Innovation, Competitiveness, Productivity

Insular and protectionist winds blowing through our world present significant opportunities for nations open to trade and immigration, such as Canada.

The 19th century French economist Frédéric Bastiat wrote a tongue in cheek petition from candlemakers asking the French parliament to ban sunlight. Why? To protect the country from being flooded by sunlight, a cheap foreign import.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us…

– Frédéric Bastiat

Most international trade in goods occurs in intermediate goods, components like circuit boards or fuses used to make other things. Hence, once imports become heavily taxed, a protected company will eventually find itself paying more than an international competitor for the same essential part that is made in another country.

Consider a tangible example. The average North American auto part crosses a NAFTA border seven times before a finished vehicle is ready for sale. As a result, if the free-trade agreement were to be diminished, new tariffs would lead to huge costs for automakers and their suppliers. These costs would be passed on to consumers who would have lower savings and credit left over to purchase other equally necessary goods and services.

Protectionists miss the point. Nations that embrace protectionism will reduce the competitiveness of their domestic firms in the export market, eventually reducing that country’s overall domestic production.

Moreover, lack of competitiveness produces a corresponding lack of innovation.

Trade protection rewards less innovative firms. Innovation is driven by R&D funding. With protectionism, firms in the steel industry with high past R&D efforts have been shown to experience a decline in their stock prices, with some even exiting the industry.

Countries that innovate also create new products that lead to higher per capita income. This leaves the manufacture of old products to those countries that do not innovate as well, which then have lower incomes. This “innovation lag” leads to trade, where innovators export new products and import old products from non–innovators.

Protectionism in the world will undoubtedly cause short term global pain for countries open to trade. For instance, Bank of Canada states that the Canadian economy will take a “material” hit should there be a more protectionist environment in the United States.

In the longer term, however, this development presents an opportunity for Canada and other nations open to trade. As some countries embrace protectionism and thus reduce the innovations that enable growth and prosperity,  other nations have the opportunity to improve their innovation, competitiveness and productivity, all of which have been relatively stagnant in Canada since the 2008 economic downturn.

If it capitalizes on this opportunity, Canada will no longer have to rely on a cheap loonie to make up for its lower competitiveness and productivity in some areas of trade. It will be able to more fully utilize its excess slack in the labour market.

Innovation is a treadmill. To maintain a higher per capita income, innovating countries must keep innovating and creating new products. Protectionism elsewhere can help Canada by providing it with breathing room as it continues to maintain its pace on the treadmill but other protectionist countries lose theirs.

The silver lining in current protectionist postures is the opportunity for trading and innovating nations to stay the course. Done properly, this should  enhance their innovation, competitiveness and productivity.

McMaster Engineering should therefore seize this moment. We must double down with purpose on ways to enhance innovation by providing the appropriate education, training and opportunities for our graduates.

Through their innovations, our graduates will improve competitiveness and productivity.

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