By Gary Norris, The Canadian Press

TORONTO - Canada provides the lowest-cost location for business among established industrialized countries, nosing out the United States and Australia, according to a KPMG study that also articulates the erosion of Canada's advantage because of the strong loonie.

"Business costs in these three countries are virtually equivalent, with less than one per cent separating these countries," the international consultancy's report released Thursday says.

The Canadian and Australian advantage declined since the previous report in 2006 while the United States improved to third from seventh in the 10-country survey, as "currency change is a central theme," commented Glenn Mair of MMK Consulting, which partnered with KPMG in the survey.

The result was "an effective dead heat" in terms of costs - though all three were about one-quarter more expensive than Mexico, which was added to the study for the first time and was the cost leader among the countries scrutinized.

The survey noted that while Canada has lost its previous cost advantage over the U.S., it has gained ground against Europe.

And it says Canada retains a strong position in so-called non-cost components of business-location decisions, which "may be equally or more significant than cost factors."

It found Canada ranks first in education outcome, based on international testing of high school science skills, while the United States spends the most on schooling but finishes only fifth in those tests.

Canada's overall cost index, which bottomed out at 85.5 per cent of U.S. levels in 2002, now is 99.4 per cent of the average American level, compared with 79.5 per cent for Mexico and 100.2 per cent in Australia.

Among large cities, Montreal is 1.5 per cent below the American average while Toronto is 1.5 per cent above. Vancouver is 4.2 per cent over the U.S. level - the highest in Canada but "relatively in line with San Diego, Denver and Seattle," Mair told a conference call.

New York City is 9.2 per cent costlier for business than the U.S. average, while the expense premium is 29.3 per cent in London, 7.1 per cent in Paris, 21 per cent in Frankfurt, 2.7 per cent in Sydney, Australia, and 14.8 per cent in Yokohama, Japan.

Costs in Puebla, Mexico, by contrast, were 20 per cent below the U.S. average.

"Popular perception may have been that Mexico's cost advantage might have been larger than this, and certainly it is if you look at labour in isolation," Mair said.

The study says labour represents 58 to 74 per cent of total location-sensitive costs for manufacturers, and 79 to 88 per cent for non-manufacturing operations, ahead of facility costs at eight to 19 per cent.

France is the least costly big European country, about 3 1/2 per cent above the United States, with its position improved by recent business tax breaks.

Britain and the Netherlands were next, with costs about seven per cent above U.S. levels, followed by Italy with an eight per cent disadvantage, Japan with costs 14 per cent above America's and Germany at almost 17 per cent.

"The United States has experienced the greatest gain in cost competitiveness since 2006, improving its position significantly against all other countries as the value of the U.S. dollar has declined," KPMG noted.

The euro-zone countries were hit by a 24 per cent appreciation in their currency against the greenback since 2006, while the Canadian dollar appreciated 17 per cent and the Australian dollar rose 18 per cent, KPMG said.

Britain has suffered even more than Canada from currency swings and other effects since 2002, when its costs were 86.9 per cent of U.S. levels compared with 107.1 per cent now.

Mark MacDonald, director of the KPMG Competitive Alternatives survey, said it made no effort to compare the 10 surveyed countries with those elsewhere in the world, such as Asia. Mexico was added to the study in place of Singapore, which topped the previous list.

The basis for the cost comparison is the after-tax cost of startup and operation over a 10-year period.

Business cost indexes in major well-off countries and Mexico, according to global consultancy KPMG, with the average U.S. level representing 100. (Ranking in previous study two years ago is bracketed):

1. Mexico 79.5 (not ranked)

2. Canada 99.4 (2)

3. United States 100 (7)

4. Australia 100.2 (not ranked)

5. France 103.6 (3)

6. United Kingdom 107.1 (6)

7. Netherlands 107.3 (4)

8. Italy 107.9 (5)

9. Japan 114.3 (8)

10. Germany 116.8 (9)

Mexico was added to the survey this year, replacing Singapore, which topped the 2006 list.

Cost indexes of Canadian cities in alphabetical order (U.S. average equals 100):

Abbotsford, B.C. 101.3

Barrie, Ont. 101.3

Belleville, Ont. 96.1

Brandon, Man. 93.8

Calgary 102

Campbell River, B.C. 100.3

Charlottetown 95.8

Chatham, Ont. 96.9

Chilliwack, B.C. 101.6

Courtenay, B.C. 100.6

Duncan, B.C. 100.5

Edmonton 99.9

Fredericton, N.B. 95.3

Gatineau, Que. 97.7

Grande Prairie, Alta. 99.8

Halifax 96.6

Kamloops, B.C. 99.8

Kelowna, B.C. 99.0

Lethbridge, Alta. 96.2

London, Ont. 95.1

Medicine Hat, Alta. 95.1

Moncton, N.B. 94.9

Montreal 98.5

Moose Jaw, Sask. 93.5

Nanaimo, B.C. 100.2

North Bay, Ont. 96.5

Ottawa 97.5

Penticton, B.C. 97.5

Pictou, N.S. 94.5

Prince Albert, Sask. 94.2

Prince George, B.C. 100.1

Quebec City 96.3

Quinte West, Ont. 97.2

Red Deer, Alta. 97.2

Regina 97.8

Rimouski, Que. 93.0

Saskatoon 96.7

Sault Ste. Marie, Ont. 99.4

Sherbrooke, Que. 92.8

St. Catharines, Ont. 99.0

St. John's, N.L. 99.5

Sydney, N.S. 97.0

Toronto 101.5

Trois-Rivieres, Que. 95.1

Truro, N.S. 93.3

Vancouver 104.2

Vernon, B.C. 98.1

Victoria 101.4

Waterloo, Ont. 98.2

Windsor, Ont. 99.5

Winnipeg 97.7