Canada’s Expanding Trade Agenda Europe, Asia and implications for business and the economy Glen Hodgson Senior Vice President and Chief Economist The Conference Board of Canada December 2015 1
Four big global drivers today 1.Demographics and aging 2.Globalization 3.The Internet and digitization 4.Climate change 2
Globalization • Expansion of global trade and investment • Dominance of global value chains • Rise of emerging markets • Integrative trade – integrated two-way flow of goods, services, investment • Role of FDI and foreign affiliates 3
What is integrative trade? • Coined the term “integrative trade” in 2004 while at EDC • Essentially modern international business, build around the integration of all key components to create value: – exports – imports used to create exports – both goods and services – FDI, into Canada and abroad by Cdn business • Global supply or value chains a key aspect of integrative trade • EDC and DFATD use integrative trade as foundation of their business strategies 4
Impact of integrative trade • Builds global value chains and helps to make firms more competitive • Conference Board research in Asia and Europe the importance of all components to business success • In past decade, Canadian trade had evolved toward: – weaker trade growth compared to 1990s – more trade diversification, less with U.S. – stronger growth in services trade than goods – greater role for FDI, especially abroad – firms seeking access as supplier to global value chains 5
Add Value to Products 6
Stylized facts on Canadian trade Early 20th century: • high tariffs to shield Cdn manufacturers • result: US capital leaps over barriers • foreign control of manufacturing • branch plant economy, inefficient scale Post WW 2: • multilateral system and GATT • slow reductions in trade barriers thru trade rounds 7
Stylized facts on trade (cont.) 1980s-90s: • shift to bilateral / regional focus -- 1985 Shamrock summit • 1989: FTA w U.S. -- largest ever bilateral deal – focus on tariffs, dispute settlement • 1993: NAFTA – Canada joins U.S. & Mexico • early 1990s: WTO Doha Round begins... – breaks down over agriculture – and is still going … ever to be completed? 8
Trade policy stagnation & restart 1990s-2000s: • strong trade growth with U.S. after FTA & NAFTA • Canada goes into trade policy hibernation • only minor bilateral agreements - Chile, Costa Rica 2006-07: • Quebec pushes for EU engagement • Feds get nudged into negotiations • renewal of broader interest in free trade agreements 9
Canada’s Two -Gear Trade Canadian bilateral trade, index 2001=100. U.S. Non-U.S. 200 180 160 140 120 100 80 Sources: Industry Canada; Statistics Canada; The Conference Board of Canada. 10
Canada’s Sub -Par Export Performance real export index, 2000q1=1 1.25 1.20 1.15 1.10 1.05 Services 1.00 Goods 0.95 0.90 0.85 0.80 Source: Statistics Canada; The Conference Board of Canada. 11
Developing Asia Leading the Way Per cent change, real GDP 7.0 2014 2015 2016 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 Japan Euro zone North America Latin America Asia Pacific Asia Pacific (excl Japan) Source: Consensus Economics 12
Canadian trade: changes to come Canada’s goods exports, share of total. . 7.0 2014 2025 6.0 5.0 4.0 3.0 2.0 1.0 0.0 India Brazil China EU Japan Mexico UK Sources: Industry Canada; The Conference Board of Canada 13
The European Opportunity The EU market is the world’s largest economy EU is a huge market with World’s largest importer of wealthy customers: products Population of 509 million Per capita GDP 34,500 $US Source of great technologies, (PPP) ideas, products, and services Europe is also a gateway to world 14
European Growth Prospects Improving Eurozone potential output, constant prices, % change from previous year 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Source : OECD StatExtracts. 15
Challenges Canadian Companies Face • Regulatory and other non-tariff barriers • Barriers to people movements • Regional and sub-regional markets differ • Market uncertainty given ongoing crisis • Highly sophisticated, competitive markets 16
CETA: beyond the headlines • Breaks the mold - most expansive Canadian or EU deal • Catch up with those that have an EU deal -- and stay ahead of the U.S. • Tariffs mostly gone, but about more than goods • Services, people, investment, intellectual property • Access to huge government contract market 17
CETA: beyond the headlines (cont.) • Mechanism to prevent future non-tariff barriers, e.g. regulations (Canadian and EU regulators to work cooperatively) • Canadian body can assess whether meeting EU standards • Expands agricultural quotas but no fundamental reform -- preserves supply management 18
Tap Into European Demand: No Single Europe Sources: The Conference Board of Canada; The Conference Board Inc. 19
Challenges: Tariffs High in Some Sectors trade weighted tariff rate on Canadian exports to the EU, per cent Food & beverage Motor vehicles and parts Agriculture Chemicals, rubber and plastics Wood products Aerospace Electronics Post-CETA Primary metals Pre-CETA Other consumer goods Industrial M&E Other transp. equip. Mineral fuels Pulp and paper Crude metals and minerals 0 2 4 6 8 10 20
Most Tariffs Eliminated Immediately (per cent) Food, beverage, and tobacco Motor vehicles and parts Agriculture Chemicals, rubber, and plastics Prior to CETA Wood products 2016 Aircraft and parts 2018 Computers and electronics 2020 Primary metals 2022 Other consumer goods Industrial machinery and equipment Other transportation equipment 0 1 2 3 4 5 6 7 8 9 10 21
$1.4 Billion More Compared with No-CETA (CETA scenario minus no CETA scenario, millions of $2007; level difference) 1600 1400 Chemicals, rubber, and plastics Agriculture 1200 Other consumer goods 1000 Food, beverage, and tobacco Computers and electronics 800 Industrial machinery and equipment 600 Motor vehicles and parts 400 Primary metals Aircraft and parts 200 Other * 0 2016 17 18 19 20 21 22 *Is comprised of wood products and other transportation and equipment. Source: The Conference Board of Canada 22
Largest Percentage Gains for Food Products impact of CETA tariff removal on exports, difference from baseline, per cent Food, beverage, and tobacco Chemicals, rubber, and plastics Motor vehicles and parts Computers and electronics Agriculture Other consumer goods Other transportation equipment Total Industrial machinery and equipment Aircraft and parts Wood products Primary metals 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 23
Business implications of CETA • Will remove tariffs, some industries will gain • Non-tariff barriers – benefits less transparent, potentially more significant • Companies that expect trade deals alone to boost sales will see limited gains • For full gains, companies will need to innovate, add value • Need to adapt to regional demands, do homework, pick spots 24
Implications for business: Evidence-based keys to success 25
Implications for business: winning strategies What happens to Does company Strategy EU sales? remain in EU? Exporting once company has been Not significant well established Not significant Exporting to the US before EU Going to Western Europe First Small firms only More important than for Frequently introducing new products emerging markets 26 26
Smaller Companies Can Succeed 10 EU sales per firm (C$ million, annual average) 8 EU sales growth (% change, annual average) Number of years in EU 6 4 2 0 Small Large -2 27
Summary: implications for business • Small companies can succeed if they are prepared • Different routes to success – may require on-the-ground presence, or via foreign company in Canada • Competing on cost alone not enough, must differentiate • Key ways for companies to differentiate themselves: • Target niche markets, develop in-depth expertise • Integrate services and products, provide “solutions” 28
Trans-Pacific Partnership (TPP) • Like CETA, TPP goes far beyond eliminating tariffs • Talks led by Australia, NZ ambitions • 12 countries, including U.S. and some Asian markets • Canada and Japan late to join the party • US: Administration has delegated authority from Congress – an Obama legacy project 29
TPP: implications • TPP text has finally emerged • Next: actions of a new federal government • Limited choice: unlikely we will snub U.S. and TPP partners • Others will now have comparable access to U.S. market – so expect more competition • Becomes all the more important to take advantage of improved market access to Asia, Latin America • Sleeper issue: Chinese accession and high standards 30
Other issue: trade and reserve currencies • More trade may be priced in other currencies… • But hard to see others rivaling U.S. dollar as dominant reserve currency • EU: not an optimal currency area – very different levels of development – no common fiscal policy or built-in transfers – financial regulations not harmonized – linguistic and cultural barriers to movement • China: closed capital markets – market forces still absent in FX market 31
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