Strategy

Business without Borders: The West's raw deal

Exporting unprocessed oil and logs, say critics, is costing us jobs.

When God handed the Promised Land to the children of Israel, most affected tribes fought the divine eviction. But the people of Gibeon instead tricked the Israelites into signing a peace treaty by pretending to be from a faraway land. When Israelite leader Joshua discovered the deception, he put a curse on the Gibeonites: “You shall never cease being slaves, both hewers of wood and drawers of water.”

Today, many Canadians fear our economy faces a similar fate because we’re betraying our national interests to the cause of globalization. “We have reverted to being hewers of wood and drawers of water,” insists Diana Gibson, research director at the University of Alberta’s Parkland Institute, a political and economic think-tank. Gibson and other free-market skeptics are appalled that Canadian politicians are allowing national resources — such as logs from British Columbia and oilsands crude — to be exported in raw form rather than demanding these commodities be processed in Canada before shipment abroad.

Despite Ottawa’s move to keep Potash Corp. out of foreign hands, this camp insists Canada is acting like a Boy Scout in the mercenary world of natural resources. Processing and upgrading resources into more valuable products creates high-paying jobs. By not forcing companies to process resources locally, Gibson says, we’re essentially exporting those jobs to other countries. She started raising the alarm prior to the global downturn. Since then, fighting unemployment has become a high priority, yet federal and provincial politicians support the export of raw resources. As a result, Gibson argues, our manufacturing base is being gutted. “We are selling the family silver, partying hard on the profits, and not thinking about the future.”

Gil McGowan, president of the Alberta Federation of Labour, recently pointed out to the federal Standing Committee on National Resources that two-thirds of Alberta’s oilsands bitumen used to be upgraded in the province, by being either transformed into synthetic crude or refined into higher-value products such as gasoline, diesel or jet fuel. “In the process,” McGowan says, “thousands of high-paying, family-sustaining, community-sustaining jobs were created among upgraders and refineries in places such as Fort McMurray, Fort Saskatchewan and Edmonton.”

In the past few years, however, the ratio of local upgrading to external refining has started to slip. According to Alberta’s Energy Resources Conservation Board, the proportion of Alberta bitumen upgraded in Canada is now at 63% — a downward trend that has critics of raw exports worried. After all, prior to the Great Recession, Alberta’s industrial heartland looked poised to become an upgrading mecca, with new refinery projects expected to boost local production of oilsands crude by more than half a million barrels a day. The downturn delayed those projects. And now, the province’s opportunity to move up the value chain appears to have been weakened by the growing network of pipelines leading stateside, where excess refinery capacity can be retrofitted to process bitumen at half the cost of building greenfield refineries in Canada. According to some estimates, the rising level of pipeline capacity could drop the proportion of oil being upgraded in the province below 50% by 2019.

Supporting the export of raw resources used to be a political no-no in Canada — even for Conservatives. Former Alberta premier Peter Lougheed is credited with building a world-class petrochemical industry by putting policies in place to block such exports. Ed Stelmach, Alberta’s current leader, came to power claiming that “shipping bitumen out of the province is comparable to selling the topsoil on a farm.” But he has since taken a more laissez-faire approach to the issue. By opening the door to raw exports, he weakened the business case for local refinery projects. To encourage investment in more upgrading capacity, Alberta has implemented the Bitumen Royalty in Kind program, which aims to supply local refineries with government-owned bitumen to upgrade. In other words, Alberta is using a carrot instead of a stick to create higher-end manufacturing jobs.

As for the federal Conservatives, the last time Prime Minister Stephen Harper addressed the issue of natural resource exports, he was lobbying for American support of TransCanada’s Keystone XL pipeline. Its purpose? To increase the flow of raw Alberta crude to the United States.

In B.C., it used to be flat-out illegal to export logs without first processing them into lumber. Under the province’s Liberal government, however, raw wood exports have almost doubled. This is a boon for companies such as Coast Tsimshian Resources, which is leading a logging recovery in northwest British Columbia by catering to Chinese demand for raw logs. But as the United Steelworkers Wood Council pointed out in an op-ed article, China is hungry for raw Canadian logs because Russia cut back on selling it unprocessed timber. “Someone in Russia figured out there are a lot more potential jobs and profit in processing Russian timber in Russian sawmills and generating investment in Russian value-added plants.”

No one disputes that exporting raw resources helps create jobs in the importing countries. In fact, one of the arguments used by TransCanada to gain American support for the $7-billion Keystone pipeline is the more than 250,000 jobs the project will create for the U.S. economy. But free traders insist that doesn’t make the case for market intervention. “If somebody can build a refinery or sawmill in this country and make it efficient and sell at world prices, they will do it,” says Fred McMahon, director of the Centre for Trade and Globalization Studies at the Fraser Institute. He points out that preventing the export of goods to customers willing to pay the most comes with a cost. “When you talk about blocking off the flow of something to the rest of the world so we can process it here, what you in effect are doing is demanding a subsidy, hidden or otherwise. And why would anybody, even a left-wing fanatic, want to subsidize an oil refinery?”

McMahon urges Canadians to consider the history of Argentina. It was one of the world’s wealthiest nations when it moved to protect its resources after the Second World War. “It threw up trade barriers to try to keep natural resources at home and force domestic manufacturing,” says McMahon. “And it ruined its economy. It’s an example of the economic horror story that protectionists would visit upon Canada.”

Glen Hodgson, the Conference Board of Canada’s senior vice-president and chief economist, likewise isn’t concerned with the level of our raw resource exports. Canada must evolve as free trade rebalances the world’s division of labour, he says. “The challenge becomes [finding ways to] capture as much value-added manufacturing as you can. And I don’t think the answer is putting up barriers. The answer is investing in innovation and productivity and the right skills.” As for our resources, “if the world is prepared to pay really high prices for what you export as raw goods, a lot of wealth is created.”

Whatever happens, Canadians are unlikely to go the way of the Gibeonites. After all, globalization long ago reduced the importance of forestry to our balance of trade. As StatsCan researcher Philip Cross pointed out years ago in a paper on Canada’s so-called underground economy, we have become “conveyers of crude and moilers of metals.” And that’s not a curse — not when commodity prices are soaring.

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