Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 9 - Evidence - Meeting of May 27, 2008
OTTAWA, Tuesday, May 27, 2008
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 5:31 p.m. to study 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.
[Translation]
The Chair: Honourable Senators, we have a quorum. I call this meeting of the Standing Senate Committee on Foreign Affairs and International Trade to order.
The committee is presently concerned with the new economic influence of China, India and Russia and the policies that Canada is adopting in reaction to that influence.
We are pleased to welcome Patricia Fuller, Erik Ens and Martine Moreau, from Foreign Affairs and International Trade Canada. I would ask Ms. Fuller to make some introductory remarks, after which we will proceed to questions.
[English]
I would ask you to proceed with your presentation, which I understand is lengthy, following which there will be questions by senators.
Patricia Fuller, Chief Economist, Foreign Affairs and International Trade Canada: It is a pleasure to be here this evening. As you said, I have a fairly lengthy presentation, one that encompasses two parts. The first part of the presentation looks at global value chains — what they are and what we know about them. The second part looks at our commercial relationship with China, India and Russia.
I shall begin with the first part, global value chains.
There are certainly dramatic changes in the global economy that are fundamentally reshaping Canada's economic relationships with the rest of the world. First, there is the growing importance of low-wage economies — China and India, in particular, which is the chief concern of your inquiry — and these imply vast new markets for Canadian goods and services. However, low-wage economies also present a competitive challenge for Canada. The second of these dramatic changes that are taking place is the emergence of what we call global value chains as new business models.
These two developments are related. The emergence of global value chains has been spurred by the emergence of China, in particular, into the world economy. China's rapid growth has shown the benefits for private enterprise of integrating these vast global value chains across the globe.
I would ask you to turn page 3 of the handout, the implications of these developments for Canada. How we respond will have significant implications for our future prosperity. There is increased competition among advanced countries for investments in what we call the higher value-added ends of these global value chains — that is, R&D, skill intensive manufacturing and services. There is also competition for these components from the emerging 0economies as they move up global value chains in terms of the value added of the activities in which they are engaging.
These pressures were motivations behind the government's economic plan — Advantage Canada — and the global commerce strategy on which you have heard presentations from Ken Sunquist and Stewart Beck, two of our assistant deputy ministers, regarding our department's global commerce strategy. The emergence of global value chains was a motivating theme behind the global commerce strategy.
The challenge to policy-makers is to make Canada the location of choice, or a location of choice, for high-value activities in these global value chains. This can be seen as essential to maintaining the living standards of Canadians.
What is a value chain? Value chains sometimes have been referred to as supply chains, which have more of a manufacturing connotation; however, a value chain can certainly be a service as opposed to a good as its end result. On page 4, value chain is defined as the full range of activities that are required to bring a good or a service from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer.
Hence, a global value chain is connoting a state of the world in which different stages of the value chain are scattered across the globe and interconnected through complex production networks, often with different stages of production being carried out by different companies.
This is in contrast to the more traditional approach to production with the complete process of production happening in one country and often one firm for export into international markets.
Illustrated on page 5, we can see the different components that I have already referred to, as well as things like ``headquarters,'' ``corporate services'' and then through to ``sales and service.''
Flipping the page, the idea here — and this is really just to put a picture in your mind — is that these individual functions become separable. Not only are they separable in terms of not being carried out within the same firm but separable in terms of where they are located in the globe. For example, page 7 illustrates a fictitious example of a Canadian company that may have headquarters, say, in Montreal, and its R&D activities contracted to a firm in California. The fictitious company has lawyers in Washington or New York, assembly operations in China and a call centre in India. These activities, as I say, could be within the firm or they could be at arm's length, what is referred to as outsourced.
Why have global value chains become such a focus of discussion? Why have they emerged in recent times? The driving forces are generally considered to be — and this is on page 8 now — as follows: the declining costs of transportation, both air and shipping; improvements in information and communication technologies, ICTs; reduced barriers to trade and investment; and the move to market-oriented economies.
The result of these forces is that it is now possible for individual stages of a value chain to be controlled or monitored from greater distances — for example, the ICT component facilitated by cheaper transportation. As a result of these forces as well, network costs decline, markets can be served from greater distances, and, the bottom line, competition for the components of these global value chains increases.
Other factors to keep in mind in terms of this phenomenon, and I referred to this at the beginning, include the emergence of new players, such as low-wage countries that have become increasingly important. We have seen south- south and south-north trade and investment increase at a faster rate than north-north flows and faster growth rates in developing economies. Even excluding China, there has been some convergence in income levels in recent years.
Along with production of goods, services are important to emphasize as well. Services have become more tradeable, with the result that all activities are becoming increasingly internationally mobile. I have some numbers as an illustration. In 1990, there were 37,000 multinational enterprises, MNEs, with 170,000 foreign affiliates. By the most recent data, this has doubled to 70,000 MNEs and four-fold for foreign affiliates. As another example, German multinationals established more R&D facilities outside Germany in the 1990s than in the previous 50 years combined. We are seeing a critical mass in terms of this kind of activity.
Turning to the question that is perhaps a bit of a frustration for all of us who work on anything related to global value chains, measuring this activity in any quantitative concrete term is difficult. The traditional collection of statistics, the kinds of statistics collected by statistical agencies around the world, is simply not designed to capture these kinds of complex trade relationships. Therefore, you cannot, at present, follow a good through the different stages of a global value chain in a traceable way. Goods' flows reflect the movement of a good from one location to another. If we think back to our fictitious example of the Canadian company headquartered in Montreal, how would that look in terms of trade or investment statistics? You would see an investment flow to China, service payments to New York and California, export of goods from China to various places in the globe, but how do we break that out of the other flows taking place between those places and say that this is a global value chain? It is currently not doable with the statistics we have, and this is something we are seeking to address, at least in an initial way, with a special survey that Statistics Canada would carry out.
In the meantime, we infer from existing trade statistics a sense of how the world is changing. Page 11 illustrates shows the expansion in flows worldwide of exports, exports of commercial services, et cetera, down this graph and relates those to growth in world GDP. The idea here is that anything that grows faster than world production is essentially becoming more important in the process of production. This shows that, relative to the production of goods and services in the world, exports are growing almost twice as fast. Exports of commercial services are growing more than twice as fast. Really remarkable is the growth in foreign direct investment, which is growing five times as fast, and this is over the 1982 to 2005 period. Sales of foreign affiliates are about double, and so forth. We see that, essentially, international activity is becoming much more intense in the production of world output.
How does Canada stack up in these developments? The chart on page 12 keeps the metrics from the previous chart in terms of what is happening at a global level, where it says ``world growth,'' and now the bars show how fast these activities are growing for Canada, again relative to our GDP. You can see here that in all cases, except for in the growth of our imports, these activities are growing significantly more slowly for Canada than they are growing at a world level.
To wrap up this section of my presentation on global value chains, the policy implication and the policy bottom line I have referred to already. Just to reiterate, this means there is increasing competition among countries for components of global value chains. These activities are much more mobile; they are much more sensitive to small policy differences. Those policy differences become increasingly important in corporate decisions on where to locate these activities, which, as I said, may not be within their firm but outsourced from their firm. The policy environment has to contribute to Canada becoming a location of choice for high-value and highly mobile activities. That is the spirit and the motivation behind Advantage Canada and the global commerce strategy about which you have already heard from other witnesses.
Turning to the second half of the presentation, we will talk about Canada's trade and investment with the three countries with which this committee is concerned. While we would like to be able to tell you what the global value chain component of this trade is exactly, that is not possible, for the reasons of statistical limitations that I referred to earlier. We can only make general inferences and simply look at how our trade with these countries stacks up against other countries to get a sense of how our integration is growing with these countries relative to some of our competitors and infer from that to what degree we are participating in the development of global value chains in these locations.
As it says on page 15, there has been a strong growth in both imports and exports with Russia, India and China over the last 10 years. Trade with Russia and India does, however, remain quite small. China is where the trade growth has been most significant. It is now our second-largest supplier of merchandise imports. The growth of imports has significantly outpaced growth in Canadian exports, so we have a trade deficit with China. However, the interesting thing about global value chains is that it really challenges the view of the world in which one thinks exports are good and imports are bad. In a global value chain, imports become a part of participation. We must think about that when we think about imports from low-wage countries.
Services trade remains small, and so does investment; however, that is picking up in China fairly significantly in recent years.
Turning to some charts, you will see on page 16 as we look at merchandise exports to China, India and Russia that China far outweighs the other two, both in size and in growth. On page 17, you can see the actual growth rates in the last 10 years with exports to China increasing nearly four-fold. Growth rates to India and Russia also are quite strong and, presented this way, are not that much behind the growth rates to China, but from a much smaller base.
In terms of our share of China's imports, that has declined from 2 per cent in 1995 to just over 1 per cent in 2007. However, as you can see on page 19, much of this is due to the development of regional value chains in Asia. Many countries within Asia have shifted assembly production to China. You can see by the growth rates in this table that countries like Malaysia and the Philippines are having great growth rates to China. We should not be surprised to see that Canada has a declining share of the Chinese import market.
Let us look at that in comparison with more comparable countries, shall we say. We have a selection of countries here that we will carry through the next part of this presentation. The U.K., France, U.S., Germany Australia are a selected group of comparator countries. You can see that our growth to China is around the middle of the pack and that Germany and Australia stand out as having done much better in terms of growth in their exports to China. We must keep in mind that Canada's growth rate has been influenced by rising commodity prices. A certain amount of our growth in exports to China is a value effect from rising commodity prices that are important in our trade with China.
I wish to give the committee a sense of the importance of our trade and our exports to China relative to the importance to Australia, for example, of their exports to China. Putting this relative to each country's GDP, you can see that exports from Australia to China are a much more important share of Australia's GDP than, say, for Canada. In this group, we are about the middle of the pack by that metric as well.
Turning now to India, there is also a decline in share in this market. The decline is not as clearly downward as China, however; it is a somewhat lower share than we have in the Chinese market.
Comparing our growth — this is on page 23 — to our group of comparator countries, we are, again, in the middle of the pack in terms of growth in our exports to India. Again, it is Australia and Germany that are ranking the highest in terms of growth in the India market. On the basis of how we compare in terms of ratios to GDP, we are quite low. Indian trade is of lower importance to us than it is to the U.K., Germany or Australia.
Looking now at page 25, we do not have a falling share with Russia but it is a smaller share than in the case of either China or India. Indeed, it is the lowest share, at about 0.6 per cent. Growth has been rather poor in this case — I am looking at page 26; we are moving to the left-hand-side of this group of countries. Once again, we have Australia ranking first in terms of growth to the Russian market. Scaled by GDP, it is mediocre and toward the lower side in terms of importance relative to GDP.
To summarize what we have seen in the three cases, in the case of China and India, our share in their imports is falling, although our growth in exports is middling; for India, there is a low value of exports relative to other countries; and, for Russia, the share is not falling, but the growth is poor relative to the comparator set of countries.
Looking at imports, China is by far the most important supplier for Canada, as I am sure you know, among these three countries. On page 29, you see the value of imports from China is rising considerably. Again, as I said, China is now the second-largest exporter to Canada after the United States. Imports from both Russia and India remain quite small. Page 30 illustrates the growth rates of imports over the last 10 years: about 500 per cent for China; slightly less than 200 per cent in terms of increase of imports from India and Russia.
Services trade remains small for exports. As you can see, combined for the three countries, we are talking about $450 million in the most recently available data, which is available with some delay. For imports, it is only about $300 million. That is found on page 32.
Page 33 illustrates a ranking of Canada's merchandise exports and imports by area, showing again how China has moved into second place among our suppliers. That is a sort of reference table for you.
Finally, turning to direct investment, on page 34, this is a critical element in global value chains, to the extent that value chain participation often involves direct investment abroad to establish a base from which either to manufacture or to serve a foreign market. We can see here that China, again, is the country with which we see the highest growth rate in terms of Canadian direct investment. It is still fairly small, at about $1.8 billion, but it has grown quite sharply. It is worth noting that the growth rate of inflows to China on a worldwide basis has been relatively flat lately. That is some good news in terms of our relative performance. In that case, our investment into China has been growing quite quickly in recent years. Again, though, $1.8 billion must be recognized as a small number, if we compare it to the stock of international investment in China, about $300 billion.
CDIA in Russia and India is small. Looking at foreign direct investment into Canada from Russia, India and China, about which we have heard a lot in the case of China, these are still small numbers in terms of overall investment flows into Canada. China, again, is the largest, at $616 million, but this is only 0.1 per cent of Canada's total stock of inward foreign direct investment; for Russia, it is negligible.
This brings me to the end of this presentation. To reiterate some concluding points, the rise of global value chains has changed the global economy, creating both challenges and opportunities for Canada. Our ability to compete for the high-value activities in value chains will be critical to our future prosperity. Our economic integration with Russia, India and China, particularly with China, is growing, but it does lag behind that of some other countries such as Australia.
In the appendix to this presentation, you will find ``Canada's Top Ten Exports and Imports with RICs.'' This annex will give you some insight into the kinds of goods that we are trading with those destinations, in the event that that information is useful to the committee, although I am sure you have this information already.
The Chair: Thank you, Ms. Fuller.
First, it strikes all of us that your task will not be any easier as time goes on because the global value chain you spoke of is so complex. We talked about trying to identify which countries these components come from, but is there also not the issue of Canadian subsidiaries — or subsidiaries of other companies that are not necessarily domiciled in Canada but may be producing parts of that final product under a different name from another domicile — which would be even more difficult to identify? Does that make sense?
Ms. Fuller: Yes. Foreign affiliate trade and data on foreign affiliates is helpful to look at as well. We do see strong growth.
The Chair: Do you capture that information? Can you capture that information is really the question.
Ms. Fuller: One of the metrics is included in that slide at page 11 and page 12. If we look at page 12, where we are looking at how Canada is keeping pace, we can see that employment in Canadian foreign affiliates abroad and sales have actually grown less quickly than our GDP. It has been growing, but it has not been growing as quickly as our GDP.
The Chair: I wondered how difficult it was to capture that information. Sometimes I am not sure that all companies are eager to be forthright about their other activities.
Ms. Fuller: This would probably be more properly dealt with by Statistics Canada, but I know it also is quite expensive data to collect. For example, in terms of breakdown, we do not have Canadian foreign affiliate sales in China. That information is not available; it is not published.
The Chair: You have given us a lot to think about and talk about.
[Translation]
Senator Dawson: First of all, I would like to congratulate you on your presentation. The use of tables and maps is a wonderful way to explain a concept that seemed much more complex before your introduction. I feel that the charts, especially those on pages 11 and 12, that show the challenges Canada faces in being involved and competitive are also very striking.
Clearly, the countries that are becoming our competitors, both in Europe and Asia, are forcing us to come up with tools to encourage Canadian business. Our first priority, and I say this with all respect to the government, is to find ways to help Canadian companies be more competitive.
A number of things have happened. For the first time in history, the cabinets of the Ontario and Quebec governments are going to hold a joint meeting this week; one of the specific items on the agenda will be Team Canada.
[English]
We are going to have a Team Canada, Senator Mahovlich, without a coach. The provinces are deciding that they have to go to China. I think it applies to India, and Russia obviously, but they are now meeting as two cabinets and will be discussing how they, as two provinces, can work together in trying to participate in this global chain.
I have had occasion here at this committee to talk a few times about the opportunities. On the Standing Senate Committee on Transport and Communications, we are debating containerization — the fact that between 25 and 30 per cent of all the container freight in the world is passing via China. We will have millions of containers going from Prince Rupert to Chicago and Houston; they will go out full and come back empty. It is an opportunity for us in that global chain to take those empty containers and put things in there that can be assembled elsewhere — or even if it is only commodities. That is the changing world in which we are competing.
I certainly encourage the provinces that are debating having a Team Canada. Something we could consider, Mr. Chair, is inviting the people who are looking at the possibility of having the provinces do a Team Canada approach to China to appear before us and tell us exactly what they intend to do.
You are the economist, Ms. Fuller. Can you tell us, from your analysis, what are the tools that the other countries are using to help their companies be more competitive in this very competitive environment? Some people are probably using tools that we should hear about, so that we can encourage our government to do the same thing.
Ms. Fuller: I would talk about tools in two categories. One is the investment environment, because the central message here is attracting the high-value components of these value chains to be located here in Canada. If we are talking about what tools other countries are using, we are all competing for these high-value activities, so it is about tax rights, fiscal framework and all of the considerations investors take into account in locating their production facilities or whatever those components of that value chain may be. We have to be concerned with how our corporate tax rate compares to other locations and all of those things that are dealt with in Advantage Canada.
The second set of tools is looking more outward to engage our companies and assist them in undertaking business in locations around the globe. I think there is an evolution there in the thinking, that we are no longer about just promoting exports. We have to let go of that kind of mercantilist view of the world, where only exports are good and all governments around the globe are seeking to flog their companies' exports. We have to think more broadly in terms of activities that bring benefits to Canada. All advanced economies are doing that; in doing so, we are competing with other governments in the kind of services and information we provide to our companies.
Again, our toolset is outlined in the global commerce strategy. In terms of how we compare internationally, perhaps Ms. Moreau would wish to comment. I think our trade commissioner service is well thought of internationally, but we must ensure it does remain on a par. In this sense, governments compete with governments in terms of the services they provide to companies to assist them in plugging into global value chains, so that is about having the resources overseas and all the things the committee heard about from Stewart Beck and Ken Sunquist, the ADMs responsible for those policies.
Martine Moreau, Acting Director, Strategic Initiatives Division, Foreign Affairs and International Trade Canada: I am not sure I can say much about how we are benchmarking ourselves against other practices that other countries are using. I can, however, outline some steps that our department is proposing to put forward as part of the global commerce strategy framework.
There are some specific resources that have been earmarked to conduct global value chain initiatives. In that respect, some of the tools that we are proposing are related to ensuring that companies have the right information to tap into these global value chains. Such tools include, for instance, the creation of a global value chain portal where companies can go from one place and get information on reports, say, that describe global value chains of specific multinationals — how they are structured, how they operate and what the decisions are behind global value chain decisions. Leads and research products would be included as well. These are some of the tools.
We will also be enhancing our dedicated resources to conduct global value chain initiatives. To that end, some new positions will be created abroad specifically to enhance our ability to look into these global value chain opportunities. Some positions, for instance, will be created in the United States. We are also looking at putting positions in some key emerging markets, such as Shanghai, Sao Paulo and Ho Chi Minh City.
Senator Corbin: I think Senator Dawson had in mind the same kind of questioning that I am interested in; however, I am not sure I understood the answer. There is so much information to digest here. You use this language day in and day out. You probably dream about it. It is an interesting concept.
The thing that struck me in the material is that small policy differences can be an advantage or a disadvantage. That is well illustrated in the graphs that you have presented. Why is it that, compared to Canada, Germany and Australia stand out as having done better than our country? What are the specific policy strategies employed by Germany and Australia that allow those countries to outperform our own people engaged in trade and import?
These questions touch on the same line of questioning as Senator Dawson's, but perhaps there would be additional information to garner here.
The Chair: If your colleagues wish to add something when you are finished, please go ahead, rather than waiting for my cue. I would be happy to hear any comments.
Ms. Fuller: Those are very good questions. I will be quite frank up front in saying that we have identified those areas as something we need to know more about. We need to know more about why Germany and Australia are doing better on these metrics than Canada.
We can offer some fairly primitive insight in terms of the high value activities in which German exports, German trade and economy are concentrated in. There is a high presence of services in European economies in general. They do better than Canada in terms of participation in international trade and services.
For Australia, the easy answer would be proximity to Asia. However, again, we see they are doing quite well in Russia. We have research to do. One thing I omitted saying at the beginning is that we are in pretty early stages in understanding global value chains. This is probably apparent from my comments.
Therefore, those kinds of questions are in the to-be-studied category. I am sorry I do not have a better answer, other than to say that those are good questions and ones that are on our research agenda.
Senator Corbin: Are you implying that Germany and Australia have been better at thinking out their strategies than Canada?
Ms. Fuller: No, I do not think we can say that at this stage, until we have looked at those factors.
Keep in mind that the graphs we presented do cover total trade. Again, we get back to the frustrating question of how we are able to distinguish within these trade flows what components can be called global value chain type of activity versus Australian sales of meat to Russia. Global value chains can touch any kind of trade activity, really, but we have to be able to distinguish between various kinds.
Taking this kind of study to a more sectoral level can give us some more insight into coming to grips with those kinds of questions.
Senator Corbin: I have a second question.
You have referenced large low-wage countries and then you go on to talk about advanced countries. I do not know whether that is elitist language, but I should like to know who is a member of that club.
We sometimes use words loosely, a habit that bothers me because I have great respect for language and precision in language. You say that advanced countries are competing for the same high-value activities. This leads me to believe that we are in a class by ourselves and that we will not be wasting our time with picayune items like peanuts or coconuts or what have you. However, at the same time, you also say that those advanced countries are increasingly encountering competition from developing countries.
There is something about the approach that makes me uneasy. I do not know if it is the nature of our trade that makes us who we are — advanced, elitist, competing for high-value activities — or if it is just something that falls in place by itself and that we have to live with.
Could you be more specific in what value you give to this kind of language? I do not believe in a world that does not have room for less technologically advanced countries amongst advanced countries.
I am still digesting the information you gave us and I have to look in greater detail at the graphs. Nevertheless, could you make a general comment about my concern?
Ms. Fuller: Certainly, senator. Those terms are simply here to represent a quantitative perspective — an advanced economy is such on the basis of per capita income relative to emerging economies with much lower per capita incomes.
However, the real message here is that these low-wage economies — China and India, in particular — are quickly moving up the value chain. That these countries have low wages is an economic fact. We have seen a change in the structure of China's trade. Not long ago, it was dominated by textiles; it is now dominated by manufactured goods.
These countries are moving into higher value-added activities. From an economist's perspective, it is about competitive advantage. One would hope that the competitive advantage of Canada is not only in resource products but also in knowledge-based activities. We should be exploiting a comparative advantage based on the level of advancement in terms of wealth per capita in our country — which allows us to have the levels of education that we have — to engage in activities that are high-value added knowledge-based activities.
We cannot compete with China in terms of wages — which is, I think, stating the obvious. Hence, we need to compete on the basis of knowledge, which is why Advantage Canada talks about the knowledge advantage.
As I say, these economies are moving along very quickly. We should not be sanguine on this point at all in thinking that these are low-wage economies, low value-added. On the contrary, the message is they are moving up the value chain quickly, so we must ensure that we are also moving up that value chain to protect our prosperity.
Senator Corbin: However, we are not moving up at the same rate.
Ms. Fuller: There are different ways to measure that, but I think that is the motivating spirit behind policies that focus on knowledge advantage and promoting the engagement of Canadian companies in higher value-added activities.
Senator Corbin: I have a brief question. Do Advantage Canada and the global commerce strategy address today's challenges adequately?
Ms. Fuller: They have, I would say, eyes-wide-open policies in terms of recognizing the challenges that are out there. Within the limitations that the government is faced with in terms of the levers that it controls, they go as far as is possible in terms of where we are now. There is a determination to continue to move in the same direction.
Mr. Ens wishes to add something on the question of measurement.
Erik Ens, Senior Economist, Office of the Chief Economist, Foreign Affairs and International Trade Canada: It goes to the same point you raised earlier and how we are doing compared to other countries, maybe not so much on the policy side but where we are in terms of thinking and looking at the issues as an economist. An economist likes to study things he or she can measure and can put an easy metric to, and one of the difficulties is that there has not been a lot of research done. One unique thing about Canada is the awareness within the government to try to measure these things.
How are we doing relative to Germany and Australia? We cannot answer a lot of those questions in terms of what policy differences there are that are making the difference. That is where we are making progress in terms of looking at the issue.
Senator Downe: I am interested in the chart on page 20 of your presentation where you indicated that our exports to China are growing but that we are behind Germany and Australia. How do you measure Germany and Australia? Do you use the same criteria you use in Canada? Is that information provided by those countries to us?
Ms. Fuller: The information comes from the World Trade Atlas. The advantage of this tool is that it places trade data from all countries in the world into a comparable format. In other words, if it is cost, insurance and freight, CIF, or free on board, FOB, or currency adjusted, all of that kind of thing, it is all in this database in a comparable manner. It is drawn from that.
Senator Downe: It is uniform, in other words? It is identical? It is like filling out a form similar in all countries and then easy to measure?
Ms. Fuller: It is drawn from national statistical authorities and then put on a comparable basis in terms of adjustments for things like whether transportation costs are included or not. In terms of being able to compare Chinese imports from Germany or from Canada, it is as good as there is. Data always has imperfections. I think you heard from Statistics Canada about how can we reconcile Chinese import data versus Canadian import data? There are also some differences.
When you compare it to the challenge we have in measuring service flows and investment flows, goods trade data is extremely good because we have the advantage of the Customs documents, which you do not have for services trade or for foreign direct investment.
Senator Downe: Given the importance of the information, do you have discussions with your Australian counterparts, for example? Do we send delegations to discuss these trade issues or statistics with them? Is there any interchange between the two countries?
Ms. Fuller: There are certainly interchanges between our statistical authorities on questions of statistical challenges, yes. Statistics Canada leads on this.
Senator Downe: They have not found any major variation, so you are telling us we can trust these figures?
Ms. Fuller: Statistics Canada carries out reconciliation exercises with various countries. They did one not too long ago with China, and there were some differences in our trade numbers. As I recall, they were not staggering. We have a much bigger problem with Mexico where Mexican import data shows far bigger flows than Canadian exports to Mexico. We have bigger discrepancies there.
Senator Mahovlich: To what degree are these three countries competing in our traditional markets, such as the United States, European Union and Japan? Are we losing? I know that for years we were number one vis-à-vis the United States. Last year, China took over. Are we losing to Russia and India as well with respect to the United States? Are we losing ground as far as trade goes with some of these traditional countries that we used to compete with?
Ms. Fuller: Our U.S. market share has declined over the past several years, and you are quite right that China became the first-largest supplier to the U.S. market last year, overtaking Canada in export of goods into the U.S. market.
In terms of that issue, it is important to think about if we are competing in the same areas in the U.S. market. There is some overlap with China, but in general we tend to sell different things into the U.S. market than do the Chinese. It is notable that the Europeans have not lost market share in the United States. While I am not sure how India or Russia's market shares performed in the United States, I think a point of concern to us is that the Europeans have maintained their share of the U.S. market whereas Canada has not. That is a concern.
Senator Mahovlich: What is the impact of the entry of millions of new workers into the labour market in China and India on wages here at home, if any? Do the millions of new Chinese workers affect us here at home, as far as wages go?
Ms. Fuller: This goes back to the ancient economic constructed theory of comparative advantage. China has a comparative advantage in labour. They have a huge population; they have lower wages. One would expect that they would excel in labour-intensive goods, and that is what is happening. They are producing toys and textiles. Although, as I said earlier, their wages are going up, the level at which they are competing in terms of value-added is going up.
Canada has seen healthy growth in wages over recent years. We want to see a shift of the labour force into higher value-added activities and, therefore, higher paying activities. Wages are going up, and there is a concern that we read about in the papers all the time to the extent that jobs are shifting from the manufacturing sector to the service sector. That, in and of itself, is not bad news. Services contain some very high-value activities. I am not the DFAIT expert on this, but the question is: To what extent are we excelling in the higher value-added services? That gets us back to the global value chain question about competing for high value-added components, both in production of goods and in production of services.
Senator Mahovlich: When smaller companies were getting involved in Russia, they were having a lot of problems with some of their rules. Are smaller companies having difficulty going into China?
Ms. Fuller: Again, that is a bit outside of my field. That is really a question about barriers to trade. It would be my colleagues who deal with trade policy and trade negotiations that would be better placed to answer that question.
Do you have any comments on that, Ms. Moreau, in terms of China and the environment there?
Ms. Moreau: No.
Ms. Fuller: If that is a question you would like us to ask our colleagues to follow up on, we can do so.
Senator Mahovlich: You are not into human rights?
The Chair: Let me ask you to clarify something and maybe ask a question as well.
You said that the Europeans have not lost their market share to the U.S. Is that the Europeans as the European Union or certain European countries or individual European countries?
Ms. Fuller: When we looked at this question, we looked at Europe's share in the U.S. market. When we looked at it in more detail, we could see that Germany, for example, has maintained their market share in the U.S. market.
Mr. Ens: The U.K. has, as well, in the service sector in particular.
The Chair: Germany and the U.K. are the two main exporters to that country; correct?
Ms. Fuller: Yes.
The Chair: My question dealt with the European Union. Years ago, it was 15 countries; it is now 27. I guess you have taken that into account in your statistics.
One of the issues that we deal with all the time is that it is okay to export, but to import things — we need it but is that really good for our economy? You made a valid point when you said that the strong growth of imports into Canada may be an indication that Canadian companies are making better use of lower-cost inputs which gives inputs. We see it from a different perspective.
Could you clarify that for us and give us some examples? Tell us exactly what you are talking about. Also, do you see any policy implications for Canada?
Ms. Fuller: This is an important question because it relates to the whole debate about offshoring, which is always a lightning rod for concern as it brings up images of jobs being shifted overseas. If a company, in taking a decision to move a component of its production chain to a lower-cost location, is able to be more competitive and build up the higher-value activities here at home, then that is what we want to see. That is a good news story. That is precisely what I was referring to by saying that we must think about imports in this world of global value chains as part of the answer.
The Chair: Would two examples be the automotive industry or RIM, maker of the famous BlackBerry? Are those two companies that you think would fall into that category?
Ms. Fuller: Yes, absolutely. The auto sector is a perfect example of a highly integrated value chain, but predominantly in North America it is a regional value chain with goods crossing the border many times. RIM's BlackBerry has components that are made all over the world.
Mr. Ens: There has been a lot of research on that in Canada but not a lot in the U.S. where it has been a bigger political issue. When looking at the numbers, they noticed that, compared to normal job losses in an economy, the loss of jobs from offshoring, which was bigger in the U.S., was actually quite small. Of that, they were able to calculate how many jobs were protected by outsourcing cheaper inputs elsewhere. In the world of global value chains, if you are not importing then you will be at the bottom of the global value chain and not at the top functions and the higher activities.
The Chair: I appreciate that.
Senator Johnson: Increasingly, we have been hearing about the toll that inflation in China has had across the United States and about factors such as soaring energy, manufacturing and raw material costs. The falling dollar and more business rules, including more stringent labour laws, are forcing Chinese factories to increase the price of their exports. That means it affects other countries that make cheaper goods.
How has Canada been affected and what are the pre-emptive measures that should be considered to address the inflation impact in terms of Canada-China trade dynamics?
Ms. Fuller: The main point to keep in mind is that, as China advances and, as we have referred to already, as prices in that economy rise and wages rise, that is to be expected as they develop. The shooting up of food prices globally in terms of its implications for us is a question of political stability to the extent that food price increases are putting enormous pressures on countries that are seeing huge rises in food prices.
I do not know what other comments I can make in relation to global value chains. I do not know if that is helpful, senator.
Senator Johnson: With a population like theirs, in terms of looking after that itself, where will that level off for us economically? Will they be able to keep dealing with this? They invested $18.7 billion U.S. overseas in non-financial sectors in 2007 in China. They are all over the place. They could probably drown the American economy with the number of American dollars they have.
From your perspective, what is the limit for China? Their population continues to increase. India is, for the most part, a poverty stricken country, except for a middle class that is coming along. Yet these are the new economies that will be emerging and we are told that we are not competitive.
Ms. Fuller: The bottom line is that while we have already seen a huge impact on the world economy of China's emergence — and to a lesser extent India's emergence — much of that impact is still to come. That is why it is so important to be looking at these issues and drawing this to the attention of Canadians and Canadian corporations. This is a major transformation in the world economy and we have not seen it all yet.
Senator Johnson: It is a huge shift, right?
Ms. Fuller: The good news here is that millions are being lifted out of poverty in China. As they develop at this incredible speed, and as they move into higher and higher value-added types of activities, they are able to offer much better prospects to their citizens.
Senator Johnson: It is a massive shift, one that is difficult to get your head around.
Ms. Fuller: The numbers in all of these kinds of metrics are staggering in terms of their current and future impacts.
Senator Corbin: In reference to the graph on page 38, entitled ``Top exports to China,'' the bottom item is ``other'' and that represents $2.8 billion. What items are included in this category as distinct from the preceding ones?
That is a huge sum in comparison to the preceding items. I am sure they are not all nuts and bolts and that sort of thing or junk for the dollar stores. What would stand out in this ``other'' category that is not specifically listed?
Ms. Fuller: This chart shows that Canada's exports to China are fairly diverse. If you look at a similar chart for other countries, you see the ``other'' category can be quite small. However, in China, these are the top 10 and the category ``other'' contains a vast collection of products, none of which ranks in the top 10. If you like, we could provide you with the top 20 or the top 30. I do not know if we have that with us.
Mr. Ens: We can provide that.
Senator Corbin: That ``other'' represents opportunities. It represents potential growth and that sort of thing, so it would be interesting to know what these items are.
Ms. Fuller: All of these areas represent opportunities. It is remarkable, in particular, to look at machinery. If we think of our exports to China, the commonly held image is that we export largely resources to China. This shows that, yes, wood pulp, organic chemicals and nickel are the top three, but machinery is number four and it grew by 15 per cent in 2007. That is good news.
As we have manufacturers of machinery under great pressure in the U.S. market, with the appreciation of the dollar and slowing growth in the United States, we see some pretty strong growth in machinery exports to emerging economies. That number is even larger for Russia. I do not think it makes our top 10 for Russia — yes, it is in the top 10 — 60 per cent growth in 2007.
We took a look at this because this was so remarkable — the machinery exports to Russia and how fast they grew last year. The interesting story there is that the resource story is not only about the export of resources but also about the export of equipment associated with resources. Agricultural equipment and oil and gas-related equipment are seeing pretty spectacular growth rates to Russia. These are small bases of numbers. That 60 per cent is about $100 million or something like that. In Canada's total exports, that is not a large number. However, it is showing that exporters of machinery who have had tough times in the U.S. market of late are seeing some strong growth in the emerging economies — and that is good news.
The Chair: On page 43, we see an increase of more than 1,100 per cent in growth rate for export of live animals to Russia. We must have sent a whole bunch of cows all of a sudden last year. Would that be because the base number was so small?
Mr. Ens: The base number is about $23 million, so when you get to that level, it could be one transaction or something that is pushing it.
The Chair: I think we did send a couple of loads of beef cows or something.
I will go to another interesting comment you made. First, as a context, the reliance on commodities for our growth in the past few years is something that eventually will get us into trouble if we do not start to diversify. You talked about the need to make Canada the location of choice for those high-value activities. I think we would agree. We have heard that before as well; this is not the first time.
Could you help us identify in a more specific way what areas your research found we are lacking in, or not as good at, or we should improve in? Let me lead you a bit by asking: Are in lacking in education, R&D, regulatory issues and/ or productivity? Could you help us with that?
A second part of the question is this: We are part of an organization called NAFTA, a trade group that has been quite successful, in my opinion. When we are talking about making Canada the location of choice for those high-value activities, are we talking about specifically Canada or do you think we should have some sort of a strategic partnership with our NAFTA partners as well?
Ms. Fuller: In response to the first part, with respect to high-value activities, one statistic that is noteworthy is Canada's comparison in terms of research and development expenditures in the OECD group. Our private sector spends approximately half as much as the OECD average on research and development. Hence, yes, R&D is an area that certainly qualifies as a high value-added activity, as measured by wage levels in that sector, where we would want to see investment. That is the kind of consideration our department looks at in choosing what kinds of investments we seek to attract and promote in Canada. Investments with an R&D component would certainly be a good example.
One should not think, in terms of resources, of low value added, non-resources or high value added. There are high value-added activities within resource industries. The reference I made to new machinery exports is a clear example of how our strength and resources can lead to strength in what is a high value-added activity — the production of equipment and technologies associated with extraction of resources or, in the case of agriculture, technologies associated with agricultural production.
With respect to the second part of the question, certainly the existence of trade agreements is an important aspect of the challenge of attracting high value-added activities to Canada.
That is a consideration in choices that investors make as far as location. It is about what access you can have to markets from a particular base. That is why NAFTA is a great advantage to Canada in terms of being able to offer access principally to the U.S. market to investors who come to Canada. That is critically important.
The global commerce strategy aims to increase market access for Canadian companies through an active trade negotiation agenda. As I said, I think you have heard from other officials who are directly engaged in that area. That is a critical component of what I referred to earlier in terms of the environment that we have to create to be a location of choice.
The Chair: Any other comments from your colleagues?
Mr. Ens: I would add that in terms of NAFTA there was recent work done by the Conference Board of Canada. They looked at trade in intermediate inputs. One of the striking things was the big jump in trade in inputs between Canada and U.S. after NAFTA. It went to the heart of the integration and regional value chains that happened with NAFTA.
The Chair: Do we have a copy of that? It would be interesting to get that.
Let me bootleg another question in here if I may: Obviously, our focus is the relationship between Canada and China, India and Russia. There are some very interesting emerging economies — some the mid-sized economies, some of the Asia ones and even in other parts of the world. Is that an area in which you have done work — you referred in your comments, but we did not ask you to expand on this. Is there an area in which you have done where you would say that this committee should not be ignoring the potential that exists for Canada in trade and investment in some of these other emerging economies?
Ms. Fuller: The group that we call emerging economies is large. Vietnam, for example, has made all sorts of headlines with the rapid strides they have made and the spectacular growth rights they have achieved.
I would say that that list could be fairly long list in terms of countries that are making the move to market-oriented economies. There are many examples of that nature; it is not only about China and India. Those are simply notable due to their size, but there are many others that, while smaller, are also presenting Canadian companies with opportunities.
The Chair: Have you been able to identify in your preparation of the information others like Brazil? We are looking at a free trade agreement with Columbia. I know this is a little away from the focus of the study, but are there some of these other economies that are emerging, growing and just beginning to blossom that you identify as ones that we should take a look at as a sideline during this study?
Ms. Fuller: Well, certainly Brazil is in the classic BRIC lineup. That is the next obvious candidate in terms of looking at it, again certainly for its size. That is a vast economy. It is not as vast as China, but it is population-wise and GDP- wise. Its trade is small relative to its GDP, so as it expands its trade there is a lot of potential there and a lot of economic might in that country.
The Americas is a priority for the government. We have important, long-standing ties with many countries in that region. That is a strategy that speaks to building on strengths. In that sense, that is why we are looking at trade agreements in the Americas and have an increased focus on that region.
The Chair: In thanking you, I want to first say that I think this is the first time we have actually been pretty well on time in the last few hearings that we have had. Therefore, I want to thank you for sticking to the timetable.
The presentation to us this evening, colleagues, was from the Department of Foreign Affairs and International Trade: Patricia Fuller, Chief Economist; Erik Ens, Senior Economist, Office of the Chief Economist; and Martine Moreau, Assistant Director, Strategic Initiatives Division WSI.
On behalf of all of our colleagues and the listeners who may see this program, we want to thank you for attending here and sharing your information with us.
Ms. Fuller: Thank you, senator.
Senator Corbin: What does WSI mean?
Ms. Moreau: It does not mean anything. It is just Strategic Initiatives Division.
Senator Corbin: However it does not match the first letters of the SID?
Ms. Fuller: It dates back to the days of telegrams in the Department of Foreign Affairs and International Trade. There is a story there.
The Chair: Very well done. Thank you again, ladies and gentlemen. We will now conclude the meeting.
The committee adjourned.