Atlantic Institute for Policy Research Highlights
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Getting closer to market doesn't mean moving

Author: Herb Emery

Posted on Jul 3, 2019

Category: Regional Economics , JDI Roundtable , Manufacturing , Government , Taxation

How can our export-based businesses grow? A common answer I’ve heard from New Brunswick’s export manufacturers is that they need to “get closer to the market”.

Since New Brunswick isn’t a floating island that can be dragged closer to some other place, this seems impossible without setting up production closer to destination markets.

In economics, transportation costs are “iceberg costs” – the further the goods travel, the more of the total value of the sales received by the producer melts away. The maximum distance that goods can be shipped is the distance at which transportation costs yield $0 residual value of the goods for sale over the costs of producing them and shipping them to market. The closer to the destination market, the fewer transportation costs, and the higher the profitability.

New Brunswick companies depend on distant markets

If moving is the only way for exporting businesses to “get closer to the market” and grow, we should be very concerned since 90% of our manufactured goods are currently shipped to markets outside of New Brunswick.

In fact, our manufacturing sector is the most “export-exposed” in Canada.

Getting closer to market doesn’t necessarily mean moving closer to market
The solution to any problem often depends on how you frame the question.

What if we don’t think about closeness of markets as physical distance? Instead, what if we thought about distance to market as a measure of the profitability of producing in New Brunswick and shipping goods to market?

We can increase exporter capacity to reach more distant markets by increasing the margin between the costs of producing and the market prices that export markets are willing to pay. We have no control over the market price of our goods but we DO have some ability to influence the costs of production and transportation in New Brunswick.

Bigger margins equal bigger icebergs that can reach more distant places before they have completely melted.

In other words, we need to reduce the rate at which the profitability of exporting declines with distance.

Reduce transportation costs with infrastructure investments

Investing in infrastructure that improves productivity of shippers is an obvious way to improve transportation costs. For example, twinning the last 40 kilometers of single lanes on highway 185 in Quebec would allow for Long Combination Vehicles (trucks), estimated to have 30% or more productivity relative to single trailer trucks[1], to operate without interruption from Halifax to Windsor, ON. As it is now, the bottleneck only serves to add to our “economic distance” from the Central Canadian markets by restricting use of LCVs in the region. ‘

Reduce costs of producing in the region

The Atlantic Provinces Economic Council has produced some excellent data showing the costs our economy pays because of our failure to harmonize our myriad of labour market and business regulations. These cost burdens can literally translate to the expense of hiring someone full-time just to do the paperwork, which unnecessarily erodes profitability before a single item is shipped.

These costs effectively moving us further from the market and encourage producers to invest in producing somewhere else … somewhere closer to market.

Fix the impact of the federal carbon tax on New Brunswick exporters

The federal carbon tax imposed in April of this year added costs to New Brunswick businesses that are not borne by businesses in the other Atlantic provinces or those located physically closer to large destination markets in the United States.

Unlike households in New Brunswick, there is no rebate to business to offset higher costs due to the carbon tax. And there is little room in a globally competitive market to pass on these costs to the customer.

In this way the carbon tax has moved our producers further from the market.

Pay attention to the labour market impact on costs

New Brunswick’s labour market has some emerging challenges for producers that are increasing our distance to market.

First, a tight labour market where employers are struggling to find workers puts upward pressure on payroll costs. Second, the Government of New Brunswick has added to payroll costs with higher WorkSafeNB premiums, serial increases in the minimum wage, and the addition of a new statutory paid holiday. All of these factors increase the distance to market.

Uncertainty means risk

Policies and conditions that raise the risk of producing in New Brunswick reduce the expected value of sales which, of course, increases our distance to market. Repeated governments in New Brunswick have fostered uncertainty over energy costs and provincial property tax to be paid by business.

It’s our game to lose

For a population of our size, we have an impressive number of competitive exporting manufacturers that can expand their business. But the investment and income from expansion may not necessarily occur here. In other words, we have world class competitive companies currently located in a province that is “distant from markets” in terms of the competitiveness of the location. If we fail to address the policies, regulations and decisions of government that increase the effective distance to market for exporters in New Brunswick then we should not be shocked if they choose to expand their business in locations that are closer to the market.

New Brunswick’s economy can grow with its manufacturing sector if we choose to let that happen. If we continue with the status quo, then I guess we can at least be proud of our contribution to the growth of manufacturing in central Canada and several U.S. States that have chosen to be closer to the market.

Dr. Herb Emery is the Vaughan Chair in Regional Economics at the University of New Brunswick and the founder of a new research initiative exploring ways to grow New Brunswick's manufacturing sector. A version of this commentary was published in the Telegraph Journal on July 3, 2019 and is reproduced here with permission from Brunswick News inc.

[1] see page 53.



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