You know that old saying, “When the U.S. sneezes, Canada catches a cold.”
It still applies. The United States remains our biggest trading partner. What happens there affects everything from our tourism to our exports.
But now, Canada is facing a bigger threat to its economic health.
It’s called Dutch Disease — and it’s complicated by Prime Minister Stephen Harper’s newly acquired China Syndrome. Stung by U.S. President Barack Obama’s rejection of the Keystone XL pipeline, Harper is looking to China’s government-owned oil companies.
Dutch Disease isn’t about tulips or wooden shoes or even sick elm trees. It’s about Canada’s steady conversion to a petro-state, fueled by the rapid development of Alberta’s oilsands. It means that, more and more, Canada’s economy will be subject to the price of oil.
Coined by The Economist in 1977, “Dutch Disease” describes what happened to the Netherlands after natural gas fields were discovered off its shores. The little country became so economically entangled with its resource industry, its manufacturing sector tanked.
“Ontario is probably the province that has suffered the most from this,” says University of Ottawa economist Serge Coulombe, co-author of a massive study on the impact of Dutch Disease on Canadian jobs, published last fall.
“The biggest losers are typically the white males who had all those great jobs in manufacturing, much like in the U.S.,” he says, adding that Canadian salaries and environmental standards make our manufactured exports less attractive, especially as our dollar strengthens. “If we want to compete with China we have to be very, very smart. It is very, very difficult.”
In his report, Coulombe and his co-researchers determined that our petro-currency was responsible for 42 per cent of job losses between 2002 and 2007. That translates to at least 140,000 manufacturing jobs gone as a direct result of the oilsands development.
It didn’t get any better after that. Our manufactured exports dropped another 12.6 per cent between the second quarter of 2007 and the first quarter of 2011.
If Dutch Disease is allowed to spread, Coulombe and other economists warn, Canada’s ailing manufacturing sector will face still more job losses, while consumers, farmers and non-oil producing industries will feel increasing pain through inflation and gas prices at the pump.
It all started when the price of oil started rising in 2002, tripling through the decade.
The long-unprofitable oilsands, which require the expensive and water-intense extraction of tarry bitumen, suddenly became economically feasible. That increased oilsands development boosted crude exports. By 2006, oil became our biggest export, displacing autos and auto parts. The loonie surged against the weakening U.S. dollar. That made our manufactured exports — long dependent on a low Canadian dollar — more expensive. And that cost factory workers jobs.
Over the past year, alarm bells have been sounding.
Last April, Montreal-based MRP Partners (Macro Research Board), an independent global investment research firm, warned of the “petrolization” of Canada.
“Canada has often been referred to in jest as the 51st state, due to its historical reliance on the U.S. as a key export market,” wrote MRB partner Phillip Colmar. “However, it is becoming more accurate to regard Canada as another Province of China.”
“You have 1.3 billion people right now that are growing at an unprecedented rate,” explains Coulombe. “That creates a huge demand for natural resources.”
And Harper is eager to meet that demand, saying it is “increasingly clear that it is in Canada’s national interest to diversify our energy markets.”
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Over the past two years, China has invested some $15 billion in Alberta’s oilsands. It wants the bitumen moved via the Enbridge Northern Gateway Pipeline to the B.C. coast, where it will be loaded into tankers.
That crude, rated the dirtiest on earth, will travel through our most environmentally sensitive areas, critics charge.
Earlier this month, economist Robyn Allan submitted a 74-page analysis of the Northern Gateway proposal to the National Energy Board Joint Review Panel considering the project.
Allan, a former Insurance Corporation of British Columbia CEO, makes a case that, if the project is approved, the Canadian economy will be hit by “an inflationary oil price shock” — as well as interprovincial conflicts.
“Right now 95 per cent of the oil is in Alberta but 75 per cent of the manufacturing jobs are in Ontario and Quebec,” she says. “If you have a policy that deliberately supports Alberta at the expense of Eastern Canada, then you’re stretching the national fabric.
“The jobs are not there, the benefits to Canada are not there,” she maintains. “We are going to experience even more upward pressure on the Canadian dollar; we are going to have even more intense division between Eastern and Western Canada.”
Yet another study published last fall, this time by Montreal’s Institute for Research on Public Policy, emphasized that “resource booms don’t last forever” and that Canada should maintain a competitive manufacturing industry.
Economists suggest there are ways to cure Dutch Disease, or at least lessen its impact.
Canada could invest in other industries, including green technologies. Or it could go the foreign currency route, by investing abroad. That’s what Norway does with its oil wealth. By creating a petroleum fund with foreign currency, it also pays down its debt, which reduces the upward pressure on the krone and protects the country’s exports.
But, as Coulombe says, “We cannot do that in Canada because we have a sophisticated and complicated federal and provincial system and it is the provinces that own the natural resources.”
Alberta doesn’t seem particularly disposed to help Eastern Canada, which, ironically, imports most of its oil from the Middle East, Mexico and Norway.
“When the federal government talks about diversifying our markets, we shouldn’t be looking to northeast Asia, we should be looking to Canada,” says Allan. “We hear we have to diversify to Asia because Asia needs to protect its source of supply so it’s not dependent on Saudi Arabia. But Canada also has a dependency on Middle Eastern countries.
“So why are our federal leaders so concerned about everybody else’s oil security and not Canada’s? We should be looking at what we can do to help Eastern Canada avoid the unpredictable and volatile (prices) and perhaps supply restrictions that are going to happen in the years to come.”
Coulombe fears that little or nothing can or will be done to protect Canadian consumers and manufacturers from the effects of Dutch Disease.
“I don’t think the manufacturing sector will come back; I think we have to accept that,” says Coulombe. “The growth of China is like a big train. Canada will be more and more a country that will live on its natural resources.”
There’s another old Canadian expression, attributed to the late University of Toronto economist Harold Innis. He compared Canadians to “hewers of wood and drawers of water” because we were dependent for so long on exporting our raw materials to buy back value-added manufactured goods.
Today, we are selling our oil to buy back gasoline, jet fuel, asphalt, plastic and other petroleum-based products.
That would make us “deliverers of crude and drawers of water.”