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Canada’s Expanding Trade Agenda
Europe, Asia and implications for business and the economy
Glen Hodgson
Senior Vice President and Chief Economist
The Conference Board of Canada
December 2015
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1.Demographics and aging
2.Globalization
3.The Internet and digitization
4.Climate change
Four big global drivers today
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• Expansion of global trade and investment
• Dominance of global value chains
• Rise of emerging markets
• Integrative trade – integrated two-way flow of goods, services, investment
• Role of FDI and foreign affiliates
Globalization
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• Coined the term “integrative trade” in 2004 while at EDC
• Essentially modern international business, build around the integration of all key components to create value:
– exports
– imports used to create exports
– both goods and services
– FDI, into Canada and abroad by Cdn business
• Global supply or value chains a key aspect of integrative trade
• EDC and DFATD use integrative trade as foundation of their business strategies
What is integrative trade?
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• Builds global value chains and helps to make firms more competitive
• Conference Board research in Asia and Europe the importance of all components to business success
• In past decade, Canadian trade had evolved toward:
– weaker trade growth compared to 1990s
– more trade diversification, less with U.S.
– stronger growth in services trade than goods
– greater role for FDI, especially abroad
– firms seeking access as supplier to global value chains
Impact of integrative trade
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Add Value to Products
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Early 20th century:
• high tariffs to shield Cdn manufacturers
• result: US capital leaps over barriers
• foreign control of manufacturing
• branch plant economy, inefficient scale
Post WW 2:
• multilateral system and GATT
• slow reductions in trade barriers thru trade rounds
Stylized facts on Canadian trade
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1980s-90s:
• shift to bilateral / regional focus -- 1985 Shamrock summit
• 1989: FTA w U.S. -- largest ever bilateral deal
–focus on tariffs, dispute settlement
• 1993: NAFTA – Canada joins U.S. & Mexico
• early 1990s: WTO Doha Round begins...
– breaks down over agriculture
– and is still going … ever to be completed?
Stylized facts on trade (cont.)
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1990s-2000s:
• strong trade growth with U.S. after FTA & NAFTA
• Canada goes into trade policy hibernation
• only minor bilateral agreements - Chile, Costa Rica
2006-07:
• Quebec pushes for EU engagement
• Feds get nudged into negotiations
• renewal of broader interest in free trade agreements
Trade policy stagnation & restart
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80
100
120
140
160
180
200
U.S. Non-U.S.
Sources: Industry Canada; Statistics Canada; The Conference Board of Canada.
Canada’s Two-Gear TradeCanadian bilateral trade, index 2001=100.
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Source: Statistics Canada; The Conference Board of Canada.
Canada’s Sub-Par Export Performance real export index, 2000q1=1
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
Services
Goods
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-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Japan Euro zone North America Latin America Asia Pacific Asia Pacific(excl Japan)
2014 2015 2016
Source: Consensus Economics
Developing Asia Leading the Way Per cent change, real GDP
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0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
India Brazil China EU Japan Mexico UK
2014 2025
Sources: Industry Canada; The Conference Board of Canada
Canadian trade: changes to come Canada’s goods exports, share of total.
.
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The European Opportunity
World’s largest importer of
products
Source of great technologies,
ideas, products, and services
The EU market is the world’s largest economy
EU is a huge market with
wealthy customers:
Population of 509 million
Per capita GDP 34,500 $US
(PPP)
Europe is also a gateway to world
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Source : OECD StatExtracts.
European Growth Prospects Improving
Eurozone potential output, constant prices, % change from previous year
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
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• Regulatory and other non-tariff barriers
• Barriers to people movements
• Regional and sub-regional markets differ
• Market uncertainty given ongoing crisis
• Highly sophisticated, competitive markets
Challenges Canadian Companies Face
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• Breaks the mold - most expansive Canadian or EU deal
• Catch up with those that have an EU deal -- and stay ahead of the U.S.
• Tariffs mostly gone, but about more than goods
• Services, people, investment, intellectual property
• Access to huge government contract market
CETA: beyond the headlines
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• Mechanism to prevent future non-tariff barriers, e.g. regulations (Canadian and EU regulators to work cooperatively)
• Canadian body can assess whether meeting EU standards
• Expands agricultural quotas but no fundamental reform --preserves supply management
CETA: beyond the headlines (cont.)
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Sources: The Conference Board of Canada; The Conference Board Inc.
Tap Into European Demand: No Single Europe
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Challenges: Tariffs High in Some Sectors trade weighted tariff rate on Canadian exports to the EU, per cent
0 2 4 6 8 10
Crude metals and minerals
Pulp and paper
Mineral fuels
Other transp. equip.
Industrial M&E
Other consumer goods
Primary metals
Electronics
Aerospace
Wood products
Chemicals, rubber and plastics
Agriculture
Motor vehicles and parts
Food & beverage
Post-CETA
Pre-CETA
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Most Tariffs Eliminated Immediately (per cent)
0 1 2 3 4 5 6 7 8 9 10
Other transportation equipment
Industrial machinery and equipment
Other consumer goods
Primary metals
Computers and electronics
Aircraft and parts
Wood products
Chemicals, rubber, and plastics
Agriculture
Motor vehicles and parts
Food, beverage, and tobacco
Prior to CETA
2016
2018
2020
2022
22
*Is comprised of wood products and other transportation and equipment.
Source: The Conference Board of Canada
$1.4 Billion More Compared with No-CETA (CETA scenario minus no CETA scenario, millions of $2007; level difference)
0
200
400
600
800
1000
1200
1400
1600
2016 17 18 19 20 21 22
Chemicals, rubber, and plastics
Agriculture
Other consumer goods
Food, beverage, and tobacco
Computers and electronics
Industrial machinery and equipment
Motor vehicles and parts
Primary metals
Aircraft and parts
Other *
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Largest Percentage Gains for Food Products impact of CETA tariff removal on exports, difference from baseline, per cent
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0
Primary metals
Wood products
Aircraft and parts
Industrial machinery and equipment
Total
Other transportation equipment
Other consumer goods
Agriculture
Computers and electronics
Motor vehicles and parts
Chemicals, rubber, and plastics
Food, beverage, and tobacco
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• Will remove tariffs, some industries will gain
• Non-tariff barriers – benefits less transparent, potentially more significant
• Companies that expect trade deals alone to boost sales will see limited gains
• For full gains, companies will need to innovate, add value
• Need to adapt to regional demands, do homework, pick spots
Business implications of CETA
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Implications for business:Evidence-based keys to success
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Implications for business: winning strategies
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StrategyWhat happens to
EU sales?
Does company
remain in EU?
Exporting once company has been
well established Not significant
Exporting to the US before EU Not significant
Going to Western Europe First Small firms only
Frequently introducing new productsMore important than for
emerging markets
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Smaller Companies Can Succeed
-2
0
2
4
6
8
10
Small Large
EU sales per firm (C$ million, annualaverage)
EU sales growth (% change, annualaverage)
Number of years in EU
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• Small companies can succeed if they are prepared
• Different routes to success – may require on-the-ground presence, or via foreign company in Canada
• Competing on cost alone not enough, must differentiate
• Key ways for companies to differentiate themselves:
• Target niche markets, develop in-depth expertise
• Integrate services and products, provide “solutions”
Summary: implications for business
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• Like CETA, TPP goes far beyond eliminating tariffs
• Talks led by Australia, NZ ambitions
• 12 countries, including U.S. and some Asian markets
• Canada and Japan late to join the party
• US: Administration has delegated authority from Congress
– an Obama legacy project
Trans-Pacific Partnership (TPP)
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TPP: implications
• TPP text has finally emerged
• Next: actions of a new federal government
• Limited choice: unlikely we will snub U.S. and TPP partners
• Others will now have comparable access to U.S. market
– so expect more competition
• Becomes all the more important to take advantage of improved market access to Asia, Latin America
• Sleeper issue: Chinese accession and high standards
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• More trade may be priced in other currencies…
• But hard to see others rivaling U.S. dollar as dominant reserve currency
• EU: not an optimal currency area
– very different levels of development
– no common fiscal policy or built-in transfers
– financial regulations not harmonized
– linguistic and cultural barriers to movement
• China: closed capital markets
– market forces still absent in FX market
Other issue: trade and reserve currencies
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• Trade is a key driver of Canadian growth and prosperity
• Canada has finally embraced regional free trade
• CETA is a big deal for Canada and EU – need to complete ratification!
• Canadian firms can succeed in trading and investing in Europe -- if they have a well-defined plan
• TPP offers the next major trade frontier – hard not to complete
Conclusions
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