What can manufacturing plant closures tell us about resource reallocation and industrial renewal? More than you think.

A new Statistics Canada’s report, Death of Canadian Manufacturing Plants: Heterogeneous Responses to Changes in Tariffs and Real Exchange Rates, authors John Baldwin and Beiling Yan explore the effect an increasing Canadian dollar and reduced tariffs have had on Canada’s manufacturing landscape.

Limiting their study to the period 1979-1996, the authors argue that, by understanding factors contributing to plant closure, governments will be able to generate better industrial, trade and foreign-direct-investment policies.

Among their findings is the concept that currency appreciation increases the probability of plant death while currency depreciation increases the probability of survival. This seems straight forward enough, but it’s interesting to note that the effect isn’t uniform across all plants – those that are less efficient experience an increase in their shutdown probabilities when the Canadian dollar appreciates.

Similarly, a decline in tariffs raises the probability of plant death, in particular for plants that are less efficient. Overall, for the period under examination, tariff reduction had a greater effect on plant exit than did exchange-rate fluctuations. For the period from 1984 to 1990, for example, the rate of plant failure due to tariff reduction was about 2.6 times that of plant failure due to exchange-rate appreciation.

Exporters and foreign-owned plants had much lower failure rates; however, their survival was more sensitive to changes in tariffs and real exchange rates.

To read the full report, click here.

http://www.statcan.gc.ca/pub/11f0027m/2010061/aftertoc-aprestdm2-eng.htm