directed towards the manufacturing sector.
Mexico has significantly increased its investments in public infrastructure. This commitment is evident in the country's gross fixed capital formation, which surged in the fourth quarter of last year compared to the first quarter of 2022.
Conversely, Canada experienced a substantial decline in FDI, which fell by 42% to C$52.4 billion in 2023 compared to the previous year. Additionally, Canada's investment in fixed capital also decreased, dropping 7% from the first quarter of 2022 to the last quarter of 2023.
The key factor in this trend is the reliance on a growing influx of inexpensive, lower-skilled immigrant labor, leading businesses to prefer short-term labor solutions over investing in long-term avenues like research and innovation.
This approach has left Canada behind most of its G7 peers in productivity, ranking above only Italy and below the OECD average. This persistent low Canadian labor productivity not only suppresses corporate profits but also renders Canadian goods costly and less competitive globally.
Economists say continued low Canadian labor productivity stifles profits and makes the country’s output expensive and uncompetitive globally.
The shifting dynamics of North American trade and investment require a strong response from Canadian manufacturers to maintain and enhance their standing in the global market, including reconsidering their strategic directions.
Emphasizing innovation in production processes and investing in advanced technologies are pivotal. Strengthening trade partnerships within North America and diversifying markets might also mitigate some of the competitive disadvantages currently faced.
How Cole International can help
At Cole International, we help Canadian importers and exporters streamline cross-border transportation processes and ensure seamless operations with our customs brokerage and freight forwarding services.
If you manufacture and export goods from Canada to the U.S., please contact one of our trade professionals to discuss how the Mexico nearshoring trend can affect you and how we can help streamline your trade operations.