We’ve just released the first research study that kicks off a multi-year research initiative that I’m directing at the IRPP.

This work continues our tradition of comprehensive, longer-term policy research on issues that matter to Canadians. This will be volume 6 in The Art of the State series. It’s called, Redesigning Canadian Trade Policies for New Global Realities, and in it, we’ve commissioned research from a diverse and impressive group of experts from Canada and abroad– including leading academics, government researchers, practitioners and stakeholders.

Together their work will analyze how changes in global commerce, technology and shifting economic and geopolitical power are affecting Canada, and what this means for our policies.

The supply chain mindset
The first advance chapter release is from Ari Van Assche (IRPP research fellow, associate professor in international business at HEC Montréal, and co-editor on this volume).

We hope that Ari’s paper will help initiate a broader discussion on the need for Canadian governments to redesign their trade policies to better reflect the changing realities of global commerce.

As one of these realities, in recent decades, production processes have become more globalized as tasks are separated and performed in different locations– often spread across countries as part of global value chains (GVCs). In fact, most international trade now involves exchanging not finished goods, but intermediate inputs, which countries increasingly use to produce their own exports.

Ari’s paper provides a nice accessible overview of recent research in this area. He describes how most firms had traditionally viewed international trade as a way to expand their sales into foreign markets, but that companies in GVCs have now developed a ”supply chain mindset”. For these firms, global business is not only about the destination, but also the journey. They use international expansion to reduce production costs, access foreign technology and diversify their exposure to supply chain shocks.

At the same time, they must increasingly deal with the complexities of moving goods, people and information across borders in multistage production systems. The growing supply chain mindset is leading to demands for trade policies that will ”grease the wheels of GVCs” by reducing trade barriers at and behind the border.

New empirical evidence; economic opportunities for Canada
Ari thinks that policy-makers should heed these concerns. Using new value-added trade data developed by the OECD/WTO, he presents new cross-country empirical evidence that GVCs have generally been good for growth–specifically, that over the past decade and half, countries that have integrated more rapidly into GVCs have also tend to have faster output and employment growth.

Here’s a scatter-plot of that first positive correlation (which holds up in regression analysis that includes year, country, and industry ”fixed effects”).

Van_Assche_scatter_plot

Ari is careful not to push a causal interpretation of his results too far (it’s possible that faster economic growth facilitated faster GVC integration– in addition to, or perhaps instead of, the other way around). But, his estimates suggest that increased GVC integration might deliver broader economic benefits to Canada, particularly because we’ve not kept pace with other countries in this regard.

To illustrate the magnitudes involved, his regression estimates imply that if Canada had simply maintained its GVC trade as share of GDP over 1995 to 2009 (rather than falling by 1.5 percentage points), our real GDP per capita growth would have been nearly 0.2 percentage points higher per year over this period, all other things equal.

Policy implications
Having identified the potential for better economic performance in Canada, Ari offers some general policy advice on how to realize it.

First, he stresses that getting the basic framework policies right is more important than ever. This includes policies to promote competition, develop human capital, maintain stable macroeconomic policies and attract highly-skilled immigrants– all of which can foster a business environment that’s conducive to performing high-value-added tasks in Canada.

The “supply chain mindset” adds some new recommendations and areas of policy focus. Ari says that the federal government should strive to create an environment where Canadian firms can link rapidly, safely and reliably with other value chain nodes (which, in part, requires efficient and fair enforcement of contracts and intellectual property rights). They should liberalize trade on both the export and import sides. And they should pursue a variety of action to improve transportation infrastructure, communications networks, cross-border data flows and customs procedures, and work to better harmonize Canada’s regulations with those of our major trading partners.

Several broader changes would help to implement this new policy approach:

  • improved policy coordination across government departments;
  • enhanced support for multilateral trade negotiations, agreements and dispute settlement at the World Trade Organization;
  • more analysis of recently developed value-added trade data to better understand how Canada fits into GVCs; and
  • better communication to the public of the economic benefits of GVCs to garner support for these policies.

In this short video, Ari provides a quick overview of his paper, and I’d encourage you to read the complete study here.

Upcoming research
Ari’s paper is the first to be released of several studies that we have underway on GVCs. Next week, we’ll release another chapter in this theme written by Emily Blanchard (associate professor at the Tuck School of Business at Dartmouth College in the United States).

Please check back in with the IRPP to follow this research initiative. We’ve been busy and there are many more chapters to come!