Trudeau’s Cure for Canada’s Slump? Architects and Accountants

Service exports a bright spot amid general economic gloom.

Jack Diamond is 83, and South African, making him an unlikely poster child for Canada’s new economy. But the founder of Diamond Schmitt Architects has built exactly the kind of business that the government sees as the wave of the future—brainy, urban and globally competitive.

Diamond has been living in Canada for five decades. His Toronto-based firm won a contract last year to redesign the main concert hall in Manhattan’s Lincoln Center, adding to a portfolio that includes an opera house in St. Petersburg and Jerusalem’s city hall. The wider lesson for a country that’s left itself at mercy of the commodity cycle is to climb up the value chain and outside the border, Diamond said.

Diamond in his Toronto office.
Diamond in his Toronto office.
Photographer: Cole Burston/Bloomberg

“It was too easy for the barons who owned the coal mines, or the lumber yards, or the oil,” he said. “Too easy for the very wealthy to simply sell our raw products because they didn’t have to do anything else to get rich.”

The riches have dried up in any case: the two-year oil slump has mired Canada in one of the weakest stretches of growth in its history. So there’s some urgency to the search for alternative models. And Prime Minister Justin Trudeau has staked out his version: an economy built on an army of highly educated white-collar workers, drawn from the world’s smartest and brightest, managing global businesses and producing services for the rest of the globe—from games design in Montreal to high-tech in Waterloo and Toronto’s powerful financial services sector—all closely connected to, and fed by, the country’s world-class universities.

Trudeau set the tone in a speech at this year’s World Economic Forum in Davos: “Canada was mostly known for its resources. I want you to know Canadians for our resourcefulness.”

There are reasons to think Canada could pull it off—it’s already moving in that direction, in fact. Service exports have been a bright spot amid the general gloom, growing at twice the pace of total overseas sales. Professional-type jobs are also the biggest contributors to employment growth.

And there are grounds for skepticism. Trudeau’s plan is a full-on embrace of the sort of post-industrial globalization that’s on the defensive across the rich Western world—blamed by Donald Trump or the Brexit movement for stagnant wages, growing inequality, the rise of the metropolis at the expense of the hinterland, and worries over immigration. Plus, it’ll require a departure in Canada’s economic history.

The country has never had a particularly innovative economy: There are no Canadian companies among the world’s top 200 spenders on research and development. Nor has it been good at producing globally competitive services. Productivity growth has consistently lagged and exports are more tilted toward goods than in any other Group of Seven developed nation.

Many of those are commodities, but during past busts the country has relied on manufacturing, coupled with currency depreciations, to weather the storm. Now, it has only the latter. The loonie touched its lowest this year since 2003 but China and Mexico have long since eaten Canada’s lunch in low-cost industry.

A telling case is the unfolding saga of General Motors Co.’s presence in the country. The automaker has promised to hire 700 engineers to research and design high-tech cars. Trudeau hailed the investment as proof Canada is on the "cutting edge."

But the company has declined to commit to its manufacturing operations in Canada, and labor unions—which embarked on what they’ve portrayed as make-or-break talks with the three big U.S. auto firms this month—are worried. “There is no doubt in my mind that GM plans on closing its Oshawa plant,” Jerry Dias, head of the 23,000-strong auto-worker group Unifor, told Bloomberg. That could bring job losses that are many multiples of the R&D gains.

Trudeau and his Liberal Party have an assertive environmental agenda, one reason their new paradigm appeals: services are cleaner than oil or factories. The Liberal-run Ontario government is implementing a new carbon cap-and-trade system this year that’s unpopular with factory owners. It will raise costs, one reason that plants may continue to close down, even though the weak currency should be helping them.

Here is how one manufacturer sees it. “When I hear politicians of various stripes talk about developing the economy they talk about a new economy that is knowledge-based and it’s an innovation-based economy,” said Dennis Dussin of Alps Welding Ltd. near Toronto. “Those are all kind of code-words for everything that’s not manufacturing.”

So if manufacturers won’t do the heavy lifting, who will?

Enter Diamond. The world-renowned architect employs 180 people, including 140 architects, in an airy but respectfully renovated early 20th-century building in Toronto’s Fashion District. It was Canada’s education system that brought him to the country—he set up the post-graduate architect program at the University of Toronto in 1966—but his eye has always been turned outwards.

Diamond says his experience is that “little is done to assist those who are exporting services.” He’s repeatedly clashed with officials who have failed to offer Canadian architects the kind of support their foreign counterparts routinely get—and which Trudeau is now promising. In particular, Diamond would like to see the government create a system to alert Canadian companies of international projects that are up for bid.

Diamond in his Toronto office.
Diamond in his Toronto office.
Photographer: Cole Burston/Bloomberg

Peerless Clothing Inc., founded in 1919, offers another success story along Trudeau-friendly lines. If you’ve bought a Ralph Lauren or Calvin Klein suit anywhere in the U.S., there’s a good chance Peerless was involved. The company has cut back production of suits in Montreal, outsourcing that work to places like China—but it’s reinvented itself as a logistics specialist, managing just-in-time inventories for retail customers.

Also promising are the increasing number of direct foreign investments by Canadian companies, something new in a country that’s long relied on importing capital. One example is Montreal-based WSP Global Inc.’s $1.3 billion acquisition of a U.S. construction firm that’s helping win infrastructure business south of the border, such as California’s proposed bullet-train.

Bank of Canada Governor Stephen Poloz points to other benefits. They support “jobs in Canada in areas such as research and development, engineering, design and marketing, not to mention lawyers, accountants, and executives who manage the operation from home,” he said in April.

Balanced against that, of course, are other job losses—potential ones in the GM case, actual ones at Peerless. Even though the menswear company’s reinvention has made it a global success, its workforce in Canada is down by about one-third.

Overall, the math is unforgiving. The Bank of Canada estimates income losses from the fall in oil exports alone at about C$60 billion annually—equal to about all the income the country generates from commercial service exports.

Jack Diamond
Jack Diamond
Photographer: Cole Burston/Bloomberg

Even in financial services—a strength for Canada’s economy—the country has a minor presence. Its banks are stable, but mostly local. No Canadian lender made it to the list of globally systemically important institutions identified by the Financial Stability Board, an international regulator.

It’s hard to see anything on the immediate horizon that can come close to making up for the losses the country is experiencing from the commodity bust. But if the numbers say one thing then Diamond in Toronto, putting his faith in Canadian resourcefulness, says another.

It all comes back to taking advantage of the expertise at our own doorstop for Diamond. “We have a very rich source of human capital in this city which is not well exploited,” he said, referring to a second generation of urban, highly educated Canadians. “The great news is that they’re here—and they’re coming.”