Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 9 - Evidence - Meeting of May 14, 2008
OTTAWA, Wednesday, May 14, 2008
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:05 p.m. to study on the rise of China, India and Russia in the global economy and the implications for Canadian policy.
Senator Consiglio Di Nino (Chair) in the chair.
[English]
The Chair: I would like to welcome everyone to this meeting of the Standing Senate Committee on Foreign Affairs and International Trade. This committee is currently examining the emerging economic influence of China, India and Russia and Canada's policy response.
Appearing before the committee today on behalf of Statistics Canada, we have Mr. Craig Kuntz, Director, International Trade Division and Mr. Patrick O'Hagan, Director, Balance of Payments Division.
Craig Kuntz, Director, International Trade Division, Statistics Canada: Thank you very much, Mr. Chair. We have a deck that has been handed out to all of you. I will start by giving you an overview of the international merchandise trade program. I will talk about some of the trade numbers for China, India and Russia, and then I would like to present the results that we have from our latest reconciliation study between Canada and China. This will give you a sense of some of the data quality issues that we have when we talk about customs-based trade statistics.
My colleague will go over the balance of payments data. He will look at trade in services, direct investment, and also some of the data challenges and quality initiatives on the balance of payments side.
Page 2 of the deck gives a quick overview of the program for which I am responsible. Our mandate is to compile, analyze and disseminate consistent, integrated and timely estimates of Canada's merchandise exports and imports by partner country and commodity as well as price and volume indices for exports and imports. We use administrative data that we receive from both Canada Border Services Agency, CBSA, and, in the case of Canadian exports to the United States, U.S. Customs and Border Protection.
We use the standard commodity industrial and geographic classifications. We adhere to United Nations guidelines on the compilation of merchandise trade for customs-based data. We adhere to the International Monetary Fund, IMF, manuals for the calculation of the balance of payments-based trade statistics. We are also responsible for the prices program — I will not go into that in detail here. We also maintain the harmonized commodity classification system, an international standard that is used by over 200 countries. We maintain the statistical suffixes for that classification for both the import and export commodity classification.
On the import side, for the customs-based data, we have about 19,000 commodities that we track, and on the export side about 6,500 commodities reported to us monthly.
In terms of our non-core program, that is, parts of our program that are not part of our monthly release, we have our exporter and importer registers. Those allow us to look at the dimensions of who are the exporters and importers.
The customs-based trade data lets us look at what was exported, when it was exported, how it was exported and to where it was exported. With these data bases, when we aggregate those transactions, we can start to look at the characteristics of the individual exporters.
We have a World Trade Analyzer database that we maintain where we purchase data from the United Nations, and we reconcile that data through an automated sort of algorithm. It is used primarily by researchers, and it provides a complete matrix of world trade partner countries based on standard international trade classification.
We also conduct periodic reconciliations with partner countries, and you will see later I have an example of one that we have done with China.
If we turn to page 3, we have a picture of our trade with China, India and Russia over the past 10 years. Between 1998 and 2007, customs-based Canadian exports increased by 41 per cent, from $318 billion to $460 billion. Exports to China, India and Russia increased almost fourfold during this period, from $3.2 billion to $12.2 billion. Exports to China, India and Russia accounted for 2.7 per cent of the total Canadian exports in 2007 versus 1 per cent in 1998.
Turning to page 4, the Canadian merchandise imports, on the import side, Canada's imports during the same period increased 36 per cent, from $298 billion to $406 billion. Imports from China, India and Russia increased by more than fourfold in this case, from $9.3 billion to $41.7 billion, and the respective shares there are now 10.3 per cent in 2007 versus 3.1 per cent in 1998.
You can see trade has grown quite rapidly. In the case of imports, while all countries have grown with double and, in some cases, triple digit percentage changes, the majority of that growth has been from China in terms of imports. China has moved during that period from our fifth largest source of imports to our second largest source of imports.
Turning to some of the characteristics of the exporters, we do not have the data for 2007 yet. It is only available up to 2006. For the period 2000-06, numbers of exporters to each China, India and Russia almost tripled. However, less than 7 per cent of all exporters export to these markets currently. Twenty per cent of the exporters to India and China and 27 per cent of the exporters to Russia are in manufacturing industries. Wholesale trade accounts for between 28 per cent and 33 per cent of all exporters to these countries compared to 24 per cent of exporters of Canadian exports to the world. These shares have not varied significantly in the 2000 to 2006 period, so this picture has remained relatively stable.
Turning to the next slide, we have a brief description of the characteristics and statistics of the importers. In this case, this data bases only goes up to 2004, so I have compared 2002-04 time period. In general, there are about three times more importers than there are exporters in Canada over this period. The number of importers from China has increased by 32 per cent during this period, and the number of importers from India and Russia has increased by 21 per cent and 15 per cent respectively. About one third of all our importers have trade with these countries, which is significantly higher than for exporters. Manufacturing accounts for about 20 per cent of all our importers from China, and there is again no significant change of this over the period. Similar to the exporter community, however, 33 per cent of importers from India and 75 per cent from Russia are in manufacturing. Wholesale trade accounts for 50 per cent of importers from China, 40 per cent from India and only 10 per cent from Russia.
If you turn to the next slide, I apologize there is one slide in English and the subsequent slide is in French, if you are interested. I could not fit all the detail to make this slide bilingual.
The trade data between partner countries, while it should be a mirror image, is rarely the same in practice for a number of reasons. Conceptual differences in terms of the system of trade that countries employ account for this. For instance, if a country has duty-free zones where the goods can enter the country but not be cleared for consumption, those goods may not be counted as part of their trade. The treatment of freight and insurance may differ between countries. For instance, in the case of Canada and China, China's imports from Canada include the cost of insurance and freight, while our exports to China do not include the cost of insurance and freight beyond our border.
There is an issue of under-coverage in terms of exports that are not reported to customs and that may be leaving the country. We have addressed that in the last few years with our colleagues at CBSA. They have put in place a number of new regulations, administrative monetary penalties and memoranda of understanding, MOUs, with carriers to ensure compliance with reporting. We have done some studies on the marine mode and have seen that has improved dramatically.
Misallocated exports are also an issue. I mentioned the data exchange we have with the United States earlier. In that case, we take the U.S. import data as our exports to the United States. If those goods, when exported, are cleared for consumption in the United States, then the Canadian exporter would not fill out an export declaration with CBSA, and we would not know that they were subsequently being re-exported to China, India, Russia or wherever. That would be an issue where they are counting those goods in the trade statistics, but they are allocated to the wrong country.
Timeliness and valuation can create issues. We have issues of transfer pricing between firms, where they may change the values or try to value the goods such that it is favourable in terms of tax treatment between different partner countries. Issues are at play in terms of the exchange rate effects as the dollar moves and how that affects the pricing and when those exchange rate movements get passed through.
In general, we say that import data are better than export data. I want to stress `` in general, '' as this is not always the case. If we look at our colleagues in Europe for the intra-EU trade, it is not the case there. They no longer have customs border controls for the trade moving within the EU, and their import statistics have suffered as a consequence. They use their value-added tax, and they believe now that their export statistics are better than their import statistics.
Another example is that we have discovered cases where export statistics may be better than import statistics, and that is for controlled goods. We have seen, in some cases, when we have conducted reconciliations with countries, that the country claims to have imported goods from Canada, yet we do not have export permits that would have allowed for those goods to have been exported from Canada.
In terms of this reconciliation table, I wanted to show you that when we go through this process and do this detailed reconciliation with our Chinese colleagues, we find that it does affect the way we view the trade balance. From the study that we did in 2002-03, we found that our trade balance with China, instead of being what we thought was an $11-billion deficit in 2002, turned out to be an $8-billion deficit. For 2003, the comparable numbers were $13.8-billion deficit versus a $10.3-billion deficit, so it does change the picture when we do these reconciliations. However, we do not take these reconciliations and feed that back into the official statistics because we do them on a one-off basis with countries.
With that, I will pass over to my colleague, Mr. O'Hagan.
Patrick O'Hagan, Director, Balance of Payments Division, Statistics Canada: The work Mr. Kuntz does in his program is closely related to the work we do in the balance of payments. The International Trade Division has a lot of detailed information on trade in goods that they label merchandise trade. The Balance of Payments Division has a more comprehensive approach to all types of transactions and positions with respect to non-residents, so we are broader in scope but narrower in terms of the amount of detail that we produce.
If you look at page 10, to give a quick overview, the core program is constructed with two main components — the Balance of Payments and the International Investment Position.
The actual quarterly balance of international payments is broken down into the current account activities and the capital and financial account activities. In the current account, the biggest component we measure is the merchandise trade that comes from Mr. Kuntz's area. We make small adjustments to that, and — for reasons which I cannot actually explain — we call it trade in goods as opposed to merchandise trade probably because we also have trade in services underneath that category, and we want to distinguish goods from services.
Mr. Kuntz has covered the activities on the goods side, and he feeds us all that information, so I will talk about the other current account components.
In terms of services, there are four main components: transportation services, which is the cost of transporting goods and services, including the cost of certain types of travel; the travel account, which is basically tourism spending as well as business spending — it also includes seasonal type workers and air transportation crews, et cetera; government services, which is official representation at different functions as well as military cross-border expenditures. However, the biggest component for us is the commercial services.
In contrast to what Mr. Kuntz was saying where he has a lot of commodity detail in merchandise trade, we have a very restricted amount in services trade. We have somewhere in the range of 10 or 12 types of commodities of services: communications, construction services, insurance services and other financial services, such as fees and commissions — brokerage fees and commissions — banking services, computer information services and royalty and income fees. We also have non-financial type commissions. One company putting together an importer or exporter in two different countries would be an example of a non-financial type commission. We have management services, research and development services, architectural, engineering and other technical-type services, as well as personal services. Finally, we have a catch-all category called ``miscellaneous.'' We have quite an aggregation over these types of services.
You will notice, because there are fewer Canadian firms involved in providing cross-border services — both imports and exports — that we have more issues in the Balance of Payments Division with respect to confidentiality. How much we can actually provide on a geographical basis has its limits, but we will come to that later.
The other components of the current account include investment income, which is income associated with foreign holdings of Canadian bonds, for example, or Canadian holdings of foreign equities. Therefore, we have receipts and payments — receipts being our exports, payments being imports. We have investment income related to direct investment, which are dividends and various types of payments moving between affiliated companies and across borders. We have other types of investment income particularly related to banking activities such as deposits and loans, where we have interest flows moving across borders.
Lastly, we have transfers, which is a relatively small category. It is current transfers going across borders; pension payments from foreign governments, for example, received by Canadians; or social security payments from Canada going to non-residents who have moved to the United States.
That is the overall current account, and we have balances for different components; balances for goods, which are the balances of merchandise trade; for services; and for investment income, et cetera. That gives us an overall current account balance that has been in surplus since 1999. However, as of the fourth quarter of this last year, that balance has slipped into a slight deficit — largely related to a narrowing surplus on goods transactions and a significant increase on travel deficit related to travel, particularly, to the United States over the last few quarters as the dollar appreciated.
In terms of the capital and financial account, that is fairly straightforward as well. We have there a mirror image of the current account. For example, if our trade and goods and services were in surplus, then we would have to finance that activity — we would be lending — to non-residents as a result because we are making more income on our overall trade. Therefore, we will be lending money abroad. It is the mirror image in the sense that it is all financial transactions related to activity with non-residents.
Again, the capital and financial account is broken down into three main components. Transactions in direct investment is one component, which is an interesting one. That is the in-flows and out-flows of intra-company investment broken into three basic types of activities: Setting up of new companies, which we have seen a little bit in Russia, India and China in recent years; injections of working capital into existing affiliates in foreign companies; and take-over activity, which was quite significant in 2007. For foreign investment in Canada, we had a record year, which surpassed the takeover activity in year 2000 — which was in the high-tech boom years. We have had very substantial Canadian direct investment abroad in 2007 as well.
This raises concerns over issues related to hollowing out or what is happening with respect to globalization when we start thinking about the consolidation of those sectors. For example, inward investment in Canada tends to be focused on manufacturing and resource industries. Outward investment tends to be focused on service-type industries. A consolidation of worldwide sectors is happening in that.
Then the other flows are, of course, portfolio investment, Canadians lending to non-residents, non-residents lending to Canadians — for example, purchasing Government of Canada bonds — and Canadians lending to non-residents. A good example of that would be the huge amounts of investment going out through pension and mutual funds to foreign markets, particularly since the ceiling on foreign investment was lifted in 2005. Of course, we saw the reverse of that in 2007 because there was a big selloff in Canadian holdings of U.S. paper related to the subprime mortgage market meltdown. The capital account has a fair bit of activity.
The other part of the core program is our international investment position. That is Canada's assets and liabilities with non-residents, again, broken down into our direct investment positions, our portfolio positions and other types of positions including banking flows and our official international reserves.
Foreign affiliate trade statistics is our one non-core program which has, again, generated considerable interest and attention, and has grown since 2001.
With respect to our trade statistics, there are two ways in which Canadian companies sell to non-residents. One way is directly through exports of goods and services; the other is through sales of their foreign affiliates operating in foreign markets. We want to be clear between the two. One is trade in goods and services, and the other one is something quite different. Trade in goods and services contributes to our gross domestic product but foreign affiliate trade activity is not part of domestic production. However, it does feedback into national income because these Canadian corporations do earn a fair bit of money operating abroad.
Page 11has a fact sheet on trade in services coming off our benchmark estimate in 2005. The grand total of exports and imports with Russia, India and China is exports at $1.6 billion and imports at $1.6 billion. We have a narrow surplus on transactions in trade and services with Russia, India and China. Listed underneath that is the breakdown of the exports and imports. You will notice is that China accounts for the bulk of that activity.
We can only provide the breakdown for Russia, India and China from 2005 because we have benchmark surveys in trade and services that go out, and it is the benchmark surveys that give the detailed geographical breakdown that is of most interest here. Our regular quarterly surveys, which run up to 2007, only give six major areas of geographical breakdown.
Turning to the investment side of the picture, halfway down the page, I have data for 2007 from a release that went out March 6. You can see that in terms of total Canadian direct investment abroad to Russia, India and China, we have about $2.3 billion invested. However, investment coming in from those countries — on direct investment — is $1.2 billion. There is a significant surplus to those three countries. In fact, the biggest surplus now currently is with China.
Of interest is the fact that we have a surplus with China, but, if you look at other aspects on the investment account, particularly portfolio investment, China's huge trade surplus has built a substantial reserve for them. They are using part of it to invest in other countries' securities, in particular. For example, China's holdings of government bonds has seen a big increase over the last few years; it is a very substantial growth since 2003. It is about a 13-fold increase in holdings of Canada bonds. Nevertheless, it is still relatively quite small.
If we turn to the next page, you get a sense of what the time series looks like for imports and exports of goods and services from Russia, India and China.
The blue line is total service imports from these three jurisdictions. They have grown at roughly the same rate, although activity has accelerated since about 2000. A lot of that growth since 2000 has reflected the growth in these emerging economies. A fair bit of it has come from China.
You can see that the last point in the slide reinforces the fact that we have a very small surplus on services trade with Russia, India and China. The pink line gives the total service exports to Russia, India and China — a very similar pattern. The exports and imports are growing at a fairly similar rate, although the imports have picked up and are growing at a slightly higher pace. The convergence of the lines is reflective of that.
The next chart on page 13, gives you a sense of how important the trade with these emerging economies is with respect to our total trade in services. When it comes to our exports of services to Russia, India and China, you can see they have not changed much, as per the pink line, since 1999. A slight increase in the trend is noticeable but nothing too substantial.
However, imports of services have grown quite a bit more sharply, in particular since about 2000. A fair bit of that is associated with China. In terms of its impact on total trade, we are talking about a range of 2 per cent of total services trade in imports of services and about 2.3 per cent of total trade in services exports from those jurisdictions. Currently, even though it is growing, it is still a minuscule part of Canada's overall trade in services in both imports and exports.
The next slide gives you a sense of how the direct investment positions stand. You can see that Canadian direct investment abroad to Russia, India and China has remained relatively stable. It is important to note that the amounts are very small — 0.5 per cent of our total Canadian direct investment abroad.
On the flip side, the pink line shows foreign direct investment coming from the emerging economies that we are talking about. It has been fairly flat up to 2005, after which there was a sharp increase. While I cannot give you the numbers because of the confidentiality problem — in year 2006, I cannot give you the breakdown because the number of companies involved in this investment is too limited for me to give you the country breakdown — I can say that from 2004 forward, much of that growth has been with China.
I will speak to the data challenges that we face. The balance of payments program outside of the trade in goods we have from Mr. Kuntz's area relies heavily on surveys. We have issues with respect to surveys. We are quite concerned about the response burden that is always an issue when dealing with surveying Canadian corporations and trying to obtain adequate details with respect to their trade in services in particular or their direct investment. We are talking about a fairly limited number of companies, but we are asking for a great deal of information with respect to those companies. We have noticed over the last six or seven years that we have had a gradual decline in our response rates in our surveys. That has been of some concern to us. We are dealing with that with respect to a couple of projects, which I will talk about on my last page.
Another interesting issue to note is the substantial growth in multinational enterprises. Canadian direct investment abroad grew substantially from 1993. The nature of that type of activity has changed quite a bit as well. We are starting to ask ourselves, as statisticians, whether it is increasingly difficult for these large, multinational companies that are spread over an increasing number of geographical jurisdictions to answer the questions that statisticians need. That type of activity is great for them in terms of efficiency of the firms' operations, but it might pose challenges for statisticians.
With respect to globalization, there are two issues that are challenges for statisticians: global value chains and goods for processing. Basically, we are seeing a worldwide dispersion of production so that instead of one firm in Canada producing all components of a particular good, they are outsourcing much of that activity to other companies within Canada and outsourcing outside of Canada — which we refer to as offshoring. You may have bits and pieces of production going across many geographical jurisdictions before the final good is produced.
This is challenging for statisticians because it is more difficult for us to measure the type of activity that is occurring. However, coinciding with that is an increase in what we call goods for processing — increased international shipments of goods that are in process as a result of these global value chains. Another important question for statisticians is whether those goods are being processed when they cross borders, and what value should be attached to those imports and exports of goods. Currently, for most of those goods going across borders, the value in the customs data is at full value. A small amount of value is added to it as the goods are processed in one geographical jurisdiction and then exported to another geographical jurisdiction for more processing. The question that statisticians are grappling with — not just at Statistics Canada but internationally because we also follow international standards for this — is whether we are seeing trade in goods or trade in services. If we believe that it is trade in services — and the international standards have suggested that we start treating many goods for processing in that way — then that suggests we have an overstatement on both sides, exports and imports. It is not a problem with respect to the net trade, which feeds into our gross domestic product and tells us whether the economy is growing, but a problem perhaps with the classification of our international trade. We are looking at this at Statistics Canada, as are other statisticians.
A working group is set up to look at the treatment of goods for processing now that we have a new international standard. One way to look at it from our own production data is that if the production data for a firm suggests that what they are producing is a service but what is coming across in the trade data is goods back and forth, then that gives us the signal as to how we might want to change this. We are anticipating these changes for our next historical revision to the Canadian System of National Accounts, which will likely be in 2013.
I will now touch on some quality initiatives. As with customs data, we do an annual Canada-U.S. reconciliation for the overall balance of payments statement. We only do that with the U.S. now. We are thinking about extending that to other major trading partners in order to assess quality issues in the balance of payments. We are looking at implementing a detailed survey coordinated by the International Monetary Fund of foreign direct investment for 70 countries. If that survey is implemented in a couple of years, it will give us much more geographical information than we currently have. There will be an aggregate level in exchange of direct investment data when this information is tabulated.
We are in the process of redesigning our survey programs, in particular our trade in services. That will give us much improved information on services and a better geographical breakdown because we are upping our coverage for services trade. Lastly, we are redesigning our foreign direct investment surveys as well, which will benefit us in terms of geographical breakdown.
Foreign Affairs and International Trade Canada has asked us to improve and expand substantially our foreign affiliate trade program because this activity is quite important.
In fact, if you were to look at foreign affiliate sales of Canadian companies and compare that to our total exports of Canadian companies, it is somewhere in the range of 70 per cent of total exports. Therefore, it is a very significant number, and you can see how there can be some important policy initiatives and study coming off these data.
I went on a little longer than I had hoped but that brings me to the end of my comments.
The Chair: I am sure it was my fault when I told you 15 minutes. You probably misunderstood, I meant 15 minutes each. That is fine for the reason I mentioned before, namely, there is a lot of information here. It is sort of mind- bending. I want to thank both of you for coming here.
Senator Stollery: I am aware that Statistics Canada is a very highly regarded institution. As I said to you before the meeting, we have had you here before, particularly when we were reviewing the free trade agreement with the United States.
We have had evidence, I believe it was from our former trade commissioner or perhaps the consul appointed to Taiwan, who before the committee — I believe it is in the testimony somewhere — said that when he got to Taiwan, he discovered, though they did not appear in the figures, that many Canadian products were sold there that he did not know we sold to Taiwan. We determined that the reason was probably because of congestion in the West Coast ports; many exports from Canada went to the U.S. to be shipped out of the Port of Seattle.
We have had testimony from very credible people, including, as I say, the trade commissioner or the consul — I cannot remember which. We also have had Danielle Goldfarb before the committee a couple of times on a variety of subjects, and she has concluded that our trade with Asia is considerably under-reported. She refers to this as Canada's missing trade with Asia.
It came as a bit of a surprise to members of the committee that goods shipped through the Port of Seattle, which I gather is very common because of port congestion, et cetera, were considered exports to the U.S. and the end user did not seem to matter.
I was a bit taken aback. When Statistics Canada was the Dominion Bureau of Statistics, DBS, in the 1950s, we had a business that did a lot of importing and were required to complete many forms for statistics. Therefore, I was a bit surprised at this. I would like to hear the story behind this, and how the committee might be able to remedy the situation.
Mr. Kuntz: I presume the senator is referring specifically to merchandise trade and not trade in services in this instance. Merchandise trade statistics, customs-based merchandise trade statistics are not new. They have been around for a long time; for hundreds of years in a number of cases. They have been around for about 180 years in Canada.
Some of the problems you mention in terms of country misallocation or goods that end up in a country are not new. In fact, I brought an article with me written by a former chief statistician of the Dominion Bureau of Statistics published in Journal of the Canadian Bankers Association in July 1926. He talks about exactly these issues: export under-coverage, which is the non-reporting of trade to customs; country misallocation, which is a situation where, when goods leave the country, the final destination is not known.
It is not that we are not aware of these issues; we are aware of them. In fact, on a balance of payments basis, which is what we consider to be our official statistical series, that our group division feeds over to Mr. O'Hagan to appear in the balance of payments, we have an export under-coverage adjustment; we re-initiated that in about 1992.
This article actually mentions that back in the 1890s, an export under-coverage adjustment was done to Canadian trade statistics. Many of these issues are not new. We have been dealing with them. However, new dimensions to the problem have surfaced. Part of it is due to our date exchange with the United States, which solved the problem of our imbalances of our statistics between Canada and the U.S., historically. When we initiated that memorandum of understanding with the United States to have a sort of single source flow, Canadian exporters understood that to mean that if they were exporting goods to the United States, they did not have to fill out a Canadian export declaration.
That is fine as long as the goods are being landed for consumption in the United States and are staying in the United States. However, if they are being subsequently re-exported or travelling in transit through the United States to continue on to another country, an export declaration form should be completed with the Canada Border Services Agency, CBSA.
We have discussed this issue with our colleagues at CBSA for a number of years. They have responded, and in the 2004 period, they started to implement a number of new measures. First, they changed the regulations so that exporters report exports prior to the goods leaving the country. Second, they instituted a regime of administrative monetary penalties, where they could actually fine the exporters if they found that they were not reporting the goods.
Third, they implemented a system or a series of MOUs with carriers for goods that are leaving directly from Canada where the carriers would not load the goods unless the exporter could demonstrate proof of reporting. That addressed the problem from a Canadian perspective in terms of goods that were being reported to customs leaving from a Canadian port, Vancouver, for example, to go to China. It does not address the problem where Canadian goods leave from Seattle and go through. Part of the problem is that we have been lobbying with our colleagues in the United States to try to get access to the appropriate documents for years now and have never succeeded. The issue now is that the focus of the U.S. Customs and Border Protection is probably no longer, and never really was, on statistics; it is on security. We would like to get access to the U.S. in-transit document called the U.S. 7512.
If we could arrange through our data exchange to have access to that document, it would allow us to tackle that issue of understanding what the coverage problem is in terms of those goods going through the Port of Seattle so that we could match them up against transportation documents, against existing export declarations, and we could get a handle on that.
Senator Stollery: Considering that we are in a new age in terms of Canadian exports and the rise of Asia and Russia, et cetera, it seems hard to believe that without this communication that you can run anything.
I remember, in the 1950s, my grandfather stating that he had to fill in all these papers for the DBS, and he said, ``Well, you can't run a country without statistics,'' and I think that is right. I do not know how we develop proper trade policies if we do not have proper statistics. I assumed that if someone was exporting something, a record was kept. We have an unusual situation in that because of congestion they use Seattle. It seems hard to believe that this has taken so long; I find it very troubling.
The Chair: Did you want to make a comment?
Mr. O'Hagan: A second part to that question related to some of the work that Danielle Goldfarb has done with respect to underestimating trade. Perhaps that is one that may be useful to deal with. I alluded to it in my opening remarks. I am familiar with the paper — I believe it went out in January or February — where the point was made that Canada's trade generally speaking was grossly underestimated.
That is not our position at Statistics Canada because much of the currency related to that point in the paper was taking our total exports of goods and services and adding the foreign affiliate sales to that. That is one way of looking at total sales of Canadian corporations, but it is not total exports. We were concerned that we do not have a misinterpretation there. Foreign affiliate trade statistics and exports of goods and services are two very different things.
It is fair to say that we could be underestimating trade in some jurisdictions. We believe we make a series of corrective adjustments, but it is more difficult when we have an emerging economy. We are more likely to be missing a little in those faster-growing economies, and we are trying to catch up with what is happening there. However, our numbers right now are reasonably reliable. Certain things, such as Internet trade, are very difficult for to us capture. We have some estimates that we put in, but they are also very difficult to classify geographically. We have surveys of Internet use and activity on the Internet, but we cannot always get the geographical locations down pat.
On the services side, yes, for very small firms it is sometimes more difficult for us to capture all of that activity. We generally stratify our surveys. We have a take-all portion, which is the big service providers, and we have a take-some, which is the sample portion of that activity. Then we supplement some of that with administrative data.
With the revamping of our trade in services program, we suspect we will get some sort of an improvement in the overall coverage, which means we will probably revise both our exports and imports up a little bit. Until we get the new results, it is hard for us to say, but we do not feel that there is a huge understatement of Canada's trade.
The last point is the point on trade in services. That is more challenging, and we are working closely on that. We could be understating total trade in services to the extent that we have a huge amount of goods in process happening, particularly with respect to China. China is known to be one of the big countries with a lot of activity in goods for processing. However, overall, our trade would not be underestimated. It would be more a classification between our trade in goods and trade in services notwithstanding the points my colleague just made with respect to geographical distribution.
The Chair: As a point of clarification, this is obviously not a Canadian problem; this is a global problem, I would imagine. It is not just us having this problem.
Mr. O'Hagan: Yes, that is correct.
The Chair: If there will be a solution, it must be a global solution as opposed to a Canadian solution.
Senator Grafstein: I wonder if we could, to put this in digestible chunks, separate the analysis in a couple of categories. Put trade off to one side with merchandise and services, which you have done, and let us start with direct foreign investment inflow, outflow. Let us start with that at the moment. These numbers, frankly, are dismal. They are growing, but a 30 per cent or 40 per cent bump from this level to that level is quite dismal, which is the whole point of our study here.
We have a myth in Canada that we are a trading nation. We are not a trading nation. We do not trade within Canada; we trade within North America, but that is really not being a trading nation. This is not a trading nation in the same way that Britain was a trading nation. If we were Manchester Liberals, as Winston Churchill was, we would be guffawing about our trade figures. We are trying to shake the Canadian psyche in some fashion to stimulate more trade and investment that would be beneficial to Canada. That is what our objective is here. We think we have to somehow tap into the new emerging giants somehow. Maybe we should not be dealing with them at all. Maybe we should be dealing with South America instead. Maybe the rate of return for us in the short run is better with South America or Mexico. We do not know that.
This is a probe to the unknown. I want to look at your figures for a moment. Let us take a look at direct foreign investment. When you do the analysis, we start with Russia at $333 million and $160 million — those are peanuts, or less than peanuts. When you think about one investment in Canada that is $4 billion, this is not substantial. This is obviously small bits and pieces.
If you had your druthers, based on all that you know, what is the fastest and quickest kick for us in terms of direct foreign investment? How do we benefit Canada most directly with direct foreign investment? What is our target? Where do we go? What do we do? Based on all the statistics that you know, give us the dartboard. Where should we hit those darts?
The Chair: For my own edification, you are asking Mr. O'Hagan what his numbers tell him.
Senator Grafstein: They live with numbers; the numbers are great; they are very intuitive. However, I am saying to you that there are numbers, but what do we do with the numbers? They say to me that this is dismal. How do we make it a positive picture? What is the fastest kick we can get for direct investment?
I have some ideas, but I am interested in what you have to tell us. We will talk about trade in services in a moment. I want to direct this to you, Mr. O'Hagan, because your information is interesting.
Mr. O'Hagan: It is a tough question in one sense. Let me go back to your opening point of whether Canada is or is not a trading nation. It depends on your perspective. If we look at distribution geographically, we could argue that there is a way to go in terms of just the numbers you have seen today with respect to Russia, India and China.
If we look at trade as a proportion of our gross domestic product, it is very significant.
Your question is how we get more from that, and how we get better geographical distribution in trade — more bang for the buck, in a sense.
Senator Grafstein: Let me tell you why I came to that conclusion. The numbers between Canada and the U.S. are fantastic, at $1.5 billion a day. However, when you look at those numbers, you discover that we have a huge surplus trade with the United States in terms of our export of oil, gas, hydroelectricity and nuclear fuels. On the merchandise account, the service accounts, we are almost flat and going down. That is not a trading nation. A trading nation does not sell off its commodities. A trading nation trades in goods and services. I am not suggesting that commodities are not very important, but trade to me means putting something together, selling it and making a profit.
Mr. O'Hagan: I will come to the topic of services in a minute, since you raised it. You talked about the important geographical jurisdictions, and you mentioned South America. If we look at South America, we would find that right now in terms of direct investment, it is certainly a much more important jurisdiction. Brazil has moved into the top 10 with respect to both direct investment in Canada and Canadian direct investment abroad, which is quite a significant leap from just a few years ago.
One point you can take from that is that we got into Brazil a little earlier than we got into Russia, India and China. It may well be that at the current rates of growth in Russia, India and particularly China, in two or three years from now we could have a substantial direct investment position with them and, if that is the case, significant foreign affiliate trade and presumably much more trade in services with those countries as well.
It is not for me to tell you where to put the bang for the buck. I can tell you where we seem to be generating some growth. Certainly at current rates of growth, China and the other two countries would be fairly significant trading partners in the not-too-distant future, assuming those growth rates continue.
You mentioned services. You are right; we do quite well on the goods. On the services, we are even with the United States. One of the reasons for that is that for export of services, if you recall the breakdown I gave you, much of it is professional scientific services — dominated by fees and commissions, professional scientific services, computer services and so on. The United States has a lot of knowledge-based capital, and so does Canada. You can imagine that in our counterpart trade with each other, we are specializing. Maybe the United States gives us more engineering, and we give them more computer services — it is probably vice versa. However, you can sort of imagine that that is what is happening with that particular economy.
In the more emerging economies, I think I mentioned that we have a surplus on trade and services with Russia, India and China. That is where we can provide more services, based on our knowledge capital. That is where we will probably get some growth in the future on the services side.
Senator Grafstein: That is helpful. Let us take a look at services and your analysis of goods and services as it applies to supply chains. In my view, this is critical for us. In other words, the fastest way to expand our growth is through looking at our existing supply chains and seeing how we can value-decrease them to value-add them — get cheaper inputs to increase our rate of return.
Again, when I look at this from a Canada-U.S. perspective, I see that the greatest growth of supply chains are not really from Canadian companies, but from foreign companies in Canada who have internal supply chains. How do we break out of that and somehow instigate Canadian businesses to develop the parallel models in these other marketplaces?
If our greatest rate of return is the internal supply chain — manufacturing and inputs, if you follow what I mean — why is it that we cannot get Canadian companies to do that, with one or two exceptions? We have the BlackBerry developer Research In Motion, RIM, which is doing a terrific job, and Magna International Inc. is also doing a terrific job; but if you subtract those two or three companies, there is not very much happening, period. It is dismal. Give us some help on that. Where should our report be directed?
Mr. O'Hagan: Supply chains are a very difficult area. In my introductory remarks, I mentioned that that is an area we do not have a lot of information on at this point. We have run a survey of global value supply chains, which we do not have the results on yet. Those results are forthcoming. We do know that we did not get a lot of quantitative information, but we did get a fair bit of qualitative information, which might help us refocus what we are doing on some of our existing surveys and help us interpret some of the incoming data.
That is a difficult area, simply because we do not have a lot of data to confront the supply chain issue at this time.
Senator Grafstein: You might look at the Federal Reserve Bank of Chicago. I have always found it curious that in Canada, or in my province of Ontario, one of the most important job creators is obviously the Canada-United States Automotive Agreement, commonly called the Auto Pact, yet we still do not understand it. We still do not understand the supply chains within the Auto Pact. No one has done a comprehensive study about supply chains in North America as it competes with Toyota because Toyota comes here under false pretences; they do not do everything they say that they do here.
Have you looked at that as a question? The Federal Reserve, apparently, is doing a study on that in North America that shows that the supply chain is much deeper and more intense throughout Canada and Central United States than we thought.
Mr. O'Hagan: I have not looked at that, but something tells me that my colleagues in our business and trade statistics field may have done some research there, looking at the U.S. results with respect to our own global value chain survey. Unfortunately, those results are not tabulated. I was trying to get some information before coming here to see what we could shed some light on.
Senator Grafstein: Anything you could get us would be helpful. We are trying to come up with templates about what we can recommend to governments and businesses that would facilitate faster, cost-effective growth.
The Chair: If you think that someone in one of the other departments may be useful in adding value to this issue, you can also let us know. We may invite them to come and address us as well. However, I agree with Senator Grafstein that if you have some information or access to some information that closes this loop, we would appreciate receiving it. I would suggest that both would be useful.
Mr. Kuntz, do you want to comment on that?
Mr. Kuntz: I will address the last point. The work being done on the global value chains is being done in conjunction with Industry Canada and Foreign Affairs and International Trade Canada, DFAIT. I believe it is the Office of the Chief Economist at DFAIT, and I think they are slated to come before your committee next week.
Senator Grafstein: They are wrestling with this as well.
Mr. Kuntz: They are, yes, and they have been talking to us about that.
Senator Grafstein: The questions are how cost-effective their trade officials can be, and what should they be working at when outside of Canada.
Mr. Kuntz: Yes, but we are just at the beginning of this, trying to understand even what sort of information we should be collecting. The questionnaire he alluded to is a pilot, not something we will implement on a regular basis. It was just a trial to see what we could find out.
The next stages would be to sort through that data to see if there is useful information. Then perhaps we could move that to a more solid footing in terms of a regular survey. There are funding issues and issues of how we approach that.
The Chair: I have just been informed that the chief economist of international trade will be appearing before this committee on May 27. Senator Grafstein, you may wish to keep in mind your great questions so that we can direct them to that individual as well.
Senator Downe: I share the view of others around the table about an insignificant trade compared to other countries with these emerging economies. Where would Canada's exports and imports be on a list of top 10 for these countries? Everyone knows the United States is doing well; you referenced Brazil. If you do not have that information, could you send it to us? Maybe your colleague has it — I see him flipping through papers.
Mr. O'Hagan: I do not have it on the services, but we can easily provide that information. We can give you the top 10 countries.
Senator Downe: I would also be interested, if we are not in the top 10, where we are on exports and imports to these three countries that we are studying.
The Chair: I would hope that you can extend that to maybe the top 20. I think it would be more useful to us to look at where we are in the world.
Senator Downe: I am interested, chair — and obviously, you are as well — in how far down the list these three countries are. We have heard testimony about the great advances other countries, such as Australia and, to a lesser degree, New Zealand, have made in penetrating markets and those economies on many levels, not only economically, but academically, in training students.
The last two times I have been to China, a Chinese person spoke with an Australian accent, which is quite a surprise. However, then you hear about the large number of students they have compared to the small number we have, there seems to be a range of discrepancies, not only on the economic side. I would like to see that when you have it.
I think your colleague has some information.
Mr. Kuntz: I do not have the actual ranking of different countries, but I do have a graphic that my colleagues put together for me, looking at the distribution of China's imports and where they are coming from.
When we look at industrialized countries versus developing countries, we see, starting in 2000, a pretty even split in terms of China's imports between industrialized countries and developing countries. We move to 2006, and the developing countries are gaining share at the expense of the industrialized countries.
In some sense, that is not a complete surprise. Countries tend to trade with countries that are their neighbours or that are in relatively close proximity to them. I suspect you will see a big increase in trade between India and China, for instance, that dwarfs anything that we have seen between Canada and China or Canada and India.
However, we will get you those relative rankings. They can be obtained quite easily from the International Monetary Fund, IMF, or the United Nations in terms of looking at the Chinese, along with the Indian and Russian, import and export statistics.
Senator Grafstein: That would be very helpful if we could get the nature and type of value-added imports that China, Russia and India are importing. Is it equipment, is it steel — what are the things that they need, aside from commodities? We know the commodity question, but this might be a helpful way for us to develop an idea about supply chains and the products that we can manufacture. It would be helpful if you could give us that.
Senator Downe: That would be very helpful as well. Obviously, these emerging economies have options.
Today, I noticed a story in the Financial Times about the Democratic Republic of the Congo entering into a $9- billion agreement with the Chinese where the Chinese will provide roads. My colleague Senator Mahovlich would be interested in those roads. The Chinese are providing for the Democratic Republic of the Congo the infrastructure they are lacking so that they can access a number of their commodities. They are shopping the world. As I hear more and more testimony, in particular about the Chinese, who are out of the loop with other countries, I am concerned about a lack of involvement in many levels.
To return to the data question that was asked earlier by Senator Stollery, do you compare the country's data and imports from Canada against your data on exports? I understand that you take the country's data and imports for the United States, but do you also check China, Russia and India against your figures? Is there a major discrepancy between the two?
Mr. Kuntz: That was the reconciliation I presented. It was on pages 7 and 8, I believe. We do those periodically but not on an ongoing basis. They are detailed exercises. Part of that exercise is to understand some of the discrepancies that exist. In the case of the China-Canada reconciliation, the principal findings are that the main source of discrepancy was the indirect trade. We found that a lot of westbound trade was going through Hong Kong. When it was going through Hong Kong, a substantial mark-up was being put on those goods before they were re-exported to China. When China was recording those goods — and the average mark-up that was occurring in Hong Kong was about 34 per cent, if I am correct — they would have a substantial valuation difference between Chinese imports and Canadian exports.
Coming eastbound, there was a similar phenomenon where there was indirect trade going through the United States and subsequently coming to Canada.
Senator Downe: Can you do that reconciliation for Russia and India as well?
Mr. Kuntz: We have not done one for India, but we started one with Russia. We met with them a few times last year, and it is in progress. We do not have results yet and have not really agreed upon all the adjustments that we must make in terms coming up with reconciled totals for trade with Russia.
Senator Downe: What is the justification for having Hong Kong? I know the Chinese consider it as a separate development area — as I believe they call it — but it is still part of China. Why do we separate Hong Kong from China?
Mr. Kuntz: It is based on what we receive in terms of UN guidelines. I believe China has asked the UN to have the countries treated as a separate economic territory for the purposes of trade statistics. That is the way that we have recorded it. We could amalgamate it with China, but, again, we will have coverage issues there. We could end up double counting things when we have an import into Hong Kong of Canadian goods and then subsequently an import by China of those goods, and then a re-export. We end up with double-counting problems there as well.
The Chair: You said that China has asked, through the UN, that Hong Kong be treated as a separate statistic for these purposes.
Mr. Kuntz: That is my understanding, yes.
The Chair: Senator Stollery spoke about Seattle. The information on page 7 of your presentation probably answers his question a great deal. Maybe you can take a couple of moments to go through that again. It is an interesting component of your presentation.
Mr. Kuntz: I did go through it quickly. Up at the top left-hand side, we have the westbound trade. The first column shows Canadian exports, and the second column shows Chinese imports. We start with the published Canadian figure, which, in 2002, was about $4 billion. We then go down and make some adjustments to that number. We add to that number the exports that went indirectly through Hong Kong. Those would be numbers that we did not count as Canadian exports. That is, no export declaration was filed saying that they were going to China or, alternatively, an export declaration was filed saying that it was going to Hong Kong but the final destination was not known at the time.
An adjustment is also made for goods that went indirectly through the United States for that time period. We would have an adjustment for goods that went indirectly through other countries. They may have gone through Europe or any which way to get to China eventually. That is a much smaller adjustment. The bulk of that indirect trade is going through Hong Kong. Some goes through the United States, but the majority goes through Hong Kong and, to a lesser extent, other countries.
If you go down that column, we take out a subtraction. We remove from the total exports that we published what we call re-exports. Those are goods that came into Canada. Their origin is not Canadian. Goods imported into Canada were cleared for customs purposes. Ostensibly, they were entered into our stock of material resources that were available in the country, and they were then subsequently re-exported in the same form in which they entered the country. Roughly $490 million is there in terms of adjustment.
The residual number is where we get to a balance that is left between what we worked out, where we cannot really find explanations, or we could not go into detailed enough investigation to figure out what that amount is. In this case, that is $720 million. That gets us to a reconciled Canadian exports number to China that is about $5.6 billion for that year.
The Chair: When we look at the statistics that are reported to us, what number is usually reported? Is it the published total, or is it your reconciled total that is shown in the statistics that are released?
Mr. Kuntz: It would be the published total at the top of the page. In this case, the $4.1 billion would have been reported in our statistics for 2002.
The Chair: That would apply all the way across?
Mr. Kuntz: Yes.
The Chair: When do we get the corrected totals?
Mr. Kuntz: They come out in the form of a reconciliation study, which we release when we do these studies. We release the results, and they come out in the dailies. In this case, we had an analytical study that went with it that documented the methodology and the different adjustments that we went through with the Chinese.
The Chair: I, too, have the same sort of question. It is not just 10 per cent; you are talking about a difference of 40 per cent. That is information that we should keep before us.
Senator Downe: On that topic, for the same time period, the Chinese would have input data for China and Hong Kong. There is almost no variance, is that what you are telling us? Their figures would be similar to these figures?
Mr. Kuntz: Their figures are actually in the next column, the Chinese imports.
Senator Downe: These figures are from China's import data?
Mr. Kuntz: Yes, they are straight from China's import data. They start at roughly $5.7 billion. That is the figure they published as imports from Canada in 2002. Down that column, there is a price mark-up for $95 million for goods that are coming through Hong Kong.
Senator Downe: I do not understand that. Is the top figure from China and Hong Kong?
Mr. Kuntz: No, it is from China. Those are goods that China recorded as Canadian imports. That amount is $5.7 billion. In that amount, some goods went indirectly from Canada to Hong Kong and subsequently to China. For those goods that went indirectly, there would have been a mark-up of about $95 million that we were subtracting out of that overall total that China reported. That brings us to $5.6 billion. Subsequently, a value adjustment is made, in this case, of $171 million. There is also a control figure.
Senator Downe: Where are the Hong Kong figures?
Mr. Kuntz: They are not on this page. It is the same for Canada; we record a country of consignment and a country of origin. In the case of goods coming into Canada from China, if they come via the United States — that is, if they are landed there — and subsequently re-exported to Canada, we record the country of consignment as the United States and the country of origin as China. Those goods would not appear in Chinese exports; they would only appear in Canadian imports. It is the same idea.
Senator Stollery: I have a supplementary question.
Senator Downe: I have a final comment. My problem is that our figures and the Chinese figures at the top line differ substantially. The accounting at the end is very convenient in that the numbers match, but at the front end, we are off by a significant amount of money between the numbers the Chinese are reporting as imports from Canada and what we are documenting as exports.
Mr. Kuntz: That is correct. That is based on the CBSA data. That is what we received directly from CBSA, and we tried to make adjustments to the balance of payments as best we could.
With respect to this CBSA database, in some senses we are the guardians of that, but we have limited influence on what is in there. It is up to Canada Border Services Agency to collect the data, and we are the recipients of that data.
We work with that data to then derive statistics that we can use to feed into the system of national accounts to balance payments, and we do that at an aggregated level. In terms of the balance-of-payments statistics that we calculate, we are looking at basically six principal trading areas and roughly 60 commodities versus the 19,000 and 6,500 that I mentioned earlier.
Senator Downe: I appreciate that. For information, it appears the eastbound has an even larger variance.
Senator Stollery: I know Senator Mahovlich has a question, but as a supplementary, the reconciliation refers to balance of payments. Is the reconciliation from gross numbers? You are taking the gross number of imports in China, what we claim we sent and what they claim they received, and you reconcile those numbers. What real value is that to our trade officials?
The trade officials are presumably interested in more individual exports and products. In other words, in the very interesting and informative material that you have given us, you have the balance of payments. That is an important issue.
Mr. Kuntz: These are customs-based trade statistics.
Senator Stollery: All right. When you reconcile with the Chinese import figures and our export figures, are those gross numbers or are they individual exports?
Mr. Kuntz: Those are gross numbers that the Chinese would have reported and that Canada would have reported.
Senator Stollery: Therefore, they do not tell us much about what our individual exports are, do they? The problem that the committee has heard about the exports of goods going through Seattle — and I do not mean to confuse the issue — that question has not been answered by the reconciliation. The reconciliation is really a balance of payments and a gross figure. I will get away from balance of payments, but I think you have said that they are gross numbers.
Mr. Kuntz: Yes, they are.
Senator Stollery: That does not tell us what the individual commodities or products are, or if they are manufactured or raw material, whatever they are. That does not seem to me to address that, but thank you.
Mr. Kuntz: When we do a reconciliation, we start off at the aggregate level in terms of the trade figures we have from the countries. We then start to drill down into that to try to identify problem areas. In some cases, it may be aggregate trade in terms of indirect flows, in this case, with China. It could be at a commodity level. If, for instance, we have large discrepancies in what was exported, where we claim we exported pork and the Chinese claim they imported pork, then we would look at that. What is the source of the error? Can we start to understand that issue? We do go down to the commodity level, but we do not always publish that information at that detailed level.
The reconciliation exercise is very difficult to do. It starts off from two different perspectives, and we try to find a middle ground that eliminates the sources of error that occur in the two countries reporting. We can get into a very detailed exercise in order to do that, and we could spend a lot of time doing so. These exercises typically take a year, a year and half or two years to complete.
Senator Stollery: Maybe the answer is that the committee should hear from Canada Border Services Agency because they seem to take the information, and it is from their forms that you have to get the information.
The Chair: There is some consideration of that. Today we are involved in a world where the global supply chain exists. All related to this, is this a function of the global supply chain and the integrated trade that we find ourselves in today that these pieces will come together at some point, or is it really a port of entry that we are talking about?
Mr. Kuntz: Maybe I will refer to the example that Danielle Goldfarb quotes about the iPod, an anecdote to the complexity of rural trade that exists today and how parts are made in Japan, parts in China and parts from the United States. When we record trade, we do not record it that way. Customs-based systems were never set up to record trade in the context of looking at supply chains and trying to figure out where all the individual components and bits and pieces came from.
We try to assign a product to a country of origin based on its last transformation, in terms of where the good was last transformed in a substantial manner that it became the product it is today. We cannot drill back down through that supply chain to get at where all the bits and pieces came from.
It is really more a question of the route the trade is taking. Today it is getting more complex, and more indirect trade is occurring than there may have been historically.
Senator Mahovlich: I have been in statistics all my life. A great American, I am not sure if it was Casey Stengel or Vince Lombardi, said that statistics are for losers.
It was brought to my attention in the Financial Times that the Democratic Republic of the Congo and China have made a deal of $9.5 billion. I know Senator Grafstein would think that that was a pretty good deal for China. I did not know that China built roads, but they will be building roads in the Congo. They made a deal to build them, which made me think that Canadians are builders of roads. We have good expertise in that.
A couple of catastrophes have occurred: an earthquake in China and a great hurricane in Burma. Will we be looking at sending expertise over to China as some type of trade? Do we have people in place there to see if we can help them? I know it would not show in the statistics because you never know when catastrophes will happen.
Mr. Kuntz: According to the UN guidelines, in terms of measuring merchandise trade, that aid is supposed to appear. The question is whether, in that urgency to get those goods on the ground, the documents are completed. As to whether the proper procedures are followed, you would have to look at that on a case-by-case basis.
As to the other part of the question, I do not know whether we have people in place. That is really for the aid agencies to address.
Mr. O'Hagan: You made an important point, coming back to something I was talking about earlier. Canada has the knowledge capital in certain areas. I suppose there is potential there. Unfortunately, as statisticians, we cannot comment on that.
Senator Mahovlich: Do we trade services with China for their services? I was over in China, I believe it was in 1988, and I was touring around Beijing. A lot of European construction is happening because of their expertise, such as building their hotels. I did not see any Canadians over there.
Mr. O'Hagan: Again, we would have to look back at what the data showed at that point in time, keeping in mind that the services trade right now with China is pretty small.
To come back to your example, there is a possibility that Canadian engineering and architectural services would be exported to China as part of their project in the Congo. It is quite possible they would look to some North American expertise as part of the contract that they have just signed with the Congo. That would show up as a result in our trade- in-services data.
The Chair: ``Flows of cash'' is a term that I think you use, Mr. O'Hagan. Are you talking about flows of foreign direct investment or are you talking about flows of cash through the banking system and payment of receivables and payables?
Mr. O'Hagan: This financial activity has three components: direct investment flows, which is intercompany investment; portfolio investment, which is trade in securities; and loans and cash flows that companies transfer through the banking system. We measure that activity through the banking system as opposed to going directly to all those enterprises and asking them how much they deposited there. We go to the banking system to ferret that out.
The Chair: Do they give you that information easily, or is there legislation that forces them to give you the information?
Mr. O'Hagan: With all surveys, there is legislation behind our survey programs.
The Chair: I was surprised to hear that you capture flows of cash, but that is good.
Someone said that you are buying statistics from the UN. Tell me what that is about.
Mr. Kuntz: We have what used to be called a World Trade Database, which is now the World Trade Analyzer. We have been doing this for a number of years. Basically countries report their international merchandise trade statistics to the United Nations. They have a database called UN Comtrade. It is available on the website, and you can download bits and pieces of it. We purchase the whole database as one piece. When we get it in its form, there are differences between country trade; for instance Canada-China, U.S.-China, Canada-Europe, and Europe-Asia. Discrepancies in terms of aggregates exist where world imports are typically greater than world exports. Part of that is due to the freight adjustments that I mentioned earlier in terms of the insurance and freight that is there.
We have an algorithm developed in the late 1970s, early 1980s, that goes through and systematically looks at these differences, tries to sort through a series of linear programming techniques and tries to adjust for the differences between the reported country's imports and the other country's reported exports. The end result is a reconciled matrix of world trade — country by country and by commodity, that sort of thing. That is a product we have developed over the years. We do it on a cost-recovery basis, and it is primarily used by the research community to look at trade flows. It is at a fairly high aggregate level in terms of commodity detail.
The Chair: That is interesting. With respect to reliability of the data, not so much the data we provide but data from countries such as China, India and Russia, are you confident that that data is reliable?
Mr. Kuntz: That would probably depend on the country at which we are looking. Some countries will be better than others; some countries will have more sophisticated statistical systems, better customs procedures.
I mentioned earlier the case of the European Union. Because they got rid of border controls intra-EU, they have lost that historical customs-based trade statistic and now rely on a survey base. That has a detrimental quality effect on their import statistics. It depends at which country you are looking and its characteristics.
Mr. O'Hagan: On the services side, we think the reliability is reasonably good. We are doing a detailed reliability study in the balance of payments by looking at our revisions with respect to a larger context of redesigning our survey programs. We have not found any major issues with respect to reliability, particularly with respect to services trade.
When it comes to the geographical breakdown, particularly with emerging economies, it is hard to get there because it is a new activity, and a smaller number of firms are involved initially. Probably, in the emerging economies, reliability is a little lower, but we are working on it right now. Particularly in the context of our redesign, we are moving to broader coverage of enterprises in our survey where we focused a lot on the service-producing enterprise. We know, however, that many goods-producing enterprises also provide services. Therefore, we will have a much broader coverage in our survey — a more scientific approach and methodology with respect to our sampling. We anticipate that that will generate good results with respect to the trade in services.
We do not think we have major problems with respect to overall reliability. When it comes down to those emerging economies, it is perhaps a little bit more problematic.
The Chair: Someone talked about a working group being set up or that exists, dealing with some of these issues. Is that a world working group?
Mr. O'Hagan: The Organisation for Economic Co-operation and Development, OECD, coordinates a working group with respect to goods in processing and how we might implement goods for processing as a change to our system of national accounts, and, therefore, our balance of payment.
The Chair: Is there such an animal for the World Trade Organization, WTO?
Mr. Kuntz: I know on the merchandise trade side, a couple of manuals out there refer to the way we calculate trade statistics generally. IMF has a manual called the Balance of Payments Manual. That has been recently revised and includes a provision — as Mr. O'Hagan mentioned earlier — to talk about trade for goods in processing, to convert those from goods trade to services trade for that component. We are looking at companies offering ostensibly manufacturing services. They do not actually own the inventories. The company contracts with them, they supply them with the inventories, they then process the goods and ship them back to the owner of those component parts. They never actually take ownership of the inventories, and that is what we are talking about when we refer to goods in processing.
Since the balance of payments has adopted that approach to measuring trade statistics, the UN has recently started a consultation process around the customs-based manual — which is sort of championed by the United Nations, it holds the pen on that — in terms of how they take this balance-of-payments recommendation now and implement it in terms of the customs-based trade statistics so that we can feed the balance of payments.
The WTO is involved in the steering group of that, as is the IMF, the UN and the OECD. A number of multinational organizations are involved in that steering group. Layered below that is an expert group of countries that contribute to the process in terms of revising those manuals. In addition, worldwide consultations happen, based on those recommendations, in terms of questionnaires sent out to collect their opinions on how they think those concepts and definitions should be modified to account for emerging phenomena, such as global value chains and goods in processing, et cetera.
The Chair: Peter Berg, who is a research economist from the Library of Parliament, has an issue he wants to ask a clarification on.
Peter Berg, Analyst, Parliamentary Information and Research Services, Library of Parliament: I have one question for each of you.
Mr. O'Hagan, this goes back to Senator Grafstein's comments about our dismal performance in our outflows of direct foreign investment. You do these surveys to determine where Canadian companies are investing abroad — and we think of the top three as the U.S., the U.K. and perhaps Ireland, that make up a huge chunk of our foreign investment. Your graph on page 14 has it very low.
Apart from publishing the numbers, do you actually go into the intentions behind those surveys? We are wrestling with the issues of exactly why Canadian companies are not investing in China, India and Russia. Is it because these other markets, such as the U.S., the U.K. and Ireland are safer, or that we are simply not aggressive as business people, or that these markets are very difficult to operate in? In other words, do you dig behind the numbers to look at the reasons as opposed to just the numbers?
Mr. Kuntz, to follow up on the iPod example that Danielle Goldfarb uses in her paper, it turns out that the value of the product is U.S. $299. Half of the value is American and half is Japanese, but because it is assembled in China, it is recorded in their data as a 50-per-cent import from China.
In that particular case, from a Canadian point of view would it be recorded as strictly an import from China? Are there a lot of cases such as that, and, therefore, is our huge growth in imports from China not of Chinese products at all but rather of products that are just assembled there with most of the value coming from elsewhere?
Should we be looking at trade data strictly between Canada and Asia and not worrying so much about the Canada- China bilateral relationship? Should it be from the perspective of Canada or North America versus Asia because everything is integrated?
Mr. O'Hagan: Even though we have some growth in those emerging economies, why do we think the numbers are so small? That is a qualitative question. When we do a survey, we try to avoid the qualitative questions with respect to the nature of the business because we are encroaching on the firms' private business — that is, how they make their money, which is not really what we are trying to measure. We are interested in the quantitative information.
When you see investment in these emerging economies, it typically has to do with the opportunities perceived by the firm, and therefore you generally see specific types of firms concentrated in specific industries. That is where the direct investment starts, and it is related to whatever advantage that firm or industry perceives might be gained from investing in an emerging economy.
Beyond that, it is hard for me to answer that question. It is more of a qualitative question, something that you might be able to glean from annual reports of those companies involved in those emerging markets; it is a little more difficult for us to comment on.
I mentioned that we are in the process of redesigning our foreign direct investment surveys. I do not think we will get to the point of asking the question quite like that. However, we will be looking for more geographical information, and, out of that, we might be able to get a better sense of what is happening, particularly if we get a better industry- geographical breakdown as a result of a redesigned survey because the survey is simply easier to fill out for those companies. We will not be able to answer the qualitative part, but we might have more information on the quantitative part.
As I mentioned before, in terms of publishing data, it is the confidentiality that sometimes limits us from digging too deeply into that. If we found, as a result of our redesign, that there were four or five other small companies investing in one of those emerging economies, then we could look at the industry breakdown, at the geographical breakdown, and probably end up publishing more information for those jurisdictions.
Why firms operate in a certain way is not a question that statisticians are comfortable answering.
Mr. Kuntz: Using the iPod analogy again, if all the component parts came together in China and the product is subsequently exported, the origin would be China, because that is where the product took form. The alternative that is posed in terms of the iPod example is that we can deconstruct items and then attribute parts of items to various countries, but how far do we go with that? You could take that much further than Danielle Goldfarb and her colleagues have. If there is gold in the circuitry, you could asked where it came from. If there is silicone, you could ask where it came from. How far down into the origins of the product are statisticians supposed to go? It becomes an impossible task.
We must have some rules of origin to adhere to. In this case, the rule is to cite the country where the product was last transformed.
We mentioned earlier the notion of how, in the international for a, we are talking about changing the definition of trade to take into account goods for processing. China has already started to do this and is one of the big proponents of this methodology because it dramatically affects their trade balance with the rest of the world. If they can demonstrate that goods are coming into free trade zones, that they do not own the inventories but are just doing processing and subsequently shipping them back out to the owners of the inventories in an assembled format, that changes their trade picture dramatically.
The recognition that there is more and more of this happening is part of the impetus for doing this. Would we adopt that in Canada? There are some serious impediments to us being able to do that. We know examples of this are occurring in Canada as well. I cannot allude to who is doing it, but we know that in Canada inventories are coming into a company that are not owned by that company. They are ostensibly being manufactured. The company is providing a manufacturing service, and those goods are being re-exported.
We currently count those components as imports because, on a customs basis, we are trying to measure changes to the material stock of goods in the country. Every time goods come in, it is an addition to the material stock of goods available, and every time goods go out, it is a subtraction from that material stock.
This is a fundamental shift in the way we look at trade. If that goes through, it will change dramatically some of the balances around world, such as China's trade balance with the U.S., or even Canada's trade balance with the U.S.
I do not know if that gets to the issues you addressed.
The Chair: It tells us how complex your job is. It is a little mind-boggling, and it is a revelation for those of us who do not work in statistics.
Thank you both for coming. You were very informative. I am sure that we will be looking to you for further clarification from time to time. We hope that you will be available to join us.
The committee adjourned.