Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue No. 12 - Evidence - Meeting of November 3, 2016
OTTAWA, Thursday, November 3, 2016
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 10:32 a.m. to study foreign relations and international trade generally (topic: bilateral, regional and multilateral trade agreements: prospects for Canada).
Senator A. Raynell Andreychuk (Chair) in the chair.
[English]
The Chair: Senators, the steering committee has just met, and that's why we are a few minutes late. We are anticipating receiving, after the testimony today, the final drafting of our trade report. You can anticipate, when we return sometime after that, very near to our return date, to be grappling with the recommendations and the report itself.
We've also wrapped up our witnesses on Argentina, and that report is in progress. We're anticipating that in the near future.
I'm alerting you that you will have some reading of drafts and looking at recommendations that you may or may not wish to propose on our study.
I thank our witnesses for being patient with us for this short delay. Good morning to you.
Our committee is authorized to exam such issues that may arise from time to time relating to foreign relations and international trade generally. Under this mandate, the committee has heard from many witnesses on the issue of bilateral, regional and multilateral trade agreements: prospects for Canada.
On behalf of the committee, I welcome in person here in Ottawa Mr. Todd Evans, Principal Economist at Export Development Canada; Mr. Ross Hornby, Vice-President of Government Affairs and Policy at GE Canada and former Ambassador of Canada to the European Union; and by video conference, Mr. Dan Breznitz, Munk Chair of Innovation Studies and Co-director of the Innovation Policy Lab, Munk School of Global Affairs at the University of Toronto.
Welcome to all our witnesses. Unless there has been some discussion about this, I'm going to take you in the order that I introduced you. We will start, then, with Mr. Evans. We have three presenters, so I'm going to ask you to make your comments and leave adequate time for questions, as I've already accumulated a list of questioners.
Welcome, Mr. Evans, and please proceed with your presentation.
Todd Evans, Principal Economist, Export Development Canada: Thank you very much, Madam Chair and honourable senators, for inviting Export Development Canada to appear here today. We appreciate your interest in our work, particularly in our work with Canadian exporters and our view on international trade and the benefits it brings to Canada.
As many of you probably know, EDC is a Crown corporation mandated to help Canadian companies grow and succeed internationally by providing financial insurance and expert advice as they seek to expand abroad. We are an arm's-length Crown corporation, and we do not receive annual funding from the Government of Canada.
In 2015, EDC paid dividends back to the Government of Canada of $500 million. In 2015, some 7,400 Canadian companies used our services to undertake more than $104 billion in Canadian international business. This included roughly 6,000 SMEs that were helped by EDC to conduct more than $15 billion in export trade and foreign investments.
Today I would like to speak briefly about the opportunities for Canadian exporters, the benefits of trade for Canada and how EDC helps exporters in an increasingly very challenging global environment.
Turning to some of the opportunities that we see for Canadian exporters looking out over the medium term, we see trade agreements such as CETA improving access to existing markets and also opening up new markets. We see growth in emerging markets, primarily fuelled by a growing middle class and rising incomes. That is boosting demand for a range of consumer-oriented products and services, the kinds of goods and services that many Canadian companies have to offer.
Opportunities we see are in areas such as financial services, health services, engineering and construction, education and recreation. Incidentally, services now represent a $100 billion export industry for Canada. That's higher than automotive and our energy sector. Other areas we see are advanced technology, clean tech, clean energy and generally higher value-added products.
Another area of opportunity is tapping into global supply chains or global value chains, as they are often called.
The other big opportunity we see for many companies, particularly smaller companies, is using the U.S. for a stepping stone to international markets. This is very important for smaller exporters.
As many of you are aware, the benefits of international trade are known and well documented. I will not spend much time on this issue, but very briefly, we know that companies that export are more productive. They pay higher wages on average. Companies that have foreign operations outside of Canada are in a much better position to compete. In a global value chain and supply chain world, domestic operations and foreign affiliates are not mutually exclusive. We see a complementary relationship between domestic and foreign operations.
Those companies that do have this expanded global footprint, this export experience, with the knowledge and experience around resources, compete better in global markets. It's kind of like a virtuous cycle. The more a company exports and the more they expand outside of Canada, they get that experience and knowledge, and that, in turn, gives them even more wherewithal to better export.
With respect to global value chains, that business tends to be much more sustainable. Those relationships tend to be secure and less susceptible to downturns in the economic cycle, especially if Canadian companies are part of that core group of suppliers to what we call an "anchor firm.'' An anchor firm would be like General Electric, Siemens, Bombardier or Magna. Quite often we see these companies sharing technology, product development and financing with that anchor firm, which is very advantageous for the smaller companies.
The big thing for us is trying to understand how Canadian exporters can tap into these opportunities. To get a better understanding of that, we survey thousands of exporters every year on a range of issues. We get input directly through surveys and also talking to many exporters, especially around issues that we focus on around the market challenges, obstacles to exporting and what they need to help them overcome these obstacles and to grow their business.
One thing that usually stands out is access to financial services, the financing, the trade credit and different types of financial products they need to manage their business. That's very important. But two things, particularly in the past few years, have consistently come out ahead of having access to credit and financing, and that is having access to market knowledge, information about accessing those markets, what the rules and regulations are around borders, customs rules, those kinds of things. Also, having the connections to local market contacts is very important for companies when they look to go abroad. For new and smaller firms, building that knowledge base and establishing those local networks is very critical and often beyond their own resources, as there are very high start-up costs for a small company when entering a foreign market.
On top of this, we all know that business is increasingly complicated, requiring more complex financial services and solutions. Companies are engaging in a range of activities, not just focusing on exporting, but we find many companies now engaged in a full spectrum of activities. They're importing, exporting, investing outside of Canada, establishing operations, sales offices and logistics marketing inside and outside of Canada, so a whole range of activity. We find on our end, at EDC, we really have to start adapting our financial services to meet this mix of different demands, so this is where we are playing a bigger role.
To respond to what we're hearing, EDC has begun to adapt our services to ensure exporters are fully supported if they seek to export for the first time or if they've been exporting for many years. As I just mentioned, we are expanding our financial products to meet the changing needs and demands of the Canadian exporter and investor.
I think just as importantly, if not more so, we are investing in our market knowledge, our research and information services for Canadian exporters. That's kind of like helping them get past that hurdle of the high start-up costs associated with entering new export markets. We have established a new global trade team, and they have been tasked primarily with establishing those connections between Canadian companies and foreign buyers. So we're adding sort of a layer of service on top of our financial products for Canadian exporters.
As you all know, Canadian companies contribute in tremendous ways to our economy, and it's no small task to enter a new market with a product or service, but we at EDC are constantly amazed by the dedication and hard work of those companies that do that.
At this point, I'm happy to turn it over to my colleagues or to honourable senators and answer any questions you might have. Thank you.
Ross Hornby, Vice-President, Government Affairs and Policy, GE Canada, as an individual: Thank you, Madame Chair and honourable senators, for inviting me.
First I thought I would just give you a quick word on GE in Canada, and then I think the clerk has circulated a short deck. I will speak to some of the points on there about why manufacturers support trade agreements.
Just on GE in Canada, we have five manufacturing facilities in Canada. In Bromont, Quebec, we make jet engine parts, and we also have the Global Robotics, Automation and Instrumentation R&D Centre in Bromont. We have a large supply chain of SMEs and software developers in the Quebec aeronautics sector that feed into that plant, and 100 per cent of its production is exported.
In Markham, Ontario, we have a global centre for smart grid technology where we do both the R&D for that technology and the manufacture of smart grid equipment. Smart grids are the monitoring equipment that allows you to keep the lights on when lightning strikes a transformer or a power line goes down. It routes the electricity around the problem in the grid, and it stabilizes the grid so that when you add, for example, wind power into it, which varies, it will end up all being stabilized so that it can be used by consumers.
Then in Peterborough, Ontario, we have our oldest plant that was actually founded by Thomas Edison himself, which makes customized large motors. These are gigantic motors that will run things like pipelines. For example, we have the contract to build the motors for the Energy East Pipeline, if it's built.
Then in Welland, Ontario, we are building what we call a brilliant factory, and this will make reciprocating gas engines that can be used for any off-grid situation where you need to generate power, whether it's a remote community in the North, a gas field in northeastern British Columbia or just a factory that wants to control its electricity costs by doing something called peak shaving, where at peak hours in the summer they generate their own electricity instead of taking it off the grid. That plant is being built in part in response to our relationship with EDC, which is extremely valuable because our customers abroad get export financing from EDC so they can buy our equipment.
Again, overall, 70 to 80 per cent of all the production in these plants is exported.
I wanted to talk a little bit about why manufacturers need free trade. Canada has many advantages. It has a strong immigration system, which is good. We can get the talent and the people we need. We have an educated workforce. We have generally low corporate taxes compared to other countries. There is a lot going for Canada. But one of the things that people often forget about is that we actually have a very good network of free trade agreements around the world, and that is growing.
My own personal involvement was in the launch of the CETA negotiations with the European Union, and I'm extremely pleased that it looks like that will finally provisionally enter into force in 2017.
What do we need in a trade agreement? People often talk about CETA being a gold standard agreement or the TPP being a unique agreement. I want to highlight a few of the points that I think trade agreements need to cover.
It is a given that they will remove tariffs. We need that market access through removal of tariffs so that we can trade goods and services freely around the world, but there are a number of other non-tariff barriers to trade that trade agreements should address and should reduce.
The first one I want to talk about very briefly is cross-border data flow. Increasingly, we are moving into a digital world, and machines now are digitally powered. They have built-in monitors. They send data back when you're flying in a jet. The engines are communicating constantly with a central control centre that analyzes the fuel consumption, the turbulence, all of these factors that make it more efficient to run the engines.
The data is put onto the cloud, but in some countries around the world, we are seeing the nationalization of the Internet. We are seeing restrictions put on data flows. You will not be able to take advantage of this digitization if the cloud cannot work across borders. We think trade agreements should address this issue of cross-border data flows.
We also need increased disciplines for intellectual property and trade protection in trade agreements. One of the things we need to do, if you work in a large global company like GE, is to protect your trade secrets. Where a country is going to basically steal your IP or hack into your IP, you need to have disciplines around that in a trade agreement so you can protect your intellectual property and your commercial advantage and recoup the high costs of developing the technology that you are exporting.
We also need disciplines around state-owned enterprises in trade agreements. Trade agreements, to the extent possible, should level the playing field between state companies and the private sector. As you know perfectly well, in some countries state-owned enterprises dominate the market. Therefore, we need to make sure that when we go into those countries with trade agreements, we try to level the playing field and that there aren't forced marriages between the Canadian-based company or a global company and a state-owned enterprise as the sort of price to pay to trade into that country. The trade agreement should address that.
It should also address government procurement. Of course in CETA, this was one of the novel parts of the agreement. It actually extended disciplines around government procurement to the subnational level in the European member states and touching the Canadian provinces. That is something that an international company trading into a country wants access to, not only to federal or national procurement but that subnational procurement. If you just look at Canada, the provinces actually procure more than the federal government when you think of the health care system and diagnostic equipment or other matters.
One thing that I highlighted in addition to market access through tariff elimination is free trade even without a trade agreement in environmental goods and services. We are all faced with the challenge of climate change. We all have very different targets to meet under the Paris agreement, and yet a lot of countries put tariffs on wind turbines, on clean locomotives and on jet engine parts. Before you enter a comprehensive economic and trade agreement, you need to have a reduction of tariffs on environmental goods and services so that we can kick-start the move towards a greener economy.
Then another aspect that trade agreements should include is regulatory cooperation. We really need greater harmonization and cooperation between regulatory authorities in trade agreements so, for example, digitally powered machines can be the same in one country or another. You can't be producing the next generation of machines separate for different countries because of regulatory incoherence across the world.
Finally, we need employee mobility. This has just been addressed in the Growth Council that gave its report to Finance Minister Morneau last week. Companies need to be able to move employees around the world in support of liberalization in trade in services as well as this global supply chain that exists increasingly where each country participates in the final production of a product. Therefore, if you can't move people around and allow them to work, it's going to be extremely difficult.
I'm not really talking about the temporary worker program. I'm talking about highly-skilled people who come in and help finalize the production of a product with the skills that they have.
I will stop there.
The Chair: Thank you, Mr. Hornby.
Dan Breznitz, Munk Chair of Innovation Studies and Co-director of the Innovation Policy Lab, Munk School of Global Affairs, University of Toronto, as an individual: Thank you. Chair, deputy chair, and members of the committee, I was asked to talk today about bilateral, regional and multilateral trade agreements and the prospects for Canada.
In order to understand the true prospects from the so-called new trade deals for democratic countries like Canada, we need to first understand the significant changes in the global production of goods and services and their impact on the gains from innovation and trade. We need to understand how a society becomes and stays rich and the different implications of the new trade regimes. Second, we need to understand the changing landscape of trade deals.
Of the highest interest is the move from multilateral to a regional/bilateral trade deals' environment in which new trade deals are also called partnerships. In effect, this is a transition from a global free trade system to a diverted trade, regional-blocks, asymmetric system where asset protection seems to be key.
Lastly, we need to reflect on the fact that the significant, cumulative and highly positive impact of multiple trade negotiations since World War II has reduced virtually all remaining tariffs. Instead, more integrated international trade forces penetration of domains that are inherently domestic in nature and intimately entwined with the views of citizens in democratic societies on what is the society they would like to have.
Further, many of these new deals back these forays into domestic policies and politics by the setting of questionable private arbitration tribunals —
The Chair: Excuse me, Mr. Breznitz. You're breaking up, and I'm not sure whether it's a technical problem or if it's where the mic is. Sometimes when you're too close or too far from your microphone, it will interrupt you. I don't know if we can correct that.
Mr. Breznitz: I will try to speak even more slowly. Does that help?
The Chair: It's not your pace. It's that we're missing parts of it. I don't know whether it's the direction of the microphone or some other technicality. We've had troubles with our video conferencing, unfortunately.
Mr. Breznitz: I can do that. Does that help?
The Chair: Let's try it, but not too close because then we'll get another problem. Let's try this and see if it works, and I'll try not to interrupt you. It's gotten worse.
Mr. Breznitz: The technician here will look at it. Is it better now?
The Chair: I'm going to hope it is better, and perhaps you could resume. I hope I won't interrupt you. Thank you for trying again.
Mr. Breznitz: Thank you again for having me here.
Of the highest interest is the move from multilateral to a regional/bilateral trade deals' environment in which new trade deals are also called partnerships. In effect, this is a transition from a global free trade system to a diverted-trade, regional-blocks, asymmetric system where asset protection seems to be key.
Lastly, we need to reflect on the fact that the significant, cumulative and highly positive impact of multiple trade negotiation since World War II has reduced virtually all remaining tariffs. Instead, more integrated international trade forces penetration of domains that are inherently domestic in nature and intimately entwined with the views of citizens in democratic societies on what is the society they would like to have.
Further, many new deals back these forays into domestic policies and politics by the setting of questionable private arbitration tribunals, ISDS, which was the case with the almost-blocked CETA.
In short, the new trade environment forces us to think about why we should seek more of those trade deals/ partnerships; how and if those trades deals will materially help us in the short- and long terms; and the geopolitical risks and negative impact the new regional trade deals have on the countries we exclude from them, as well as how we are seen in the world when we do that.
Lastly, and most importantly, on how much of our democracy and constitutional sovereignty, that is, our ability to use the democratic process, relying on the legal supremacy of our constitutions to make decisions on how to shape and regulate our own society, are we willing to give away for continuously decreasing gains from trade.
The reality of global production and value creation is significantly changed, as we just heard, and many of our trusted theories and policy tools no longer fit. Starting slowly in the 1970s and accelerating since, there has been a long and complex evolution in the way firms create value and organize themselves. The most important is the global fragmentation of production and the rise of a new global trade landscape in which countries are specializing in particular phases of production in specific industries.
If we look at the electronics industry, for example, Apple, who used to produce its own products in California, has never even engaged in the production of its recent products. Each of these products is now devised, designed and produced in stages around the world. Even components and subcomponents are now manufactured in discrete stages. This should make it eminently clear that there are many ways to excel in innovation-based growth. Indeed, as I have shown in prior work, globalization significantly increases political choice, not decrease it.
However, to sustainably succeed in each phase of production, every country needs to perfect different innovational capacity and support that with the very different set of institutions they need, from finance to research, skills, and the kind of trade agreements that allow that society to increase productivity, profits and jobs. Different countries require different models, and this new system of stage specialization poses serious and long-term challenges to leaders aiming to ensure sustainable prosperity to all citizens from all backgrounds and skill levels.
Second, the development of information and communication technologies and the fragmentation of production have led to the algorithmic transformation of services: the ability to reproduce them and supply them repeatedly without geographical limitations. This leads to one extremely good thing: We now have rising productivity in services, something we thought we would never have. However, it also leads to an even more rapidly fragmented globalization in services than the one we faced in physical goods.
In addition, we also have more influx and uncertainly in the job market where jobs that not long ago seemed to be secure for life can now easily be done better somewhere else in the world, either by software or human-software combinations.
It also means that in order to have gains in trade in services, we need — and I agree with the other witness — to change domestic laws to a level that raises questions of sovereignty and the limits of democratic choice. This is especially the case when those agreements include the usage of ISDS arbitration systems that operate above and beside the national justice system.
The concern that those arbitration courts will take precedence above even the Constitution was voiced by no less than Chief Justice John Roberts, stating, "Substantively, by acquiescing to arbitration, a state permits private adjudicators to review its public policies and effectively annul the authoritative acts of its legislature, executive and judiciary.''
The changes in the global system of production have already moved us into a world where intangibles are worth much more than tangibles. For example, IPR (patents, copyrights and trademarks) now comprise 80 per cent of the value of American firms, and 78 per cent of American exports currently come from IP-intensive industries. When we think about trade, it's crucial to remember that intangibles such as IPR are, by definition, human creations, granting a negative right, a monopoly) in exchange for public good. As such, the debate about what kind of monopolies, and in exchange for what public good, has been evolving as a part of political negotiation — democracy at work — over long periods of time.
If we want to have real gains from trade and our own investments in innovation, it is crucial to understand that trade rules about who can dictate IPR usage are not about the high-tech sector. Think for a moment about our farmers. The changing landscape of what is a seed and who owns it, and what is a tractor and who owns it, changes their relationship with what used to be their suppliers, moving those relationships from ones of independent business owners who have choices in buying ownership of needed production factors to one of power, in which a soy or maize farmer is treated as a contract worker without the benefit of the big seed companies and, if courts allow it, machinery companies like John Deere. Over the last few decades, changes in the world trading system tilted the power and profits sharply toward the holders of intangibles such as IPR and away from the toilers and owners of land and other tangible resources.
Even more disturbing is the fact that the new kind of trade deal creates a static and rigid system instead of promoting evolving and flexible organizations and agreements. Only a true believer in the genius of bureaucrats would think that they can draw the rules that would fit the needs of the market 10 years from now, let alone 50. This is especially the case in IP, and hence, trade treaties that specifically designed to freeze the evolution of IPR laws and regulations, domestic and international, are based on a blind trust in the god-like, omniscient powers of the bureaucrats who negotiate them. Otherwise, why would any sane society sign on to the equivalent of a legal prison?
In sum, the policy requirements for growth have changed, leading to the creation of a new growth model by changing the requirements of competition and productivity. We need to update our understanding of what it takes for firms to compete in global markets, create value and generate jobs.
It's essential to understand two things here: We do not have good theories to understand, much less predict, what would be the best set of policies. In the case of trade, we have no good model with which to predict how much gain or loss from innovation a particular trade deal would grant to the signatories. Second, we need to understand that our current system of education does not give Canadians the necessary tools to comprehend what is at stake and make informed decisions. That is correct for both for private citizens and policy-makers alike.
If all of that was not enough to urge you to rethink why and how to approach new trade deals, we have also moved from pursuing multilateral to pursuing regional and bilateral trade deals. Thus, we moved from a system that operates to maximize free trade to one that diverts trade toward specific regional blocs.
At best, we can argue that by signing all those deals, we will create a normative momentum and a de facto need that will force all the excluded nations to join the new agreement, making them multilateral — but on our terms.
In short, these trade deals should be viewed as instruments of geo-political competition, and as such, they carry costs. We might have increased trade with some nations, but less with others. We might curry favour with some, but snub others.
Furthermore, signing these deals between the powerful nations of the world is a way to effectively silence the poorest nations, preventing them from having a say about the new global system of trade they would like to see. This is something Canada might decide is worth doing, but we have to publicly acknowledge it. If, to paraphrase Prime Minister Trudeau, we are Canada and we are here to help, then signing trade deals that foster trade mostly between the already rich and powerful while allowing only the rich and powerful to decide what are rules of the game is a cynical way to do so.
Free trade is the key to economic growth, and the rules that govern it also decide which and how some societies can become and stay wealthy and what are the levels of inequality we are willing to have for more growth. A democratic society should strive to educate all its citizens to be able to understand those choices. It should also enable them to weigh in and have a voice. On both those matters, we are doing a terrible job.
Thank you again, and I hope you managed to hear what I was saying.
The Chair: We certainly did hear you. It would have been better without the interruptions. We hope that these technologies continue to improve. It's another method of communicating, using video conferencing, but we're finding it still has shortcomings. It's easier face to face. We got the face to face but not quite all the voice. I'm sure most senators understand the points that you've made. If not, they have a moment to ask you to clarify.
Senator Ataullahjan: Thank you for your presentations this morning. My question is for you, Mr. Breznitz.
In a CBC news article that was published yesterday, you were quoted as saying ". . . we have never had an innovation policy.'' Could you expand on that?
Mr. Breznitz: Sure. We need to understand that innovation is not about inventing. It's about taking ideas and either coming up with new products and services or improving products and services basically for the same price of making them in order to increase production and make profits in the market, which means that innovators are either private companies or entrepreneurs.
What we have in Canada is extremely good science, technology and research policies. We never had a good innovation policy that tried to focus on those agents of innovation, both creating the capabilities that allow them to innovate, like science, technology and research policies, which we have, but also to stimulate them to actually use those new ideas in the market, enable them to grow and enable them to have a defendable position in global markets.
Senator Ataullahjan: What would an innovation policy look like? We do have an innovation minister now. I know it's too soon. How effective has he been?
Mr. Breznitz: I can't say how effective he has been. They call me from time to time to talk about the policies that they want to implement. Once they let us know what policies they are going to implement, we can ask questions about whether those are the right policies, which I still don't know.
What I can say is that Canada is at least 20 or 30 years behind in that game. I can also say that all other countries that have been successful got that way by creating a framework to constantly experiment with policy. If your aim is to stimulate agents such as Canadian small- and medium-sized enterprises to innovate — you want them to do things, but you don't know they're going to be — then you need to prepare a policy framework that would constantly allow you to change your policies as those companies come up with new products. We don't have that. Successful countries on innovation-based growth have it and have been playing in that since the 1970s.
The Chair: Again, your voice broke up a bit. Could you tell me what you say other countries have that we should have so we can get that on the record correctly?
Mr. Breznitz: Yes. What we have seen in other countries, from Finland to Israel to the U.S., is that not only do they have policies that target the innovators, but knowing that by definition innovation is trying to change how markets behave, to come up with things that we don't know what they are, they've created a framework that constantly allows them to experiment with policy.
They come up with new ideas. If they fail, they kill them quickly. If they succeed, they scale them up quickly. When the markets change — for example, you suddenly have a semi-conductor industry or autonomous car industry — you change what is the role of the state, and you also change the regulations quickly. We don't have that. Countries that are successful have that.
Senator Housakos: On that issue, can you tell us, from the two or three most successful international trading nations, what percentage of their trade comes from innovation?
Mr. Breznitz: I can tell you that in the case of Israel, it's more than just innovation. Seventy per cent of all GDP growth comes just from start-ups, not only innovation.
Senator Housakos: Would Israel be one of the top two or three trading nations in the world?
Mr. Breznitz: No, but it would be one of the top innovators. In the case of the U.S., which I presume is something we should aspire to, 78 per cent of all exports are IP-based or innovation-based.
Senator Housakos: Seventy-eight percent per cent. Wow.
Senator Ataullahjan: We have heard from previous witnesses that FTAs don't necessarily increase trade, and there seems to be a growing scepticism towards FTAs. How would you explain that? How should this influence government policies going forward, like trade and economic policies?
The Chair: You're addressing the question to?
Senator Ataullahjan: To all the witnesses, if they would like a crack at it.
The Chair: Mr. Evans or Mr. Hornby?
Mr. Evans: I can respond to that. I'm familiar with some of the research behind those issues around FTAs.
When we have an FTA with a foreign market, the trade doesn't automatically come into place. As government, as business support, we really need to help our companies take advantage of those trade deals.
There have been cases where companies have been able to take advantage of an FTA, but what it comes down to is really helping our companies, making them aware of the benefits of the trade deal, getting them into the market, doing those connections and sharing a lot of that knowledge with our companies.
Again, I think we have to be careful that just because we sign a deal with a foreign market, we're not going to see all this trade take place. Once the deal is signed, that's when the on-the-ground work really has to start taking place if we want to benefit from that deal.
Mr. Hornby: I would agree with that. The trade deal opens the door, but you have to help companies, especially small- and medium-sized companies, walk through that door through various programs such as those that EDC, government agencies and trade associations have to train their members on how to take advantage of the agreements that provide this market access.
Mr. Breznitz: I agree completely with the two other witnesses. However, I think we should also remember that we live in a democratic society. As I and other witnesses have said, those new trade deals also encroach on things that up until now we saw as part of why we have a democratic society.
We have done a horrible job in explaining to people, our citizens, why they should even think about that. We also have growing inequality in many parts of the world, and we moved from a trade deal with multilateral. So it looks good. It really tries to develop trade, to have particular trade deals, which by definition, they might free some trades, but they also divert trade. Even economists treat them very carefully in terms of overall growth of trade.
Senator Eaton: How are you preparing people for CETA? What are your doing for your members?
Mr. Evans: There are a couple things with regard to CETA in particular, but this applies to supporting trade in general.
We recently started a new team at EDC called the global trade development team, and their primary task is to make those connections between Canadian companies and their counterparts in the E.U. We also opened a new office in London and we have an office in Düsseldorf, so we have people on the ground in Europe that can make those connections. We're going to be working with Global Affairs over the next few months doing a series —
Senator Eaton: Can I just interrupt you for a minute? Have you picked up any of the things you're doing for CETA because they worked in the U.S.? When we did NAFTA, for instance, in U.S. and Mexico, did you do some of the things you're doing in Europe, or is this a whole new initiative?
Mr. Evans: With the CETA focus, it's a whole new initiative. Going back to NAFTA and the FTA in 1988 and 1994, it was quite a different trading environment then. A lot of companies understand the U.S. market much more than they do Europe and, as the witnesses are saying here today, our trade is much more complex now, not just with Europe but with other countries. It involves a whole range of activities. Most people think trade is exporting, but quite often many of our exporters need to import inputs. There's a whole range of support services. They need to establish a foreign office.
We're kind of following that same model. We have people on the ground in Europe who have been tasked with making sure we can help start making those connections. We have a series of upcoming seminars across Canada, from coast to coast to coast, designed primarily for the business community to make them aware of how CETA works and what the advantages might be for their business and their sector. There's a lot of work to do around the awareness of that. As we mentioned earlier, just because a deal is signed and the door is opened, we really need to encourage our companies, particularly smaller ones, and help them get into that.
One other thing I'd like to point out is that at EDC we have a program designed to help smaller companies get into the large supply chains with what we call those big anchor firms, such as Ford, GM, General Electric, Siemens and Bombardier. We have very few of those anchor firms in Canada, so quite often we need to look outside of Canada. We have a financial facility with those large firms designed to help them procure from Canadian companies.
Senator Eaton: You talked in your presentation about tapping into global value chains. Do you find big anchor firms either in Europe or the U.S. and you try to find a component we make here? Is that what you mean?
Mr. Evans: That's basically it. We'll have a credit facility with a large foreign multinational. There are many examples on our website. We have them with Telefonica, the large automotive companies and General Electric. Through that credit facility — they can be quite large: $600 million to $800 million — those companies will use that facility or that credit to purchase from Canadian suppliers. As part of that, to help encourage and make sure Canadian supply gets into the chain, we'll have match-making events between the big anchor firm and Canadian suppliers. We have another team at EDC that looks at all the skills and capabilities of Canadian companies to ensure that they have the product or service that that foreign company needs.
Through those match-making events, we do see those companies purchasing from Canada. Since we started that program in 2003, on average, for every dollar that we put into those credit facilities for those foreign anchor firms, getting those companies into foreign supply chains, we've seen $1.40 in purchasing from Canadian companies, and most of that procurement is coming from smaller companies. We are having some success with that, for sure.
Senator Eaton: Thank you very much.
Mr. Evans: You're welcome.
Senator Eaton: Can I ask you a quick question, Mr. Breznitz? Have some sectors in Canada proved better at getting innovation from bench to table, through the valley of death, as we called it in the Agriculture Committee, where you have all these wonderful things produced around Guelph University's campus where they're doing substantive innovations? They have a marketing team now, I think, to try to get start-up money for them. I know at St. Michael's Hospital in Toronto, at Li Ka Shing Knowledge Institute and the Keenan Research Centre are also looking at ways of taking things that originate at St. Michael's hospital, in our research labs, forward to market.
Are some sectors better than others, or are we really hopeless in most sectors?
Mr. Breznitz: Some sectors are actually better than others, and, interestingly enough, they are the sectors where the government has taken more of a role. Agriculture is one. If you want to think about a different province, like Saskatchewan, just think about canola for a moment and how it came into being. This is a perfect example of where the Canadian and provincial governments realized the market would bear. The centre of it, which is still there at the University of Saskatoon, is very impressive.
It is the same, by the way, in the oil industry. We should not forget that we wouldn't have the latest boom with the oil sands in Alberta without a private-public relationship that allows the government to basically give credit and other grants to allow the testing of the technologies. Then, after they were proven, private companies were willing to become more involved.
We are also quite good in agriculture. There is a lot, of course, to perfect. We are quite good in the resource extraction industry and aerospace. We are actually less than what we should be in medical research. We should be one of the world leaders, especially when you think about our national health system. I would urge us to think about how we can use the fact that we have a national health system to really put things all the way from the lab to the market, which would also reduce the costs that we are paying now, basically, by importing so many of the things we need for our medical system.
Senator Marshall: As each of you were speaking, I kept thinking about what's happening south of the border and the American election and the issue of protectionism. When each of you was speaking, I thought about that concept. Mr. Evans said the U.S. is a stepping stone to international markets, and Mr. Hornby said there was a good network of free trade agreements, and I thought about one of the candidates saying they wanted to scrap NAFTA. Then I heard Mr. Breznitz talk about future trade deals.
Can you talk about the concept of protectionism? Do you see that as something out there on the horizon? Is that something we should really be concerned about, or do you think it's just a blip at this point in time that's raising its head during the American election? I would appreciate comments from each of our witnesses on that.
Mr. Hornby: Senator, I think you're quite right. We have never really seen such a period where there's been a combination of protectionist forces as well as an anti-globalization reaction to what has been happening in the economy over the last 20 years, or even longer. It is a very difficult time, now, to be an advocate of free trade and to show the benefits.
In Mr. Evans' testimony, I think he showed some of the case for free trade, and certainly General Electric is a strong supporter of free trade. A lot of people, both in the U.S. or in Europe, who are opposed to trade agreements, actually say they're not opposed to exports. Everybody likes to export, but what they don't like are the imports. Sorry, but it doesn't work that way. Remember the old debates about reciprocity in Canada? Trade agreements go both ways. You have to import in order to export because there's a basic element of reciprocity in any trade agreement. People really have to understand the complexity of it. Plus, I'm not sure there's a way to go back to a period before globalization, because supply chains are globally integrated. To undo those is very difficult.
I know that Mr. Evans has data on this at EDC. Look at the Canadian companies that export to the United States through what we make at GE in Canada or vice versa, the small companies in the United States that are dependent on trade with Canada. The State of Ohio trades more with Canada than it does with any other state or country in the world.
There are a lot of jobs that are dependent on international trade and on that free flow of goods across the border in both directions. I think the advocates of trade need to simply get out there and try to explain the complexity of these supply chains and why it is a benefit to all.
Senator Marshall: You represent a large company. Are you just hearing it from the United States, or are there other countries that are making noise also?
Mr. Hornby: Ever since the global financial crisis a few years ago, we've seen a rise in protectionist sentiment. In the European Union, CETA got caught up in that anti-globalization movement, as well as some local protectionism. We also see equivalents to the "buy America'' policy in other countries, "buy China,'' "buy Russia,'' localization requirements and local content requirements all around the world.
This makes it extremely difficult for a global company to operate. You have to make very serious choices about where you're going to make investment, and those choices generally are in favour of countries that have an open, market-based economy.
Senator Marshall: Mr. Evans, you would be familiar with a lot of companies. Do you have any comment on protectionism?
Mr. Evans: Certainly. Going back to your earlier comment, we think it's more than just a blip. Even if Trump loses next Tuesday, that kind of sentiment is not going to go away. It's alive and well on both aisles in Congress, as you're probably all aware.
What we're seeing, not just in the United States but globally, as Mr. Hornby has mentioned, is there is frustration about people getting left behind. There is technological change, and they see all these trade agreements and feel that they're not part of this new economy. Going forward, we need to start looking at how trade deals can be more inclusive so there is less of that kind of frustration or impact. Fewer losers and more winners is what we really need.
In terms of Canada and the U.S., we know the two economies are very highly integrated. We've been working up some of the numbers. Two and a half million jobs in Canada are tied to exporting to the United States; it's huge. On the other side of the border, 1.7 million jobs in the United States are tied to exporting to Canada. Sixty-four per cent of all of our trade between the two countries is in intermediate goods and components, the raw materials and services that these companies need to support their supply chains.
We are the top export market for the United States. There are 35 U.S. states that count Canada as their number one customer.
Luckily, no matter what happens next Tuesday, there are checks and balances in the U.S. system between the executive and the legislative branches. It would be very difficult for one branch of that government to bring in any kind of radical policy.
We try to envision a situation where you can imagine a company like Ford or GM making an announcement that they're shutting down a factory in Michigan because they can no longer get parts from Ontario. Nobody wants to see that. Luckily, there are mitigants against any kind of radical action.
Mr. Breznitz: I'm actually even more worried. If you look deeply into what happened in Britain with Brexit and why Britain has done it, you will see exactly the issues of why we love trade and why we want more immigration. It basically was a growing sense of inequality and of being left behind. It's a growing sense that we have to recognize; otherwise we will face more and more political backlash on trade deals.
Many citizens feel uneasy that for a trade deal, we change things that they see as defining their national identity. Again, that's what happened in Britain.
By the way, what is especially concerning in the case of Britain is that if you look at the areas that actually enjoyed the most from the EU relationship in Wales and England — apart from London, of course — those are the areas that voted the highest to leave the EU.
If we don't understand the political consequences of how we do those deals and how citizens actually perceive them, we will probably face significant obstacles. With those obstacles, we will face lower growth.
There was a time when we had globalization that was almost the levels we have now. It's the period just before World War II, and when things started to unravel, they unravelled very quickly and very violently, and the world was a horrible place for years because of it.—
I think a lot is at stake, and if we don't understand what is acceptable for both trade and politics, then people see a world that gives them less.
Senator Cordy: I'll ask both of my questions at the same time.
I want to thank the three of you. This has been a very informative and interesting session this morning.
We heard yesterday that a number of small- and medium-sized businesses weren't always aware of the benefits when a trade agreement was signed, and they were not quite sure where their business fit in. Is this the type of thing that Export Development Canada does? When you do your surveys and talk to exporters, are you talking to those who are not exporting and maybe should, that maybe there is a place for them in one of the deals? You mentioned market knowledge, having local connections, the financial aspects and how important that knowledge is if you are going to be successful in exporting.
Mr. Evans, in your comments, you said that companies with foreign offices have a better advantage, and the more you export, the more knowledgeable you get. That certainly is a very true comment, but it's almost like the university grad who is looking for their first job, and every job needs experience, so how do they get it? How do you get a foreign office when you're a small company, and how do you get the knowledge if you're just starting out?
Mr. Evans: On the first question, we've done a lot of surveys. When we try to break down the data, we want to look at companies that are well-established exporters, and we look at new exporters.
Something we started doing about a year ago is we started to survey those companies that we have identified as not exporters, but they're probably ready to export in the near future, in the next one or two years. We have identified that there are about 20,000 of those companies in Canada that are ready to export, and we are putting in, through some of the programs that I mentioned earlier, ways to make them aware of where the opportunities and benefits lie.
For a lot of small companies, when they first leave Canada, there's a lot of angst and anxiety, particularly for smaller companies, about the risks in foreign markets. As a public agency, it is our job to help them manage those risks through a number of our different products. Companies will tell us, "We can't export to this market; it's too risky.'' Well, we can help manage that risk through a whole range of different kinds of insurance products we have, such as accounts receivable insurance, political risk insurance, those kinds of things.
We are investing heavily into adding market information, market knowledge and connections to our service offering, and we think that will be very important for companies looking to break into new markets.
Sorry, what was your second question on?
Senator Cordy: Your comment about the more you export, the more knowledgeable you get. With someone in a foreign office, trade is going to be easier, but where is the starting point with that?
Mr. Evans: We look at what we call the exporter journey. A lot of companies will start in stages. Many of them will go to the United States first. They are very comfortable with that market. It's a lot like Canada, and it's pretty easy to trade north-south between the two markets.
When we look at them going outside of North America, that often takes a little more hand-holding. Companies that first get their experience in the United States, we see them tend to move to other markets after that.
In the last few years, we've seen what we call the born-global companies. These tend to be highly innovative, technology-oriented companies, and as soon as they start exporting, they're exporting to many different countries. Again, the improvements in technology and communications allow them to do that. There is a class of those companies in Canada as well that we've identified and are trying to encourage. I hope that answers your question.
Senator Poirier: Thank you to everyone for being here. I echo the same comments of Senator Cordy; it has been an interesting morning with a lot of good information. I had a couple of questions that have already been addressed, but I do have an extra one for Mr. Hornby.
On the third slide of your presentation, you made the comments that the first gold standard trade agreement, CETA, was better and more comprehensive than the TPP. Can you comment on that? Why do you feel the CETA would be better than the TPP?
Mr. Hornby: Yes. Thank you. It's always very difficult to compare trade agreements, but the CETA really is a comprehensive trade agreement. It really deals with all of those behind-the-border measures that I was speaking to in my presentation that are important for a manufacturer to have addressed in a trade agreement. It also contains very rapid tariff elimination, with a few exceptions, whereas the TPP is a little more gradual in terms of tariff elimination and not as comprehensive in dealing with the non-tariff barriers that CETA deals with. It's not to say that it is a bad agreement. It is a very good agreement. In fact, we are a strong supporter of Canadian adherence to the TPP, but CETA really is in a class of its own. It truly is a next-generation trade agreement.
Senator Poirier: Thank you. On the second page of your presentation, you talk about the nationalization of the Internet. I know you highlighted that a bit. Can you give us more details? In your opinion, what are the reasons for the nationalization of the Internet and how could it affect businesses out there?
Mr. Hornby: Yes. What we are concerned about is that we will not be able to use the cloud to enable the optimal operation of machines that are installed around the world if there are requirements that put restrictions on the ability to export data out of a jurisdiction. Some countries, both in Asia and the Middle East, are looking at national requirements for data storage so that you would have to have a domestic cloud in order to operate those machines optimally, and that simply is not economic.
Why are countries doing that? I think it's a combination. There is concern about security. The countries that are the biggest proponents of nationalization of the Internet tend to be authoritarian states, so they want to control access to the Internet, including by their companies, and have national control. Therefore, you don't get the advantages and the economies of scale that you would otherwise be able to get through a global system such as we have in most countries today.
It's something that we are concerned about going forward. In those countries, we try to point out the problems they could encounter, because they could actually get left behind in terms of the efficient operation of equipment.
Senator Poirier: What would be the possible solution to that problem?
Mr. Hornby: I think the solution is to leave the Internet largely unregulated and to have free flow of data across borders. With the adequate privacy protections that are in place, in Europe and in Canada we have very strong privacy regimes, but we also have free flow of data, with very few exceptions.
Senator Housakos: I guess my first comment is in regard to the fact that I believe fundamentally trade agreements are dependent on making sure the country you're trading with has a robust and healthy economy, and we see the success we had with the U.S. free trade agreement. We launched into that in the 1990s as the U.S. was experiencing some tremendous economic growth, and we benefited tremendously from it. I am a bit sceptical right now. We're heading into an agreement with Europe, and their technicalities and fundamentals are going on the south side.
Having said that, my question to the panel here is in regard to subsidies for industry and subsidies for the manufacturing and agriculture sectors. Would you agree that it's getting tougher and tougher for Canada to compete with some of the larger economies like the Europeans, for example, and the Americans, who have a high propensity to subsidize their manufacturing sector and the various sectors they want to promote?
Mr. Breznitz talked about the importance of innovation. I think we all agree that Canada has to do more, but we're also suffering a cash squeeze compared to some of the larger economies when it comes to investing in innovation.
Mr. Breznitz, you appropriately pointed out the successes of our health care system in terms of providing good-quality and innovative health care. The problem we've been facing, though, is when it comes to delivery of health care, we've had some shortcomings. Delivery of health care is starting to eat up larger and larger portions of our budget. Those challenges continue to grow.
I guess my last question on the innovation investment side is whether you guys have any innovative ideas on how we can finance innovation. As time is rolling forward and we're facing that cash crunch, it's getting tougher and tougher for Canada.
Mr. Breznitz: First of all, I would like to add one thing that I think is important. When we speak about trade, the most successful nations that have successful innovation policies saw their innovation policies as an export policy. Look at Israel and Finland and all the rest. I will provide a concrete example. You cannot get a grant from the office for scientists in Israel unless a panel of experts agrees that this is an export-oriented product. The aim of sustaining an innovation is to increase the GDP and to increase economic growth. It also goes with the data that my fellow witnesses talked about, that the most innovative companies are also the best exporters. It goes together. You have companies that started as innovating companies in the ICT and they're going global. You have companies that started to export, and as they start to export, they have new demands on them. They realize that they can make a lot of money if they change their products for a different market, and it goes together.
However — and here I completely agree with you — if you look at the rules that we constantly have with trade agreements, many of the policies we tried in the past — what used to be called industrial or innovation policies — are maybe now not even legal in terms of subsidies.
The other thing that I think specifically relates to Canada is a question we avoid: If you look at the amount of money the Government of Canada actually invests — the public money — that goes to private R&D, we're not behind. Where we are behind is in using that money to leverage private R&D.
There are two options here: One, almost every CEO and entrepreneur in Canada is stupid, naive or they don't understand it, or you have an environment in which they think this will not help them maximize profits. I would tend to agree with the second. Most people who start companies and manage them know what they're doing and have minds on profit.
Therefore, we have to go to them and ask them why they think that investing more in innovation is not something smart to do. Is it because they have not done it? So we can use something like the export programs we have, but instead of just export, train them to think of innovation. This is part of it. Also, it may very well be that we have a system in Canada in which to innovate is just too risky, and you can increase your profit without innovation. If this is the case, we have to think about how to change it.
Mr. Hornby: Is the EU the right target market for Canada? I would certainly argue that — which is why we support the TPP — if you look at where the growth is in the coming decade, it's going to largely be in Asia. The advanced OECD countries are in a period of secular low growth, with the expectations that growth will be slower in Canada, Europe, the United States and Japan going forward, for a number of factors primarily related to demographics. We have aging societies, and as you get older, you don't buy and purchase as much.
But there is still an enormous amount of wealth in the EU, and there are great complementarities between Canada and the EU. I think there are opportunities for Canadian companies to seize if they are so inclined.
Just a comment on subsidies: We often see a battle of incentives between jurisdictions to attract investment from global companies or even local companies, and there are certain discussions and disciplines in the OECD around, for example, aviation subsidies, or some of them constitute really just polite agreements between the parties that are not legally binding. In an ideal world, we would have a level playing field everywhere, but Canada has to engage in this "battle of jurisdictions,'' for lack of a better term. If we were to stop subsidies to the extent that we do them, or incentives or tax expenditures, to use the technical term, it would be akin to unilateral disarmament, because the other countries are going to continue to use incentives.
What we have to do is make sure that our incentives are smart. One of the problems we face in innovation is this commercialization difficulty that we've been talking about. There are a number of ways that governments can use public money to help the commercialization of technology and innovation, and one of them is through pilot programs. We don't run a lot of pilots in Canada. There is a whole number of problems with that, but partly it's because of the procurement system that governments have that look typically for the lowest-cost supplier.
Perhaps in the United States, Israel and other countries, they have an amount reserved for new technology. But then you have to have a public and, quite frankly, parliamentarians, who are willing to accept risk, because some of this procurement will buy products that will fail.
We need to be a lot savvier about how we use public money to assist the commercialization of new technology.
Senator Cools: I was just remembering that, many years ago, the Senate purchased word processors for all the senators. The problem was that they were then obsolete and went faster into obsolescence. But pretty soon the personal computers came on.
I would like to thank the witnesses for what I thought was a very relevant and thoughtful presentation. I have two questions, and any one of you can answer. I think it was Mr. Breznitz who said that trade deals between the powerful countries result in the squeezing out of the less powerful countries. I would like to hear some comment on that, if I could.
Then the second statement was that trade deals encroach on other aspects of business, life or rights. I didn't quite get the last word there, but I wonder if you could explain to me exactly what you meant.
I'd like to know more about squeezing out the poorer, smaller, lesser nations. I would like to know what aspects are being encroached upon.
Mr. Evans: I agree with those comments. When you see those trade deals between the large, powerful countries, the less powerful countries are not part of setting the rules. With that said, we are seeing institutions like the G20 and other institutions bringing the voice of emerging markets to the forefront. We can't forget that, globally, trade has lifted hundreds of millions of people out of poverty. That said, that doesn't really help the guy who lost his job when the factory shut down.
It behooves us as policy-makers and government agencies to have the appropriate policies to ensure that, for the people who are left behind, there is more inclusivity in trade deals. Over the next year or two, you're going to see a lot more research around how we can actually do that.
Mr. Hornby: I would just comment that perhaps in an ideal world we would only have multilateral trade negotiations at the WTO that would include all countries, but we don't live in an ideal world. We have attempted unsuccessfully in the Doha round to reach a comprehensive, global, multilateral agreement; it's failed. That's why I think you have seen these regional agreements become more prominent. Canada cannot afford to stay out of these regional agreements because we are a trading nation. We depend enormously on trade for our GDP.
There are still some efforts at a multilateral level to address this issue, and there's been work on the trade facilitation agreement at the WTO that the committee may wish to study going forward.
The Chair: We actually will be seized, I hope — and soon — with that bill. It's in the Senate at the moment.
Mr. Hornby: In terms of encroaching on other aspects of life, I presume you were referring to, for example, the investor state dispute settlement provisions that have become quite controversial, particularly just in the last few weeks, with respect to CETA.
Senator Cools: Right.
Mr. Hornby: These are a long-standing feature of trade agreements. Canadian companies do actually take advantage of these where they feel that they have been discriminated against in other jurisdictions or where they have felt that they have not been able to have environmental permits or other permits required to operate, not because of an actual environmental harm but because of political considerations.
It goes both ways. Canada isn't just at the receiving end of these disputes. Canadian companies do use them abroad, and they're considered to be a useful tool in order to protect the investment they are making.
The Chair: Mr. Breznitz, you covered some of these points before, but perhaps there's something else you would like to add?
Mr. Breznitz: It's not just the things that the other witnesses talked about. When we deal now with simple things, and data has been discussed now, we are creating unbelievable unease in citizens who do not know which data that might refer to them sits where. It's wherever you think that some of your data should be at some point.
You're also talking about environmental protection, and some places prefer to have different regulations on environmental protection. If you look at some of those trade deals, they actually tell you what you have to do.
The same goes, for example, to IPR. If you look at the TPP and why some people felt very uneasy about the TPP, it is because they will force Canada to basically change our domestic laws, which are considered by experts to be much better than the American laws, and to make them at a minimum into American laws. Those are things that other more traditional trade deals didn't ask countries to do. Whether or not they're right is a whole different debate. The fact is that they do that and that creates significant political unease.
With regard to the arbitration courts, I might agree when you have a country that has a questionable justice system, but to have an American company suing Canada and a Canadian company suing the U.S., and then you have an arbitrator court that disregards the domestic law and 200 years of advancement in law, claiming that Canadian law is not good enough, that's a bit strange.
The Chair: That tempts me to really want to get into that topic, but I think we will have an opportunity to do so in the future trade agreement discussions here.
As you can tell from the questions and the interest from the senators, all three presentations have been right on point for our study. They were provocative, informative and certainly helpful. We are concluding with three excellent witnesses on our trade study. I hope all three witnesses look forward to our report, and something they have said will resonate in the report. Thank you for coming.
Mr. Evans, in light of the way the conversation was going today, I didn't put this question, but it was raised with us. Why does EDC take so long to get into a country when other enablers are there before us when a country starts to open? I'm mindful of our recent trip to Argentina. I will leave that with you. You may wish to respond. Thank you for your input on the more global EDC issues. Thank you to all three guests.
Senators, we are adjourned.
(The committee adjourned.)