How can our export-based businesses grow?
A common answer I have heard to this question from manufacturers who export is that they need “to get closer to the market.” To many, this may seem like a logical impossibility; New Brunswick is not a floating island that can be dragged closer to some other place. Nor is the physical size of the globe getting smaller, reducing physical distance between New Brunswick and its destination markets.
But what if we don’t think about closeness of markets as a physical distance? What if we thought about distance to market as a measure of the profitability of producing in New Brunswick and shipping goods to market?
In economics, transportation costs are often modelled as an “iceberg cost” where the further the goods travel, the more of the total value of the sales received by the producer melts away. You can determine the maximum distance that goods can be shipped as 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.
If all that mattered for profitability was distance to market, one could think of “getting closer to market” as simply establishing a production facility at a location which, because it’s closer to the point of sale, has lower transportation costs as a share of the total value, yielding higher profit.
But there are other ways that we can get closer to market. First off, we could look at how to reduce transportation costs, or the costs of getting goods to market – including loading and unloading – to reduce the rate at which the profitability of exporting declines with distance.
Investing in infrastructure that improves productivity of shippers is an obvious way to improve transportation costs. For example, twinning the last 40 kilometres of single lanes on Route 185 in Quebec would allow for Long Combination Vehicles (trucks), estimated to have 30 per cent or more productivity relative to single-trailer trucks, to operate without interruption from Halifax to Windsor, Ont.
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.
We can also increase exporter capacity to reach more distant markets by increasing the size of “the iceberg” that transportation costs will melt. This means reducing the costs of producing in the province, so there is a bigger margin between costs of producing and the market prices paid by buyers outside New Brunswick. Exporters in this province typically can’t influence the market price of their goods, given the high degree of competition they face and their small size relative to global supply. That means we need to think of ways to reduce business costs in New Brunswick to get closer to market. Bigger icebergs can reach more distant places before they have completely melted.
The Atlantic Provinces Economic Council has produced some excellent work, showing the costs our economy bears from our failure to harmonize our myriad regulations for labour markets and business. These cost burdens, which can literally represent the cost of hiring someone to do paperwork, erodes the before-shipment profitability of exporters by raising costs. This reduces the feasible shipping distance for exporters, effectively moving us further away from the market and encouraging producers to invest in producing somewhere else...that is, closer to the market.
The federal carbon tax imposed on New Brunswick in April added costs to business in this province that are not borne by businesses in the other Atlantic provinces or businesses located physically closer to markets in the United States. Unlike households in New Brunswick, there is no rebate to business to offset the higher costs due to the carbon tax. In this way, the carbon tax has moved our producers further from market.
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 is putting upward pressure on payroll costs.
Second, adding to this market pressure, the government of New Brunswick has added to payroll costs with higher WorksafeNB premiums, increases in the minimum wage and adding a statutory paid holiday. All of these factors reduce exporter reach to outside markets.
The provincial government has also increased exporters’ distance from market with the uncertainty it has created over energy costs and property taxes to be paid by business. Compared to places closer to market, policies and conditions that raise the risk of producing in New Brunswick reduce the expected value of sales which, wait for it…increases our distance from the market.
New Brunswickers need to understand that for a population of our size, we have an impressive number of competitive exporting manufacturers who can expand their business, but that investment and income from expansion may not 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, 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 American states that have chosen to be closer to the market.
Herb Emery is a Brunswick News columnist and the Vaughan Chair in Regional Economics at the University of New Brunswick.
This article first appeared in Brunswick News publications – July 3, 2019
The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.
