In some respects, Canada has matured as a trading nation during the past two decades. Exports now account for almost one-half of our total economic out- put, up from a one-quarter share in the 1980s. By this meas- ure, we are the leading export nation of the G-7 countries. During this period, we have also managed to increase our exports in some new-economy areas such as telecom equip- ment, aerospace, and multimedia services.
Reflecting this progress, our national leaders have not been shy in extolling Canada’s accomplishments. Allan Rock described Canada, in November 2002, as ”œone of the greatest trading nations on earth,” while John Manley spoke about Canada as a ”œnorthern tiger.”
Moving beyond the generalities and rhetoric, however, reveals a more troubling state of affairs in the area of Canadian trade competitiveness. The facts show that Canada is not a particularly dynamic nor diversified trading nation ”” indeed our exports remain largely based in low value-added ”œrocks and logs,” we are increasingly beholden to one global customer, we are losing market share in the world’s fastest growing economies and we are not aggressive in exporting our infrastructure skills nor other value-added expertise.
In export diversity, four natural resource sectors continue to account for almost one-half of our total annual exports. Two of these ”” energy and forest products ”” generated a com- bined trade surplus of $80 billion in 2001, an amount that exceeds Canada’s overall trade surplus by some $25 billion. Reinforcing this depend- ence on low value-added exports is the fact that our surplus in these areas has increased, not decreased, over the past five years. We are becoming more dependent on natural resource exports for our foreign exchange, not less. On the flip side, Canada continues to run large annual trade deficits in high skill areas such as industrial machinery, consumer goods and business services.
A continued reliance on commodity exports reinforces the decline in Canada’s currency ”” from 85 cents US in 1993 to lows below 62 cents before the recent rally to nearly 75 cents. This decrease represents a relative decline in Canadian wealth of over 20 percent in less than a decade ”” a key failing of Paul Martin’s otherwise strong period as finance minister. As competition in natural resources intensifies, it is likely that currency traders will continue to factor these commodity-related vari- ables into the value of our currency.
Beyond natural resources, much of the remaining export success that Canada enjoys is tied to the automo- tive and aerospace sectors and is, in large part, a function of government policy rather than an ingrained trad- ing culture. For example, government policy has played a major role in the global success of Bombardier through technology funding, federal procure- ment and trade finance, while Canada’s integration into the US auto- motive cluster reflects business response to the Auto Pact.
Geographically, the markets of China, Brazil and India encompass almost one-half of the global popula- tion and enjoy rapid economic growth rates. China, for example, expands its economy by 7 to 8 percent annually ”” several-fold larger than Canadian or US growth ”” and features even greater demand growth in key sectors such as clean energy, urban infrastructure and transportation. The match between Canadian capabilities and the needs of these countries is evident. For exam- ple, Canada has arguably the world’s best telecommunications, power and social infrastructure ”” critical areas of expertise that are sought by these developing countries.
These considerations could lead one to expect that Canada is making great strides forward in capturing busi- ness in these countries. This is not the case. In fact, Canada’s share of the Chinese import market has actually declined over the past decade – from 1.8 percent in 1990 to 1.7 percent in 2000. More significant declines are seen in India, where our market share collapsed from 1.3 percent to 0.7 per- cent during this decade, and in Brazil where our share fell from 2.1 percent to 1.9 percent. In the world’s most rap- idly growing markets, Canada is becoming a progressively smaller play- er vis-aÌ€-vis our competition.
In the 2002 global competitiveness scorecard compiled by the World Economic Forum, Canada has fallen to eighth spot, in its worst ranking since 1996. While such studies carry many limitations, this conclusion does in any event reflect the weak exchange rate and poor access to credit that are intertwined with our trade competitiveness.
Our modest competitiveness as a trading nation is also reflected in the fact that Canada has not produced a private sector bank with global business hori- zons. In this respect, we are the only G7 nation without a bank that is committed to international markets, as reflected in a global network of trade and investment support expertise. While Germany fea- tures Deutsche Bank, France BNP-Paribas, and the US Citibank, to name a few, Canada continues to feature banks that focus, to an overwhelming extent, on the cozy Canadian and US world of mort- gages, wealth management and credit cards. Moreover, the ongoing merger debate seems to be oriented around the banks simply becoming larger providers of these retail banking services.
These symptoms reflect a malaise in Ottawa in many dimensions of our national trade strategy. This article dis- cusses three pillars of the trade portfolio ”” trade policy, trade promotion, and invest- ment/innovation ”” and pro- poses reforms that would position Canada for future success. Before these improve- ments can be made, there is a need to change the gover- nance structure on which Canada bases its trade strategy.
The champion of these major reforms would, by necessity, be the prime minister of Canada. Without such authority, the successes of even the most dynamic of trade ministers would be limited to tinkering at the margins. Prime Minister Chrétien has attached low priority to the interna- tional trade portfolio over the past decade, with the result that his trade legacy will be limited to leading Team Canada trade missions and signing a free trade agreement with Costa Rica. The most evident illustration of the problems within Canada’s trade strate- gy rests in the outdated structure and culture of the Department of Foreign Affairs and International Trade (DFAIT) ”” where a foreign affairs minister and a trade minister are housed in what is essentially a senior-junior relationship.
Canada is almost five decades removed from the era of our true diplo- matic influence ”” the glorious days of Lester Pearson and the confluence of a relatively strong Canadian military, dev- astated postwar European economies, and a call for global institutions. The combination of these realities in the late 1940s and 1950s saw Canada help estab- lish the United Nations and NATO, con- tribute to the concept of foreign development aid, and minimize some Middle East tensions.
The subsequent decades, however, have been dominated by the emergence of international trade and globalization as the prime foreign policy/development tool, drawing on advances in production and communications technology, rapid- ly increasing investment flows and declining trade barriers. As one measure, the proportion of world economic out- put attributed to trade has increased from 8 percent in 1950 to some 30 per- cent in 2002. Global foreign investment flows have shown even greater growth during these decades. Both figures dwarf the growth in worldwide flows of devel- opment aid.
There are only a handful of coun- tries in the world where Canada has more important foreign diplomatic than trade relationships, and even some of these are debatable. One could argue that even in the cases of Israel and Cuba we have more significant interaction and influence on the trade front than on the diplomatic front. Canada also trades some $2 billion per day with the United States ”” over $1.5 million per minute ”” as a further illustration of globalization. Canada’s ”œforeign policy” influence on the US, to the extent that we have any, flows from the fact that we represent the single largest export market for 37 states and from the fact that we cross each other’s border to consume/deliver goods and services over a half-million times daily.
Canada’s governance structure has not adjusted to reflect this age of global- ization. Foreign affairs ministers and offi- cials still drive the departmental limos while trade ministers and officials scram- ble into the back seat. The foreign min- ister retains lead authority for DFAIT ”” approving all delegation lists and similar department-sponsored actions, main- taining oversight for three secretaries of state, overseeing the international coop- eration minister and in turn the Canadian International Development Agency (CIDA). The majority of our ambassadors abroad continue to be drawn from the foreign affairs, rather than trade, stream. The foreign minister is housed in palatial surroundings on the top floor of the Pearson building in Ottawa, while the trade minister is crammed into small surroundings sever- al floors below. Trade, as a federal gover- nance priority, continues to be grouped with soft-power, landmines, human security, development, international criminal court, and similar fuzzy areas of feel-good internationalism.
There is a need for Canada to reori- ent the existing foreign affairs-trade rela- tionship ”” to reflect the present era. One way of doing this would be to replace DFAIT with a department of trade and innovation (DTI) with lead co- ordinating responsibility for trade, investment climate, foreign aid, and US border management. In this context, the responsibility for foreign affairs could either be captured by a foreign minister within DTI or shifted to the Prime Minister’s Office as an additional minis- ter served by the Privy Council Office. In the interest of prudent fiscal manage- ment, government leaders should also eliminate the three existing secretary of state positions from DFAIT ”” these are redundant and contribute to the image of a bloated federal Cabinet.
A second illustration of a faulty foundation is Canada’s approach to man- aging the US border ”” where the Revenue Agency is responsible for cus- toms collection and border manage- ment. A century ago, Canada relied on customs duties for a sizeable portion of government revenue ”” indeed in 1920 such duties accounted for some 37 per- cent of total federal revenues. In this sense, it was logical to house responsibility for bor- der customs and duties with- in the national revenue portfolio. Today, due to tariff cuts, duty revenues amount to little more than a rounding error ”” presently con- tributing around 1 percent of total feder- al revenues. Yet responsibility for the border, and customs collection, remains with the Revenue portfolio, which has little expertise in the critical issue of lob- bying for an efficient, effective, and mod- ern US border. All Canadian exporters pay a price for this awkward structure, although it is small businesses who have the least ability to resolve and withstand border delays and obstacles.
The downside of the existing struc- ture became evident in the after- math of September 11 as the US border closed, truck line-ups in the tens of kilo- metres formed, and the Canadian econ- omy became imperilled. In Trade Minister Pierre Pettigrew’s office, it was unclear which minister was responsible for leading on this critical border-trade issue. The revenue minister also puzzled at the cumbersome governance struc- ture, wondering why a portfolio nor- mally tasked with designing GST rebates and delivering child benefits was theoretically in charge of managing the US border-trade relationship. John Manley, then foreign affairs minister, sensed this gap, stepped in to fill the void with some confident public remarks and became the de facto minis- terial leader of the Canada-US relation- ship. Manley continues to hold this lead responsibility as deputy prime minister, overseeing such trade support activities as the Smart Border Initiative.
While it may be difficult to formally shift border/customs management away from its century-old home, there is a need to provide the trade portfolio with some formal oversight of this responsi- bility. In this sense, the trade minister’s primary border objective would be to secure growth and advance Canadian interests in the United States, rather than the present Revenue Agency focus on processing paper and collecting duties.
This lead border responsibility would also include an important co- ordinating role, such that the security, transport, defence, immigration, foreign, cultural and host of other Canadian interests are effectively protected and advanced in the United States. This co-ordination would best occur through the formation of a US relations cabinet committee, supported by a Privy Council Office secretariat, and chaired or cochaired by the trade minister.
There has long existed a level of mistrust between the aid and trade communities in Canada. The former draws on grant money and involves CIDA acting in liaison with hundreds of Canadian nongovernmental organizations and aca- demics, serving humanitarian and social objectives. This community views exporter activities as profit oriented, debt-generating, and noncaring. For their part, many exporters believe that aid money has often been wasted over the years and that NGOs and academics may be too small, diffuse or inexperienced to generate truly beneficial and sustained development results.
The present federal governance structure reinforces the disconnect and mistrust between aid and trade by hav- ing no linkage between the two commu- nities. There is no reporting relationship between the CIDA minister and the trade minister, for example. There is no ongoing dialogue, no mutual planning, no discussion on priority countries, no exchange of sectoral development prior- ities. Rather than following such a co- ordinated approach, the federal government has adopted a silo strategy where development aid is channelled through, and jealously guarded by, the foreign affairs side of DFAIT.
One negative of such an approach is that the trade/aid streams remain unco- ordinated, to the detriment of exporters, NGOs and recipient countries. Even more important, the aid stream itself develops in a soft manner, beholden to NGOs and academics. Canada’s aid sup- port stretches in all directions, trying to serve multiple interests ”” including over 65 countries and several dozen areas of technical expertise.
By way of reform, Canada’s inter- national development strategy should be developed and prioritized through a three-way dialogue involving the trade minister, the CIDA minister, and the foreign minister. There should be a dotted-line accountability that con- nects the CIDA minister to both the Trade and Foreign ministers.
The inner workings of government
Keep track of who’s doing what to get federal policy made. In The Functionary.
The Functionary
Our newsletter about the public service.
Nominated for a Digital Publishing Award.
While the main objective of this liaison would be to bring greater discipline and effectiveness to our for- eign aid spending, there would be a related benefit. The dialogue between the aid and trade ministers should be two-way, such that the international development perspective is systematical- ly integrated into Canada’s trade policy planning. For example, Canada’s trade approach toward Europe would likely take on a harder edge if our diplomats better understood the moral bankruptcy of Europe’s agricultural protectionism toward the developing world ”” exem- plified by an EU agricultural policy that provides a daily subsidy of $4 per cow, far more than the majority of the African population tries to live on. We would also be more likely to ease the trade pol- icy barriers which we ourselves maintain against developing countries in the apparel and agri-food sectors.
The CIDA/international develop- ment annual budget of $3 billion should be focused on fewer areas and countries. While this is more easily said than done, it is nonetheless important for Canada to focus on core strengths, to build an effective aid image in key areas, and to strengthen relations with inter- national development banks in these core areas.
Canada’s approach to trade policy over the past decade has comprised an ad hoc array of ini- tiatives, including a free trade agreement with Costa Rica, lengthy yet failed free trade nego- tiations with four small countries in northern Europe, and ongoing discussions with Singapore and four Central American countries. These initiatives, while requiring a noteworthy amount of trade negotiators’ time, are unlikely to generate significant annual benefit for our exporters ”” perhaps opening trade doors equivalent to a few hours of our US trade.
The cornerstones of Canadian trade policy remain the World Trade Organization Doha Round negotia- tions and the ongoing Free Trade Area of the Americas discussions.
Here again, it is unlikely that these two trade policy priorities offer much potential for Canadian trade growth over the next five years. Rather, these discussions will progress slowly, with or without Canadian impetus, and the federal government should redirect some of these resources toward activi- ties that have greater daily resonance with Canadian exporters. The FTAA, for example, is a complex undertaking that attempts to marry North America with 31 Central and South American countries, most of which have limited democratic experience, feature tradi- tions of corrupt business-government bidding practices, and have unsound financial and legal systems. Adding to these limitations is the reality that Brazil aims to become in effect the US of South America ”” in part through enhancing its existing Mercosur agree- ment. In this regard, it will work behind the scenes to obstruct progress toward a hemispheric trade agreement.
The WTO also faces many future hurdles, as it aims to evolve from its GATT origins, a small club of rich Western nations cutting tariffs, to its broader role attempting to oversee nontariff-related trade practices in some 150 countries. The jury very much remains out as to whether the WTO can evolve into a useful forum for decisions on nontariff barriers.
From Canada’s perspective, the WTO has not proven to be an effective decision-making body. A dispute between Canada and Brazil on regional aircraft subsidies, for example, is enter- ing its seventh year of WTO gamesman- ship ”” it took three years and considerable business lobbying for Canada to conclude that the WTO path was relatively useless and to then begin offering its own trade finance terms to match the Brazilians on specific con- tract bids. The WTO has also proven to be a nonviable option in resolving the softwood lumber dispute ”” too slow and subject to too many appeals. Some 10 formal trade actions have already been mounted by Canada on this file, with submissions representing a cumu- lative paper volume equal to one-half Canada’s annual softwood harvest. Potato disputes, wheat harassment, steel tensions and dairy issues also emerge at regular intervals from the US, further highlighting the impotence of the WTO (and NAFTA) as trade regulator.
Beyond WTO and FTAA, the trade policy option of ”œNAFTA-plus” is attracting increased public and media attention. Trade officials and academics have been musing over this issue for several years ”” musings that intensified in the confused aftermath of September 11. The existing NAFTA and its predecessor FTA have been effective in rationalizing Canadian exporters and formalizing US rights to bid on Canadian natural resources, and have consequently con- tributed to Canadian export growth. Many observers, such as the Canadian Council of Chief Executives, now call for enhancements to this agreement.
The implications of a Canada-US customs union would be more psycho- logical than substantive and such a pro- posal would introduce sovereignty concerns comparable to those raised during the 1988 free trade debate. Substantively, any present differences between Canadian and US customs policies are marginal and the positive economic impacts of a union would also be marginal. Negatives working against progress in negotiating a customs union would include reluctance on the part of the US, complications from the Mexican end and Canadian sovereignty con- cerns. A less contentious yet equally effective path for Canada would be to unilaterally harmonize most of our tariff rates to those in the US, such that rules- of-origin and related paperwork and inefficiencies can be eliminated. This measure could be one component of a trade security package that could be pro- posed by Canada to the United States in the aim of improving and broadening existing relations.
The prospect of freer trade with Europe has received recent discussion, and a business-government partnership has been in place for several years. However, in reality this option remains little more than a pipedream. The European Union government contin- ues to pay lip service to such talk and Pettigrew has been unable to convince his colleague Pascal Lamy of the merits. From Europe’s perspective, there would be no upside to freer trade with Canada. Under the present arrangement, Europe enjoys a $15 billion annual trade surplus, applies barriers against Canada in areas such as wine and biotechnology, and subsi- dizes its own priority sectors. Canada responds to this treatment by holding cozy biannual Canada-EU Summits and rewarding our diplomats with the cushiest of postings in historic European capitals. Unfortunately, there is little incentive on either side to change this arrangement.
Beyond improvements to our US relationship, the trade policy option that would generate the best results for Canada over the next decade would be to pursue a sustained effort at capturing greater market share in Asia. The Asian population is, on average, 10 years younger than Canada’s, and trade levels amongst Asian countries are growing rapidly. Key countries in the region are developing a noteworthy middle class, and countries such as China are project- ed to surpass the US in economic might within a decade. Canada has expertise to offer Asian countries in many areas.
As a top trade policy priority, Canada should propose and negotiate a ”œCanada-China Partnership for the Future.” This would capture the half- dozen areas that offer the greatest poten- tial for mutual growth, which could include telecommunications, environ- ment/clean energy, small aircraft, engi- neering and geomatics, financial services, and social infrastructure expert- ise. To be effective, such a partnership would have to be championed by the prime minister, including with new budget monies, CIDA funds, Program for Export Market Development funds, EDC support, climate change funds, a devel- opment finance Institution, and so forth. Similar priority should be attached to building a ”œCanada-India Partnership for the Future.” India is notorious for its bureaucracy and inconsistent approach to economic development ”” a partner- ship could aim to make progress on this front while highlighting to Canadians the opportunities which exist in this bil- lion-person market.
Any other trade liberalization strides that Canada could make in Asia, through freer trade with Japan or Australia for example, would also help Canadian firms gain a foothold in a region that will offer staggering market opportunities for decades to come.
Canada has a considerable invest- ment in trade promotion, centered around a cadre of some 600 trade com- missioners representing Canadian interests from postings in 140 cities. In recent years, this network has made good progress in more clearly defining what international support it can and cannot provide to Canadian businesses.
Beyond this first step, however, there remains a need to examine Canada’s international complement of expertise. For example, it is worth examining the question of whether we have enough trade development skills abroad. Are our trade support profes- sionals housed in the markets of tomorrow or the markets of yesterday? Why do we need so many bureaucrats in London, Paris and Rome? Should not these resources be shifted to high- er-growth regions such as the southern United States and China so that they can better support Canadian exporters? The PM should task the trade minister with conducting a re-engineering study of these questions.
One of the main trade support tools utilized by the federal govern- ment during the past decade has been trade missions ”” where a collection of Canadian companies travel to a foreign market and follow a structured program of meetings and events. The government organizes several hundred such missions each year, ranging in size from a handful of participants to a few hun- dred. The most visible of these has been the annual Team Canada mission, in which the PM, the premiers and over 200 business executives make a high- profile visit with the aim of advancing or closing export transactions.
A number of questions should be asked of this trade mission strategy. For example, one frustration that would reg- ularly face Pettigrew was that so many missions led by other ministers went off in various directions, each placing demands on our trade commissioners. Dealing with trade issues is an exciting role for a minister, particularly for those whose core mandate is domestic ”” for this reason, Natural Resources, Industry, Fisheries, Agri-Food, Heritage, and other domestic ministers have all led trade missions or built in-house trade expert- ise in recent years. But to what effect?
Despite amassing considerable business wealth in recent decades, Canada continues to demonstrate weak results as an innovative economy. We trail all G7 countries in R&D spending, ranking only 17th in the world. We rank 27th in developing unique products and processes. Most troubling is that these results exist despite Canada’s world- leading R&D tax treatment regime. This gap, again, relates to Canada’s lack of competitiveness as a trading nation.
Canada’s national success as an innovator is dependent on our develop- ing an aggressive involvement in global markets, which provide our businesses and workers with a potential reach 50 times larger than the domestic market. Canadian businesses should be designing products for world markets from the ear- liest stages, rather than adapting existing products after the fact. Similarly, govern- ment initiatives such as the vaunted ”œinnovation agenda” should be driven from a global market perspective, rather than through the usual domestic lens.
Exporters would be best served through a seamless delivery of the con- tinuum of federal export services ”” including market intelligence, financ- ing, training and trade promotion. These should all be under one minister. This solution would require the Canadian government to either place the industry and trade portfolios under the same minister, as was considered for Paul Martin’s original cabinet post in 1993, or to subsume many responsi- bilities of Industry Canada within a Department of Trade and Innovation.
In order to strengthen Canada’s international business culture, this department and minister should be charged with leading a review of gov- ernment policies or regulations that may work against building an innova- tive value-added economy. In this regard, the minister’s future perform- ance, mandate letter and annual departmental reports should be based on value-added measures, such as the extent to which Canada increases its global market share of engineering, geo- matics, power, clean-tech, biotechnolo- gy, aerospace, and IT-telecom contracts.
The global investment promotion and Brand Canada efforts of the federal government, so integral to our innova- tion strategy, have also been hampered by a lack of clear governance and lead- ership. Canada presently has among the most compelling investment messages in the world, as reflected in the findings of the biannual KPMG Consulting study. While Canada has a good mes- sage to sell, we do not have a sufficient- ly skilled cadre of sales professionals posted abroad, nor do we deliver the message in a systematic or sustained manner. The re-engineering exercise described earlier should include this investment-promotion dimension, such that we have the right skills in the right cities. In this regard, it is evident that officials being considered for ambassa- dorial appointments should have a strong grounding in the trade and investment competency areas.
The author’s views do not nec- essarily reflect those of any Canadian trade organizations, although this article draws from discussions with various exporters and trade officials.
