Is Canada sleepwalking its way toward the new global economy? What are Canada’s economic prospects in an increasingly “flat” global economy? Is the naturalresource-fuelled prosperity we see most vividly today in Alberta a bellweather of Canada’s economic future? Or are the economic dislocations and painful restructurings that we see taking place in too many of Canada’s manufacturing-based communities a more accurate barometer of what lies ahead?

When Marshall McLuhan spoke of a global village based upon mass communications, he basically had the right idea. But he had no idea what that village would be like with technologies like the Internet, Facebook and MySpace. When Maurice Strong and Brian Mulroney met with world leaders in Rio in 1992 to talk about the urgent need to care of Spaceship Earth, launching the Kyoto Protocol and the Protocol on Biodiversity as a result, they had the right idea. But again, they really had no idea that industrialization in China would eventually determine the fate of the polar bear.

Analysts are now talking about the flat earth and the global economy and the way in which life today will change. They are right, of course, but while they have a fairly good understanding of the changes that will take place, they really have no idea what will happen when the rest of China’s population joins the market economy, for instance, or when the skills of the hundreds of thousands of PhDs and engineers around the world are properly harnessed, or when outsourcing services to India will move beyond computer programming and call centres.

The question we must ask ourselves is, “Can Canada prepare itself for this new global economy about which it has a pretty good idea and yet, in many ways, has no idea?”

Here Canada’s forest products industry has learned a number of lessons that can be applied to the rest of the Canadian economy. Over the past few years, the industry has experienced a confluence of economic challenges. With mills shutting down, people losing their jobs and communities being devastated as a result, some “experts” have argued that we should let the industry go; that this is an inevitable by-product of globalization and that lost jobs in forest communities will be replaced by new opportunities in other sectors and regions.

Some believe that our economic future depends almost entirely on the prosperity and dynamism of a small handful of metropolitan areas, effectively dooming 300 forest-dependent communities from Newfoundland to British Columbia to a future of economic dependency and increasing irrelevance. While such reasoning is as economically wrongheaded as it is socially and politically untenable in a country as large and regionalized as Canada, it risks becoming a self-fulfilling prophecy.

It is important to understand that the Canadian forest products industry is the world’s largest exporter of forest products, an $84-billion industry representing 3 percent of Canadian GDP. It directly employs over 300,000 Canadians in high-wage, highproductivity jobs that are virtually irreplaceable in rural and remote regions of the country. While the sector faces tough competition from a growing array of low-cost, emerging market producers, it also enjoys a number of key competitive advantages, including the quality and diversity of the Canadian fibre basket, proximity to the huge US market, a skilled workforce and, in some provinces, relatively inexpensive electricity.

There is an enormous market out there for forest products and it is growing every year. We live in a world hungry for natural resources, and who better to deliver excellence in product, services and know-how than Canada? There is no good reason to be fatalistic about globalization.

Today, the Canadian forest products industry faces a very fundamental choice. Either it continues on the current path and faces a future of diminishing possibilities or it accepts the reality of a changed global environment and strives for the opportunities that this changed environment offers. Last year, we brought together the Forest Products Industry Competitiveness Task Force, a group of industry chief executives, leading financial analysts and senior government officials, to look at the industry’s competitive position and future prospects. Its mandate was to try to find a pathway to a more prosperous future for the industry and to identify the key changes that would be necessary to make it possible.

The task force released its findings in May and concluded that despite current challenges, the revitalization of the Canadian forest sector can be realized to take advantage of growing global markets for forest products. In fact, the task force concluded that Canada can— and should— be at the forefront in redefining social, economic and competitive success in the global forest and paper industry of the 21st century. However, the path to renewal will not happen on its own it must be chosen— by companies, by governments, by workers and by communities.

One of the most compelling things to come out of the task force was the concept that underlying our complacency— that “sleepwalk” toward the new global economy— was a confusion over “neighbourhoods.” We live in Canada. It is a nice place with universal health care and relatively safe streets, and everybody says “sorry.” It is a good place to live. But we make the mistake of thinking that we work here, too. We do not work in Canada; we work in the global marketplace. When you leave the house and go to your office, you are leaving the “nice place” and going to the global marketplace, and this is a very different environment where they will steal your pacemaker, they will not say “sorry” and they will take your job.

If we forget how tough the neighbourhood of the global marketplace is when we go to work, we leave ourselves vulnerable to losing our jobs, losing our lifestyle and losing our quality of life.

The task force found that renewing the industry involves three major elements: getting costs right, getting industry structure right and deepening and taking credit for our environmental credentials.

Getting costs right: In an increasingly competitive global market, the ability of Canadian producers to be cost-competitive with their leading international rivals is key to economic viability. Although there are pockets of the Canadian forest products industry that are globally competitive, the majority of capacity is below average in terms of cost competitiveness. One example of competitive renewal in the industry is the softwood lumber sector in the interior of British Columbia, where market-oriented forest tenure policy reforms enabled the industry to attract new investment needed to create a critical mass of production facilities that are world class in terms of scale, productivity and cost competitiveness.

Across the forest products industry, the four largest input costs for most products are fibre, transportation, personnel and energy. Cost competitiveness is largely a function of these input costs and the efficiency with which they are converted into finished product.

• Fibre: Wood fibre costs vary widely across regions of Canada, ranging from very competitive in parts of BC and Alberta to among the highest in the world in much of the east. Provincial governments have a crucial role to play in enabling industry renewal through reform of forest tenure policy. Priorities in this regard include policy reforms to encourage more investment in forest management, allowing fibre to be allocated to its highest-value use and the elimination of rules that have the effect of dictating industry structure and production decisions.

• Transportation: The forest products industry is the largest user of rail services in Canada. The cost of these transportation services directly affects the industry’s ability to translate our proximity to the world’s largest and most lucrative market into competitive advantage. The monopoly power exercised by rail carriers over mills “captive” to a single rail line added $280 million or about 15 percent to the industry’s total rail freight bill in 2006. While the ability of railways to extract monopoly rents from shippers substantially undermines the competitiveness of the Canadian forest products industry as a whole, this situation is particularly damaging to the cost competitiveness of those production facilities operating in the most northerly and remote communities. The federal government can reduce excessive rail costs through legislation to expand running rights and strengthened final offer arbitration in order to give rural Canada’s shippers better access to North American and global markets.

• Personnel: Across the forest products industry, Canadian personnel costs are highest or very near the highest in the world (see figure 1). However, labour productivity levels in most sectors of the industry are well below world-class levels, creating a productivity gap. Industry, in collaboration with labour, needs to identify means of increasing productivity in the sector so as to better match personnel costs with productivity levels.

• Energy: The forest products industry has a unique capacity to self-generate energy from renewable sources. Canada’s pulp and paper sector already self-generates 60 percent of its energy needs from renewable sources and the forest sector as a whole has the potential to become a net source of green power within a decade and a half. However, some major segments of the industry will remain significant consumers of purchased electricity, and competitive power costs will be key to their continued viability. Public policy can support attainment of energy self-sufficiency through a market-oriented approach to environmental and renewable energy policy that encourages investment and innovation in bio-energy technologies.

The core challenge facing Canada’s forest products industry is transformation efficiency: the requirement to attract the capital necessary to renew its capital stock. Despite pockets of excellence, the capital stock of the industry as a whole is older and less productive on average than that of leading global competitors. While attracting new capital investment to the sector is ultimately the responsibility of the industry itself, public policy plays a critical role in shaping the business climate. In this regard, governments can assist the renewal process through a more globally competitive tax and investment climate, as well as through a new approach to forest tenure and mergers policy.

While significant efforts have been made to improve industry competitiveness in recent years, more far-reaching action will be required by both industry and government in the years ahead if the success story of the BC interior’s lumber sector is to be replicated elsewhere.

Getting industry structure right: The restructuring and consolidation currently taking place in the global forest products industry offers a window of opportunity to create an industry structure in Canada better suited to a changed global marketplace. While Canada ranks among the largest producers and exporters of forest products in the world, until early 2007, no Canadian-based forest products company ranked among the global top 20 in size. This is in part the legacy of federal and provincial policies that have actively constrained the ability of the industry to adapt its structure and operations to meet the demands of the global marketplace.

Increased capital investment is also critical to the renewal of Canada’s forest products industry. Despite capital expenditures of $3.5 billion last year, billions more will be needed in the years ahead in order to maintain and enhance the industry’s competitive position. While attracting capital investment is ultimately the responsibility of the industry itself, the quality of hosting conditions created by Canada’s public policy framework has an indisputable impact of the process (see figure 2). In this regard, governments can assist the renewal process through a more globally competitive tax and investment climate, as well as through a new approach to forest tenure and mergers policies.

Deepening and taking credit for our environmental credentials: In an increasingly environmentally sensitive marketplace, Canada’s strong environmental credentials are under-leveraged. Canada’s forest products industry is a global leader in sustainable forest management with a track record that can provide competitive advantage in the global marketplace:

• Since 1990, the industry has reduced its greenhouse gas emissions by 44 percent— seven times Kyoto targets— while increasing production.

• Canada’s deforestation rate is zero.

• With over 124 million hectares of certified forest, Canada has the largest area of third party independently certified forests in the world (Canada is home to over 40 percent of the world’s certified forests).

• Today, 60 percent of our pulp and paper mills’ energy needs are self-generated from renewable sources, primarily carbonneutral biomass.

While the industry is very proud of these achievements it is keenly aware that there is no room for complacency and that the industry must constantly strive to improve its practices.

In the new global economy, environmental sustainability is an important component of cost competitiveness. In this regard, Canada must better leverage its environmental credentials by telling its story and branding it and insisting that those countries that are using illegal logs, deforesting the countryside and producing more greenhouse gases be held to account, and that Canada’s record be put upfront.

Despite current challenges, facincreased customer focus, expanded offers a sustainable means of revitaliztors like strong global economic growth, emerging breakthrough technologies and increasing preoccupation with climate change and sustainability are creating unprecedented opportunities for Canada’s forest products industry. The pulp and paper sector already self-generates 60 percent of its energy needs from renewable sources, and the task force believes the industry can get to energy self-sufficiency or beyond by 2020. In the future, mills in the forest products industry will produce not only traditional products like pulp or lumber but also green power, ethanol, petrochemical substitutes and a host of other products from renewable, climate friendly biomass resources. Realizing this potential will require competitive strength in core business lines and traditional products as well as a focus on such priorities as continual improvement in sustainability and sustainable forest management performance, an market development efforts and a sustained commitment to research and innovation.

Can we do it? There is nothing in this list that is particularly hard to do. If we use our forest resources responsibly from an environmental perspective but intelligently from an economic perspective; if we allow industry to structure appropriately; if we reorganize our working practices to improve productivity; if we stop the exploitation by the railways; if we move faster toward energy self-sufficiency— then the answer is yes. We could keep jobs and succeed in the global marketplace.

The task force recognized that much of the needed change must be initiated by the industry itself. The unique opportunities the new global marketplace offers, however, will also require decisive action and far-sighted leadership on the part of policymakers, labour and other stakeholders. Realizing the emerging opportunities in the global forest and paper sectoring one of Canada’s most important industrial sectors and is of special importance to the self-sufficiency and economic well-being of hundreds of communities across rural Canada.

So if we think about the global village, Spaceship Earth and the new global economy, do we have an idea of what is coming? We know it is going to be a lot harder than it is. We know that Russia, Indonesia, Brazil are all going to be competing for the global marketplace. We also know that the global economy is going to be hungry for natural resources, which we have. And there is no reason why Canada can’t continue to be the world’s most successful forest product exporting nation, unless of course we continue to sleepwalk.