Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue No. 11 - Evidence - Meeting of October 20, 2016
OTTAWA, Thursday, October 20, 2016
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 10:33 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: We are meeting today under the committee's purview to examine such issues as may arise from time to time relating to foreign relations and international trade generally. Under this mandate, the committee will hear from a witness on the topic of bilateral, regional and multilateral trade agreements: prospects for Canada.
Our witness, Mr. Ari Van Assche, is the Department Chair and Associate Professor of the Department of International Business, HEC Montréal. His research focuses on the organization of global value chains and the implications for trade policies. He authored Global Value Chains and the Rise of the Supply Chain Mindset, published by the Institute for Research on Political Economy.
Thank you for accepting our invitation and appearing before us. We are particularly interested in global value chains, as this was the issue that was coming up most often as a new issue — not that it's not been around, but it's new in everyone's thinking — and also the impact of how we collect data and whether we have a good handle on how goods and parts flow into and out of Canada, including services. You're well placed to give us some advice and opinions, particularly from the research you've done.
We would welcome your opening remarks, and then we will go to questions and answers. Welcome to the committee.
Ari Van Assche, Department Chair and Associate Professor, Department of International Business, HEC Montréal: Thank you very much for your invitation and kind remarks. It's a real pleasure to be here and to talk about my own research but also the work I've been doing with Stephen Tapp and Bob Wolfe on a book called Redesigning Canadian Trade Policies for New Global Realities. You've already had here many speakers who have contributed to the book, and I'm happy to be able to give my own views on global value chains and trade policy.
To understand the importance of global value chains, it's useful to revisit the traditional way we've been looking at trade. For decades, our thinking on trade has been based on the notion that the production processes are concentrated within the geographical boundaries of a country, something which I call the national production paradigm. A Canadian export product or service was considered entirely made in Canada; a product or service imported from China was considered made in China.
This national production paradigm has helped shape the main tenets of our thinking about trade policy. The traditional argument is that policy-makers should fight for heightened foreign market access since increased export opportunities for our firms are believed to strengthen Canadian production and employment. At the same time, policy- makers should impose certain import restrictions, since imports are believed to threaten our firms and jobs. In trade negotiations it is argued that policy-makers should only be willing to reduce import restrictions if they get increased foreign market access in return.
The national production paradigm, however, has never been so disconnected from reality as it is today. Thanks to reductions in communication and transportation costs, our companies have long abandoned the practice of producing goods and services in a single country. Through outsourcing and offshoring, they have sliced up their supply chains and dispersed their production activities across multiple countries, leading to what are known as global value chains.
A new OECD database on Trade in Value Added, TiVA, provides information — just a glimpse — of how important global value chains are in Canada's trade. A first point it illustrates is that "Exported by Canada'' does not mean made in Canada. Firms located in Canada rely heavily on imported inputs to produce their exports. For example, in 2011, which is the last year for which we have data, only three quarters of Canada's gross export value was made in Canada, whereas the other quarter was actually the value of imported inputs.
A second and related point is that Canada specializes not in entire industries but in slivers of an industry. For example, Canada is not really specialized in the aerospace industry; rather, it is specialized in certain high value-added aerospace activities such as aircraft engineering and development, and flight testing. We find evidence of these specialization slivers in the OECD database.
Once we take into account what is truly made in Canada, it is clear that our country is far more specialized in the export of services than previously thought. In 2011, services accounted for 45 per cent of Canada's export value when measured in value-added terms, which is three times higher than when measured in gross terms.
A third point it illustrates is that a large portion of our exports are ultimately consumed in a country other than where they are exported. For example, many Canadian companies export intermediate goods to the United States, where they have a value chain partner. This gets put into a final produce and this final product is then exported all over the world.
You can actually find evidence of this in the data as well. In 2011, 19 per cent of our gross export value ultimately ended up being embodied in other countries' exports. This factoid puts the discussion of our excessive dependence on the U.S. market in a slightly different light.
Finally, my own research shows that global value chains are generally good for growth. They create a positive productivity boost by improving a country's allocation of resources and providing firms access to cheaper and higher quality inputs, and they also provide firms the opportunity to tap into foreign knowledge pockets, which stimulates technological and knowledge spillovers from abroad.
Using the OECD TiVA data, my empirical analysis shows that countries which integrate more rapidly into global value chains tend to have faster output and employment growth.
What are the implications for trade policy? One implication that stands out from the new global value chain reality is the importance of connectedness. To retain and strengthen Canada's competitiveness, new trade policies should aim at facilitating our companies' ability to connect rapidly, safely and reliably with their foreign value chain partners so that Canadian value-added activities can be better integrated into global production networks.
In this regard, policy-makers should not only focus on greasing the wheels on the export side, but also focus on eliminating barriers on the import side. Indeed, the productivity of Canada's export sector depends critically on its ability to connect to the most competitive foreign value chain partners. In this respect, the federal government's commitment to eliminate all remaining tariffs on manufacturing inputs has been an important step in the right direction.
Second, policy-makers should focus not only on the barriers that exist at the border — for example, tariffs — but also on those beyond the border. Empirical evidence shows that the quality of the transportation infrastructure, communications networks and regulatory environment all positively affect the ability of firms to integrate into global value chains.
Finally, policy-makers should push for free trade agreements, which can be bilateral, plurilateral and multilateral, with deep integration. Regulatory cooperation, mutual recognition of standards and investment liberalization are all powerful policies that can smooth the operation of value chains across borders.
Implementing these policies will require greater policy coordination across government departments and better communication to the public of the economic benefits of global value chains, but given the important benefits that are related to a better Canadian integration into global value chains, this seems worth the effort.
Thank you very much, and I look forward to your questions.
The Chair: Thank you.
Senator Eaton: You're obviously an expert on trade policy. Can you give us some insight into CETA or NAFTA? Let's take NAFTA, because you've certainly had a chance to examine it. How would you change NAFTA, or what would you try to incorporate into NAFTA if you had to renegotiate it? Depending on the election in the U.S., we might be in a position of having to renegotiate NAFTA.
Mr. Van Assche: I might focus a bit more on CETA, because that's more in the news right now. One thing that is very important to point out is that CETA is an example of a free trade agreement with deep integration that seems to be more in line with a new global reality, but that is very different from how we have traditionally been thinking about trade.
If you look at CETA, there is a lot of discussion on service trade liberalization, investment liberalization and protection and the acceptance of standards from other countries. These are all very much in line with what is really in the minds of companies trying to do business in multiple countries and are really helping our companies to find better partners with whom they can start adding value.
I'm indicating that, on the one hand, these are all things in line with a new global reality, but as we can see in what is going on right now — I'm of Belgian origin, so I've been following it a bit more — one of the issues with these agreements with deeper integration is that many more stakeholders need to be included in the discussion, and I think that's a good thing. This can create new problems that we haven't had in the past.
Senator Eaton: If you think back to when China wanted to make huge investments in our oil industry, we looked very carefully at some of their investments and decided that they were against our national interests. In the new way of thinking of these trade agreements, is there room for things like national interests? In other words, there are some industries that you don't want taken over by another country, such as the aerospace industry.
Mr. Van Assche: I think there's absolutely room. A free trade agreement is an agreement where there are negotiations and we try to get certain benefits from the free trade agreement. The other country has certain concerns and wants to get certain benefits as well, so what we do is try to understand what we feel is the best for our interests. That is what the negotiation is about.
There is absolutely room for national interest concerns in these free trade agreements, but we have to make sure that they are always done for the right reasons.
But absolutely, we see in the CETA agreement as well that many different things have been brought in that are really trying to make sure that issues like environmental or labour regulations are upheld. There's absolutely room for these things.
Senator Eaton: Thank you.
Senator Oh: Professor, you are an expert on Asia/Pacific Rim policies. Just now, Senator Eaton mentioned the CNOOC, which acquired Nexen just three or four years ago. During that time they paid a big premium for Nexen. The shareholders made a huge profit on CNOOC's acquisition in Canada. Now, the price has dropped from $100 down to below 50 bucks, and I understand that CNOOC has been losing a lot of money for the last two or three years. That was a good investment for our company and for the shareholders in Nexen who got out in time at the best price they ever got, when foreign investors came into their country.
So the market sort of sets its own pace on how the prices go and on investment from foreign countries. Can you comment on that?
Mr. Van Assche: I'm not sure a lot of people thought that oil prices would go down as much as they have, but it ended up being very beneficial for the shareholders.
There is a lot of concern about Chinese foreign direct investment into Canada, especially by those state-owned enterprises. There are certain instances where the concern is legitimate, but we always have to think carefully about what the goal of a certain policy is and whether or not a certain regulation is meeting that goal.
Any company that comes into Canada has a requirement to follow the rules and regulations of the land, and that includes state-owned enterprises from China as well as any other company. If we want to put in extra regulations for protection of national interest reasons, we can certainly decide to do that; we just have to make sure that by doing that we are not making it more difficult for the entire foreign direct investment in the country to take place. We have to be very careful in how we decide on what is good for the national interest of Canada.
Senator Oh: A high-profile delegation from a Chinese entrepreneurial club is currently doing a cross-country tour of Canada. Some witnesses mentioned the recent mission by Prime Minister Trudeau to China as a door opener for Canadian businesses, and the Chinese are coming more often to North America. For example, the local firm of Graphite Software received $8 million in funding from Chinese investors in June of this year.
Do you agree that the olive branch works both ways, for trade, in all of this?
Mr. Van Assche: My personal view is that I'm very happy to see that the current administration is doing something that almost seems the opposite from our neighbour to the south or often Europe in the sense that our administration is putting a lot of effort on improving our trade. This is very important because if you look at the trade performance of Canada in recent years, it has not been very good. For a country like ours that is so dependent on trade, it's important that we are actively pushing to find new ways to improve our trade.
China is a very good example. China is maybe having a growth slowdown, but in the last couple of years, they contributed to about half of global GDP growth. So it still is a very important player, and it's very important for our companies that the government is trying to find ways to make "dynamize'' the relationship of trade and foreign direct investments between the countries.
Political relations between countries are very important for what is happening on the ground for companies, and particularly that is the case in China. Indeed, we have the China Entrepreneur Club here right now, and it's a very important thing. They can go to many countries in the world. This year they decided to come to Canada. It's great for them to be exposed to what is going on here, and it's great for us to be able to see how China today is very different from 10 or 15 years ago.
Senator Oh: You are an expert on the Chinese economy. Where do you see the current state of China economic growth?
Mr. Van Assche: They have many challenges. They used to have an important demographic boost, and that has stopped. Right now, population aging in China is much more rapid than we have seen in Canada and much more rapid than in Europe. That's a very big challenge.
Second, they went from a low-income country to a middle-income country, and that was mostly through catch-up. Now they have the challenge of going from a middle-income country to a developed country, and there you suddenly have to shift from being an economy that is able to become more efficient to one that actually becomes innovative, and that is a big challenge. It's something people call the middle-income trap. So China has to find a way to be able to incentivize companies to make this shift. That's a big challenge they have.
They have other challenges in the financial system, et cetera, but if we're looking at the long term, their big challenge is to be able to make the shift and upgrade along the value chain.
Senator Cordy: Thank you very much for being here.
I'm interested in the global value chains. Increased trade, which is a positive thing for Canada, is a good thing, and the global value chains I think are increasing significantly.
However, I have heard from people who are concerned that Canada sends raw materials to another country, usually the United States because it's our closest neighbour; and then the United States gains greater value by processing the raw materials and further exporting it to other countries around the world. Is that something that we should be concerned about, or is that just the way of the world?
I remember having a meeting a number of years ago in Germany. I'm not sure if it was with the German trade minister, but the message we got was that if they had a discovery or an innovation, they wanted to take charge of that and keep it within German borders and export it to other countries, not send it offshore to another country.
Mr. Van Assche: That's a great question.
Our goal is not to trade; our goal is to make our economy perform better and make our people better off. Ultimately, our goal is to attract and retain higher value-added activities in order to stimulate our productivity and improve our performance.
All else being equal, we would prefer to have higher value-added activities than lower value-added activities.
The main point the government should be focusing on is to make sure that all the incentives are in place, that we have a very strong and educated labour force, that we have important skills, et cetera.
The question about trade policy, however, is given what we already have and what we're good at, how are we going to improve the attraction and retention of these high value-added activities? There, the question is whether indicating that you are required to do something in a country is really the best way to do it.
I have a slightly different view of that. My view is that if we want to make sure that we're able to retain high value- added activities, one way of doing that is ensuring that those companies focused on these high value-added activities are able to ably, rapidly and safely link with the necessary partners in Canada or elsewhere. This can actually induce an even further boost to keeping these activities.
But you're absolutely right: We are not interested as much in exporting the low value-added activities; it's mostly the high value-added activities that we should be focusing on.
Senator Cordy: That was helpful.
The Chair: I have a supplementary. You were saying to link within Canada and link otherwise. Can you give us an example? Is it our trade policies or is it the awareness of the companies? What are the impediments to that fast link in today's system?
Mr. Van Assche: There are many impediments. The two that you mention are very important ones. The first is that there are many barriers to trade. For me, trade is not only goods trades but also services trades and information that make it more difficult to link with foreign suppliers or foreign buyers than linking with local suppliers or buyers. That's kind of the first thing.
You've got at-the-border barriers and tariffs, et cetera. That's a very minor part of it. But you have many more that include the fact that if you're producing a certain component and you want to sell it to four different countries, you might have to have four different certificates to be able to do that. That's very complicated for companies to do. That is one very important impediment by itself — these real barriers.
The second, however, is indeed an information issue, and there the government plays an important role. A company in Montreal making a certain component doesn't necessarily have all the information as to which companies not only in Canada but around the world that might be interested in buying their product. So this issue can also very much constrain the decision of companies to not integrate as well into global value chains.
The Chair: Is it a facilitating role that the government would play in identifying and working on those barriers and providing information, a different data bank?
Mr. Van Assche: Absolutely. Trade commissioners can play a very important role in that. Agencies like Export Québec or others can play an important role in that as well. Trade facilitation is not only making sure that the customs procedures are simplified; there is much more going on. If you're going to China and you want to find potential partners, there is no big database out there where you can say, "These are the partners that are very reliable,'' et cetera. You need to be able to get this information rapidly. There are trade commissioners and other organizations that play a very important role in that respect.
Senator Cordy: In your answer to Senator Andreychuk you touched on barriers at the border. I believe you mentioned transportation. Could you expand on the barriers beyond the border? Do you mean barriers within another country? What control would Canada have over those barriers beyond the border?
Mr. Van Assche: You can call it beyond or behind. It's both.
There is not just a frontier kind of border and the moment you cross it everything is perfectly fine. You have to get the product to the border, and that is often very costly. Once you cross the border, you have to get into the transportation infrastructure.
I'll give you one example that demonstrates how this can really be an issue. I did a study with Jacques Roy, also from HEC Montréal, where we were looking at air transport in the aerospace industry. We were looking at the data. One thing we found is that a lot of aerospace companies in Canada, when selling their products to Europe or to Asia, don't produce it here and use a local airport to send it on. What they actually do is put the product on to a truck, and then truck it down from Montreal, Toronto or elsewhere to Chicago or New York, where it gets air lifted from there to another location.
We looked at the aerospace exports in 2008-10, and 6 per cent of the entire aerospace export value actually left Canada by truck toward U.S. airports. This is an example of where we see how airport infrastructure can have an implication on the trade costs that our companies are facing when they are doing trade internationally.
There are other indications as well. Every year, the World Bank produces a logistics performance index. Canada actually does a relatively good job; we are ranked number nine on the index. The problem is that we are slightly below the United States, and in infrastructure, we are often in competition with the U.S. Where Canada was considered particularly weak compared to the United States was in the ability to track and trace shipments; there, apparently, we were a bit behind. The other one was the efficiency of customs clearance.
All these things add a small amount of trade costs for companies, but if you are tracking and shipping many products in a year, these small things can really have an impact on your productivity.
Senator Cordy: Thank you.
The Chair: Just out of curiosity, I know that when we were shipping potash and grain to our ports, and there wasn't the capacity there — first of all, there was some rail incapacity at the port — and therefore the deals were made in United States. Why would the aerospace industry go into Chicago and air lift from there? Is it the price? Is it the cost of the airport?
Mr. Van Assche: In our study, there were two different reasons. The first one was price. You have to have data on the cost of air shipments. We did an exercise where we drew from the same bundle of goods in Montreal, Toronto, Chicago, New York and looked at what the difference in price would be of shipping the same bundle to these different destinations. Montreal was 20 per cent more expensive than Chicago and New York, and Toronto was 10 per cent more expensive. This was in 2008-10. That's the first thing.
The second thing, of course, is capacity. At Montreal's airport, we often are on smaller planes because the airport is not as big a hub as Chicago or New York. A lot of the transport of aerospace products occurs in the belly of the airplane, and so if big pieces cannot fit in there, then you need to find other ways to do it.
It is both. I'm just giving this example to demonstrate how thinking about infrastructure is important and how it should be an important part of any discussion we are having about our trade capability, because even though it is not what is happening at the border, it directly affects our ability to be able to trade.
Senator Housakos: I want to follow up on your comments with regard to infrastructure because, of course, infrastructure is the fundamental basis upon being able to trade effectively and efficiently.
You mentioned airports. A Senate committee did a study on airports recently and found that the federal government uses our airports as an engine for revenue rather than a foundation to propel economic activity in communities. Airport authorities in the U.S. are very often a lot more aggressive in promoting them in business rather than as being a cash cow for local government treasuries.
Are there other examples where you think the Canadian government can be more strategic in developing our infrastructure to better accommodate our trading companies?
Furthermore, what infrastructures can we develop in order to do more development in terms of international trade? I find that the Canadian strategy has been sitting on its laurels a little bit. We have been commodity-based oriented in our trade. It has been easy to do, especially when our currency is devaluated from time to time. As a result, I find we haven't been strategic in developing either our infrastructure or new ways of promoting service sector businesses and other sectors that we don't necessarily identify as top-item trading commodities.
Mr. Van Assche: Those are interesting points.
I have not studied the airports and their operations in Canada as much, but I would say that the most important thing is that we have to think outside the box. We have to take into account the new global reality that we're dealing with, and we need to be looking at, for example, infrastructure in light of this new reality. The important thing for our companies is to integrate into global value chains, where connectedness is important. We should be commissioning reports and pushing to make sure that we better understand the role airports and infrastructure play in it. We should see whether or not this requires a review of the way we structure things. I think that is really the important thing.
The other thing we have to take into account is that the way we think about airports and ports, et cetera, needs to be from a more North American perspective. There is no problem in flying things out of Chicago, per se, if that is the cheapest way to do it. It's just that if we don't know that this is what is going on, we might be building policies in the wrong way.
Senator Housakos: I want to talk also about venture capital. Obviously, developing trade in certain sectors requires capital in order to be effective and efficient. When you're doing business around the world, huge initial seed investment is required and then continuous investment. I have heard from a number of people in various Canadian sectors that Canadian banks are not accommodating enough. We heard recently on a trip to Argentina that EDC has really cycled back over the years in terms of their involvement in promoting and supporting trade. Generally speaking, venture capital, especially in my province of Quebec, is hard to come by. What can we do? What is the impediment that has created such a deadlock and bottleneck when it comes to venture capital coming to Canada, compared to our competitors around the world?
Mr. Van Assche: This very much links with the comment of Senator Cordy. What we should be trying to do is attract high value-added activities and be able to retain them. An important part of being able to do that is making sure that the interesting ideas are created, developed and brought to completion.
Particularly in an international context, these things are very important. You have already heard comments by Bev Lapham and other people that have been focusing on the fact that there are huge fixed costs related to conducting international trade. For big companies, these fixed costs are not a problem because they have sufficient resources in- house to be able to start exporting. Small companies, however, don't necessarily have the resources to jump over this fixed cost hurdle. There, venture capital or other programs can be very important in helping companies tackle these fixed costs.
I do think we need to do a bit more work, though, on understanding what money can be put into most efficiently. I'm talking here more about government agencies. "Fixed costs'' is a vague term. We want to understand what the biggest hurdles are for companies when it comes to conducting trade. For this purpose, beyond detailed trade statistics, we need to talk more with companies to see exactly what the biggest hurdles are for them.
The Chair: We have heard that Canada has paid attention to start-ups and that if your business is small, that we have been encouraging that. Once you grow slightly larger and you want to move out, then there is no money to be found. Many companies look offshore to find money, you sell to them and they take over your company. Is one of the issues we're having, that there is no growth? It's a bit like what we used to do with aid. We would go to the least developed. Now we're identifying that we need to pay more attention to and help those countries who are already on a progressively positive line. I see the parallel there in our thinking.
Mr. Van Assche: Absolutely. This is exactly in line with knowing what the fixed costs are that companies are facing, and what can be done. I have heard the same story about companies in Canada. In Quebec, in Montreal, they don't necessarily lack the resources to start a project, but once the company reaches a certain point, suddenly they do have more problems. That must be discussed and looked at more carefully. It is a key portion that links closely to trade policy. It is all related to one another.
Senator Housakos: Are we strategic enough when it comes to negotiating trade deals right now? Canada's first significant trade deal was the free trade agreement with the United States. It paid great dividends. It was a great bonanza in terms of profitability and results. Since then we have aggressively pursued trade agreements. On reflex, we figure any trade agreement is a good trade agreement. The stats shown, though, that as we move forward and are trading with countries with a devalued currency, they have been at a net loss in terms of trade benefits to Canada, for example Mexico, and other countries we have made agreements with. Is it automatic right now to just expand for the sake of expanding trade? Is it worth our time and effort to be expanding trade with economies whose fundamentals are not consistent to ours and whose currencies are devalued considerably to ours?
Second, Canada is isolated geographically compared to most trading blocks. We also have some difficulty in terms of communicating person to person. Canada, despite being officially bilingual, is one of the more unilingual countries in the world compared some of our trading competitors.
I look at the results of youth mobility agreements. Over the last decade, our government has pursued youth mobility agreements around the world with nations such as Taiwan, or European countries and others. Unfortunately the results have not been two-way. We have had people from all over the world jumping to come to Canada in order to pursue their education and to learn a second language. The number of Canadians leaving to go to countries we have signed these agreements with has been negligible. Canada is very insular compared to our competitors in Europe or people in Asia. If you're from Taiwan, Japan, South Korea, Italy or Europe, there is a reflex of young, talented people wanting to do their post studies and education in the United States, England or Germany. Canada is lower down on that list, but still on the list. In reciprocity, Canadians don't do that.
Mr. Van Assche: Concerning CETA, TPP and the potential free trade agreement with China, these are actually three indications of very important trade agreements. There has been basically no growth in Canadian trade with the United States in real terms in recent years. All the growth we have seen is actually with the rest of the world. So diversification in other regions is very important to ensure we stimulate something that we know can eventually increase our productivity.
I don't have to spend too much time on Europe. It's a big market. It's our second most important trade partner right now, so that seems very straight forward.
I'm not going to look at all the different parts of the TPP, but in general it's great for Canada to be part of it. It ensures Canada has access to a very big chunk of the world in a preferential fashion compared to others.
China will be a very difficult negotiation. However, it is clear there are benefits for Canada to trade more with them. We must ensure that the losses being created are not outweighed by the demands offsetting it. There are a lot of things which complement each other between the Canadian and Chinese economies. Those agreements are very important for Canada.
Regarding education, it's a great thing that a lot of people are coming from other countries into Canada to study. A lot of them stay here. Intellectual capital is coming here, and it ensures we can increase our dynamism. For those who return to their country of origin, it is very well-known they are more likely to do an exchange with us in the future because they have a certain affinity with us.
I'm travelling to China in a month with 20 MBA students. We will be visiting many companies from Quebec and Canada where the directors are Chinese people who received their degrees from Montreal or other universities.
We would hope there would be more Canadians who want to go overseas. Maybe they didn't because they like the education here. I do think that educating people about the benefits of studying abroad should be emphasized more.
We are in severe competition with United States and Europe. The academic market, especially for exchange students, has become extremely competitive in the past 20 years, and so it's no longer sufficient to say that there are 10 spots, please come here. We really must advertise it and convince students that it's actually worthwhile going to Toronto or Montreal over Boston or Chicago. It must be seen as a place to compete to attract and retain talent.
Senator Housakos: Is there such a thing as a bad trade deal? Obviously TPP, CETA and NAFTA are significant markets for us. There is a ton of good reasons why we should engage them. The question is, should we be engaging in signing agreements with Honduras, South Korea and potentially Argentina? These countries clearly have currency differences and fundamental and technical differences from our economy. It makes it very difficult for Canadian products to compete on an equal footing. Should we sign these agreements? So far the short term results have been trade deficits with some of these countries.
Mr. Van Assche: I see CETA, TPP and potentially China as a very different category. There is a danger of trying to have many trade agreements with many different countries, beyond which you are indicating that it's not going to have a very big impact on the economy, first of all.
The second thing that is very important is that it might actually undermine our ability to push things through in the World Trade Organization. That's another thing that is very important. Bob Wolfe has already given his views on it. He believes — and I believe as well — that there is still an important role for the World Trade Organization to play. Every time we start trying to find the supposedly easy way out by creating free trade agreements with the coalition of the willing, we are slowly undermining the World Trade Organization, so we have to also take that into account as we are thinking about our strategy.
Senator Andreychuk: Just to follow up on that, there are professors and trade specialists who say quite the contrary, that the more we start signing trade agreements and set an international norm, the easier it will be to get into the WTO because we're slowly gaining the standards, and particularly coalitions of the willing can set the standard. If you're saying Europe, Canada and the United States set a certain standard, if we can bring China into that, you are in essence getting a WTO through the back door.
Mr. Van Assche: I think that is the case for the bigger agreements. The smaller agreements, I'm not as sure. The danger is that if you cede thinking about the World Trade Organization, it will decline in importance; and if everybody does that, then it will put the World Trade Organization under siege.
So it's important to set out a strategy that, on the one hand, thinks about free trade agreements but also thinks about the interaction with the World Trade Organization and what potential role in the future the World Trade Organization could play or what the path could be to make sure that, indeed, there is this transition. They should be thought about in the same context.
The Chair: When the WTO was not moving, this committee actually did put out a report saying WTO first, but out of frustration, regional or . . . .
One other question I would ask is the fact that sometimes we go into smaller trade agreements for two reasons: one, that it may prefer one of our regions that needs that trade agreement, where perhaps we don't think enough whether there is a negative to the rest of the country. I'm talking about my region, which is agriculture oriented, and breaking into a market requires the trade agreement. My other point is that everyone else is signing trade agreements and it's putting us into a greater disadvantage if we don't step up to the plate.
Do you have any thoughts on this? Canada has often gone into trade agreements so that it wouldn't be left out, including NAFTA. That was an initiative between Mexico and the United States, and the discussion then was what are the benefits of going in and what are the benefits of staying out, but also what are the detriments? In the end, the government of the day chose to be at the table rather than watching that dynamic, which would affect us. One can speculate, I'm sure; somebody is writing a paper as we speak that maybe we shouldn't have gone into it. So that's the other thing.
I've been having a discussion with the researchers that we can't really tell; if we don't go into a trade agreement, we can't tell you what might have happened if we had not. We would only be speculating. We know exactly the pluses and minuses of going in, but there is no measure of our staying out. It's a political decision and then you're out of the game.
Mr. Van Assche: These are all excellent points. I don't think that we're actually in disagreement. I think there is an important role for free trade agreements. The only thing we have to make sure of is that we take into account the larger context where, when we are signing many free trade agreements — which we do because we see that there is an important complementarity — we know that in the long run it can have an implication regarding the role of the World Trade Organization in the trading system. We have to take it into consideration. This should be something that certainly is in any overview of what is going on right now. Bob Wolfe has been trying to push this point and demonstrate clearly the dangers are of doing it, but also showing where the World Trade Organization could play an important role.
Senator Cools: I would like to welcome our guest here today, our witness. I know you're from Belgium, but I guess that you are Flemish.
Mr. Van Assche: Yes.
Senator Cools: Wonderful. You would know very well that a large part of Belgium is Flanders. Flanders is an extremely beautiful part of the world — Ghent and Bruges and all these beautiful, glorious towns. At the same time, Belgium is home to the graves of many Canadians who fell in war and in combat. I remind senators that Canada has a very deep connection to Belgium.
We had some witnesses last night, mostly from Deloitte. It used to be Deloitte Touche, but it's just "Deloitte'' now. I found their conclusions a bit staggering. I wonder if you are aware of the document that they have produced. It is called The future belongs to the bold: Canada needs more courage. I repeat: Canada needs more courage. So let us understand that we may have many cowards around, but we should not hurt them or upset them; we should encourage them.
We are talking about wealth and the creation of wealth. As senators, the best we can do is to assist, to create conditions that will enable those very gifted and special individuals, who are actually wealth creators, to create wealth. The wealth of a community and of a nation, when you get right down to it, is created by very few and very special people. I have great respect for them as entrepreneurial types, and I come from such a family. In the kind of community I grew up in, there was no livelihood unless you could create your own. So you had to build your own businesses, whatever those businesses were. Some of those people were extremely prosperous and lived very comfortable lives. But that was the mindset, that you might be somebody else's servant if you didn't create a livelihood.
My point is that money is a coward and money will flee in the face of any adversity, civil unrest or trouble. That's the nature of money.
My question to you is whether you have seen this document and if you agree with it? Well, maybe I shouldn't ask you if you agree. That's posing the question in a poor way. I would ask you this: What do you think of this document, and what do you think of the author's conclusions?
Mr. Van Assche: I have not read the document, but I might be able to think about what they are trying to point out.
Senator Cools: Oh, good.
Mr. Van Assche: It is something that one hears very often in many different business circles, which is that compared to companies in the United States or elsewhere, we are more risk averse in order to go international. This is something you hear very often. I have never seen a single paper that has actually demonstrated empirical evidence of it, but it is something that is out there.
If it is the case, it's something important. Because if it's indeed the case that you have opportunities out there and companies are not taking the opportunities, these are opportunities that have been lost. But we certainly need to understand it a bit better.
We also have to be careful with pushing it in the opposite direction. I have already indicated that international trade requires a lot of high fixed costs, and fixed costs are often very difficult to quantify in advance. So if you're pushing smaller companies to internationalize because this is what the courageous do, then there is the danger that they might go too early or too rapidly, et cetera.
In the book edited by Steve Tapp, Bob and I, there is a chapter by Steve Tapp and Sui Sui, from Ryerson. They actually find that in emerging markets, a lot of smaller and medium enterprises have a much higher rate of leaving after one year or so because they were not successful over there.
What I'm indicating here is that this issue about courage or being willing to take a risk is, on the one hand, a very important issue, because it can really make or break taking an opportunity. But we do have to understand it much better because it can go in both directions.
Senator Cools: Do you have a copy of the document? Could we lend him a copy of the document?
The Chair: I think that it would be unfair to even lend the document and ask someone try to parse it very quickly.
Senator Cools: I was going to give an example of a case study that they cite. I'm from Toronto. I've made it my business to know the history of Toronto and its major entrepreneurs — the Timothy Eatons and the Hart Masseys and that whole group of individuals — who were exceptional individuals. Many of them were Methodists, by the way, and in that day that religion had a certain meaning.
Anyway, the case study here is the case of Loblaws. It says that:
In 2013, . . . the owner of the Sobeys supermarket chain, purchased Safeway for $5.8 billion, significantly increasing competition in the Canadian grocery market. At the same time, retailers like Walmart and other non- traditional players had begun to expand into fresh food retail.
Facing growing competition in an already ruthless sector, Loblaw felt the need to act. In July 2013, Loblaw acquired pharmacy chain Shoppers Drug Mart for $12.4 billion — an unexpected, provocative move championed by the company's executive chairman, Galen Weston Jr.
You have to know that the Westons began their family business in bread. They were producers of bread. Over time, they expanded into retail supermarkets especially.
But the important thing to know about Loblaws and Galen Weston, who is a very great man, is they were under pressure from Walmart. I don't know if you know — I'm sure you do — but Walmart is an extremely ruthless dealer, so the Westons went into the business of starting to sell clothing and everything else in their stores. They had to go that route because their competition, quite frankly, was Walmart.
To my mind, I'm amazed that they've done as well as they have and have succeeded in maintaining a very strong place in the supermarket business.
But I'll go on about this:
As with its previous bold moves, such as the 1998 launch of PC Financial and the 2006 establishment of clothing retailer Joe Fresh, Loblaw achieved significant growth from its Shoppers acquisition. Loblaw's net income rose 117 per cent in 2015, which analysts attribute to the Shoppers deal.
I do not know what their analytical tools are. I do not know what their methodologies are. I don't really understand how they chose their samples. None of that is explained. This is a very large statement to make and a very good one, I think, to make about Loblaws, but it doesn't do that much for the others who maybe — let's be quite frank — do not have as much capital at their disposal.
I just wonder if, in all of this, you can make some sort of a comment for me to help me grasp this. Everybody can talk about creating wealth, but very few can create it. The essence of successful business ventures in any community is that the official part of the community — those who make regulations and laws and rules — creates laws and rules that facilitate and assist and are helpful to that kind of environment, where there can be growth and wealth, and wealth can prosper.
I grew up hearing a lot about wealth creation in my family. I want you to know that.
The Chair: Senator Cools, if he could answer —
Senator Cools: I'm not asking you to comment on their work, but I'm asking you to give some insights into this sort of thing.
The Chair: Perhaps on the topic, as opposed to the report, because you're at the disadvantage of not having —
Senator Cools: — having read the report, yes.
The Chair: I think, in fairness, you need to read the report and understand the testimony from yesterday. Perhaps you could just, then, answer the question in a general way, if you wish.
Mr. Van Assche: I have not read the report. However, if I understand it correctly, they use cases to demonstrate certain things.
The Chair: I should tell you, if you're going to answer, that they actually interviewed about 1,200 not-for-profit, for- profit and private companies, et cetera, in all these categories, in a questionnaire form. They were trying to find guidelines as to what successful companies are in their eyes. They came up with about five indicators. I'm sure I'm not doing justice to what they said, but what they're trying to do is find the factors that lead to global success in a situation.
Mr. Van Assche: We certainly need a lot of these studies, exactly for the reason that I indicated before. We know that fixed costs exist. We know in the data that the behaviour of firms is very much in line with the existence of fixed costs. But beyond data, we actually need to know a bit better what companies really are seeing as their biggest hurdles. These kinds of studies are interesting exactly because they allow us to go a bit deeper and understand more what the priorities are and which things are more important.
I think that this, in combination with big data studies, which I've also done myself, is a very valuable tool for us to better understand the factors that stop companies from being successful or from internationalizing.
The Chair: Thank you. We've come to the end of our time. You've been very generous with yours and very helpful, particularly on the issue of global value chains. The insights that you've provided for us will be extremely helpful in putting our report together.
If there's anything else you wish to reflect on in that area, please provide it to the clerk. This is precisely what we want to do. We are not looking at a particular trade agreement; we are looking at concepts and issues that have to be taken into account in trade agreements for the benefit of Canada's business and prosperity.
Thank you very much for sharing your insights and your research. Please continue your work; I think it's very important to Canada. Thank you for coming today.
(The committee adjourned.)