Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 16 - Evidence
OTTAWA, Tuesday, May 5, 1998
The Standing Senate Committee on Foreign Affairs met this day at 4:03 p.m. to consider the consequences for Canada of the emerging European Monetary Union and other related trade and investment matters (briefing on Canada-Europe trade and investment trends).
Senator John B. Stewart (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, as you know, we have been concentrating on Canada and the Asia-Pacific region. We have another reference, however, one which directs our attention to the consequences for Canada of the emerging European Monetary Union and other related trade and investment matters.
Given the fact that the EMU is moving forward these days, we thought it would be useful to turn to that other reference, and ask for information on what trends can be detected in trade and investment between Canada and Europe. Our witnesses will serve to bring us up to speed on a certain aspect of Canada's economic relations with the European Union.
The witnesses will use a fair number of charts, and it would be helpful to those who read the record of this meeting if those charts could be reproduced in that record. Will one of the committee members move a motion for the incorporation of such graphs?
Senator Di Nino: I so move.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: We will incorporate those graphs and illustrations in the record of today's meeting.
In the past, we have had some very good presentations from Statistics Canada on our trade relations with Europe, as well as with the United States. I am looking forward with a great deal of anticipation to what our witnesses have to say today.
Mr. David Dodds, Director, International Trade Division, Statistics Canada: Thank you for the opportunity to talk about this issue. Hopefully we can shed light on some issues and some trends in our trade with the European Union.
My two colleagues are Yves Gervais, who is responsible for much of the production of our trade numbers and also has done a lot of analytical work in Statistics Canada, and Marlene Sterparn, who started this study a little over a year ago. She is also working on the reconciliation of our idea of the Canada-EU trade and Eurostat's idea of Canada-EU trade.
We would like to examine our exports in the context of the European Union's imports, and to look at some of the areas where we have had the opportunity to do better, and some where we appear to be vulnerable.
When I talk about trade, I am talking about the trade of merchandise goods. In the study, as you will see it unfold, there is more to the trading relationship than is simply shown in these numbers. For instance, a Canadian company can set up a subsidiary in one of the European countries, and perhaps skip over the tariff wall. Also, with respect to trade, we have the possibility of shifting from trade in goods to more trade in services, such as advice on how to manufacture the goods in the European country, or the provision of services such as maintenance.
For the purposes of this analysis, when we talk about the European Union, we mean the 15 countries that are currently part of that union. We have excluded intra-EU trade from much of the study, because that dwarfs much of the trade that we have with the EU.
For similar reasons, when we talk about our exports, I will be excluding our exports to the U.S., because the U.S. represents such a huge portion of our market share that I think it dwarfs the analysis.
Lastly, our period of reference is the 10-year period from the 1983-85 period to the 1993-95 period, which is about the latest data available. This is not to say that our data is particularly late, but we have to rely on data from the other countries in the world, which we get through colleagues in the United Nations.
Let me discuss one or two of our conclusions. I will then go through the analysis, and return to our conclusions again.
Intra-EU trade has grown enormously, and it is second only to the U.S. We sell a great deal to the European Union -- about $15 billion annually. Over the 10-year period that I mentioned, the EU has become relatively less important to us.
It is also interesting to note that, proportionally, the EU is importing more manufactured goods at the end of that 10-year period than it did in the beginning. Proportionally, we are also exporting more manufactured goods to the EU at the end of the period than we were at the beginning. In some sense, there is some evidence that we have adapted to the structural changes.
You can see from the graph that our exports have essentially doubled over that 10-year period. We are exporting twice as much at the end of the period as we were at the beginning. In terms of market share, the proportion that we export to the U.S. has largely increased as a result of the partial decrease in our trade to the European Union. We have seen the decrease in the share of exports more in the non-EU and the non-U.S. countries, however.
From the other side, the European Union imports more than two and one-half the imports that it had at the beginning of the 10-year period. Again, most of that increase is due, in terms of the market share, to the intra-EU. Trade between the 15 countries has increased significantly, and both the U.S. and Canada have lost some small market share. In terms of imports, it is mostly non-North American countries who have lost the market share.
Is the European Union an important trading partner for us? Yes. In total, it is the world's largest importer. If we exclude that intra-EU trade, it is not quite as large as the U.S., but it is the second grouping in terms of the size of imports.
One point of explanation there -- the NICs are the newly industrialized countries: the group of South Korea, Taiwan, Singapore, and Hong Kong. That is the third grouping on that second graph.
In terms of a potential market, the EU is second only to the U.S. for its imports. The third graph shows the EU import growth over that 10-year period.
It is a potentially enormous market for us. We have defined the EU as the 15 countries that are currently part of it, and we are comparing Canada's trade with the EU to Canada's trade with the rest of the world.
Most of our exports go to the U.S., but Europe is our next largest market.
The analysis that follows excludes the U.S. because it dwarfs everything else. Our exports to the European Union run at about just over 30 per cent. Japan is at a little over 20 per cent, followed by that grouping of the four new industrialized countries at around 10 per cent, and then the rest trail off fairly quickly.
In terms of our exports to non-U.S. destinations, we have three criteria. First, we are looking at the leading exports -- those exports which have the most value. Second, we are looking at the largest growth over the 10-year period. Third, we are looking at the commodities that have the fastest growth in exports over that 10-year period.
If you look at those, there are several that show up in all three categories, or under all three criteria. These would include pulp and paper, wood, motor vehicles, and transportation equipment, which are among our leading exports. They also have the largest and fastest growth over the 10-year period.
If we look at our exports to the EU, and at those three criteria, transportation equipment and power generating equipment turn up in all three graphs. These are some of our leading exports to the European Union. They are two of our largest growth areas. They also show the fastest growth over that 10-year period.
We thought that it would be interesting to see, in terms of these commodities, whether our major exports to our non-U.S. destinations coincide with the European Union's major imports. In other words, are our favourite exports the same as the EU's favourite imports? Looking at the charts, I would say that these 10 commodities are our favourite exports.
On one graph, we have the European Union's leading imports. We have four groupings that are amongst both our favourite exports and the EU's favourite imports: non-ferrous metals, motor vehicles, transportation equipment and telecommunications equipment.
If they are amongst our favourite exports, and also amongst the EU's favourite imports, one would expect that they would make up a large part of our trade. On another chart, however, you can see what are leading exports to the EU are, and what the EU's leading imports are. You will see that there are four commodity groups that are among our leading exports to the EU -- the same four, the leading imports from the world.
When you compare this with the previous page, motor vehicles are not a leading export to the EU, although motor vehicles are one of our favourite exports, and also of the EU's favourite imports. One would assume that, since it is one of our favourite exports, and one of their favourite imports, the connection would be made.
The connection is not made, however. Even though it is one of our favourite exports, it is not one of our favourite exports to the EU. While motor vehicles are one of the EU's favourite imports, Canada is not the source of those vehicles.
If we look at our 10-year performance for those coincident export leaders, you can see that it is a mixed story. In the case of transportation equipment, our market share is increased, as it has in the case of non-ferrous metals. In the case of computers and telecommunications equipment, however, our market share has decreased.
If we look at the second criteria -- contributors to growth -- we have the same sort of analysis. Again, we have four common commodities groupings.
They are motor vehicles, transportation equipment, telecommunications equipment, and computers. In other words, as far as we are concerned, that has been our largest export growth, and, as far as the EU is concerned, those have been the commodities with the largest import growth over the 10-year period.
Senator De Bané: I have a question about telecommunications equipment. Our exports to Europe have decreased?
Mr. Dodds: Yes. The market share has decreased.
Senator De Bané: You have Nortel, which is very big in the United States, and which, perhaps, also serves Europe. Nortel is also present in Malaysia. Could our decrease in telecommunications exports to Europe be due to the fact that other Nortel plants might be providing those exports? Mr. Gervais seems to be nodding.
Mr. Yves Gervais, Chief of Production and Analysis Section, International Trade Division, Statistics Canada: Yes.
Mr. Dodds: That is a very good point. One of the things that I mentioned at the beginning was that it is very difficult to interpret the trade statistics because of that. Nortel sets up a subsidiary in another country, but we are only showing the trade from Canada itself, from here to the other countries. As you say, there may, in fact, be indirect trade.
Senator De Bané: Nortel has also established a plant in France, so that might explain that as well.
Mr. Dodds: Thank you.
Senator Bolduc: Statistically, it must be the same problem if you analyze the American transnationals already established all over Europe.
Mr. Dodds: Yes. With these things, and with globalization, it is very difficult to make a good study of trade patterns. It needs a lot more detail, and a lot more research and analysis than it used to.
Senator Carney: This is a very interesting approach. It certainly supports our study, which was published in June of 1996, and which indicated that we were not necessarily exporting what the European Union wanted to import. Some of your categories are very broad, such as transportation equipment or non-ferrous metals. Is it possible to get a more detailed breakdown of what is in these leading sectors? Motor vehicles are fairly explicit, and you have made the point that it is not a matching situation. In terms of these other broad sectors, it would be interesting to know what the major components that are attractive are. I doubt if it is railway engines.
Mr. Dodds: Yes, that is a good point. One of the things that I should have mentioned in the caveats at the beginning is that these are very aggregated levels, and there are lots of interesting stories buried within each one.
Senator Carney: We would like to know the stories. The category of non-ferrous metals is a huge ones. It seems to me that a lot of the areas contained within it are not active, and it would be interesting to know which ones are active. I would have the same question with regard to transportation and computers. What are we good at in computers -- software?
Mr. Dodds: We can certainly provide more detailed information. As you noted, some of these things appear obvious and some do not. For instance, I knew that we included parts in the motor vehicles category, but this morning I found out that we also include wheelchairs. This is not to say that wheelchairs will represent a large part of the trade, but it is an example of how large these categories can be.
A category like computers would also include some office machines, photocopying machines, and so on. Transportation equipment, of course, would include ships, boats, railways, and aircraft, and each of these probably has a different story.
Senator Grafstein: This is an interesting picture, but it does not help too much in determining our competitiveness. Have you done a line study from 1983 to 1995 based on the value of the Canadian dollar as it might impact exports? Although our dollar has become softer since 1983, and our market share has gone down, our absolute numbers have gone up. I would like to know if any studies have been done to determine what the impact of our dollar is, versus the European currencies. Those currencies were down, but they are edging back up again, and to a large measure that likely determines our ability to penetrate market-places such as commodities and ferrous metals. Has there been a parallel study that would indicate how competitiveness based on currency would work? That is obviously what we will be talking about next.
Mr. Gervais: The last time that we came to this committee, we had a graph that showed the relationship between the exchange rate and the market share. We did not do that for this particular case because we did not have the basic data to do so. We are not only talking about import market share, but also about real market share, where you have to include the domestic market production. We had privileged access to the U.S. data, and we could compute those.
Senator Grafstein: Would it be difficult for to you graph something for us? You did a very good job for us before, and I wonder if we can put the two of them together. I think that there is a direct relationship, particularly in the impact on commodities -- paper, pulp, cereals, wood, and fertilizer -- and even on the value-added goods.
Mr. Gervais: We could try to do that.
Senator Bolduc: You have given us nominal prices, as opposed to real prices.
Mr. Gervais: Yes.
Senator Grafstein: Could you give us some information on that?
Mr. Gervais: In the study that we did with the U.S., we found that there was quite a lag between a change in exchange rate, and a change in market share.
Senator Grafstein: How long does it take for the market share to catch up?
Mr. Gervais: I was quite surprised by how long it takes -- it is about two years.
Senator Grafstein: For that to catch up?
Mr. Gervais: In terms of market share, yes, because you have to include things like domestic production in it.
Senator Carney: Would that also hold true for raw materials? With regard to lumber, for instance, I know that there is a very fast response to changes in the exchange rates.
Mr. Gervais: We only did the study at the global level. As soon as you get down to the lower level, the problem is that exports and imports are on a commodity base, and everything else is based on industry. The relationship between the two is not evident. We can see what we can do, given the data problem.
Senator Grafstein: This is obviously very relevant to our study of the European currency, and what the impact will be in an exchange-rate situation. To my mind, the heart of the issue is the nature of the impact, since we are tied to the U.S. dollar, and lagging with respect to it. Without some statistical analysis, it is difficult to determine that impact.
Mr. Gervais: In terms of prediction, we can only look at the past.
Senator Grafstein: Can you give us a prediction?
Mr. Gervais: It really depends on how strong the EMU is as a currency. If the Canadian dollar is devaluated in relation to the new currency, then we can look at the past, and see how a reduction in the Canadian dollar had an impact on the economy.
Senator Grafstein: What is your prediction?
Mr. Gervais: I am a statistician. I am really bad at predictions.
The Chairman: We should go on with the main line of presentation. This kind of question might very well be brought up afterwards.
Mr. Dodds: If you permit me, I will predict that it will be a lot easier to do with one currency than with 15.
Our second criteria is the issue of growth. We looked at our exports, our commodity groupings, that showed the largest growth over the 10-year period in comparison with the growth of the EU's import commodities.
As I said, four of them are in common. If we look at our exports, compared to the EU imports, there are only three in common: transportation equipment, computers, and motor vehicles. The difference between the two is that telecommunications equipment is one of the commodity groupings with the largest growth in terms of our exports, and it also has the largest growth in terms of imports to the EU. Our growth in exports is not going to the EU, however, and the growth in imports in telecommunications equipment is not coming from us.
Let us look at transportation equipment, computers, and motor vehicles. Our market share in transportation equipment has increased, our market share in computers has gone down, and our market share in motor vehicles has marginally increased.
The third criteria is the fastest growth over the 10-year period. Of our 10 fastest growing exports, and the EU's fastest growing imports, we have three in common. Electrical machinery, motor vehicles, and computers are also among the EU's fastest growing imports. We have done the same analysis on our exports to the EU versus the EU's fastest growing imports, and again there are several in common.
Whether we look at our major exports, or the growth over the 10-year period, or the fastest growing sectors, there are a number of commodity groupings in common between our exports and the EU's imports. If we look at the commodities that grew the fastest, although their market share remained small, motor vehicles have increased, and the others have decreased. For electrical machinery, metal goods, non-metallic mineral goods, and medicinal products, our market share has decreased.
Let us move on to manufactured goods. Our manufactured goods accounted for a greater share of our exports to the EU at the end of the 10-year period than they did in the beginning. In terms of manufactured goods, the EU's imports have also increased. Our share has grown less than the market has, however.
Has our mix of exports changed over the 10-year period? If we look at our 10 leading exports to the EU over a 10-year period, and if we look at our lead exports to the European Union at the beginning of that period, as well as at the end, at the beginning, only four represent manufactured goods. At the end of the 10-year period, six of the 10 are manufactured commodities.
The Chairman: Metal ores have dropped, while pulp and paper have gone up to the first place. Cereals and fish have disappeared. Non-ferrous metals have gone up, as have paper and paper board. Crude fertilizer has disappeared. Wood has gone up. Organic chemicals are gone. Computers are gone. We have some new things such as power generating machinery, transportation equipment, and telecommunications equipment.
Senator Bolduc: The comparison between manufactured goods and the others is interesting.
Senator Carney: You said that it had gone up, but it is off the list.
The Chairman: Why have cereals disappeared? Is it because of greater consumption of products produced in European countries?
Mr. Dodds: It is not one of the leading 10. It may not necessarily be that the amount of exports of cereal has gone down. It is just that these other commodities, such as transportation equipment, have come out of nowhere and pushed the others out of the top 10. It is not necessarily that cereals exports to the EU have diminished.
Senator Andreychuk: Does this growth have something to do with this expansion of the EU into four countries that had virtually no telecommunications services, and the base services that we bid on? In other words, is this likely to drop again?
Ms Marlene Sterparn, Senior Analyst, International Trade Division, Statistics Canada: We have used the same 15 countries as of 1995, and cast them back to 1983 and 1985.
Senator Andreychuk: You would have used the figures from Portugal, Greece, and Ireland before. They received all of these cohesion funds and, as a result, started an aggressive development which they would not have had before. It is a time-limited thing, and we might lose the industry in that.
The Chairman: In the first table, it says that only four of Canada's 10 leading exports in 1983-85 were manufactured goods, and that those were 25 per cent of the value of the top 10 exports. Canada's 10 leading exports to the EU 10 years later were manufactured goods, and their value had risen to 48 per cent of the value of the top 10.
Mr. Dodds: Yes. Six of the top 10 are now manufactured, so we are seeing a shift in the structure of our exports. We have managed to change the relative proportion of manufactured exports to the European Union.
The Chairman: Yet pulp and paper stays right up there.
Mr. Dodds: Yes. In fact, it has increased in size.
Senator Carney: I wonder if there has been change in that sector too, because, in terms of the product actually manufactured, there has been enormous change in the Canadian industry. In many cases, there has been a change to higher value-added. We would like to see what is happening in that sector.
Mr. Dodds: As you mentioned earlier, there are different stories within each of these. Even though pulp and paper has stayed up there, it may have different categories within itself now.
The Chairman: I notice that you have "pulp and paper," and then there is also another heading -- "Paper and Paperboard." I assume that there is a technical distinction between the two.
Senator Carney: "Pulp and paper" is usually considered to be wood, craft paper, and the raw material. "Paper and paperboard" are usually the higher value-added.
Mr. Dodds: Under the categories here, pulp and paper is regarded as non-manufactured, and paper and paperboard is regarded as a manufactured good.
In terms of the areas in common between our exports and the EU's leading imports, our market share for things such as non-ferrous metals and transportation equipment is relatively small. In motor vehicles and miscellaneous manufactured goods our market share has increased, whereas for computers, telecommunications equipment, and electrical machinery, our market share of the EU import market has decreased.
As I said earlier, it is an enormous market. It has increased tremendously over the 10-year period. It we exclude the intra-EU trade, it is second only to the U.S. In terms of our market, we currently sell about $15 billion to the EU. It has become relatively less important to us now than it was 10 years ago, mostly because of our increasing share of exports taken by the U.S. The EU is importing proportionally more manufactured goods, and we are proportionally exporting more to the EU. Ten years ago, a quarter of our exports were manufactured goods -- now that figure is approximately 50 per cent. We have adapted to the structural change.
In terms of commodities that are important to the EU, and to us, four of the 10 are in common. In terms of the principal contributors to the growth, three out of the ten are in common. Amongst those commodities that had the fastest growth between our exports and their imports, five of those ten are in common.
That is the conclusion of our study. There are some other interesting things which we can show on investment. One of the things that does not show up in an analysis of the trade of manufactured goods would be our investment in the EU. Over that 10-year period, it has increased fairly substantially; from about 12 or 13 per cent, to a little over 20 per cent.
Senator Grafstein: Is that a percentage of our investment, or a percentage of Canadian investment in the EU?
Mr. Dodds: That is a percentage of our investment overseas. The EU's share of our overseas investment has not quite doubled, but the market share has gone up about 50 per cent.
Senator Grafstein: During that same period, our percentage of investment in Europe would have gone down as a total number?
The Chairman: Their imported investment?
Senator Grafstein: If our investments have gone up 100 per cent in 10 years, our share of foreign investments in the EU would have gone down as a total number.
In terms of its absolute investment growth, the market itself has grown more than 100 per cent. As an absolute number, therefore, I assume that we are less of a player than we were 10 years ago, notwithstanding the fact that our increase has doubled.
Mr. Gervais: I have some numbers that can shed some light here. In terms of the entire EU, direct investment went up by seven times from 1983 to 1997. That is the explanation behind the big increase in proportion. The figure for the U.S. increased by more than three-fold. We are talking about a seven-fold increase for Europe, and a little bit more than three-fold for the Americans.
Ms Sterparn: The first part of the presentation was based on merchandise exports and imports. Now we are on investment, which includes investment in goods, plant equipment, and in many service industries, so it is different.
Senator Grafstein: I understand where we are.
Ms Sterparn: I do not believe that we have figures with us that show the level of our investment in terms of all of the investment that is going on in Europe.
Senator Stollery: The chart includes the United States, does it?
Ms Sterparn: This is our total investment abroad, yes, including the United States. This shows the European proportion of it.
Senator Stollery: Of our total investment, 21 per cent goes to the EU. Considering that, in terms of actual trade, our trade with the EU is quite small compared to our trade with the U.S., that figure is very high.
Ms Sterparn: That is right.
Senator Stollery: There must be a great Canadian enterprise developing in the European Union that would reflect that 21 per cent. It is not in bonds, it is in direct investment.
Ms Sterparn: It is not necessarily only in the production of goods.
Senator Stollery: What else would it be in?
Ms Sterparn: Things such as banking, insurance, and some service industries. We cannot compare it directly to the first part of the presentation.
The Chairman: We must take into account the fact that the great increase took place from 1985 to roughly 1991. It appears that we are lower now than we were in 1991.
Senator Stollery: Does that reflect the recession?
Mr. Gervais: In 1991 you can see that we level off.
The Chairman: Yes, and we actually appear to be lower at the last point on the graph than we were then.
That begs the question, why the sudden splurge of direct foreign investment in Europe in the four- or five-year period beginning in 1985? Was there some particular form of opportunity which attracted us?
Mr. Dodds: Perhaps we could arrange for more details from one of my colleagues who deals with investment and trade in services. As we noted earlier, even if we just look at the "goods" part, there is a different story in each area. I am sure that there are a number of stories in investment. If that information would be useful, we could arrange for it to be presented to you.
Senator Di Nino: It would also be nice to know if any major components would have been directed at specific countries. This obviously speaks to the earlier comments about the reduction of export. One of the possible answers was that the investment made by Canadian companies in the European market would have taken that which may have been an export prior to 1983, and made it into a direct investment. That would still produce a certain value for the Canadian companies, but it would have been manufactured in Europe as opposed to being exported from Canada. Would that be a partial answer?
Mr. Dodds: Yes.
Senator Di Nino: The years from 1985 to 1991, particularly in Ontario, were very good years. There would be a larger availability of capital for outside investment. By 1992, we faced a recession. That may be another part of the explanation for the blip that we have in 1991.
Senator Stollery: This is a quite an impressive statistic. It is true that it dropped off. That may reflect the recession and the availability of investment capital, but it certainly is moving back up. It is very interesting. I cannot be the only person who has been on that flight to Heathrow, surrounded by business people, and wondered what all of these people are doing there if we have such a small export business.
I have friends in the investment business in Europe -- Canadians who are based in Toronto, bankers and such. That figure explains a great deal. It would be interesting to know a little more about it, because it is a lot of money.
Senator Grafstein: When you say "investment," are you including debts and equity?
Mr. Gervais: Direct investments are direct investments, in the sense that it is not monetary movement. You buy something or build something. You invest.
Senator Grafstein: Could you track the dollar to the investment curve as well, to see whether the de-valuation in our exchange rates has had an impact on investment? We do not know if it does have an impact, but is it possible to see if there is a parallel between the two?
Mr. Gervais: These are very interesting questions. There is another chart which raises even more questions. This is the comparison between the U.S. and Europe. In terms of levels, you can see that it is 70 per cent, which is lower than the goods, and the proportion going to the U.S. is dropping like crazy. In fact, those dollars are going to Europe and, more recently, to Asia. You must be meeting a lot of business people on the plane who are making deals in Asia.
I have a very simple hypothesis. It is probably easier to build a plant overseas than to actually export the product. The U.S. is so close that you can just manufacture the product and ship it there. That could be an explanation for the levels and the changes.
The Chairman: I do not quite understand. You say that it is easier for the United States to have a plant in Canada, and then to ship the product into the United States. In the case of Europe or Asia, however, you would build the plant there, and produce the product there as well.
Mr. Gervais: That is an hypothesis.
The Chairman: I understand that the Conference Board has made a report on investment links. and has raised the possibility that Canadian investment in Europe may be displacing rather than creating trade. Are Canadian firms establishing themselves in Europe in order to conduct primarily inter-European trade? In other words, are they going there to get inside the tariff wall?
Mr. Gervais: That is a good question, but I do not have the actual answers.
The Chairman: Do we have any idea of the end point of this direct investment in Europe? Is it going to plants? Is it going to build aircraft in, for example, Belfast?
Mr. Gervais: I do not have the details in terms of the industry, but I do have them in terms of countries. Half of the direct investment in Europe is going to the U.K. In terms of investments, we still have very strong links with the U.K.
Senator Grafstein: If we are doing that, we should also look at capital returns and dividend flows. It is not fair to look at one number and the range of investment without seeing what the return into Canada is. We would need a line about dividend flows and the return of capital. We could then begin to get a better picture.
Senator Stollery: What is the percentage of trade going to the European Union? Is it 6 or 7 per cent?
Mr. Gervais: Yes.
Senator Stollery: When you look at movement of goods, that compares to 80 per cent going to the U.S. When you get to investment, it means that you have a rapidly declining direct investment from Canada to the United States -- the figure is approaching 50 per cent of our investment, to give a rounded number. That figure is dropping. Our direct investment to Europe meanwhile is rising to 21 per cent. That is a totally different picture than the one with the U.S. and NAFTA.
This is a far different picture, and a very interesting one. I certainly would like to know a little bit more about this.
The Chairman: We entered into a free trade agreement with the United States. We do not have such an agreement with the European Union. That goes back to a point that you made earlier. In the case of a company producing an export for the United States, the plant can be in Canada, and there is no tariff wall. If that same company wants to sell in Europe, however, it may well have to build a plant over there in order to be inside the European tariff wall. Does that make sense?
Mr. Gervais: It does make sense. That would be a good hypothesis to investigate -- one that might explain why we see those movements. In fact, those movements are suggesting the hypothesis. I would not say that they prove it.
Senator Stollery: Would that hypothesis cover such an enormous investment flow as 25 per cent or 22 per cent must represent? That is an enormous amount of money.
The Chairman: We can be a little more specific as to where it is going. I am informed that, within the European Union, the United Kingdom is the largest recipient.
Mr. Gervais: Yes.
The Chairman: It absorbs almost half of our direct foreign investment; 48 per cent.
Mr. Gervais: Yes.
The Chairman: Ireland takes 17 per cent. Therefore, it is not getting into continental Europe. It is getting into the U.K. and Ireland.
Senator Grafstein: Just to understand that American number again -- is that initial investment, or is that reinvestment? If you look at successful Canadian firms that have moved to the United States, they make their initial investment. They invest in a plant, a building or whatever. Then, on the redeployment of the proceeds, they will start getting a rate of return. In the worst type of return, that will happen after six or seven years. In a better type, it would be after three years.
Does that chart indicate the reinvestment as well, or does it only talk about the initial investment as a percentage? As an example, the Bank of Montreal buys the Harris Bank in the United States. The Harris Bank becomes a profit centre. All the dividends are not brought back to Canada. They show on the balance sheet, but reinvestment for expansion is all done out of their cash flow in the United States.
Does that chart indicate that? If it does not, it penalizes us for success down there. In other words, it emphasizes investment, but it does not properly emphasize successful investment.
Am I right about that?
Mr. Dodds: Our purpose in showing it to you was to give you some interesting information on manufactured goods. The investment picture is also of interest, however, and in some show, shows trends in the other direction. Our trade in goods with the U.S. is increasing, whereas investment is decreasing, and the situation with the EU is similar.
Senator Grafstein: I am trying to grapple with that phenomenon.
Mr. Dodds: I understand. We could arrange for our colleagues who are experts in the investment area to do some charts similar to the ones that we have done on manufactured goods. That would be more interesting for you than our speculations would be.
Senator Di Nino: Is there a FTA component to this, for that period? Would there possibly be a repatriation of U.S. investment that would affect the numbers? That is a very dramatic change. Could a component of that reduction be a change in investment philosophy by the Americans, one under which they would invest less in Canada, and/or repatriate some of the investments that existed in Canada prior to the FTA?
The Chairman: Perhaps you want to leave that question to your colleagues who specialize in this field. That would be a question to which they could address their minds, and then come here with their conclusion.
Would that be satisfactory, Senator Di Nino?
Senator Di Nino: Yes, that is fine.
Senator Stollery: I was talking to someone about the subject of investment in the U.S. just this afternoon. It is interesting to note that those statistics fly in the face of general information about investment into the United States. Everyone talks about the fact that there is massive investment into the United States from everywhere but Canada. The market is over 9,000, and money is pouring into the U.S., over-valuing the U.S. dollar. Actual investment from Canada into the U.S., however, is dropping like a stone. It flies in the face of investment wisdom at the moment.
Mr. Dodds: Yes, but it is partly the issue of market share, as Mr. Gervais was saying. In the one case it has increased seven-fold; in the other case it has only increased three-fold. The fact that it has increased three-fold means that it has increased enormously over the 10-year period; it is just that, relative to another market where it has increased seven-fold, it does not show as well. It is partly a question of market share.
Senator De Bané: In order to have access to the European Union, a Canadian firm would be interested in investing there, in order to be on the other side of the tariff wall. Can we reasonably say, however, that a Canadian company that builds a plant in the U.S. does so because it realizes that the cost of labour, the tax burden, et cetera, are much more attractive in the United States than in Canada?
As you know, many Canadian companies are receiving solicitations from American business groups, inviting them to their states and setting out the advantages that exist there. When they do go there, it is not so much for access to the market, but rather because the fiscal regime, the tax rate, and the cost of labour there are better than they are in Canada.
The Chairman: You are not implying that any American government, state or municipality would subsidize investment in order to attract it, are you?
Senator De Bané: No, but some Canadian businessmen have given me letters that they have received from the United States. These letters explain why they should expand in the U.S., and tell them of the various incentives that they can receive.
I can bring them to you tomorrow, Mr. Chairman.
Mr. Gervais: I have some statistics that might help explain some perceptions. One person was saying that there is a lot of investment into the United States. That is true. If you look at growth, you must look at levels as well. In terms of absolute growth, there was an increase of $70 billion in investment to the United States between 1983 and 1997. That is the slightly more than three-fold increase I was talking about earlier. In terms of Europe, it is only $35 billion, but that represents a seven-fold increase.
We are comparing an increase of $70 billion to an increase of $35 billion. In terms of proportion, because your growth is slower, it is decreasing. We must realize that.
Senator Stollery: As the Chairman said, direct investment into the U.S. is about 50 per cent, and the other is a little less than 25 per cent. I am sure that members of the committee find that quite dramatic.
The Chairman: I wish to make a point because of something Senator De Bané said.
KPMG released a study last fall entitled The Competitive Alternative: A Comparison of Business Costs in Canada, Europe and the United States. That study demonstrates that Canada has lower overall business costs than the United States and five leading European countries. Overall it costs 5.4 per cent less to do business in Canada than it does to do it in the United States. The summary of findings in the report stated that the study rigorously measured 42 cities in Canada, France, Germany, Italy, Sweden, the United Kingdom and the United States. Various factors were considered across eight industrial sectors -- electronics, food processing, and so on. The study found that Canada was the lowest cost country in each of the key manufacturing industries examined.
Senator De Bané, there must be something other than cost. It must be the weather.
Senator De Bané: I would not be surprised if KPMG wanted to please the Minister of Finance in producing that study.
The Chairman: That is a very cynical attitude.
Senator Andreychuk: In my experience, many rules that had time-frames attached to them precluded our ability to either invest or trade in Europe if we did not get in by a certain time period. We may now have Team Asia, but from 1985 to 1990 the Canadian government was quite focussed on investing in Europe as a way of getting into trade, because of these barriers being put up and barriers falling within. There was a lot of advice about finding a partner in Europe, and entrenching oneself in the process. Perhaps someone in the Department of Foreign Affairs and International Trade would tell us what rules were adopted as a result of the EU practices, as well as what understandings might have driven some of the investment at that time.
The Chairman: We should ask Mr. Dodds and his colleagues to put people in Statistics Canada on notice that we have questions concerning investment, and the factors that seem to have quite dramatically influenced the direction of Canadian direct investment abroad. Would you do that?
Senator Grafstein: Perhaps we should apply all the same questions, not only to investment, but also to trade and services. I notice that we have a serious deficit in trade and services. I do not know if we will have an opportunity to spend a few minutes on that, but, as this material reflects, we have a serious problem there.
The Chairman: Do you wish to say something about the trade in services?
Mr. Dodds: Only that we have experts in that area who can address that issue.
The Chairman: We have been spending so much time on the Asia-Pacific region that it is very salutary to be reminded of the EU's importance to our exports. Thank you very much.
Honourable senators, I should like now to move in camera to discuss a committee budgetary matter.
The committee continued in camera.