Speech by Professor Debra Steger
Director, Emerging Dynamic Global Economies (EDGE) Network

The Canadian Chamber of Commerce
2007 International Trade Day
June 7, 2007

I. Introduction

The world is going through a major economic and political transformation the likes of which have not been seen before.  World economic growth is higher than it has been for over 30 years, yet the international community and the world economy is becoming increasingly fragmented.  We are in a global maelstrom, in which the only constant is change.

The former head of the World Bank, James Wolfensohn, recently observed:  “While being more interconnected, it (the world) is now rapidly breaking into four tiers of varying levels of prosperity and hope.”  The first tier consists of the rich countries, which maintain 80 per cent of the global income while accounting for only 20 per cent of the world’s population.  Their dominance is being contested by the emerging economies, comprising the second tier of approximately 30 poor and middle income countries that are experiencing sustained growth rates of 7 per cent or more a year.

Emerging economies, such as China, India and Brazil, with their large pools of inexpensive labour, are becoming increasingly important in the world economy.  The emerging economies now represent roughly 50% of global GDP, using Purchasing Power Parity exchange rates. Asia already represents around 20 per cent of global GDP.  The projected economic growth rates in major emerging markets for 2007 are in the order of: China - 10%, India - 7.5% and Brazil - 4%. With prosperity and economic growth also comes a demand for commodities.  For example, from 2002 to 2005, China accounted for more than one-quarter of the increase in global oil demand and nearly 80 per cent of the increase in global demand for all base metals. Already, China and India account for nearly 5 per cent and 2 per cent of world GDP, respectively, at current exchange rates.

As their per capita production and consumption approach levels similar to those of the developed economies, major effects on the global economic landscape will be seen. There is a growing middle class in those countries demanding sophisticated goods similar to those being demanded in the developed countries. Reliable projections forecast that China will grow at an annual average of 6.6 percent from 2005–20 (an aggregate increase in output of 162 per cent), and India at a rate of 5.5 per cent a year (an aggregate increase in output of 124 per cent).

These emerging economies are learning how to leverage the global economy.  A multi-polar world is emerging, with China and India as major economic and political powers along with the United States and Europe.  If a customs union develops in Asia, we could see three major trade blocs in the world within the near future.

In contrast, Canada’s share of global GDP is less than 3 per cent, and will continue to decline in the absence of proactive measures. Living standards in Canada measured in GDP per capita terms are less than four-fifths of US levels. Canada is in 10th spot among OECD countries in purchasing power parity behind Norway, Ireland, the Netherlands, Denmark and Australia.

The living standards gap stems from lower Canadian productivity – on that indicator, Canada ranks 20th among OECD countries.  Canada also ranks 13th among OECD nations in the contribution that information and communications technology makes to productivity.  While many people fear the rising import competition from China, it is largely because of these cheap imports that for the first time in recent history, we have had full employment with no inflation.

We are at a pivotal moment in history.  The Chinese have a word for “crisis”:  “Wei ji”.  Literally translated, it means:  “danger/peril opportunity”.

Responding to these massive global transformations will provide Canada with both challenges and opportunities.  It requires fundamentally changing our mindset – reinventing Canadian trade policy to reorient ourselves to the new realities.  We have a tremendous opportunity to develop closer economic, business and political ties with Asia – to expand our horizons beyond the North American market.   We need to re-focus our trade policy from its current emphasis on exports, to opening up Canada to imports so that we can improve productivity, add value and re-export to the rapidly growing markets in Asia and around the world.  There are real opportunities – the time is to act is now, but we need to act quickly and decisively, or the window of opportunity will close.

There is a pressing need to re-energize and reinvigorate Canadian trade policy through engaging collectively in strategic medium and long term thinking about where we are as a country and where we want to go.  Governments cannot do this alone, we need to work together:  the private sector, governments (federal and provincial) and Canada’s top research institutions – to find and assert our new place in the world economy.

II. What Should Canada Do to Respond to these Challenges?

Trade policy is commercial policy.  In addition to tariffs and other border measures, rules and regulations (non-tariff barriers such as technical barriers, standards, and certification mechanisms) are government measures that affect trade.  Moreover, trade is not simply about exports and imports of manufactured and agricultural goods.

Foreign direct investment – including integrative trade and intra-firm trade – is becoming increasingly significant.  Services trade, including the movement of persons, is also growing – and yet, we do not have accurate methods to measure flows of services and investment and as a result, do not have good statistics on the shares of trade that they represent.

Our trade policy is rooted in the world of the past:  the mercantilist world of exports and imports of manufactured and agricultural goods.  We need to re-focus on investment and services, including movement of people, which are critical to the knowledge economy.  And we need to look inward, to open the Canadian economy up to the world so that our companies can become innovative and globally competitive.

Global supply chains are the way that international business is now conducted.  And, yet, we do not know enough about how they operate and we do not have reliable data on them.  How can we be sure that our policies and regulations are not hindering trade, if we do not understand how international business is actually conducted?

Governments, researchers and the private sector are working to understand the way that global supply chains operate and their significance for doing business.  By working together, we can find policy solutions that will help, rather than hinder, business strategies.

What do we need to do to re-invent or re-energize Canadian trade policy?  First, we can start with doing some longer term strategic thinking.  Second, we need to recognize that our domestic regulatory regimes affect trade and take steps to reduce our internal barriers.  Third, we need to determine where our global economic interests lie, what is our global competitive advantage, in order to develop a trade negotiations strategy that will provide real benefits to our economy.

Our trade policy has to be based on, and reflect, our domestic economic strategy, a strategy that will increase our productivity (which has been lagging), maintain our competitiveness, and increase our investment (both in research and development in Canada and foreign direct investment in the rapidly growing parts of the world).

1. Get our own house in order

In a recent study, the Conference Board of Canada emphasized that while negotiating free trade agreements and going on trade missions can have important benefits, they consume a tremendous amount of resources, and ultimately, “the benefits of such deals will be much larger if Canada’s domestic house is in order.”  They go on to say:  “Canada’s current long and unfocused list of free trade negotiations does not always make sense in terms of core Canadian interests.”

In other words, greater gains for Canadian trade and investment will come from getting our own house in order – unilaterally making changes to our own restrictive policies and regulations.   We have to rid ourselves of the mercantilist approach to trade policy thinking and negotiations – there are many things we should be doing that will be good for Canada without demanding that another country, especially a developing country, should pay us to do it.

First on this list is:  achieving an open economy (free trade) within Canada!  Whereas the trend everywhere else in the world – Europe, Asia – is towards free movement of goods, capital and persons, in Canada, we are half a century behind.  British Columbia and Alberta have made an excellent first step with the new TILMA, which provides a role model for other provinces.  How can we expect to remain competitive in the new global economy if we do not get serious about removing inter-provincial barriers to trade?

Second:  deepening and improving economic integration within North America.  We need to take NAFTA to the next level, including by taking advantage of value chains within North America to export to the rest of the world.

Third:  removing restrictions on foreign direct investment and reducing rules and regulations that restrict competition.  In 2006, the OECD ranks Canada as one of the most restrictive OECD countries in relation to investment.  Why are our banks, except for Scotiabank, such lackluster performers on the international stage?  Do our internal competition and regulatory regimes prevent Canadian firms, such as in telecommunications, from achieving the size that they need to become truly global competitors?

Fourth:  cutting the applied rates of tariffs and reducing the border measures we use (we have been doing this).

Fifth:  improving domestic customs and port procedures, reducing inspection and other delays, allowing goods to move more freely across the borders.

Sixth:  harmonization or mutual recognition of standards and regulatory requirements.  We need to do this across the provinces, but also with the United States and Mexico.

Seventh:  reduce barriers to movement of persons by overhauling our immigration system and developing more modern approaches to recognizing foreign accreditation of professionals.  Our restrictive immigration regime is a major hindrance to companies seeking to move their own personnel across the borders.  And in a time of labour shortages, especially in the booming western provinces, allowing for accreditation of foreign professionals and simplifying or easing visa requirements, should be a major priority.

Governments don’t trade.  People and firms do, and we need to find ways to make cross border movement of goods, services and persons more efficient, effective and less costly.

Taxi driver story.

Eighth:  reduce the taxation burden on Canadian firms so that they have more money to invest and increase the incentives for companies to invest in research and development.  If we reduce tariffs, how do we make up the loss in revenue?  We need to reduce the inconsistencies in our taxation regimes that create unintended barriers for business.  For example, the film production and video game industry in British Columbia – the firms are organized so that they produce animated films and also video games from the same production/creative process.  However, they receive tax incentives for film production but not if the ultimate product is video games.  This government measure does not reflect the way the industry actually works.

Businesses also have to be encouraged to invest in themselves.  Canadian firms do not invest in research and development, as compared with other industrialized countries.  Our resource companies have not shown an interest in diversifying their customer bases or engaging in value-added production, despite governments’ attempts to help them.  Our experience in using information and communications technologies to enhance productivity is also low.  Governments, both federal and provincial, should assess their taxation and regulatory regimes and provide incentives to enhance Canadian firms’ competitiveness and productivity.

I probably cannot get away with out saying something about the current exchange rates, and the strong Canadian dollar.  While this is not good for export sales, this is a golden opportunity for Canadian businesses to think big – to invest in upgrading their productivity by purchasing capital equipment, entering into licensing agreements, etc.  We need to seize this opportunity to invest in our own businesses.

2. Show leadership in the world community

What should our external trade policy priorities be?  Currently, we are embarked on a dual strategy of participating in the Doha Round while also negotiating a number of bilateral free trade agreements.

We need to develop a strategic approach to our external trade policy driven by what is in our domestic economic interest.

The Doha Round, while important, is fundamentally about market access – in agriculture, on manufactured goods, and on services.  In many ways, this is an old agenda from a different era.  There is a currently an impasse in the Round, caused, in my view, by the great transformation in the international trading system – it has moved from a bi-polar system driven by the United States and Europe – to a multi-polar one, but most Members have not yet figured out what is in their interest in this negotiation.  Whether or not the Round is successful, the WTO will continue to regulate international trade.

The dispute settlement system continues to work effectively, but the WTO decision making and rule making machinery needs a major overhaul in order to equip the organization for the challenges of the new economic order.

Canada has not been a major player in this Round unlike in previous Rounds, in part, because of the view that we cannot liberalize any further without incurring significant opposition at home.

On negotiating regional trade agreements, while it is clear that regionalism is on the rise, particularly in Asia and Africa, I am not convinced that it is in Canada’s interest to try to keep pace with other countries, such as the United States, Europe and Australia, in negotiating FTAs and BITs.  We should be pursuing a more strategic approach, after having objectively assessed what is in our economic interest.  There are costs and benefits associated with negotiating FTAs and BITs.  Moreover, we should not be taking a “one size fits all” approach in our regional trade agreement negotiations.  Progress should not be measured in how many agreements we have signed in the last few years or how many we are currently negotiating.

We also need to be very careful to ensure that the RTAs we negotiate are comprehensive and open, and do not create greater barriers or trade diversion because of restrictive rules of origin.  John Weekes, our NAFTA Chief Negotiator and Ambassador to the GATT and the WTO, recently indicated that he is becoming increasingly worried that the “spaghetti bowl” may turn into rot if the current trend continues.

In their own ways, China, India and Brazil are seeking to increase their influence on global affairs and on the architecture of the international system.  China, in particular, has taken major steps to build its own diplomatic alliances – with African countries, in Latin America and in Asia.  It is not clear, at this juncture, whether China’s goal is to re-establish its empire or to work to improve the existing international organizations.  China’s massive reserves and its offers to be a lending agency for African development could threaten the continued mandate for the International Monetary Fund.

These new geopolitical realities require Canada to revise its view of the world – which has been focused in the past on North America and Europe.

At this point in history, there is a unique opportunity for Canada to demonstrate leadership in restructuring the major international economic organizations that govern the world economy.  These institutions:  the World Bank, the International Monetary Fund, and the World Trade Organization – were designed in the 1940s for very different time and purpose.  Responding to the challenges of the global transformation requires rethinking the mandate of these organizations, the way they function, and their institutional structures.  Canada has had an enviable record of playing a major role in the creation of a number of key international institutions:  the United Nations, the Law of the Sea, the WTO, and the International Criminal Court.

It is our time to shine, once again.  There is much to be done in reforming the international economic infrastructure, and we have the resources and the know how to play a major role in that process.   We are trusted by the international community and could play the role of an intellectual broker between the major emerging economies, the developing countries and the industrialized world.

III. Government(s) cannot do it alone.  We need to work together.

The EDGE Network – which stands for Emerging, Dynamic, Global Economies – was established just over a year ago as a new initiative under the federal Networks of Centres of Excellence program to foster collaboration among the major research institutions and think tanks in Canada working together with the private sector and federal and provincial governments to help Canada develop coherent and effective longer term strategies to meet the challenges, and take advantage of the opportunities, brought by the emerging economies.

The best trade policy for the future would be to open up Canada to the world:  by creating a Canadian economic space free of interprovincial barriers; by reducing restrictions on foreign investment; by harmonizing regulations and standards and providing for mutual recognition of certifications and accreditations; easing border restrictions; and allowing freer movement of persons across our borders.   Governments can also do more to provide information and tools to Canadian businesses to equip them to take advantage of the opportunities for foreign direct investment and exports of goods and services.  The markets are there, we need to do more to access them before the window of opportunity closes.

It is imperative that we invest in our youth, by putting more money into higher education and practical skills training through co-op programs and internships.  Exchange programs in foreign countries are also essential to allow our next generation of leaders to develop contacts and to learn respect for the cultures, languages, histories and values of the people they will do business with in the future.

A key goal of the EDGE Network is to raise the level of informed public debate about the emerging economies, leading to enlightened policy-making, improved global and domestic business strategies, and better knowledge-sharing between academia and industry.

Together, we can meet the challenges of the future, we can compete and prosper.  But, we can only do it by working together – as we have never before – business, governments, and research institutions.  We have a tremendous opportunity to re-invent ourselves: our economy, our trade policy and our diplomacy – to show leadership both at home and in the global arena.  Canadian productivity and prosperity as well as our competitiveness and influence globally will be determined by how well, or how poorly, we respond to these new realities.