Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 16 - Evidence - May 29, 2007
OTTAWA, Tuesday, May 29, 2007
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 6:06 p.m. to examine and report on international business policy (including bilateral and multilateral trade relations, softwood lumber agreement and others).
Senator Consiglio Di Nino (Chairman) in the chair.
[English]
The Chairman: Honourable senators, good evening and welcome. I would just make a very brief comment, since I will not be here for very long. I wanted to be here to personally thank Ms. Goldfarb for coming again. We look forward to her usual great presentations at this committee.
I will have to leave in about five minutes. Rather than start the meeting, I will ask that, with your indulgence, our Deputy Chair, Senator Stollery, take over the chair and continue with his more than capable chairmanship.
Senator Peter A. Stollery (Deputy Chairman) in the chair.
The Deputy Chairman: Thank you, Senator Di Nino. Honourable senators, I want to thank our witness and welcome everyone to this meeting of the Standing Senate Committee on Foreign Affairs and International Trade. Our agenda today is focusing on Canada's international trade policy.
I am honoured to welcome Ms. Danielle Goldfarb, Principal Research Associate from the Conference Board of Canada. Ms. Goldfarb used to be with the C.D. Howe Institute and appeared before our committee last June during our Africa study. She is now part of the International Trade and Investment Centre at the Conference Board of Canada. The centre's main aim is to help Canadian leaders better understand what global economic dynamics, such as global and regional supply chains, mean for public policies and business strategies.
Over the past few months, the Conference Board of Canada published three reports of interest to this committee: Adopt a More Strategic Approach to International Trade; If We Can Fix It Here, We Can Make It Anywhere: Effective Policies at Home to Boost Canada's Global Success; and Canada's Changing Role in Global Supply Chains.
Danielle Goldfarb, Principal Research Associate, Conference Board of Canada: Thank you for the opportunity to present to the committee again. The committee's focus on appropriate policies to nurture and enhance Canada's international trade and investment performance is an important focus. It is not because trade is an end in and of itself, but rather because of the balance of evidence that shows that trade and investment have significant effects on Canadian productivity, innovation and, ultimately, on Canadian living standards.
We will soon be publishing new research that shows the importance of the effect of trade on a variety of quality of life indicators. It is an important topic, and I am pleased to be able to speak to it today.
I want to start by first describing the rise of global supply chains. It is important to understand this acceleration of global supply chains in the economy today. It is a key tendency we need to understand as we are trying to develop trade strategies.
We have seen there have been lower transportation costs and lower communications costs over the last number of years, as well as the ability to digitize production. All of these things have come together and enabled businesses to break down production, where they are locating different parts of production in different parts of the world. Companies are now producing goods or delivering services using inputs from all over the world. This is important because we thought of certain things before as being disassociated from each other, like imports and exports; now we use imports to make our exports. We use foreign direct investment in both directions to boost our trade rather than to substitute for our trade.
This is especially the case for trading services, where we have to invest abroad to sell services to other markets. It is a fundamental rethinking of trade and investment, how integrated they are with each other. It is also a rethinking of goods and services; they are not separate things. In order to make goods through global supply chains, you need services, which are essentially the glue that links those global supply chains together.
What does this mean? It means a number of things. The rise of global supply chains means that companies do not need to be able to do everything. They can build innovative and highly valued businesses by specializing in only one part of that supply chain. They can specialize, focus on logistics, manufacturing or design, and actually buy or make components or other items they need for their business elsewhere in the world.
I mention this in the Canadian context because Canada has a large proportion of small- and medium-sized businesses and people question how they can possibly compete in the global economy. In fact, because of the way global supply chains operate they can specialize. If they can find a unique niche in the supply chain, they can actually be quite effective and develop a highly valued business without having to do everything. They can specialize. That is one important implication.
Because companies can build successful businesses at any point along the supply chain, that means competition at any point along that chain is incredibly fierce. There is competition for functions that can move globally, not natural resources; but for example, electronic components, data management and payroll operations. The competition for those functions is intensifying. We have every reason to believe that will continue, especially since we now have large, low-wage rapidly growing economies that can out-compete Canada when it comes to wages, and increasingly, in more skilled labour areas.
The reason I am spending so much time talking about this intensification of competition along various points of the supply chain is because it means that policy competition for locating those specific business functions is very intense. Domestic policies matter when it comes to where businesses choose to locate their production or where they will make their next investments.
It is important to take the time at the beginning to describe this real acceleration or change in global economic dynamics because it is a major change from how we measure trade and investment performance and from how we think about trade and investment strategies. When we measure our trade using Statistics Canada data, we are thinking about trade as if it is final goods being traded from one country to another, rather than trade in parts used as inputs to a global supply chain model. It is an important change that we need to consider as we are developing our trade policy.
Where does Canada fit into global supply chains? We do not know that much about Canada's role because the way we set up our statistics in the past does not necessarily measure realistically how businesses are operating today. The Conference Board of Canada took a first step towards trying to describe where Canada fits in. We took a unique approach and tried to look at trade from the point of view of the supply chain it is being used in. What we found, not surprisingly for Canada and the U.S. over the 1990s was that Canada was getting highly integrated into Canada-U.S. supply chains across the border. That will not surprise the committee. What we found over the more recent period, 2000-05, is that increased trade in parts between Canada and the United States and integration into regional supply chains has stalled. This is important not just because of our ability to access U.S. supply chains and markets but because Canada's access to the U.S. markets is the way to access U.S. global companies. This is a way for us to access the global market either by shipping goods through the United States to Latin America or by exporting to the Americans, goods that they can use as inputs as they make exports to other countries.
It is a worrying trend. Why has it stalled? Either there are few gains left from increased trade between Canada and the United States, or we have non-tariff barriers that prevent us from taking advantage of the gains from trade between Canada and the United States. By non-tariff barriers, I mean border security regulations, regulatory differences between the two countries and so on. That is something we need to think about.
What we found in contrast with our trade with the United States when reviewing Canada's trade with its major trading partners from the 1990s to 2005 was that Canada is becoming much more integrated into the supply chains of other trading partners. Our trade in parts inputs between Canada and countries like China and Mexico has increased significantly, both over the 1990s and that has not slowed down over the recent period. People understand we buy computers and toys or final products from China. It is less understood that we are buying more inputs of electronic components to use in Canadian supply chains. Even with that integration it is starting from a very low base. We have very little trade with these countries, and that suggests that overall our integration into global supply chains beyond the U.S. market at this point is quite limited.
This is only a starting point. There is not a lot of information that we do not really know where Canada fits into these supply chains. This is a challenge that governments and statistical agencies all over the world are facing right now. How do they accurately measure this activity?
There is evidence that Canada is not fully fulfilling its potential, in terms of integrating into these global supply chains. We know that policies matter as competition for business functions that can move intensifies. What does this mean for policy? Where should our priorities be in terms of policies aimed at improving our global economic success?
The first priority according to the research done at the Conference Board of Canada must be changes within Canadian control rather than trying to get other countries to change their rules to allow us more access. Why do I say that? This is what the evidence shows. A recent OECD study showed that if all developed countries, all the rich countries, reduced their barriers to competition, eliminated remaining tariffs and reduced their foreign direct investment restrictions to what the OECD considered best practices, Canada would see dramatic gains in exports.
Interestingly, almost three quarters of those gains would accrue to Canada as a result of changes to Canadian policies, not as a result of changes to policies in other countries. Only one quarter of the dramatic export gains for Canada would be attributable to changes other countries make. It does not mean those changes are not important, but that we can see larger potential gains from changing our own policies.
We know Canada's existing barriers to trade; competition and investment prevent businesses from innovating, adapting to global conditions and making efficient decisions that enhance their global competitiveness.
What do I mean about policies within Canadian control? They can range from policies to facilitate access to other markets like addressing port congestion or ensuring we have appropriate infrastructure in place, good transportation policies within the country, and ensuring that workers can move between provinces so that does not become a barrier to investment in Canada. It also means reducing remaining barriers that exist on our imports, regardless of what other countries do and whether they give us access to their markets. If we have barriers on imports and use imports to make exports, then we are penalizing our companies' competitiveness and our consumers.
Other policies within our control are those with respect to allowing foreign investment. We know that foreign direct investment increases jobs. Foreign companies increase Canadian productivity, increase government revenues, bring new ideas, technology and innovation to Canada and, ultimately, increase Canadian living standards. We also need to encourage outward investment, which allows companies to integrate into others' supply chains and makes them more competitive by allowing them to access specialized skills or larger markets elsewhere.
The good news is that these changes are within the control of Canadians in that they do not require us to get concessions from other countries. If we make these kinds of changes, then when we go out and do trade and investment promotion and negotiate trade agreements with other countries, we are likely to see much larger gains than if we were not to address these issues in the domestic market.
The next priority has to be securing access to the U.S. market. As I mentioned, addressing U.S. barriers matters not only for our access to Canada-U.S. supply chains but also for our access to the world through the U.S. market. The media often focus public attention on Canada-U.S. trade but it is even more important for investment. This is because companies will always be biased in favour of locating in the U.S. market. It is a larger market than that of Canada so any small changes or increases and any small rise in border costs that make the border more difficult to cross will exacerbate the bias toward locating production in the U.S. market.
The Conference Board of Canada explores this issue in several papers that will be released over the next few weeks on the effect of the post-9/11 border security environment on Canadian trade and investment. They speak to the long-term implications of an increase in border costs to locating plants on the Canadian side of the border.
I do not want to imply that free trade agreements are not important. Certainly, we know that the gains from multilateral trade deals are the highest. If we were to have a successful Doha round, that would achieve the largest gains possible, rather than the pursuit of smaller free trade deals. We know that the Canada-U.S. free trade agreement has led to major productivity gains for Canada. Canada's policy over the last number of years has been very unfocused. We have opened up many trade deals but have closed none of them. We have been unwilling to address certain key areas that have stalled a number of the agreements.
If Canada wants to pursue agreements with the potential to boost our trade and investment performance, then we would need to base our strategy on a rigorous assessment of the benefits and costs. We would need to spend our limited resources on negotiating deals with major trading partners that are core to our interests, and we would need to think about comprehensive deals. Given the reality of global supply chains, it does not make sense to negotiate agreements that exclude services and investment. We need to think about how goods, services and investments relate to each other and negotiate comprehensive deals. Any deals that we do negotiate need to reinforce our multilateral efforts rather than take away from them.
We also need to think more creatively about other areas, such as how many flights exist between Canada and other markets and whether that is an impediment to our ability to trade and invest with those regions. We need to be creative about such elements.
We also need to have a better understanding of Canada's role and which business functions are located where and why. Are companies locating here for good reasons, such as access to skilled workers, or are they choosing not to locate here because of border problems and other policies? How well-positioned are we to take advantage of and to attract unique and high-value business functions to Canada?
In conclusion, these issues are so important that the Conference Board of Canada has established a new research centre on international trade and investment. Essentially, our mandate is to try to better describe the reality of global supply chains and the rise of developing economies and what that means for Canadian decision makers. We bring together business and government to talk through these issues and to grapple with what it all means for their future. It is truly important that we have both parties at the table, simply because it no longer makes sense to look at the aggregate statistics. We need to understand individual businesses: what they are and how they organize themselves in the global economy. We need to understand them so that we can advance or better our trade strategies.
Senator Segal: Thank you for that broad-ranging and most helpful presentation. I have five short questions.
Ms. Goldfarb, you did not talk about currency. Several years ago, Mr. Tom Courchene distinguished academic and economist at Queen's University in Kingston wrote a thoughtful piece for the Institute for Research on Public Policy about the need for a North American currency. He wrote of the need for us to do in North America, what the Europeans have done. We hear that Fortune 500 companies across Canada are experiencing export difficulties on a manufacturing basis because of the rise in the Canadian dollar. I would like you to comment on our currency being an unwitting, non-tariff barrier to business and trade.
Second, I would like your views on NAFTA. You spoke to the relative stalled status of further trade integration between Canada and the United States. For all the strengths and weaknesses of NAFTA, both proponents and opponents would agree that it is a static instrument in that it does not change and has no dynamic. Simply, it is what it is. For its time, it was right but it might not be sufficiently adaptive, and most people would say that it is not. Does that mean we need a new North American trade initiative? If so, what would it be?
I notice that Chancellor Merkel of Germany has called for a new North American-European trade alliance. At the EU summit meeting in Washington a few weeks ago, she and others agreed on a new framework for reducing non-tariff barriers in Europe and in the United States, but not in Canada. They had some lighthouse projects in that process, such as intellectual property and border security issues.
Third, Mr. John Helliwell, the economist with the borders effect thesis, argues intensely that we have done all that we can do with the Americans in relative terms. There will be economic growth between the two countries but the investment should be in terms of trade promotion and the various kinds of instruments that you have discussed in places such as Asia, South America and the rest of our hemisphere and Europe, where our piece of the market is sufficiently small to allow us to gain great yield from greater investment. Of course, that would raise the issue of why the present government is closing consulates in many parts of the world and increasing them in the United States and whether that is the most productive thing to do.
Ms. Goldfarb, in your presentation you referred to the various reasons, perhaps, that we are not progressing as much with the U.S. You do not give an answer, I suspect because you are waiting for empirical research to provide that answer, which is fair enough. However, I am interested in your view.
My final question is with regard to Robert Reich. Before he was Secretary of Labour in the Clinton administration, he wrote a book called The Work of Nations in which he said that whether you had an American plant in Taiwan flying the Taiwanese flag, owned by Americans but employing Taiwanese, paying local taxes, contributing to the community, strengthening the economy, or a Taiwanese plant in Connecticut owned by the Taiwanese, flying the American flag, hiring Americans, paying taxes and supporting the local community, really did not matter in terms of ownership. What matters is where they are in the supply chain and what added value they put into the mix and how that community is being rewarded for it. In light of the current debate in the country on issues of foreign ownership and takeovers, I am interested to know whether, in terms of your supply chain analysis, who owns a company is as important as it may have been 30 or 40 years ago.
Ms. Goldfarb: With regard to currency, I am not a monetary policy expert, but the analysis I have seen suggests that our monetary policy is working well in Canada. If we had a North American currency, we would have to give up an independent monetary policy, which would mean some adjustment on the Canadian side. The analysis I have seen to this time suggests that it would not be in our interest to give up that margin of manœuvre.
Also on currency, on our highly integrated trade there are two sides to the equation, the export side and the import side. Because we use imports to make our exports, this can partially offset the effects of the currency. Many of Canada's exporters are also importers. They import new machinery and equipment. Some exporters do not use imported inputs, but many do; therefore, a currency effect is not one-sided in that sense.
With respect to whether NAFTA has reached its limits, the evidence I cited from the paper on Canada's changing role in global supply chains suggests that some limit has been reached. However, it is not clear from our research whether it is due to things that are policy accessible or to the fact that we have simply reached the limit of what is possible.
There are a number of barriers between Canada and the United States. Many new policies have been implemented on the border since 9/11. As I said, we will be publishing a major study on that next week. We conducted 60 interviews with companies crossing the border and found that there are a number of things that are still quite problematic. In fact, they are going back to some of their pre-Canada-U.S. Free Trade Agreement behaviours, for example, in terms of carrying high inventory levels. They are stocking very high inventory levels on both the Canadian and the United States side of the border. After the Canada-U.S. Free Trade Agreement, we moved to just-in-time production, where goods crossed the border within hours of order. We are finding that because of uncertainty and unpredictability at the border, companies are moving toward stockpiling inventory at the U.S. side of the border, which nullifies the effects of this just-in-time inventory management that is supposed to cut costs.
To make a long story short, there are a number of problems with respect to border security programs and policies that need to be addressed. Many of them are being addressed under the Security and Prosperity Partnership of North America. However, the evidence that we have seen suggests that there is not the stability and predictability at the border that there should be six years after the events of 9/11. That is one area in which we need to do much more in order to move beyond the limits of NAFTA.
There are other areas such as small regulatory differences between our two countries, yet we have similar policy goals in many areas. We need to address a list of things, which impede trade between our two countries.
Much work still needs to be done. No matter what initiatives we have elsewhere in the world, the United States will be our bread and butter. We must ensure that we have continued smooth access to that market, because it is critical to our living standards.
At the same time as we move forward on the Canada-U.S. relationship, and possibly in the trilateral context, we need a strategy with respect to other countries. We are limiting our potential for growth and better living standards if we are absent from global supply chains or not pursuing many of the global opportunities.
The Conference Board of Canada has not done analysis of trade promotion and trade consulates with regard to how many and where they should be located. Some of that has been done, but not by the conference board and I do not want to comment on where we should place them. However, we must have strategies to try to insert ourselves into global supply chains beyond the United States; that is critical.
With respect to Robert Reich's point that what matters is where we are in the supply chain and which activities we are locating, the debate taking place in the media obscures some of the important questions about which business functions are locating in Canada. Are we getting the low-value parts of production or are we attracting the high-value, innovative parts of production that will generate all kinds of spin-offs, new ideas and new technologies that will lead to high-wage jobs? That is important.
At the same time, we still generate increases in living standards from our natural resource activities that we tend to consider less desirable. Canada's prosperity as a nation grows when the price of commodities rises as well. There are activities that are desirable to locate in Canada, but your point about focusing more on where we are in the supply chain is very important.
One thing we know about global supply chains is that they tend to be dominated by one company. That company may not even own everything, but has the power to make the decisions. We know this from research where they interviewed 500 of the top global competitors and found that one company dominates the supply chains.
It is a concern if Canada does not have many of those dominant supply chain players. It is a concern if Canada does not have companies employing unique niches in that supply chain. We need to focus on how we are involved in supply chains so we are influencing the decision-making and whether our small companies are accessing these supply chains and we are developing capacities that are unique enough that we still have power in a supply chain even if we are not the dominant player. We need to have unique capabilities to do that. We need to focus on those issues.
Senator Smith: I am not trying to get into an argument here: I am just trying to figure out whether the Conference Board of Canada has a position on the issue of the number of major Canadian companies that, in the last few years and recent months, have been taken over by foreign interests. You are very familiar with the list. It is quite a long list that includes Inco, and who knows what the result will be with Alcan and Magna International Inc. and "the Russian" and how that will play out. Forty years ago, I was Walter Gordon's executive assistant when he was championing the cause of economic nationalism. He would be rolling over in his grave. We are a far more economic global community now than we were then. I am not trying to take a hard-line position. I am curious as to whether or not the Conference Board of Canada has any concerns about the number of major Canadian companies in very recent times — it is quite a long list — that have been taken over or are about to be taken over by foreign interests and the impact of that on the Canadian economy. Is that something you are not worried about?
Ms. Goldfarb: Yes, I am aware of the major Canadian companies that have been taken over and that have dominated the press reports.
The first thing to note is that if you look at the 2006 foreign direct investment statistics, you will find that foreign direct investment in Canada has grown significantly, and so has Canadian direct investment abroad. In fact, Canadian direct investment abroad has actually exceeded foreign direct investment in Canada over the last decade. In 2006, that gap has grown. In other words, Canadian direct investment abroad now exceeds foreign direct investment in Canada by more than it did last year. Canadian companies are out there in the world acquiring foreign companies at a value much higher than is happening in Canada. That is just one piece of context setting that we need to keep in mind and that is often not raised in media reports.
We also need to think about this global supply chain reality. As I said in response to Senator Segal, we need to think about maintaining and enhancing our position in global supply chains. That means enhancing both foreign direct investment in Canada and Canadian direct investment abroad and thinking more about where the various activities are locating. Are we maintaining the decision-making capacity? Are high-value activities locating in Canada? I think it makes more sense to focus on those types of questions.
When we look at inward foreign direct investment, the evidence that we have suggests that foreign-owned plants are huge contributors to labour productivity gains in Canada. They have allowed us to have much more capital investment in Canada. They have increased our revenue, employment, wages and our access to new technologies. We need to start thinking about foreign direct investment or consider at least the realities of what it actually brings to Canada.
I should also mention that if you look at the numbers on head offices in Canada, they have not declined over the last number of years. In fact, head office employment has been growing.
It is important to put the numbers in the media in context. I am not saying we should not be thinking about these issues, because we need to think about where decisions are being made. That is important, but we also need to move beyond taking a couple of different examples and assuming that represents the whole.
Senator Smith: I am talking about the trade aspect. With respect to the North American car industry, I am not talking about statistics as much as almost about a pocket full of stories. They are hurting right now. There was a huge rally in Windsor over the weekend about the number of jobs that have been lost in that city. Overall, Ontario has more auto-related jobs now than the state of Michigan, but many of Michigan's jobs were lost to southern states where they were not unionized. The unions were getting difficult to deal with.
I have always bought North American cars. I have an older Cadillac that I bought from Madison Cadillac years ago. They just closed on Bay Street. It is unthinkable. There is no Cadillac dealer anywhere in the central part of Toronto. You have to go up to Victoria Park or something. I am serious. When you look at the wheel sections in the weekend newspapers it is all BMW, Audi, Mercedes and Lexus. If I want to get a car serviced anywhere near where I live, which is in Yorkville, I may be buying a non-North American car. Will they come back? What do you think about the impact on jobs and trade? The auto industry just keeps shrinking.
Ms. Goldfarb: I think I am not qualified to comment on the North American auto industry, not being a car industry expert. I think I will defer. Other people at the Conference Board of Canada can answer your question, and I would be happy to forward that question to them.
Senator Merchant: Important in what you have said is a focus on eliminating trade barriers between provinces, removing labour mobility restrictions, lessening regulatory differences, as we now have 10 different regulatory systems in Canada, and reducing government purchasing restrictions.
We have been talking about this for 25 or 30 years. Very little progress is being made. I wonder if the Conference Board of Canada can tell us how to kick-start this thing. Obviously provinces have their own reasons for protecting what they protect since they must be elected.
However, can national leadership work this out? What opinions do you have on the subject that has been under discussion for so many years?
Ms. Goldfarb: The Conference Board of Canada is not an expert on making things happen so much as analyzing them. We leave that to the policy-makers.
Perhaps the time is different now. In the past, things like labour shortages were not as acute as they are now. Things like labour mobility, for example, is something that businesses are asking for to meet these labour shortage issues.
There are regional differences or disparities. Senator Smith was referring to the auto industry and the job losses in Ontario, but we also have acute labour shortages in B.C. and Alberta. Perhaps the timing is better for discussion of these types of issues now because the circumstances have changed.
As I mentioned, the stakes have also changed because of the rise of large developing low-wage economies. They were not able to compete with us before because it cost too much to transport goods and communications cost too much. Now those barriers have fallen. The timing places increased demands to deal with these domestic policy issues.
In addition, some of the provinces have taken these issues — for example, B.C. and Alberta signed a trade, investment and labour mobility agreement that came into force in April. They essentially have said they will not get this done on a national scale so let us do it between the two provinces and make the agreement open to accession with the other provinces. That is one example that illustrates that if things are not happening at the national level, progress can still be made.
Senator Merchant: Do you think that Canadians are aware that we have no free trade agreement in Canada? You can drive across Canada without too much trouble. I wonder if they realize goods, services and labour cannot move between the provinces as easily.
Ms. Goldfarb: We did a survey of businesses and they raised the issues of labour mobility, government procurement and regulatory differences between provinces. They identified these issues as restricting innovation and competitiveness of companies. Businesses are certainly aware of the issues.
Perhaps if you are a chiropractor and you want to move between provinces, you will be more acutely aware of this issue. Certain business groups aware of this issue and are moving it forward. At least from our research, business people are placing these issues at the top of their list.
Senator Andreychuk: I just want to pick up not on the intra-provincial, but on the international. You have given us a good analysis of all of the issues and problems. You have illustrated for us how companies can expand here or elsewhere and the benefits and difficulties associated with the process.
In your opinion which policy would bring about the most competitive and productive change?
Ms. Goldfarb: I hesitate to tell you the one most critical policy or the one policy that will lead to the largest trade investment gains because there is simply no analysis. For example, many of the policies that were just raised — the regulatory differences between provinces, the external remaining tariffs, the potential free trade agreements elsewhere — there has been remarkably little analysis done that has ranked these kinds of things.
Business leaders seem to think that regulatory differences between our provinces and trading partners are critical issues. That is a survey of business leaders and not an analytical assessment of: If policy changed, exports would change by this amount.
In my assessment, labour mobility and regulatory barriers are important. I would also include infrastructure policies within Canada when it comes to borders and ports. We look at what the Chinese are doing, in terms of expanding their border infrastructure, and what we are doing in terms of border infrastructure. We already have problems with congestion in Vancouver. Most ports along that part of North America are also having problems and congestion. What we are doing is a fraction of what has been done in China and elsewhere.
I would say some of the policies with respect to investment are important as well. I think policies that encourage two-way investment are important if we expect to grow our trade in terms of services. If we expect to make gains in the area of services, we need to think more about two-way foreign investment.
Senator Corbin: In terms of the so-called stalled trade between Canada and the U.S., you have alluded to non-tariff barriers, border security, and regulations and so on as harming Canadians. Does that also have an impact in the United States, keeping in mind the size of the relative economies of each country?
Ms. Goldfarb: Our focus has been on the Canadian side. As you say, these businesses are highly integrated with most of the trade taking place within the same company on both sides of the border and goods going across at various stages of production. They are highly integrated across the border, and any problem at the border affects production on both sides of the border. If the U.S. is waiting for a part from Canada, they cannot proceed with their production.
Senator Corbin: Are you telling me that you only looked at transborder integrated companies?
Ms. Goldfarb: No, but many of our companies shipping across the border everyday are part of highly integrated supply chains.
We were not looking at flows that went through pipelines, for example. We were looking at the kinds of stuff that tended to go back and forth across the border just because that is the type of stuff that is affected by border policies.
Whether it is harming the United States, there is one thing to consider, and this is a real problem. On the U.S. side of the border, over time when contracts expire and companies decide where to place future investment, they could decide that the border is a real problem, so they will locate their production in the U.S. and not have to cross over the border.
In other words, Canadian companies compete in the U.S. market with companies that do not have to cross the border. They can locate all their production on the U.S. side of the border. In other words, Canadian companies have to eat the higher costs associated with crossing the border. Companies located partly in Canada and partly in the United States with goods travelling across the border have made the decision that the extra cost of having to cross the border is worth it because of the increased competitiveness that locating on the Canadian side provides, but they can locate their production entirely in the U.S. and not have to cross that border.
While these border issues hurt the highly integrated U.S. businesses, they can choose to locate entirely in the U.S. market. Of course, there is an asymmetry, as you mentioned, that the U.S. trade represents a much smaller proportion of their GDP than it does our GDP. It is harming the U.S., but one could argue that perhaps also security and protectionist interests in the U.S. can actually work together, if they want to protect industry and the United States economy. That can actually work in the same direction as tighter border security, to locate less production in Canada and more in the U.S. Does that answer your question?
Senator Corbin: Thank you for the comment.
Senator Mahovlich: The Canada-United States friendship group met with Congress and Senators in the U.S. last week. The number one problem in the Detroit-Windsor area is the bridge, which is privately owned. The mayor and the local governments are talking about building another bridge. They say they need it, but if the Americans want to keep traffic going, would not they open a few more booths on their side for the security?
Have things improved on the border crossing in the past two years? Do we need a bridge or do we need the Americans to open up a few more booths?
Ms. Goldfarb: We need both. Our research has shown that in some respects things have improved, that the delays that were a real feature of the period from 2001-04 have lessened in both directions. However, they are still problematic in some areas and border treatment is still unpredictable in some areas.
As I mentioned, there is some evidence that companies are resorting to some of the pre-Canada-U.S. Free Trade Agreement behaviours, which suggests there is still uncertainty surrounding the border.
The Americans have opened up more booths; the Canadians have done so as well. Both countries have increased their staffing. A number of changes have been made. The evidence we have found suggests there needs to be major changes in terms of infrastructure. There are real problems getting to the border crossing at Windsor-Detroit. We have these special fast lanes that companies are supposed to be able to use to go quickly through the border, but they have to wait in the line with everybody else just to access those lanes. That is not really making worthwhile their upfront investments to access those fast lanes.
We need to make some major changes to infrastructure. Yes, we do need a new crossing at Windsor-Detroit. There is much more to be done at that crossing.
The Deputy Chairman: We have started to concentrate on Canada-U.S. That is understandable considering that 80 per cent of trade is with the U.S. The committee is also interested in serious investment from Western Europe. The rate of growth of European investment surpassed American investment some time ago. We have the China issue, which we cannot deal with tonight.
What about the European rate of investment and our trade with Europe? That is only one other market. Could you comment on that?
Ms. Goldfarb: I have not done an extensive analysis of our trade with Europe. There have been some discussions about whether Canada should sign a free trade agreement with Europe. The Premier of Quebec has talked about that. Certainly, I did not mean to neglect other parts of the world.
The Deputy Chairman: We were doing it, not you.
Ms. Goldfarb: There has been significant investment with Europe. There has also been quite a bit of investment in Latin America that we do not pay that much attention to because our attention if often focused on Asia. I will not go into the details of the Canada-Europe relationship, but in our research we looked at Canada's role in global supply chains and it shows that we are becoming more integrated into European supply chains. It is not growing as rapidly as our trade inputs with China, Mexico and some of these other large developing regions, but there considerable activity there. It is still from a relatively small base, relative to our trade with the United States, but that is an area that we have to talk about developing, perhaps jointly with the United States. That is something on which Glen Hodgson, the Chief Economist of the Conference Board of Canada, will be publishing a paper for the Canada Institute of the Woodrow Wilson International Centre for Scholars. Mr. Hodgson will discuss the various agreements we might sign jointly with the U.S. Do we need to think about a Canada-U.S.-EU agreement? Should we be thinking about those things? We need to think about doing trade deals with large partners that are part of our core, of which the European Union would be one.
The Deputy Chairman: You have given us two important thoughts. We heard in our last meeting about the inputs, about the fact that a gizmo can take parts from Canada, Mexico or China; it is not all manufactured in one place in Canada. I can understand this input business a little bit. I would like to know more about it. We have problems with statistics, if I am not mistaken.
I have to remind members that this committee has looked in depth into the free trade agreement with the United States. We reviewed it, and NAFTA as well. If I am not mistaken, we concluded that much of our trade with the U.S. was currency sensitive, the exchange rate. When we did the free trade agreement, the Canada dollar was 63 cents U.S., so obviously our trade was going through the roof no matter what happened. Our dollar is now at 92 cents U.S. There has been a considerable slide, which we thought probably had a lot to do with the exchange rate.
Thank you very much. The committee has a great deal to think about in pursuing this important subject as it affects Canadians' standard of living.
The committee adjourned.