By Peter Josty

Peter Josty is the Executive Director of The Centre for Innovation Studies based in Calgary.

One of the many stated aims of the U.S. tariffs in to create more manufacturing jobs in the U.S., including by returning offshore manufacturing to the country. What about the manufacturing sector in Canada? Should we try to increase manufacturing, too?

Trends

In both Canada and the U.S., manufacturing has steadily declined as a percentage of GDP and employment over the last 50 years. This has been the same in all Organisation for Economic Development and Co-operation (OECD) countries.

In the 1950s and 1960s manufacturing represented more than one-quarter of the economy in Canada and the U.S. But by 2024 it had declined to 10 percent to 11 percent of GDP in both countries.

Manufacturing employment has also declined, from almost 2 million in Canada in 2001 (15 percent of the industrial workforce) to 1.6 million in 2024 (8.6 percent ), according to Statistics Canada. The main reason for this is the faster growth of the service sector.

The definition

The definition of manufacturing isn’t completely straightforward. Technically, manufacturing is in NAICS the North American Industrial Classification System (NAICS) codes 31-33.

According to Innovation, Science and Economic Development Canada (ISED): This sector comprises establishments primarily engaged in the physical or chemical transformation of materials or substances into new products. These products may be finished, in the sense that they are ready to be used or consumed, or semi-finished, in the sense of becoming a raw material for an establishment to use in further manufacturing.

Examples of manufacturing are food manufacturing, the chemical industry, oil refineries, furniture manufacturing, transportation equipment, and machinery manufacturing.

The oil sands, which have a lot in common with oil refineries, are not classified as manufacturing but as NAICS code 211 – oil and gas extraction.

Research and development

The manufacturing sector spends one-quarter of Canada’s business R&D.

However, Canadian-owned firms spend more than foreign-owned firms on R&D as a percentage of revenue (1.8 percent vs. 1.1 percent).

This is in marked contrast to the service sector where foreign-owned firms spend more than twice as much as Canadian-owned firms (5.7 percent vs. 2.4 percent), according to Statistics Canada.

Are manufacturing jobs “better?”

There is a long-running debate among politicians about whether manufacturing jobs are “better” than services jobs.

A brief summary from the Economist provides a good answer to this question  “The nostalgia of politicians is misplaced.”

According to Statistics Canada, the average hourly wage in manufacturing jobs in 2024 in Canada was $34.32. The average hourly wage in the services sector was $34.74, so not much difference.

However, there is a wide range of wages in the service sector, from a high of $47.50 in professional, scientific and technical services, to a low of $20.58 in accommodation and food services.

Exports

According to a report from ScotiaEconomics, total Canadian exports in 2023 were $965 billion.  Of these, 20 percent ($197 billion) were services and 80 percent ($768 billion) were goods.

Of the goods exports, $467 billion was manufacturing, according to ISED. Manufacturing represents 48 percent of Canada’s total exports. For comparison energy exports were $174 billion, or 18 percent of total exports.

So, manufacturing exports are a very significant part of Canadian exports, as shown below.

Imports     

In 2023, Canada’s total imports were $978 billion, of which 79 percent were goods and 21 percent were services. The main imports are shown below. Most of these are manufactured goods.

Where is manufacturing in Canada?

There were 93,870 manufacturing establishments in Canada in 2023, of which 93 percent were small businesses, having fewer than 100 employees.

The distribution of manufacturing jobs among provinces is shown below. The largest amount of manufacturing is in Ontario, but the highest share as a percentage of Canada’s GDP is in Quebec. Manufacturing represents at least five percent of the economy in nine provinces.

                                                                                    Source:  Statistics Canada

Productivity

According to the NGen Productivity Report, manufacturing has increased its labor productivity  by 33.6 percent over the last 25 years, about 17 percent more than all industries.

Several manufacturing sectors – wood products, electronics and motor vehicle parts – have increased their productivity by much more during this period, as shown in the table below.

According to ISED, manufacturing labour productivity from 2018 to 2022 actually decreased, compared with a very small increase for the economy as a whole.

However, productivity can increase and decrease for many reasons. For example, the move from large breweries to craft breweries decreased productivity in that sector as smaller plants are less productive than large plants.

The aerospace industry is less productive now than it was 25 years ago. In food manufacturing – the largest manufacturing industry in Canada in terms of employment – productivity growth has not kept pace with the overall manufacturing sector.

International comparisons

The table below shows the share of manufacturing in GDP for the G7 countries.

                     Source:  World Bank

For comparison, China’s current share is 26 percent (similar to Canada’s share in the 1960s), the OECD average is 13 percent, and Australia is five percent.

Foreign ownership

According to Statistics Canada, 44 percent of the manufacturing sector in Canada is foreign owned, the second highest sector behind wholesale trade at 48 percent. This is far above the national average, where about 15 percent of assets are foreign owned.

Conclusion

The manufacturing sector in Canada contributes 10 percent of GDP and about 1.6 million direct jobs. It contributes 48 percent of Canadian exports.

Despite political rhetoric to the contrary manufacturing jobs are no “better” than services jobs.  The productivity performance of the sector is higher than the average of Canadian industry – recognizing that Canadas productivity performance as a whole has been very poor.

In terms of future actions, rather than trying to bring to Canada manufacturing activities that are done more efficiently elsewhere, it would make more sense to focus on increasing the productivity of the current manufacturing sector.

One area that is poised for significant growth is the defence sector, where 585 firms generate $14 billion revenue.

According to a 2023 report by the Canadian Manufacturers & Exporters industry group, Canada needs to adopt a comprehensive manufacturing strategy that addresses the manufacturing sector’s core challenges and seizes the opportunities represented by current economic, geopolitical and environmental trends.

One possible impediment to improving manufacturing in Canada is the large amount of foreign ownership, where U.S. owners may be tempted to move operations to the U.S., especially in the face of tariffs imposed by the Donald Trump administration.

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