Canada far behind other developed economies in advanced industries output: Hamilton Index

Canada has underperformed and continues to fall behind in strategically important advanced industries compared with other G7 and OECD nations, according to a new Hamilton Index study.

Canada lags all other countries except Australia and Norway in the value of output from 10 advanced technology industries, says the study by the Information Technology and Innovation Foundation (ITIF) based in Washington, D.C.

In terms of advanced industry strength, Canada is above average in only one industry: “other transportation,” and is about average in information technology and information services, the study found. The above-average ranking in other transportation is “presumably based on the strength of plane maker Bombardier,” the study says.

“In contrast, Canada is below average in all other advanced industries,” it says. Two industries – electrical equipment, and computer and electronics – are among the worst-performing sectors in G7 and OECD nations.

“I don’t think there’s any question that it is a very poor showing,” Robert Atkinson (photo at left), president of ITIF and the index’s author, told Research Money.

If Canada wants to be what it used to be, “which was a pretty significant country even though it was small in the G7,” such a poor performance should be a wakeup call for Canadian policymakers to do something, he said.

Since the early 2000s until 2020, the performance indicator for all Canada’s advanced industries, except other transportation and IT and information services, declined, according to the study. Industries that are weak and declining include: basic metals, motor vehicles, computers and electronics, electrical equipment, machinery and equipment, fabricated metals, and pharmaceuticals.

“The decline in motor vehicles is especially noteworthy, as it was an industry in which Canada over-performed prior to the 2008 financial crisis,” the study says.

Atkinson noted that all the Commonwealth countries, including Canada, Britain, Australia and New Zealand, did very poorly in output from advanced industries.

That’s partly due to “the dominance in those countries of an economic ideology that was never about production or, frankly, innovation,” he said. In contrast, continental Europe and the Asian “tiger” countries have focused on advanced industry production and innovation.

Countries that rely on natural resources – like Canada, Saudi Arabi, Australia and Norway – also do poorly in advanced industries, Atkinson said. “Relying so heavily on natural resources means by definition you’re going to have a higher currency. So you’re just going to have less effort and less focus on these other more advanced industries.”

Advanced industry output is different from productivity or innovation

This edition of the Hamilton Index assessed 40 nations’ value-added output and relative levels of industrialized specialization in 10 advanced industries:

• IT and information services
• computers and electronics
• pharmaceuticals and biotechnology
• machinery and equipment
• motor vehicles
• electrical equipment
• other transportation equipment
• chemicals
• fabricated metals
• basic metals

The study draws from the OECD’s latest dataset on trade in value-added products, covering the period from 1995 through 2020. The 10 industries included in the Hamilton Index together accounted for more than $10 trillion in global production in 2021.

The information technology and information services industry (including software and Internet services) is the largest of the 10, accounting for 18 percent of global advanced industry output.

To assess nations’ industrial performance on a size-adjusted basis, the ITIF uses an analytical statistic known as a “location quotient” (LQ). The LQ measures any region’s level of industrial specialization relative to a larger geographic unit – in the index’s case, a specific nation relative to the rest of the world.

Canada’s overall LQ is 0.58 in the new Hamilton Index, a decline from 0.89 in the previous index in 1995 and is the second-worst regression among the 40 nations surveyed. Currently, only Australia and Norway – which both have mining-based economies – are worse performers in advanced technology industries.

Canada’s 0.58 LQ indicates that the country’s value-added production in advanced and strategically important industries is 42 per cent below the size-adjusted global average in 2020.

Productivity and innovation are different and separate from achieving output in advanced industries, Atkinson said.

Canada can have the most advanced and productive retail sector or garbage collection sector, for example, or lots of innovation for patient care in hospitals, he said. While such things are important to quality of life, “it doesn’t do anything for your global power.”

“At the end of the day, if you’re an advanced country in the top leading the pack, you have to have some advanced industries that are able to compete in tough global markets,” he said.

Canada, which already has a significant problem turning university research into commercial products, will find it increasingly harder to translate such research into commercialization without having strength in advanced tech industries, Atkinson said. “If you don’t have some strength in these advanced sectors, you basically become a second-rate economy.”

“As the study shows, Canada is an innovation laggard, a country that is too complacent about the challenges we face,” award-winning Canadian journalist and author David Crane, who writes about the economics of globalization, innovation, sustainable development, and social equity issues, said in an email to Research Money.

China now dominates output in advanced industries

Globally, the Hamilton Index study found that China has taken a commanding lead in technology advanced and strategically important industries, by capturing market share from the U.S. and other advanced economies in the G7 and OECD.

As of 2020, China was the world’s leading producer in seven of the 10 industries covered. China produced more than one-quarter of the world’s output across all 10 industries combined in 2020 – 25.3 per cent, up from 12.9 per cent in 2008.

On a relative basis, China’s overall LQ in the Hamilton Index was 1.47 in 2020, meaning its production in the 10 industries was 47 per cent higher than the global average on a size-adjusted basis. In comparison, U.S. production was 13 per cent below the global average.

“China is running away with technologically advanced and strategically important industries,” Atkinson said. “It would be one thing if China’s growth in these industries was proportional to its overall economy. But it hasn’t been.”

Instead, China has made a determined effort to outperform in these industries, “and it has used mercantilist methods to subvert trade rules to achieve its goals,” he added.

China is 70 per cent more specialized than the U.S. in advanced industries, the study found. To match China’s specialization, U.S. output would have to expand by US$1.5 trillion, or 69 per cent, which would require doubling output from all 10 industries surveyed except IT services.

Nations are in a fierce win-lose global competition for market share in advanced, traded-sector technology industries because, for most, winning enables economic and national security, the study says. “China’s gains are coming at the expense of the United States and other G7 and OECD economies.”

“Time is running short to turn around U.S. advanced industry fortunes,” the study notes. “The 2020s are likely to be the decisive decade because once China captures sufficient global market share, U.S. and allied nations’ production risks being permanently weakened.”

 The U.S. Congress should make closing the “massive advanced-industry output gap” its overarching economic policy goal, including through tax, trade and other elements of a comprehensively focused national industry strategy, the study recommends.

Do countries compete in a “zero-sum world?”

However, for Toronto writer David Crane, there are problems with the Hamilton Index’s operating assumption that for the 10 industries covered, “we live in a zero-sum world” when it comes to who benefits from advanced technology industries.

“I don’t believe that,” he said. “If Germany develops a better machine tool or China a better electric vehicle battery we all benefit. Ditto [for] treatment of cancer.”

Current U.S. policy is too focused on a zero-sum mentality, which leads to protectionism and “America First” under both political parties, he said.

The idea behind trade liberalization for a long time was that it encouraged competition and specialization, boosting innovation and expanding consumer choice, as well as lowering consumer prices, Crane said.

“We have now shifted to mercantilist policies which have the opposite effects and in the aggregate lead to lower economic growth, less innovation and higher prices. At the same time, policies aimed to hurt China’s economy are not hurting Chinese companies – they are setting up subsidiaries in places like Mexico and Vietnam.”

In the 1960s, the West had an alleged missile gap with the Soviet Union, which was a phony gap but served its purpose – much bigger defence budgets and much bigger sales and profits for the U.S. military-industrial complex, Crane said.

“Today we have an exaggerated idea of a technology gap with China, where China, we are told, is outpacing us in all the leading technologies,” he said. This claim is also wrong, but it provides a rationale for massive U.S. subsidies to its tech companies and major shifts to a much more protectionist country – policies that also hurt Canada, he added.

 Said Crane: “As the ITIF contends, we have to do better. But the way to do that is to innovate better and not rely on a protectionist view of a zero-sum world.”

But Atkinson argued that China’s competing for the 10 advanced industries is different from friendly nations such as Canada and the U.S. competing with each other, or Canada and Germany competing.

“China is engaged in seeking absolute advantage in the world. They’re seeking domination,” he said.

The share of the global economy is the same for the 10 industries covered in the index, he noted. “So in that sense, it is a fight. It’s kind of naïve for people to say that it’s not.”

Countries – just like provinces within Canada – vie with each for competitive advantage, Atkinson said. It is not a completely zero-sum world, but when it comes to advanced technologies, countries compete for a specific market share, he said.

For example, the global semiconductor market is a fixed market, with sales driven by demand and expected incremental growth year-over-year. The huge subsidies provided in the U.S. CHIPS and Science Act isn’t meant to increase sales, it is aimed at influencing where the microchips in semiconductors are going to be manufactured and who will capture that incremental market growth, Atkinson said.

For the U.S., the core message in the Hamilton Index is: “the United States is living off past glory,” he said. “We really don’t fully understand how poorly we have performed over the last 20 years in these advanced industries. We still think we’re Number One.”

The reason for that is policymakers and others conflate innovation, R&D, entrepreneurship and advanced production “and glom them all together, and they’re not that,” Atkinson said. He pointed to several examples to back up his argument:

• The U.S. performs well on innovation and entrepreneurship, and had 60 per cent of the solar panel market in 2000. Now it has less than 10 per cent. China has captured 65 to 70 per cent of this market.
• GE was an incredibly strong company 20 years ago. Now GE’s appliance business is majority owned by Chinese multinational home appliances company Haier.
• The U.S. once had a machine tool industry – no longer. China’s shipbuilding capability is now 35 times greater than that of the U.S.
• The U.S. and Canada were dominant in telecom equipment in the late 1990s, with the world’s two largest companies Lucent and Nortel, which no longer exist. Atkinson detailed what happened in a 2020 article in the journal American Affairs.

When it comes to performance in advanced industries, he said, “I think there’s a lot of wishful thinking in Canada and the U.S. that the green [energy and tech] transition will be the engine that moves these numbers up. I’m skeptical frankly. The might a little bit, but they’re not the saviour.”

For Canada, Atkinson said, the message is the “game” of advanced technologies “is way tougher than the NHL. If Canada doesn’t see it like an uber-hockey competition, it’s going to lose.”

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