Canada gains business cost advantage over US

Canada’s cost competitiveness as a business location has not been adversely affected by the lingering effects of the recession in the United States, according to KPMG’s Competitive Alternatives 2010 study, which compares business costs in 10 countries in North America, Europe, and Asia Pacific. The results show that Canada now holds a 5% business cost advantage over the US — an improvement over the virtual break-even position reported in the previous edition of the biennial study, last released in 2008.

The slight easing in the Canada-US exchange rate over the past two years has helped Canadian competitiveness. A variety of tax cuts and reforms that have been implemented, or are in the process of being implemented, by both the federal and provincial governments, are also assisting the cost competitiveness of Canada for global business.

Indeed, business taxes are now lower in Canada than in any of the other G7 countries. Competitive Alternatives examines business competitiveness in 112 cities in Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, the United Kingdom and the United States. The study measures 26 significant cost components that are most likely to vary by location, including labour, taxes, real estate, and utilities, as they apply to 17 business operations over a 10-year planning horizon, as well as a range of non-cost competitiveness factors.

Competitive Alternatives 2010 compares business costs among a group of 41 large international cities, all with populations in excess of 2 million. Canada’s major cities fare well in this comparison, with Montreal (3rd among 41 cities), Vancouver (5th), and Toronto (6th) ranking ahead of all major US cities studied in terms of affordable business costs. Indeed, Manchester, England (4^th), was the only other G7 city to match the rankings of the Canadian cities.

The results were determined using recent exchange rates with the Canadian dollar valued at US$0.943 (CAD$1.06 per USD), down from parity in 2008. “With the Canadian dollar at USD$0.94, it is very positive for Canada to demonstrate this cost advantage over the United States,” says Simon Harding, Associate Partner in KPMG’s advisory services practice and head of its strategic & commercial intelligence practice. “Ten years ago, we estimated that the break-even exchange rate for the two countries was about USD$0.80, yet a number of structural changes through the 2000s have allowed Canada to maintain a cost advantage over the US, even in this high-dollar environment.” However, Harding believes Canada cannot rest on its laurels. “It must continue to present a clear value proposition to businesses in other areas in order to maintain its attractiveness for international firms,” he says.

Meanwhile, on the wider international front, the United Kingdom has pulled ahead of both the US and France as an affordable jurisdiction to conduct business.

Mexico retained its No. 1 ranking from the last time the survey was conducted (2008), while Japan’s cost competitiveness has deteriorated owing to the strength of the yen. Changes in exchange rates, energy costs, transportation costs and taxes are the main factors influencing international competitiveness over the past two years.

For more on the rankings, click here.