Atlantic Institute for Policy Research Highlights
Economic policy commentary and research from the AIPR

Economic survival means learning from the past

Author: Herb Emery

Posted on May 26, 2020

Category: Regional Economics , Manufacturing , JDI Roundtable

New Brunswick’s economy and population have grown slowly for a decade because growth in our manufacturing exports stalled. Coming out of our COVID19 lockdown we can restart that economic engine but for that to happen, the provincial government and voters need to rediscover an understanding of industrial competitiveness. And the best way to get familiar with that concept is to revisit when the province failed to adjust its policies and regulations in response to external factors like an appreciating dollar and global trends buffeting our exporting industries. I am referring to the province’s missteps after 2003 which cost the Northeast of New Brunswick its pulp and paper industry.

It’s not that hard to see where we went wrong

It turns out that describing the factors or conditions that allow exporters to profitably produce in New Brunswick are easy to identify. The Canada/US Dollar exchange rate has provided an advantage for exporters who process our natural resources since their revenue is in US dollars but they pay their costs in Canadian dollars. But the exchange rate is not in the control of the exporter.

Then there are other things that affect a New Brunswick exporter’s bottom line like electricity prices, natural gas prices and distribution rates, labour costs relative to labour productivity, corporate taxes, and various regulations applied to producers. All of these influences on exporter competitiveness are determined, or at least are potentially alterable, by government policy. This list of competitiveness factors is not unique to New Brunswick. The Atlantica Centre for Energy reported in 2010 that a survey of North American corporate location decision makers identified the top four site selection factors for business as labour costs, highway accessibility, energy availability and costs and then corporate tax rates. Moving to an industry like pulp and paper, you would add the cost of, and access to, wood fibre as an additional consideration.

The pulp and paper industry was ours to lose. And we did.

In the early 2000s, the province’s trade exposed, high wage pulp and paper producers faced declining US and global demand for newsprint and other paper products and an appreciating Canadian dollar. The appreciating dollar, all else equal, was eroding the competitiveness of paper producers in New Brunswick and other provinces like Ontario and Quebec. The declining demand for print media like this newspaper meant that the industry was going to rationalize and concentrate production at the most profitable locations. In 2005 as the mill owners in the province were warning that they may exit the province, Premier Bernard Lord remarked that "Businesses make these decisions for business reasons… We have to continue to work at making sure New Brunswick remains competitive."

In 2003, New Brunswick had 10 pulp and paper mills operating in the province and many of them were part of multinational enterprises’ operations that were in the Northeast of the province. By 2008, the province had lost the US based Abitibi-Bowater mill in Dalhousie, the Finland based UPM mill in Miramichi, and the Chicago based Smurfit-Stone Container Corp. mill in Bathurst.

Smurfit-Stone blamed slowing demand for packaging in North America, as manufacturing shifted overseas. The company also noted that it was “unable to pass along inflationary costs, such as energy and fiber, to our customers”. AbitibiBowater closed the Dalhousie mill as part of its North American restructuring as the forest industry was hit with high fuel costs, a slowing US economic and “the competitive disadvantage of a high dollar”. UPM blamed the high Canadian dollar in 2007 for its decision to close its mill in Miramichi. It is worth noting that the American owner of the Nackawic pulp mill opted to shut down in 2004 when it could not find a buyer for its mill before the mill re-opened after 2010 when the dollar started to depreciate.

Quebec kept mills while NB lost them. Why?

It bears note that mills in Quebec also faced an appreciating dollar and softening demand for paper products but its pulp and paper employment did not drop as abruptly as New Brunswick’s. Something specific to New Brunswick was what undermined the competitiveness of pulp and paper producers in the province and it turns out that was likely the abrupt exceptionally large increases in electricity prices for large industry in the province between 2003 and 2007.

Right at the time that pulp and paper producers were facing a dollar increasing from around 65 cents per US dollar in 2003 to 94 cents US at the end of 2007, rising fuel costs and debt service costs for NB Power resulted in a dramatic escalation in power prices particularly for large industry. From December 2004 to December 2007, power selling prices to large industry increased by 30 percent in New Brunswick, compared to 17 percent in Nova Scotia and 8 percent in Quebec. The Atlantica Centre reported in 2010 that by 2009 “industrial electricity rates in New Brunswick were well above the median in Canada and the United States and 40%-90% higher than areas that directly compete with New Brunswick firms in the forestry industry”.

Part of the reason for the large power price increase for large industry in New Brunswick was that as late 2004, rates for large industry were lower than for residential customers and intermediate sized industry in the province. There are many reasons for pricing electricity lower for high volume base load power users from the perspective of the electric utility and the economy, but by 2007 the historical and sizeable price differential between large industrial power purchasers and intermediate sized industry was gone. The choice in New Brunswick was to put more of the rising costs for power onto large industry rather than lighter industry and residential consumers. While pulp and paper mills in the province were facing these challenges to their competitiveness, little adjusted elsewhere in their costs to provide relief, labour compensation per hour in particular.

Why was the Northeast the biggest loser?

Why were the mill closures concentrated in the northeast of the province when all mills in the province would have faced the same increase in power costs and inflexible wages? A few factors seem to be at play in the concentration of losses in the northeast of the province. First, if you look at all of the other factors that affect competitiveness, then we should not be surprised to see that the surviving mills were in proximity to the four lane Route 2 between the Nova Scotia and Quebec borders completed in 2007, and the four lane Route 1 from Moncton to St. Stephen that the province had also prioritized for development after 1987. Highways to the Northeast remain 2 lane for the most part to this day.

Saint John was developing as an energy hub around the time of the competitiveness troubles so there might have been different expectations for energy diversification in the south of the province that would have diversified the risk of being overly reliant on electricity. The Northeast of the Province had no similar capacity for energy diversification in the mid-2000s.

And the mills that closed were multinational firms leaving New Brunswick, but not the industry. The remaining mills were “home teams” for the province and somewhat less footloose. While total employment in pulp and paper today has not recovered to its peak in the early 2000s, GDP from pulp and paper production in the province has recovered to its peak, as capital intensity of production has driven gains in labour productivity as a source of competitiveness. Further growth from the industry is likely possible if the province chooses to follow Bernard Lord’s 2005 advice to “to continue to work at making sure New Brunswick remains competitive."

The Northeast of the province has never recovered from the losses of large industry after 2003. The Northeast’s industry losses has been a big contributor to our province’s excellent record for reducing emissions and with the loss of the Belledune generation facility, the region will further contribute to the province’s green record and fall even further behind with respect to infrastructure and assets that would support the competitiveness of the region for industry.

Fast forward to 2020. Can we avoid the mistakes of the past?

So here we are in 2020 following several years of challenges for the province’s exporters to deal with rising electricity costs, rising costs of getting products to market, rising labour costs that have emerged with labour shortages in the province, and environmental and labour regulation changes that have increased the cost of doing business from the province. Our exporters have been supported by a low dollar but now we are dealing with a pandemic that is altering demand for our manufacturing exports and our capacity to compete for global market share as supply chains re-organize.

Knowing what happened to the Northeast of the province over a decade ago when similar challenges for exporter competitiveness arose, what do you think the Government of New Brunswick should do this time so that the economy can grow instead of contract? If you aren’t sure, then consider this. For nearly a century prior to 2000, Governments of New Brunswick’s had a laser focus on developing low cost electricity supply as a source of industrial competitiveness. It appears that while the province benefited from the legacy of their success in developing manufacturing exports, we lost our understanding of business competiveness and we are all paying for that loss to this day.

Dr. Herb Emery is the Vaughan Chair in Regional Economics at the University of New Brunswick. He is the head of the Atlantic Institute for Policy Research and the research director for the JDI Roundtable on Manufacturing Competitiveness in New Brunswick. He writes a regular column for the Telegraph Journal and other Brunswick News publications.



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