International Trade Committee on May 15th, 2014

[The Chair, Conservative, Rob Merrifield]

You have ten minutes.

[Dr. Keith Head]

I wanted to start by giving some background on what I see as the main goal of policies like the global markets action plan, and then talk briefly about the research I did on previous policies that pursue the same goals. Then finally I'll talk about what we can learn from those, and infer what might be effective in the GMAP.

Is that okay?

[The Chair, Conservative, Rob Merrifield]

Okay.

[Dr. Keith Head]

Ever since I've been doing this, there's been this overriding concern in Canada to diversify trade away from the United States. I think that some of that has to do with what happened in the 1990s. In 1990, Canada exported about three-quarters of its goods to the U.S., but by 1999 that had peaked to 87% of Canadian exported goods going to the U.S. market. That stayed there for three years. It's much higher in Ontario, at 93%. Since then, though, the long sought-after diversification to other markets has been going on. With the tailwinds of a stronger Canadian dollar and simply changes in the different sizes of the economies, exports to the U.S. have now gone back to the level they were in 1990, at about 75% of total; still higher at around 80% for Ontario, but much lower in B.C., at 46%.

One way to read this is that the mission was accomplished, that the long sought-after trade diversification away from the U.S. has occurred. But another way of thinking about it is to say we've moved away from trading so much with the U.S., but how did we do it and how can we continue to move in that same direction? I think that leads to the study of what policies have been employed to move Canada away from the U.S.

The one that we were really interested in was the Team Canada approach taken by the governments of Jean Chrétien and Paul Martin from 1984 to 2005. John Ries and I spent a long time going through the numbers and looking at the effects of a series of trade missions that Canada ran during that time. They visited 17 different countries. They made deals that, if you summed them all up, they claimed to be worth $33 billion, and $33 billion is a large number when you consider that in 2000 the total trade to non-U.S. destinations was $54 billion. So we're looking at three-fifths of the total amount of trade during that year.

Then the question was: did these trade missions that were run under the auspices of Team Canada actually work? If you listened to what people said at the time, you'd get highly conflicting accounts. The Ontario premier said, “This trip was an unqualified success”, “trade deals that will expand their business in the short-run”, they “made contacts that will lead to continued trade” and “even more job creation” in the long run. That was his view.

On the flip side, Michael Hart, who had been a negotiator of the trade agreement with the U.S. and long an advocate of more trade with the U.S. and less emphasis on diversification, said that trade missions are popular with ministers, but they have virtually no enduring impact on trade and investment patterns. So there was this alternative view that basically considered trade missions, like Team Canada, to be only photo ops.

We didn't know what the truth of the matter was. Both of those seemed like they could be plausible, so we took all the trade missions.... There were eight Team Canada missions and 15 different Canadian trade missions that were smaller, led by the Minister of International Trade instead of by the Prime Minister. These missions involved a lot of other government officials, premiers often, anywhere from 25 to up to 500 Canadian companies would come along, so they were a big deal. It is important to find out whether they work, because they're attractive to politicians and we want them to be doing them if they actually yield benefits for Canada.

What we found was that if you cut the data in the most naive way possible, it seemed like these trade missions were really successful. Yet when you started drilling deeper, when you started cutting the data in a more intelligent and thoughtful way, you found the effects started to diminish.

What we finally did, what we believe is the most natural thing, was to look at trade between Canada and the trade mission visited country, the trade mission targeted country, and look at how that bilateral trade evolved after the mission. You find there's no significant change. Trade with these countries we visited was higher after our mission to them, but it was higher before the mission. We don't really have any real evidence, any statistically significant evidence, that the trade missions affected Canadian exports to the targeted countries at all, which is kind of a downer.

We also looked at services. The previous panellists emphasized that services are very important. What about foreign direct investment? It's the same sort of story. Nothing was really happening. We were targeting countries with which we already had pretty good commercial relationships. We kept those commercial relationships at about the same level, so, in other words, nothing much changed.

If you believe our results, what does that tell you about the global markets action plan and what things should be done in the future by Canada to diversify its trades? The first observation that I would draw is, a policy that was geared toward photographs of politicians serving Beaver Tails in China is a policy geared toward appearances, and therefore we might expect it to have only superficial effects. In some sense, our results were predictable if you take that kind of skeptical view.

What kind of policy would be better? It would be a policy that works more quietly, behind the scenes. It's not about photo ops, but it's more about Canadians creating the connective tissue of networks between Canadian businesses and the foreign businesses that would buy from them. Everybody working on international trade right now is really obsessed with this process by which firms connect to each other and create trade with each other. Maybe we were late to the party, but we now understand that it's not just about markets, that networks and the formation of networks are vital.

I believe that using consular trade missions to permanent trade missions that are there every day, all year, for years in a row, is a potentially more effective way to do it because it allows for that kind of follow-through, the kind of building of connections, sharing of connections, sharing of all kinds of valuable information that can make a lasting impact. There is research to support that. I don't know if you're going to hear from Dan Ciuriak, formerly of DFAIT. He's done research for Canada showing that consular offices increase exports from Canada to the countries where they're located. Also, for the United States, Andrew Rose, a pretty well-known trade economist from Berkeley's Haas School of Business, has shown this for the United States.

There is some evidence to support it. I would caution that I haven't worked with that data and subjected it to all the same scrutiny that I subjected Team Canada to. It's possible some of these results would not be as strong if we drilled deeper. But I do think that based on the evidence we know so far and simple reasoning, quiet, behind-the-scenes network-building can be more valuable than the kind of flashy stuff that gets done in front of the cameras. That is a very promising aspect of the global markets action plan, namely, its upfront and central emphasis on economic diplomacy. If I understand economic diplomacy the way the GMAP does, then I think that to me seems like a much more promising way of approaching things.

The second thing that I think is a really sensible aspect of the plan is an emphasis on small and medium-sized enterprises. What you see over and over again, if you look at the data from every single country, where anybody's looked at the data, is that large companies have no trouble really exporting. Size and export participation are extremely closely linked. It's the small companies that have the trouble. What do we need to do to get smaller companies more involved with exporting? We need to perhaps have our government act as a facilitator to try to bridge those gaps for them.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now hear from our last presenter.

Mr. Gupta, the floor is yours.

[Karna Gupta, President and Chief Executive Officer, Information Technology Association of Canada]

Thank you very much for inviting ITAC to this forum. We are pleased to submit our position on this issue.

To frame the discussion, we represent the information technology companies in Canada. Our members are multinationals, but 75% of our members are SMEs across the country. There are 30,000 ICT companies across Canada. We generate about $155 billion in revenue, and 5% of GDP. We're the largest private sector R and D provider in the country today, by a factor of five; we do about $5 billion of R and D. The second largest is pharma. The last estimate for the total export that goes into the ICT sector was around $21 billion, and it's still quite extensively over-rotated towards the U.S. Some 64% of our exports are in the U.S. and 12% in the EU. The other countries are much smaller. The service side of ICT makes up about 86% of our export.

When you see this kind of backdrop, there is the underlying thesis that for most of the technology—I'm talking about Canadian companies—to be successful, they must have a global footprint. The Canadian market in its totality is extremely small, with 35 million people. These SMEs traditionally do not know how to do business outside of the north-south Canada-U.S. border. They typically don't go to Asia or to east Europe. Those markets are foreign to them. The GMAP lays out a foundation for Canadian SMEs to grow their business in broader emerging markets.

There are a couple of main challenges that our members face, and I will bring in two sets of examples here. In my past life, I ran public and private companies globally. I've seen how the other markets play out, so I'm going to weave that into the discussion.

The major issues facing Canadian companies, what I call “in terms of adding muscles quickly”, are really in three sources. One is access to market. Other than the U.S., the access to market continues to be fairly low for Canadian companies. This is where the GMAP could play a significant role by having the proper trade commissioner services on the ground, not only providing intelligence, but also connecting a B2B connection. If you don't connect the demand side and supply side, it ends up being just a photo op. You need to connect the demand side and the supply side.

The second issue that most companies face is access to capital. On the capital side, the Canadian SMEs are struggling, after initial friends and family funding. That means that they now have product and it has been commercialized; they have one customer, and they need to scale.

From then on, the funding cycle is not there in Canada because nobody is funding Canadian companies until they become cashflow positive. There's a huge “dead man zone” opening up for SMEs to build out the organization and exports. This is where we need to work with EDC and other government agencies. Whether it's an IRAP...they need to come together to support that level of SMEs to scale their businesses.

The third issue that the SMEs face is access to talent. In our industry particularly, the talent is the resource that we base our products on. It is a knowledge-based economy that we're creating. When you're creating a knowledge economy, it will move where the conditions are right. It is not tethered to the ground, so it's not tethered to the resources. They will move where the conditions are right. We need to create the right conditions to attract the right talent in the country.

When I look at the global markets action plan, the fundamentals are very good in terms of outlining the broader strategies. It responds to most of the needs that we lay out in the ICT sector. The target markets are way too large. They need to be narrowed down and focused, as the previous witness mentioned. You can't have 76 priorities. You need to pick five, maybe ten, but you can't go to 76 priorities. We need to narrow down where we focus on.

We need to try to build economic diplomacy by working in back offices and connecting people to the right places, rather than having broader trade missions. When we take businesses from here to a foreign country, ITAC sets up proper business arrangements on the other side through the trade commissioner service. There is a business-to-business dialogue to create a transaction, rather than having a broader trade mission.

TCS is absolutely critical in achieving our success. From an ITAC point of view they are providing a very good service on the ground, but they are underfunded. They do not have sufficient resources to do what is necessary to help our businesses. In our budget submissions to the government we have previously recommended that this funding be changed

Canada's business incubators need to be encouraged to connect to foreign countries to create the free flow of goods and services and human capital back and forth. That is absolutely critical to our success.

Finally, the whole EDC and IRAP support needs to be added to the overall strategy to move this forward.

On the GMAP side, we think enhancing the Canadian competitive edge is laid out at the end of the document. It's fairly well articulated, but it needs to lay out what we are going to do specifically to help Canadian companies be successful in a global market because we have an importer/exporter distinction. Most of our companies are importers as well as exporters. If you're trying to punish them as importers because of tariffs and everything else, they cannot in turn export. As somebody said, they cannot have their feet nailed to the ground then you give them a back rub and say go and export, because we're dealing with the global supply chain. Both the import and the export need to be dealt with in a comprehensive fashion.

I'll stop there. I'm not going to go through the presentation. You have the details and those are the highlights.

[The Chair, Conservative, Rob Merrifield]

That's very good. We'll get into the question and answer period right away.

We'll start with Mr. Côté. The floor is yours.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much, Mr. Chair.

I would like to thank our three witnesses too. First, I would like to talk to Ms. Wright.

I appreciated the frankness of your presentation. You really got down to business, we might say. It was really very helpful.

In terms of the plan, the example used was the Team Canada missions, which, unfortunately were not followed up on. Mr. Gupta also took the opportunity to talk about the resources required to launch a plan.

For 10 or 20 years, Canada’s approach has always been to think things happen by magic, which is unfortunate. Things have been allowed to slide, with very little investment made to support Canadian services abroad, including our trade commissioners, and our network of embassies, delegations and representatives in a given country.

To what extent will you have trust in the plan if it does not come with resources?

[Dr. Lorna Wright]

If there are no resources I have no trust. If you want this to succeed, you have to put in resources, both financial and talent, as one of the other witnesses said. It's very important.

On the trade commissioner service, when trade commissioners on the ground come fresh out of Canada, it takes them a while to figure out how things work in the particular market they're in. If you can keep trade commissioners in place longer, so they understand things more...from my experience a lot of the major value in the trade commissioner service comes from the local hires who know exactly what's happening on the ground, who know who the good players are, who the suspect ones are. Building those networks that Professor Head talked about is absolutely critical.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

I would like to look at an article you wrote with you.

The title is “The e-business capability of small and medium sized firms in international supply chains”.

There again, you are talking about resources. But what is very interesting is that companies devote their own resources in order to be able to do their own distribution chain. You mentioned that in your presentation. You talk about new technologies, new approaches. From that point of view, Canada seems to be behind. Canada seems to have a cultural problem compared to the United States, where entrepreneurs are not afraid to innovate and to invest in new technology.

What do you think about this missed opportunity? Do you think that the government has wasted an opportunity to make us competitive and to let the plan we are now studying reach its full potential?

[Dr. Lorna Wright]

Yes, I think we have missed some opportunities. Canada, compared to many of the Asian countries, for example, is very far behind. I'm working with Korea at the moment, and Canada just isn't in sight.

SMEs need a couple of things where government can help. Because SMEs are usually cash-strapped and don't have the finances, they're reluctant to try something new because, if it doesn't work, what are they going to do?

Canada re-entered the GEM project, the Global Entrepreneurship Monitor project, after 10 years away, and it was quite interesting what their report found in terms of use of technology. Most are not cutting edge; they're using technology that is one to five years in use.

What the government can do is provide training for SMEs so they know what the value is going to be. Help them with some financing. For BDC, SMEs are its target market. I was talking to one of their vice-presidents the other day, and he was saying that their penetration rate in Ontario is 3%. That's not much.

One of the other things goes back to education. It goes back to marketing, actually making SMEs know what's available and what's out there, and doing some training with them to get the information out.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you.

Now I am going to turn to you, Mr. Head. In terms of the lukewarm results of diversifying our international trade outside the United States, the conclusions you presented to us are very interesting.

I cannot stop myself from leading you to another area, to the fact that Canada has become a major exporter in the extractive industries. In other words, our manufacturing has lost a lot of ground in international trade. Pablo Heidrich, one of our witnesses, brought that up and made the point that we are making a serious mistake by concentrating on exporting natural resources. The Conference Board of Canada came to the same conclusions in the report it published in December 2012.

Do you want to comment on the problem of our lack of product diversification?

[Dr. Keith Head]

It's a really interesting issue, products interfacing with countries. If you look at trade patterns, Canada is almost two countries on this issue. You have Ontario and Quebec being manufacturing-oriented but also being very U.S.-oriented. On the flip side, once you go west, we're more aimed toward Asia, but if you look at the list of things that western provinces export to Asia, it's all natural resources. You can just go through the top 20 commodities and you find almost nothing that's not related to the earth, to what's available below or above the soil or in the sea. That's the thing, and that's the fact, and that has not changed, that really sharp orientation of ours in terms of exporting natural resources to Asia.

It's very different from the U.S. The U.S. does export manufactured goods to Asia, and so it is a puzzle that Canadian manufacturers are so good at exporting to the U.S. but not so good at exporting to Asia. The fact that the resource exporters are good at exporting to Asia is not that surprising when you think about the huge growth that's going on in Asia. A lot of that growth requires raw materials of the kind that we can provide: fertilizer, ores, etc.

[The Chair, Conservative, Rob Merrifield]

Absolutely.

Mr. O'Toole, the floor is yours.

[Erin O'Toole, Conservative, Durham, ON]

Thank you, Mr. Chair. Thanks to all of our witnesses for appearing.

I found it very interesting to have Professor Wright and Professor Head together in the order they were. Because Professor Wright, after your assessment of the pros and some areas of improvement in the GMAP, you looked at Team Canada and you said that it looked as though things were happening, but there was no follow-up.

We were fortunate, then, to have Professor Head, who's actually analyzed the follow-up, monitored the post-Team Canada mission trade between the countries, and said there was no significant change and it was difficult to show that those missions yielded any benefits.

Professor Head, when I look at the largest mission that Prime Minister Chrétien and the Liberal government did, it was in 2001 to China, with over 600 people—premiers, mayors. There was $5.7 billion announced in that event. But then if you look at it, there were a lot of letters of interest, memorandums of understanding, that sort of thing. Did you look at that mission in particular, and does it fit with your general conclusion? You mentioned photo ops; there were a lot of photo ops. But an analysis of the data shows that there was no long-term change. Our trade with China was already going up, and there was no discernable benefit from this flashy mission.

[Dr. Keith Head]

We didn't look at trade missions mission by mission. We looked at the 17 visits as an ensemble, estimating the average effect of those missions. And the average effect was zero. If you start going country by country, the trade is just so volatile, it's just bouncing around, and it's very hard to see what's going on at all. We did some graphing of it. Trade bounces around a lot, so you have to take all the missions together and average them out to see what's happening. And the average is basically zero.

With regard to what you said about the memorandums of understanding, etc., what we've heard from talking to people is that they would take some deals that were already happening, and then they would hold off on announcing them for a while so that they could announce them at the mission. And they would take other things that were sort of wishful thinking, hoping they might someday come together, and add those. So in other words you take the future that may not happen, and you take the past that's already happened, you lump them together and announce this big thing, but that's not really a change that was brought about by the mission.

[Erin O'Toole, Conservative, Durham, ON]

You mentioned Mr. Hart, who said these were very popular with ministers and Prime Minister Chrétien, but of no impact, and I can see from that description the politics of it.

The phrase I liked best, when you talked about the contrast approach, the global markets action plan, a strategy, was your term “connective tissue”. So putting resources on the ground; enhancing the role of trade commissioners; building a less photo op-driven and more long-term approach, including getting that small number of SMEs that export, and getting more of them exporting, do you feel that's a better long-term approach, that it doesn't provide for a good short hit in politics, but it's probably the more prudent long-term approach?

[Dr. Keith Head]

Yes. I like the idea of the quiet Canadian who's behind the scenes telling the people who are really in a position to make big purchases from Canadian companies, that maybe they've overlooked Canadian companies they should be talking to, that have products they're not aware of. That kind of thing that's going on—and it won't be covered in The Globe and Mail—might end up being much more effective in the long run.

[Erin O'Toole, Conservative, Durham, ON]

Professor Wright, do you have any comments on that longer-term approach to diversification, but also of growth of markets in Asia in some areas that you said were lagging? Do you see that reflected in the GMAP? I know you've identified areas such as education and a few specific areas you'd like broken out better. But do you see the strategy and the long-term allocation of resources being effective for the long term?

[Dr. Lorna Wright]

I see the strategy as definitely effective. What worries me is that I see a lot of great strategies, but a strategy is only as good as its implementation. For this to work, you do have to put the resources in.

And the other thing I would be very concerned about is that this does have to be long term if it's going to succeed. You can't chop and change and next year decide it's going to be something different, because I've seen that happen a lot with governments. You need to keep on, because it will be long term. You're not going to see a big jump in exports this time next year, but if you keep moving slowly, keep the follow-up, keep your eye on the ball, then yes, I think it will work, and I think it is the way to work.

I would say, though, particularly in Asian markets, there is a place for the photo-op. There is a place for high-level government people to go out, if a company's having problems—for example, I think Bombardier in a couple of instances found it extremely useful to have Jean Chrétien come along—because that show of authority, of prestige, means a lot, and can help smooth things out if there are problems. So I wouldn't abandon it entirely, but I wouldn't make that the focus. I think the GMAP has the right focus of, behind the scenes, building your trade commissioner's service, and, I would also say, reaching out to other partners—private sector, NGO, whatever—so that it becomes a coherent whole.

[Erin O'Toole, Conservative, Durham, ON]

This approach with the consular and trade commissioner on the ground permanently is also more conducive to SMEs, which you've both identified as an area we can really increase our exports in, if we get that 10% of SMEs that export most to the U.S. Even if we doubled it to 20%, it would be huge.

Professor Head, on the big trade missions, many of them were the large companies that already had the contract signed, as you said. You broke it down as being the large companies don't need the supports—like the trade commissioners—that the SMEs do.

Do you see the GMAP helping SMEs much better than the Team Canada large missions?

[The Chair, Conservative, Rob Merrifield]

I'll allow a short answer.

Go ahead.

[Dr. Keith Head]

There is some evidence that heads of state visits can sell things like Boeing, Bombardier, and Airbus. That can work when the heads of state show up and Bill Clinton can get the United Arab Emirates to buy an extra 747, but I don't think that should be the priority for Canada. I think the priority should be to address the deficits that the small and medium enterprises have. I think that's done not by heads of state but by the consular missions.

[Erin O'Toole, Conservative, Durham, ON]

Thank you.

[The Chair, Conservative, Rob Merrifield]

Very good.

Mr. Pacetti, the floor is yours.