International Trade Committee on Feb. 1st, 2007

[The Chair, Conservative, Leon Benoit]

Good morning, everyone.

The Standing Committee on International Trade of the House of Commons has invited the Conference Board of Canada to present its final report of its three-year research project, Mission Possible: Sustainable Prosperity for Canada.

The presentation of this report has been touted as a landmark study and provides a blueprint for building a new era of Canadian prosperity. It's timely, given that the committee is studying opportunities and challenges that Canadian business faces in today's global market.

I would like to thank Mr. Glen Hodgson, senior vice-president and chief economist for the Conference Board of Canada, and Mr. Gilles Rhéaume, vice-president, public policy, Conference Board of Canada.

We'll start today with their presentation. It's a short presentation on their report, and then of course we'll go to the usual round of questioning.

I'd like to start by thanking you very much, gentlemen. We're looking forward tremendously to this presentation and to these next two meetings to deal with this really important issue.

Go ahead, please.

[Glen Hodgson, Senior Vice-President and Chief Economist, Conference Board of Canada]

Mr. Chairman, thank you very much.

Thank you, committee members.

I had a chance to be here last October when we had a round table on international trade, and I alluded at that time to the fact that we were publishing a fairly substantive report. We're now two-thirds of the way through the final publication. I thought I would start by talking a bit about the context and volume one. My colleague Gilles Rhéaume will speak to the second volume, dealing with resources.

The report is called Mission Possible: Sustainable Prosperity for Canada, a huge topic. We've found that the only way we could deal with it would be to divide it into three clusters: one dealing with Canada's place in globalization; one dealing with the resource boom and how we can capitalize on the spectacular rise in resource prices that we're experiencing right now; and the third on cities. Our president, Anne Golden, will be presenting that next week. In fact, she'll be giving a speech at the Toronto Board of Trade releasing the third volume.

The first volume is called Mission Possible: Stellar Canadian Performance in the Global Economy. It really addresses the question of national drift, setting the facts out, and then setting out elements of a strategy to create sustainable prosperity for Canada. I'll just spend a couple of minutes on the core hypothesis.

The evidence is very clear. Economists are almost unanimous, effectively unanimous, that Canada right now is a nation that's drifting. It's very hard to see. It's almost imperceptible. But the evidence is clear, and I'll give you a couple of examples.

On per capita income, we've slid from fifth to tenth place in the OECD over the last 15 years. That's a very slow slide, but you can see it. In terms of productivity performance, over the last five, ten, twenty years, we've slid slowly towards the back of the class.

We're now in the bottom third of OECD countries, the rich industrial countries, in terms of annual productivity growth rates. When we compare ourselves to the United States, we now find ourselves at about 83% of U.S. levels of productivity. Of course, that translates into having a smaller automobile in your driveway. The analogy I use is you have a Corolla rather than a Lexus in your driveway.

Where it really matters of course is because we won't have the capacity.... And that's not a free ad for Toyota, by the way. It really translates into whether we can pay for the social goods, the health care system we want, the education system we want, and the retirements we all want as we get older. What's driving that? We see two major forces. One is a combination of global demographics, aging populations in the industrial world, in Canada, and countries like Japan and Italy, combined with young populations and changed economic policies in the emerging world.

All of a sudden, countries like China, India, and Brazil have become competitors and much stronger forces within the global economy. I think in Maclean's magazine, I was quoted as calling it “a shift in the tectonic plates” of the global economy. That's a good analogy, because you can see the major structural forces that are creating friction but are also creating a new world where Asia, in particular, will be a pole of economic growth for the world economy.

The other major force we see is the changing alignment of how international trade occurs today. I've given it an expression, “integrative trade”,

integrative trade.

Trade today is driven by investment. More and more, it's business using foreign direct investment to reposition parts of their supply chain around the world. As we've dropped trade barriers over the last 25 years, businesses are now able to reposition elements of their production anywhere in the world where it makes the most sense, and they use foreign investment to do that. Canadian companies have done that to a certain degree, but it really is a question of whether we're keeping pace with the global dynamics.

Our report then goes into a number of near-term factors we're going to have to face. We talk about sustainability. In fact, sustainability, the balancing of the environment and the economy, is a theme that passes through all three volumes. I know that Gilles has spent quite some time looking at sustainable practices in the resource industry.

We talk about global imbalances. The United States, in particular, has a massive external deficit equal to about $850 billion annually, which means that it needs to attract equally massive savings from the rest of the world to keep itself aligned. Will there be a shock at some point where the United States is brought back into line?

We talk about the Doha Round, which is stalled right now, and whether we can find the political means to get Doha moving again before the U.S. President's negotiating mandate expires in July of this year. If we don't, we are on the front line of a new Congress in the United States that we fear will be protectionist. Because Canada has a trade surplus, we could well be on the front lines of an adjustment in American attitudes.

Lastly, we talk about emerging markets, and the competition they're presenting. China is now, in some months, a bigger exporter to the United States than Canada is; there's been one month so far. But two or three years down the road that will become a standard centred pattern where we're slowly being displaced by countries like China in the U.S. market.

But the flip side is there's tremendous opportunity in those markets. For the first time there's a middle class of hundreds of millions of people who have purchasing power and the ability to buy things that we produce and we manufacture.

So how do we actually take advantage of the structural changes going on in China, India, Brazil, and 150 other countries? The balance of the volume then sets out five strategies that we think are critical to creating sustainable wealth within Canada. I'll go through those very quickly.

First is the need to embrace productivity and competitiveness as a national priority, because that's where wealth creation should come from. This is the smartest form of growth: to boost productivity, output per worker. It's not about working harder; it's all about working smarter, finding better ways to combine innovation, technology, creativity, to boost wealth within Canada.

We then drill into that framework and address a second theme, which I think is arguably the most powerful in the volume, and the theme we've selected is to create a single Canadian market. Our research, through the many studies we did under the Canada Project, identified barriers to commerce at the provincial boundaries, misalignment of regulation between the federal and provincial governments, misalignment even within levels of government, barriers to competition, lack of innovation in our industry and in government policy, barriers to tax, and infrastructure. So there's a whole array of things that we've done to ourselves to render ourselves less competitive in the world. And you cannot be competitive in a modern global economy unless your firms are able to compete effectively at home, by reaching a national market. So that's a powerful message. I'd be happy to talk about it at length.

The third theme for us is to address the aging labour force: find ways to encourage more immigrants and integrate them faster into our workforce, and incent older workers to stay longer. Our whole pension system and employment system was designed for a time of surplus labour, but the rules have completely changed. We're now at a point of labour shortage, and if you live in western Canada, represent constituencies out there, you know exactly what I mean. But that's even emerging in central Canada and Atlantic Canada. There are now skill shortages across our economy. So how will we find ways to address that? We think it's through smarter immigration policy, smarter investment in education, focusing on post-secondary and skill development, and finding ways to keep older workers attached longer.

The fourth strategy for us comes directly to the issue of this committee, which is international trade and investment, and the need to have a comprehensive, well-articulated, international trade and investment strategy going forward. We'll be quite happy to talk about that in some detail. We've looked at things like reducing barriers to foreign investment, strengthening the border to make it more seamless, so that foreign investors don't see the border as a barrier to functioning within North America, issues such as growing the services exports within our economy. The balkanization of our national economy makes it very hard for services exporters to actually get out there and compete, because they don't have to compete hard enough at home to really be at a competitive level internationally.

Ultimately, it comes back to making trade and investment a centrepiece of our national productivity strategy, having a well-articulated plan, which means Canada assuming a leading role, again, within the WTO negotiations. We've allowed ourselves to be pushed, really, to the side. We've become policy-takers rather than policy-makers, we believe, at the WTO. We have to reposition ourselves again.

But even as that is occurring, we know there's a risk that Doha will not proceed for two or three or five years, and we can't sit idle in the interim period. So we have to think about deepening our relationship with the United States within NAFTA, both broadening it to expand its coverage and dealing with very difficult things like non-tariff barriers, the north-south alignment between Canada and the United States, and then pursuing other regional and bilateral deals where there's really great potential, and thinking about engaging countries like China and India much more deeply on trade.

The last of the five strategies in volume one is around foreign policy. We argue that we really need to think about foreign policy as yet another part of a national productivity strategy that reinforces our trade investment and all the other elements. Our view is that our foreign policy really needs to proceed along two main tracks. Track number one is, obviously, with the United States, our most important relationship by far, something we have to think about every day, but we're not recommending or advising a big bang solution, in terms of the our relationship with the United States. It's more a matter of practical, day-to-day, rules-based engagement with the United States, seeing that they're our greatest friends and allies, but also looking after our own interests in that relationship.

The second track that we believe in very strongly is the need to embrace the emerging markets as a core piece of our foreign policy—China, India, Brazil, and many others—because they are the second pole of economic growth within the world economy, and by deeper engagement in our foreign policy we can have a better articulated trade and investment policy towards those countries.

We cover all of that in a report of about 130 pages. It's hard to get through, frankly. I've read every word multiple times, and it takes about seven hours, if you have the patience. But we'll be putting out an executive summary next week of about 20 pages, which will articulate that more effectively.

Gilles, do you want to add a few words about your volume now?

[Gilles Rhéaume, Vice-President, Policy, Business and Society, Conference Board of Canada]

Sure.

Last week we released our second volume of the Canada Project, called Mission Possible, a Canadian Resources Strategy for the Boom and Beyond. We focused on the rising global demand for natural resources, which comes primarily from Asia, and basically the fast pace in terms of economic growth in China and India. We have a population in China, with respect to the middle class, of 200 million at the moment. We're looking at it rising to 400 million by 2010.

In India they have a middle class of about 90 million, and growing fast. All these people have higher incomes, and they are looking for things that basically we wouldn't think they would purchase in the past, including motor vehicles, electric appliances, housing, the various gadgets that we are used to. All of that requires the natural resources and energy.

There are some opportunities also within North America with what we are seeing in terms of long-term trends, demographic growth, and economic growth, but to a lesser extent. When we looked at that, we looked at four key sectors: forest products, agri-foods, mining, and energy. Each has important opportunities, but also major challenges.

I'll just briefly say a few words on each one.

The major challenge in forest products is maintaining global competitiveness. Our plants, particularly pulp and paper plants, are small and old compared to those elsewhere in the world. Some competitors didn't previously exist, such as Brazil, Chile and New Zealand. All that puts a lot of pressure on our Canadian producers. They're also dealing with costs that are growing faster that those of other countries. The strategy is therefore to renew the forest sector.

The biggest challenge in the agricultural sector is opening global markets. My colleague Glen mentioned that our tariff barriers were high. The Doha Round is not progressing. If we want opportunities in the agricultural sector, we really must have an aggressive strategy for liberalizing agricultural trade. We also have to raise the innovation level in our agricultural sector.

When we turn to mining, one critical thing is that there are great opportunities, but our reserves are declining. We need to boost our exploration activity to an extent that we have never seen before so that we can open new mines. There are a number of things we recommend to bring that forward. On the energy side, we have vast energy resources. The greatest challenges that we are seeing have to do with the environment, and dealing with those environmental issues.

What we are suggesting is that there is an opportunity for Canada to basically become a clean energy superpower. I emphasize the word “clean”, which means a dual strategy of developing that resource, but also developing environmental technologies.

That's basically in terms of the four sectors. There are two common themes that come out of it. One has to do with labour shortages. When we look at these resource sectors, the workforce on average is older than what we are seeing in other sectors. The shortage that Glen alluded to is coming faster than what we are seeing in other sectors, and we are already seeing it on the energy side.

The second major theme that crosses everything in terms of all the resource sectors has to do with the regulatory complexity, the hurdles these companies have to go through to get projects approved, and at a time when we have a boom that will not last forever. We're seeing this boom that will exist for maybe 10, 15, 20 years. Then it's certainly going to slow down, if not decline.

We are looking at that opportunity, which is not only a time-limited offer, but it is an offer that we won't see repeated for generations to come, looking at trends and demographics that we are seeing worldwide. This is a short-term opportunity where we can benefit, and we have to meet the challenges that we have identified in our volume.

[The Chair, Conservative, Leon Benoit]

Thank you very much, gentlemen. Fascinating.

We'll go now to questions, starting with the official opposition Liberal Party, Mr. Bains. Go ahead, please, seven minutes.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Thank you very much, Chair.

I want to thank Mr. Hodgson and Mr. Rhéaume for coming in.

I wholeheartedly agree with your assessment overall, Mr. Hodgson. In a nutshell, the way I would summarize what you've said is the essential goal of this entire exercise in the reports is to have a better standard of living while working fewer hours and generating more income per capita. That's the essence of it, working smarter and being productive. Some say we have to work longer. I disagree with that. We have to work smarter.

One of the most important indicators that one can see as a means to judge our success is the average income, which is not keeping pace with that of the United States, and that gap is widening with other countries as well. That is really a reflection of individual wealth and the inequity that's growing in our society as well between the haves and the have nots.

The two areas where I want your assistance in better understanding are diversification in trade and, secondly, the Canadian common market, which you alluded to in your remarks as well.

In your view of the current Government of Canada overseas trade resources, are they limited when compared with other countries? For instance, we've seen and we've heard that they'll be closing consulate offices, for example, in Milan, in Italy, in Russia, and in Japan. Do you think that is the appropriate strategy to promote trade, or do you think we need to open additional offices? If so, strategically, what would some of the recommendations be? Which markets should we focus on?

That's my first question. After you answer that I have a couple of other questions as well for you.

[Glen Hodgson]

All right, let me take a step back and say that a well-articulated trade policy basically has three pieces. One, your business has to be ready to go and compete internationally, and that's why we put so much weight on the concept of a single market in Canada, ending the balkanization and allowing our firms to achieve optimum scale here so they really have that sharp edge that's needed to compete internationally.

The second piece is about market access, and that's what international trade negotiation is all about. Right now we can see Doha drifting. We've gone 13 years with NAFTA, and, as we articulated in our report, we think NAFTA has effectively matured. There's no more dynamic energy coming out of NAFTA. Firms are not restructuring any more, so there's a lot of capacity there to both broaden the coverage of NAFTA by including things like services in much more detail, and also deepen it through much greater effort around harmonization. Maybe that's the wrong word. Harmonization is a little bit scary sometimes, politically, but I think we can say alignment of regulatory standards and processes without giving up any of our sovereignty. Often we have slightly different standards that achieve exactly the same end, so we need to find ways to penetrate more deeply with the United States in the integration of North America, and then pursue other markets.

The third piece you're talking about is on the trade investment promotion side, but that is basically the sales force of a company. It's perfectly fine to talk about diversification and whether we have the right resources in place for sales, but we want to make sure that we have all three pieces in place and that we are actually building companies that are going to be competitive internationally, which can go out there and win market share based upon high-quality products and price, and the issue of market access.

When it comes to diversification, we all want to be more diversified, but you can't push a string, and without having these first two pieces, without having more active market access negotiations, let's say, bilaterally, regionally, multilaterally, there's really only so much you can do by mobilizing more resources in the field. I would argue strongly that you really have to look at all three pieces.

Clearly, 83% of our exports go to the United States, and our trade, frankly, with other parts of the world has not grown for some time now. It's actually fallen considerably with Japan, so arguing for more investment in trade development officers, let's say, on the ground with Japan without cracking the nut of market access with the Japanese is probably not going to be a very efficient use of resources.

It is the same thing with Europe and the same thing with many other markets. I would like to put at least as much weight on the export and investment readiness piece and the market access piece as I would on the number of trade commissioners in the field.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

In your understanding, how do our international trade resources and consular services and trade missions compare with those of other countries? Do you believe in the current strategy that's being deployed?

You talked about Japan. It's still a very important trading partner in terms of absolute dollars, and we've had a very strong relationship there. Russia is an emerging market with a strong GDP forecast at 6.5% for the upcoming calendar year. In your opinion, do we have sufficient resources in those markets to promote trade, or do you think we should cut back?

[Glen Hodgson]

Given how poorly our trade investment has performed for a number of years now, I think it would be folly to cut back the resources. Clearly, more is required in the right places based upon strategic analysis, which means, frankly, more in the United States and more in other markets where you see high potential.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

You talk about emerging markets. You speak at length about China, and I know we've seen that with the government over the past year, for instance, there have been issues in terms of the relationship. Now the Minister of Trade has gone there and the Minister of Finance has gone there. But you talk about how those visits are, at one level, important, but there has to be something more comprehensive. You allude to that as well. Can you talk about that? What more can be done? Because simply sending a minister once a year is not going to cut it. We acknowledge that, and there's common understanding. So what more can be done?

What more can the government do to really take our relationship with China, which is one of the most important emerging markets, forward? How can we further strengthen that? And that comprehensive strategy you're suggesting, can you elaborate a bit on that?

[Glen Hodgson]

I think the most important first step, as we articulated in our report, is to recognize that emerging markets really deserve a much higher priority within our foreign policy. I'm referring to China, and I put India and Brazil there as well, the major economies in the emerging world. We haven't completely ignored them, but they haven't been receiving the same weight over time that we think they deserve going forward.

Secondly, I think our future in engaging China, India, and Brazil is going to be investment-led. So rather than working on trade promotion and focusing on shipping finished goods from Canada to those countries, I think we have to look at the much deeper integration, which takes you to things like consideration of bilateral arrangements, looking at things that are called FIPAs, foreign investment protection agreements, for example, looking at all the tools we have both multilaterally and bilaterally to engage more deeply.

Unfortunately, there's no easy fix. You have to roll up your sleeves and really go sector by sector and identify where the opportunities are.

But, frankly, I also think there's a change in mindset required within Canada. Part of the reason why we put so much weight on the concept of a single market is because we have quietly protected much of our economy from international competition and therefore they don't have the same imperative, the same urgent need to go out and actively invest in India and China as companies in other countries do, and the protection is very subtle.

We have to really change our mindset to where it's not about mercantilist thinking where we protect ourselves at home and think we have a right to go out and trade with everybody in the world. Part of this is opening our own market up to more competition to ensure--

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

That is taking place with the provinces of British Columbia and Alberta, and I believe now they're also incorporating another province, I believe Saskatchewan, and they're trying to get an additional territory in as well, so that is starting to take place.

What leadership can we show at the federal level with the provinces? How do you see that relationship being structured? Obviously that's their jurisdiction, but what kind of leadership can we show and where can we help facilitate that process?

[Glen Hodgson]

You're absolutely right. We believe very strongly that what's called the TILMA, the trade, investment, and labour mobility agreement between B.C. and Alberta, is effectively a turning point in attitudes in this country. There's very important leadership being shown by two provinces.

Frankly, it's extraordinary to think that two provinces in Canada had to sign a free trade agreement to reduce barriers between the two of them. But it's done, it's going into force. You're absolutely right that other provinces are now quite interested in figuring out the benefits from aligning themselves.

But what can we do federally? I think we go right back to the agreement on internal trade, which was struck in 1994. One of our studies called Death by a Thousand Paper Cuts sets out all the barriers and points to the small areas of progress we made under the AIT. But we have to go back and re-energize that as a real centrepiece and set much higher targets and have a much more ambitious negotiating strategy on the federal end to try to liberate, effectively, markets across the country.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Bains.

We'll go now to the Bloc Québécois, Monsieur Cardin, seven minutes.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair.

Good morning, gentlemen. I'm pleased to meet you. I've often heard about the Conference Board, especially when I was dealing with oil. Let's say I haven't always been a believer, but I'm going to show some gratitude for the work you've done in Volume I. I admit I haven't read Volume II yet.

You mainly talk about natural resources. We had been promised a kind of summary in French. I read it in English, but I required help on certain aspects.

The international trade policy that Canada should adopt obviously concerns a number of virtually incalculable factors. Like some of my colleagues opposite, you advocate complete or nearly complete liberalization of markets, by eliminating supply management in Quebec, among other things, because you assume that certain protectionist measures here undermine the productivity of our manufacturers and so on.

So the four factors you mentioned earlier, productivity, a single Canadian market, trade policies versus investment and the aging population, are obviously based on productivity. We know this is an obligation, because we have to respond to quite fierce competition around the world in order to generate wealth.

I only want to make a brief digression and talk about the philosophy of progression, market development and economic growth versus demographic growth. I don't know what excuse is used to explain one or the other — demographic or economic growth. It's said that we lack people; we must make them, we must invent them. Is that in order to increase productivity or consumption? There will be limits at some point. There is China, whose population is 1.4 billion inhabitants, and there are other, small countries. So there's no comparison on consumption.

Today we're still aiming to increase wealth by increasing consumption, until we hit the wall. Technically, a number of countries have hit a wall, including Canada. It's said that the 1980s were harmful for productivity. Instead of replacing 100 employees with a modern robotic machine, we should have given one to each employee. Productivity might have increased as a result.

What actual recommendations are you making to the Canadian government? What path will it take so that Canada really becomes a competitor with time? If we die before we become productive, we won't be any further ahead. What do you recommend in the short term?

[Gilles Rhéaume]

You started by talking about demographic growth. We're not proposing that we increase the birth rate in order to meet our challenges. Instead we propose that we focus on the aging population. People will lose their pensions. We have to find ways to encourage them to stay in the labour market, on a part-time or other basis, in order to help. That's one of our proposals.

The other proposal concerns immigration policy. We have to be able to integrate immigrants into our markets more readily. That's another strategy we can adopt.

[Serge Cardin, Bloc, Sherbrooke, QC]

You mentioned immigration. While you're not advocating increasing the birth rate in Canada or Quebec, you're nevertheless indirectly advocating increasing the birth rate in foreign countries, so that we can have immigrants.

[Gilles Rhéaume]

In fact, a potentially very large number of foreign workers have skills and are looking for prospects. Where are they going to wind up? We could attract them here, rather than let them go elsewhere. An immigration policy might encourage them to come to Canada. Perhaps we could integrate them into the labour market and offer them wages comparable to what's offered elsewhere in the world. I think that's an important part of the strategy.

There's also the entire issue of training. Let's take adult training, for example. Canadian employers spend roughly $850 a year per employee on training. In the United States, it's more than $1,000. In Europe, it's approximately $1,200 a year. We spend very little on training. When we think of establishing a labour market strategy, we have to consider training.

Another group of potential workers, which Glen didn't mention but that we mention in our human resources program, are Aboriginal people. They form a young and growing population. However, they haven't achieved sufficient educational levels to enter the labour market. We have major challenges regarding education. The federal government has a role to play in this regard, particularly in relation to youths on reserves. We have an opportunity to integrate them into the labour market when we need human resources. So this is another factor that must be considered in the context of this thinking exercise.

Lastly, we talk about investment in order to access foreign markets. Another aspect of foreign investment is being able to access this professional competency outside the country.

[Serge Cardin, Bloc, Sherbrooke, QC]

I read somewhere that, for every dollar invested outside Canada, we can expect an impact of two dollars in Canada and Quebec.

Can you explain that to me?

[Gilles Rhéaume]

In fact, in the past, we put the accent on trade. We said that we needed exports. These days, there's a very close connection between investment and trade. We've often observed that investment in a country results in increased trade.

I think that Glen could explain that to you better.

[Glen Hodgson]

I could probably explain it to you better in English.

The concept--and this is really based on analysis done at the OECD, a multilateral organization--is that when you invest you're pulling along other services and you're deepening your business penetration with other countries, so there's a multiplier effect created by investment. It's not merely a matter of exporting jobs, although that does happen, but it's a matter of building that part of production into your total business model and making a particular business or a particular sector more competitive. So the analysis the OECD has done, which has been replicated at Export Development Canada, where I was prior to joining the Conference Board, shows that for a dollar invested in an industrial country, in a mature country, you probably get a multiplier of about 60¢, 0.6. So there's a small net effect through creating more trade by deeper engagement. But when you invest the same dollar in an emerging market you get a much more positive multiplier.

We actually cite the EDC analysis that says two dollars of future trade for every dollar invested. But in fact the poorer the country, where the country is less developed, where it has a less sophisticated economic system, financial system, where markets are not as well developed, you get a much higher multiplier. For a very low-income country you might get a multiplier of six times. So one dollar invested may create as much as six dollars of future trade, two-way trade, between the two countries. So that's a huge knock-on effect.

That's part of the reason why I personally have been on a bandwagon on this for five or six years in my research. We have to focus a lot more energy, not just on attracting investment to Canada, but on actually facilitating investment outward by our companies because there is this significant multiplier effect. That's particularly true at a time when we no longer have labour surpluses, when we now have labour shortages. One way to actually generate wealth in Canada is to encourage our business community to use investment as a way to deepen their penetration of other markets, to make themselves more efficient, to reach other consumers, to make sales from foreign affiliates.

But, really, c'est le degré d'engagement d'intégration.

[Serge Cardin, Bloc, Sherbrooke, QC]

When we talk about penetrating foreign markets, if we don't stimulate consumption, we don't create a direct link with businesses here. In that case, the only person who'll make $2 or $6 is the entrepreneur doing business outside Canada, not the exporting country or the country seeking to attract investment.

[Glen Hodgson]

No, but it's often the case that if a Canadian firm that is trying to compete globally does not make that investment, they may not be protecting any jobs at home. They may be out of business. Because this is not a closed system. They're competing head-on every day with firms from around the world that are doing exactly the same thing. And part of the reason you get the multiplier effect is that by becoming more efficient and taking advantage of that integrative trade model, they can probably maintain certain kinds of jobs at home, and in fact even improve the quality.

What we're seeing is that if you take apart global distribution, the kinds of jobs we want to capture in Canada are jobs that are high value, research and development, conceptualization of product, the marketing, the financial services. And frankly, I think this train has already left the station. The United States has lost 20% of its manufacturing employment in the last ten years. Almost all of it has gone to Asia, to China, to Vietnam, some to India. Yet American unemployment has actually gone down over that period.

There is a fundamental issue on the nature of employment and how we're sharing the gains from globalization. That's a very important issue, and that's something we'll have to think hard about in our social policy design. But it's not as if you can stand against the tide of globalization. Because if you resist, you may simply be gone. It may be not a matter of protecting a certain number of jobs within Canada. Those jobs may simply be gone because the firm will close. It will be gone, and you'll lose 100% of the jobs, rather than trying to find a way to improve the quality of the two-thirds of employment that you can maintain in Canada. Then with the multiplier effect, deeper engagement of trade, we do see it as a net positive.

Obviously this is a grand concept. This is not hard reality for a firm in a particular town. That can be very tough. You're absolutely right to have concerns about the consumption effect and the employment effect for a particular employer in a particular jurisdiction.

[The Chair, Conservative, Leon Benoit]

Merci, Monsieur Cardin.

Mr. Menzies, from the government side now, parliamentary secretary to the Minister of International Trade.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

Thank you to both of you gentlemen. This is exactly what this committee is looking for, is this type of input. We've been trying to analyze what should be a go-forward position for Canada, a successful go-forward position. I think everyone in this room knows full well that we're an exporting nation, and if we don't take advantage of what God has given us, then we deserve to fail. So it's this encouragement that these papers of yours are bringing to us, and I hope we can.... I have to admit, I haven't read it all myself. It's a long read. I need a long airplane ride to be able to read all of this.

There are some highlights in it that I would like to.... Rather than your listening to me talk, I would rather have you explain this integrative trade strategy that you spoke about when we met last fall. You said that countries specialize in what they produce best through firms shifting elements of production globally, resulting in greater overall wealth. I would like you to elaborate on that. You talk about not only “outward foreign direct investment”, but “inward forward direction”, and how that can advantage Canada. Can you elaborate on that for us please?

[Glen Hodgson]

I invented the phrasing “integrative trade” because I was trying to find a simple brand that people could get their heads around and really understand. That reflects what's happened with liberalization of trade all the way back to the end of the Second World War. There has been steady, step-by-step progress. The tariff barriers have come down. That's allowed businesses to reposition parts of their production around the world because they don't face the same added costs of manufacturing something in one country and then shipping it to another. And that's being driven by foreign investment. This is a phenomenon you see in Canada, and you can actually trace it. For example, in looking at the foreign share of our exports--it's a hard concept--I'll flip it around: the Canadian content of our exports has actually fallen very progressively year after year, until recently, for a long period of time. I think in 1990 the Canadian content of our exports in aggregate was about 70% or 71%. Now it's about 65%.

Think about the auto industry. The auto industry is probably the most striking example, because it is arguably one of the most, if not the most, globally integrated industries in the world. In Canada, we make machine tools, which are then shipped to the United States to make parts, which are then shipped back to Canada to make bigger parts, which are then shipped back to the United States. Pieces of a car can cross the border apparently as many as seven times before the end product is made.

Of course, we're making more than our fair share of end products in Canada. We have a clear advantage in final fabrication in Canada. We're a net exporter of automobiles by about 1.6 million a year. So that's a clear example of where the auto companies fit within an integrated North America.

We've had the Auto Pact since 1965. We chose quite deliberately, as a trade policy way back then, to try to integrate ourselves into the North American economy. And they use that repositioning of pieces of their whole production chain within North America to create their greatest possible advantage. That's the most striking example of the integrated trade concept.

Of course, you have to invest on both sides of the line to do that. You may draw parts in from other countries. You might make seat cushions or pieces of glass in Brazil or in Poland and fit it into your supply chain. That is the new trade paradigm.

When I went to grad school--I did my undergrad at the University of Manitoba many years ago--we were taught about trade in end goods. One country was making cotton and one country was making shoes and you traded them. You traded based on comparative advantage, which was relative efficiencies. Modern trade is all about trade in inputs. Something like 40% of all global trade now is traded within companies, intra-firm trade, and that's because companies all around the world are looking to gain their competitive advantage by putting pieces of their supply chain wherever it makes the most sense.

Our thinking, as a country that has resources, but what we really have is brain power, is that we want to position ourselves at the end of the supply chain where we can make the most money by using our brain power. So the way forward is we think about a trade policy. It's wonderful to export coal and unfinished logs, but it's far better to export brain power and to invest in brain power. And that's why so much of our report goes back to human capital, investing more in our education system.

As you think about trade investment policy, you really have to take all the pieces on board and think about how to make the national economy as competitive as possible and where to make the right kinds of investments going forward.

One of the things I liked in Advantage Canada, but I also liked in the Liberal statement a year earlier--that's because the Conference Board doesn't do politics, we try to do policy--was the emphasis on post-secondary education. I think the federal government has a really significant role to play going forward and investing far more in post-secondary education, because human capital is ultimately very portable.

So as you think about trade policy you really do have to think about all the pieces and where you want to fit within those supply chains.