International Trade Committee on Feb. 13th, 2007

[Stephen Poloz]

Excellent.

The end of your question before was what is EDC doing to deal with this transformation that is in services as opposed to merchandising, and this connects directly to your question as well. We have never drawn that distinction per se. Many of the companies we work with are service providers, like engineering companies. The very big foreign operators are the best example. The same kinds of products and services that we offer to companies that produce goods are there for companies that do services. But there are things that they use more, such as contract insurance or bonding services. An engineering company may have to post a bond to guarantee they'll be done the job by a certain date. We'll insure that bond for them against wrongful call, and it reduces the draw on their capital at the banks. That's the way we work with their institutions.

What sectors are really taking advantage of integrative trade? Probably the answer won't surprise you. They are companies in the advanced technology business, the telecom business, the aerospace business. When I talked before about trade penetration, or the importance of trade to the next dollar of GDP, 15 years ago 38¢ out of every dollar earned in the world depended on international trade. Today it's almost 60¢ out of every dollar. It's a 50% increase in the importance of trade, and it's because of this growth in what I call the supply trade, the trade that happens before the job is done.

If you look at it as a company, how deeply does trade penetrate the business model, there are companies in these sectors that look like Hong Kong. They import stuff by the tonne and export stuff by the tonne, and it all adds up to far more than the actual size of their company. It's because they need massive amounts of inputs, they're adding their value to it, they're doing something to it, and out go those same massives, but with the additional value added. That contribution to GDP is just that nexus of what they add on the way by. So we'll see, routinely, companies in the AT sector with trade penetration of 150%. Their revenues might be 100%, but they trade 150%, exports and imports.

The service sector as well--I mentioned engineering firms. We have many engineering firms that have set up offices abroad, who are thereby creating global models both of supplying and providing. So they'll have a project, and some of the work will be done in more than one office around the world, in different time zones perhaps, and indeed the actual delivery is then face to face.

I should mention financial services: a very big exporter and a big contributor to the numbers I mentioned before, which are foreign affiliate sales. A Manulife Financial or Sun Life, for example, has big operations out there. They've made these investments, and they provide those services directly, face to face, and of course the cheque ends up finding its way back to head office and generates income back here.

You have companies that are transforming to become global. In many cases it's do that or shrink, because their competitor is doing so. If you're in a highly competitive business such as a telecom equipment provider, there are all kinds of providers, so you have to be on the cutting edge. If they're doing it with a global model, they can provide a telephone handset for $100, and yours is $200. If the BlackBerry were $600, fewer of us would have them, that's for sure. It's that global model that allows the cost to be as low as it can be.

But you're right, for the companies confronted by this change, such as those in the textile business, it's a very big thing to transform yourself, but it is the kind of thing EDC has helped companies to do. Often it means they'll say, for example, “I'm making this garment. I need to cut my costs. I know somebody, and I can take advantage and buy this little factory in India to cut my costs on some of the pieces of this garment. That way I can preserve jobs here and I create jobs there, and I've got a model that works. I can meet my cost point.” And EDC will help them with that investment, help them with that restructuring.

Of course, in the end, what we hope is that the company still has its footprint in Canada. In fact, that's part of the requirement. The risk is that if we weren't able to do that, the footprint might disappear because they just restructure totally, and it goes.

So I don't have a convenient metric for you.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

No, it's just more your impressions.

On the textile side, I've seen that even in my riding, where a textile company was making low-end textiles at one point and they couldn't compete, but they just reoriented their company and now they make more complicated products--still textiles, but they're making safety textiles, fire-retardant textiles that are used by other companies to make firefighting suits, and that type of thing. So they simply found a niche through some trial and effort on their part. So it is definitely a possibility.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Lemieux, your time is up.

Mr. Atamanenko.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

Thank you.

You mentioned, Mr. Poloz, the disintegration. I would like to pursue that a little bit. Is this a logical outcome? Is it unavoidable, or can incentives be given to Canadian companies not to disintegrate and to offshore? Is this workable? I've read also that Canada actually is in many aspects an advantageous place to invest, that because of our social policies and national health care, it costs less to build a car in Canada than in the United States, for example.

I'm wondering, is this a road that we can't turn back on? Is it basically a fait accompli or can we do something to try to mitigate this and to provide some incentives to retain more control over the jobs in Canada?

[Stephen Poloz]

I do think it is both logical and unavoidable that if we were to try to develop incentives to keep our companies whole here in Canada, that incentive would need to grow every year. It would be without limit, in effect, and it would prevent us from actually capitalizing on the growth in the world economy. I do think that wouldn't be a very good use of our resources. Rather, I would see much more benefit to leaning with the wind as opposed to against it. That is to help companies to make these kinds of transformations faster and more easily so that they do assure their Canadian footprint and indeed grow it.

If we look to lessons in the United States, there are companies that have disappeared. For example, in the state of Massachusetts, which used to be a very big shoe manufacturing area of the United States, there are hardly any left now in terms of shoes. But one that is still there is New Balance, which is an athletic shoe, and they were the ones who were most aggressively global. They were the ones who built their own factory in China. So 60% of the pieces now come from China, a big container every day, but they've kept the final assembly and the finish. And of course the really expensive jobs, such as the design, the engineering, the marketing, the accountancy, etc.--all the good jobs--are still there, and in fact they are a bigger operation today than they were back when they were actually manufacturing the shoes in totality there.

So this model is a model for growth, but it is also a model for transformation. There will inevitably be people, as there have been over the past 50 years...and during the 100 years before that, people moved from the farm into manufacturing, and now they need to gradually move into higher-end manufacturing or design, or the other services that go with this, that are marketable globally. If we can aid that transition, it would be a better place for us to put our resources and, in particular, help those who are caught on the short end. So if, for example, a textile firm is unable to transform itself and then some of those workers become unemployed, where we can put the resources to lean with the wind is to help them with that transition into new gainful employment, not to try to somehow keep the company existing, because it will become increasingly unsustainable over time.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

It's possible then to present the New Balance model to a company that, let's say, wants to shut down everything and get some help to go and invest in another country. It's possible to talk and say, look.... And is it possible to not only talk but to put some pressure and some conditions on companies, after having looked at the scenario, to say, this is a model that can work and why can't we keep 30% of your jobs or your business here? Has this been done? Are you considering it for the future?

[Stephen Poloz]

In principle, that's exactly what happens. I just want to caution that it's not a cookie cutter approach or something that works every time. But most Canadian companies, when they are feeling those kinds of preventive pressures, are looking for a way to reorient themselves, as the member described. So they may need some sort of access to financial capital domestically or financial capital abroad, which is something that EDC is well equipped to help them with. Either way, that combination then allows them to redesign themselves and take advantage of the true skill sets they already have and to continue to make use of those.

The example we heard before was an excellent one. It isn't always possible. So the notion of putting pressure on, I think, isn't quite the one I would look for. It's more a question of making sure that the ability to take advantage of these programs is made clear so people know they have room to manoeuvre, that they have room to adjust. And for us, it would be to have the Canadian benefits always in mind. So we're looking for a solution that helps Canada at the same time, of course, as it helps the company. Those are the same thing, fundamentally.

So I believe we have many of the tools we need. We occasionally are restricted when a company needs some assistance, say, to re-equip itself or to upgrade its equipment. When that would be to, say, help it expand its export markets, that's fundamentally a domestic transaction. And we need to work more often with our domestic partners, either EDC or the chartered banks, to help get those things done.

But you're absolutely right. I just think it can't be something we can predict or force.

[Alex Atamanenko, NDP, British Columbia Southern Interior, BC]

My second question has to do with agriculture. Normally I sit on the agriculture committee, and I think I can speak for all my colleagues, regardless of our political leanings or the debates we have. I think we all are adamant that we would like to see the primary producers survive and the family farm survive, and with that, our rural communities. I'm wondering whether the EDC has, or is contemplating, a role somehow in this process specifically.

I know the Americans are very aggressive in bilateral agreements these days. We may not have been as aggressive. It may not fall within your framework. But do either of you gentlemen have any thoughts on this issue?

[Stephen Poloz]

We, of course, are major participants in Canada's agricultural economy. They're one of the biggest users of our insurance product, which Mr. Siegel was talking about before. There is considerable global reach out there. It's very big business, and it's been one of the faster-growing ends of our export community over the past year or so. So it's a very good story.

It has its problems, as you know, which are, if you like, trade policy related. And you're right, there are some significant unlevel parts of the agricultural playing field in the world. It's certainly not EDC's role to do anything about that; it's rather to facilitate, given those things.

The other aspect of this is that if those companies need domestic financial support or intermediation, which they often do, then they have the FCC, Farm Credit Canada, which is designed expressly for that. So they do have resources to tap into if it's a domestic issue. And if it's a foreign issue, then EDC is there to facilitate the trade.

Trade policy in agriculture is extremely difficult. It's one of the reasons free trade agreements are so elusive. And it's one of the reasons, in my concluding remarks at the beginning, I suggested that we should focus on foreign investment protection agreements, because they're simpler. They will truly help companies that need to get out there and capitalize on a growing world economy to lean with the wind. It may take us much longer to finally reach a good conclusion on liberalizing trade because of the agricultural barriers. They are the biggest ones, traditionally.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Atamanenko. Your time is up.

Now we go to the official opposition and Mr. Maloney, for five minutes.

[John Maloney, Liberal, Welland, ON]

I'll talk about the global footprint, if I could.

You indicated that you have 1,000 employees, 10 of whom are offshore. That's only 1%. It's also perhaps an oversimplification, because obviously there's support staff to assist them.

But the effect of these individuals is exemplified by your experience in New Delhi, where in one year the services were tripled. You have two in China: Beijing and Shanghai. I would estimate that you could probably use all 10 in China.

Do you have targets to increase the number of offshore individuals? How well do they work with our consulates and embassies? Do they share space? Do they meet regularly? Is there overlap? And can things be done to improve those relationships?

[Stephen Poloz]

To begin, I want to emphasize that this is part of a process that starts with that face-to-face meeting, perhaps in a faraway land. The people at head office do most of the work of the actual completion of those things. And we spend a great deal of time out in the marketplace as a staff when the transactions come to light.

So what we're talking about, the people on the ground--the 10--are true business development folks who are keeping contact with strategic foreign buyers and facilitating visits for Canadian companies when they are there. They work hand in hand with the trade commissioners in the consulates or the embassies or high commissions. In fact, their offices are normally right beside them. We co-locate. So there is a very cohesive relationship there.

We have a plan for expanding this. We're starting to get good payoff from those things. We have, if you like, a kind of machine going in terms of how we do these things, and so we expect that will rise steadily over the next few years. But it is expensive, so we research very carefully and look for the outlook of those markets and what we are actually going to be able to do for Canadian companies before we do it, so we're not just going everywhere, but we're being strategic about it, and it will go up.

Also, as Mr. Siegel was saying, under his leadership our whole delivery system has changed to one that is fully integrated. So if the front-end person is there representing a sector, they're talking to the right person, and they have stacked up behind them all the key people who can fulfill the demands like that. It's not a compartmentalized model, but a fully integrated one.

Perhaps my colleague would like to add something.

[Eric Siegel]

I'd just like to add one thing.

The concept of EDC having representatives abroad is a fairly new concept, so we're still in the early stages of it, but EDC has certain restrictions under its act. EDC does not have the power to have an office outside Canada. It's something we would love to see changed, and potentially it should be. That means EDC can have a representative, but that representative is attached to the Canadian embassy, works within the Canadian embassy, and can't be outside the chancellery.

For one, there are restrictions as to where that can happen, and there are also restrictions in certain markets in terms of who EDC can employ. If we go into China, there are restrictions in terms of finding people who have a minimum number of years of citizenship in Canada, who will meet certain security requirements, etc. It's not easy for EDC to hire locally within those markets, which is often ideal in those situations when you're trying to penetrate with local players. There are certain restrictions under which EDC currently operates.

The other point I'd like to emphasize is that EDC is not in this alone. Obviously the biggest presence is the Trade Commissioner Service, and EDC is there to work alongside the Trade Commissioner Service, so the real footprint of Canada is much broader than just EDC. As Mr. Poloz said, because the EDC person is attached to the Canadian embassy, he's working intimately with the trade commissioners and their locally engaged players to achieve our objectives in those markets.

[John Maloney, Liberal, Welland, ON]

Thank you, Mr. Siegel.

Mr. Temelkovski is going to share my time, whatever is left.

[The Chair, Conservative, Leon Benoit]

Mr. Temelkovski, just a very short question, and a quick answer, please.

[Lui Temelkovski, Liberal, Oak Ridges—Markham, ON]

I have a very short, direct question as well.

You mentioned there are some barriers among provinces when you're looking at assisting outside Canada. Maybe you can help us deal with that a little bit more?

[Eric Siegel]

They are not so much barriers. I think the comment was made that when we're talking about going into markets, we want to increase the image of Canada and the branding of Canada, and each province has its own objectives as well. Sometimes in a market the observation is that, to be honest, we may have diluted the Canadian brand at times by having a series of provincial visits but not having as much focus in terms of Canada as a market.

I've recently come back from India, for instance, and we've obviously had provincial visits to India, as the minister is proposing to be in India next month. At the same time, I observe a market like Australia, where they come in as one market, and in one sector alone--the mining sector--they had over 100 people mobilized in India to concentrate on the mining sector, independent of the states and the fact that various states have different levels of mining activity within Australia.

So the image can be a very powerful image, and I think at times we have to focus on that, particularly in markets where we're trying to establish and initiate Canadian activity where it may not be very established at this point.

[The Chair, Conservative, Leon Benoit]

Thank you.

Monsieur André, for about four minutes.

We're going to try to get in two more questioners.

[Guy André, Bloc, Berthier—Maskinongé, QC]

I think Canada is somewhat dependent on the United States because of its huge exports to this country. So the United States have a major political influence in Canada. This may explain why we do not have more bilateral agreements with other countries.

Last week, we met with representatives of the European Free Trade Association. In the present context of economic globalization, small countries like Iceland, Norway or Switzerland – also Quebec, if it were a sovereign country – can easily be part of this market. Why isn’t Canada signing more bilateral agreements? I think it would be one way to diversify our export markets which are too heavily concentrated in the United States and to provide more security to our industries. We are now used to export to the United States. It is easier in many respects.

In terms of the knowledge economy, I would like to know if you have any comments on intellectual property. Ideas, manufacturing and design are one thing, but intellectual property is not necessarily protected. China easily copies our products. We find it difficult to protect our manufacturing processes and our designs.

[Stephen Poloz]

Thank you.

If you do not mind, I will answer in English. It will be clearer.

Many would say that we are too dependent on the United States. More than 80% of our trade is with the United States.

I mentioned before that our trade has become triangular. Much of our trade growth has been with globalized U.S. companies, and in that sense we are tapping into the global economy, albeit indirectly. So the 83% number probably is wrong, as a guide. It's probably much lower than that.

For example, our services trade is much more diversified globally. Our foreign affiliates operating out there are more like 50% United States, and 50% the rest of the world. It's the same thing with services trade. You can see there's something different going on when you measure it that way. So if we are sending goods to the United States that end up going to China or India...well, we don't know that from the statistics, but we presume there's a lot of it that we'd miss.

We are perhaps more global than we look. Certainly there is no need to incent companies to go global, because as I said before, the emerging markets are growing at two or three times the pace of their traditional markets. So there is a great deal of benefit to going global.

EDC is very active in that. Just to put out the big numbers, about 60% to 65% of what EDC does is in the United States, even though more than 80% of what Canadian companies want to do is in the United States. So you can see that EDC is much more focused on taking those opportunities out into the world.

What prevents Canada from being more diversified? I think it may be more a case of there being some obvious advantages to focusing on the relationship that is so good with the United States. And of course the U.S. is itself the biggest, most diversified economy in the world already. So in terms of diversification, there is a lot already there.

As for intellectual property, very briefly, Mr. Chairman, this comes up quite a lot. Canadian companies say, “I'm a little worried about going into China, because I'm worried about my intellectual property. I'm worried about going into Eastern Europe; I'm worried about intellectual property.” That's a real worry. But I would just say that every company in the world faces those same challenges. Canadian companies aren't uniquely challenged by this. Somehow our American counterparts have managed to get over that. They've been very aggressive investors in China despite those intellectual property challenges.

I also think it's improving with time. The actual business ethic and the ability to work there are on an upward track. It's far different from what it was five or ten years ago, so I'm quite encouraged about the way that is evolving.

[The Chair, Conservative, Leon Benoit]

Merci, monsieur André.

Now we'll go to Mr. Cannan for a few short questions. But can we dispose of a motion here quickly before then?

The motion is that the committee approve a budget of $20,000 for a study of Canada's trade policy. So it's just the routine budget for this committee.

(Motion agreed to)

[The Chair, Conservative, Leon Benoit]

Thank you.

Mr. Cannan, go ahead. You have maybe three minutes.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thank you, Mr. Chair.

Thanks, gentlemen.

Congratulations, Mr. Siegel, on your appointment.

Since we're down to the last couple of minutes here, I'll just summarize. The purpose of the committee in having you as witnesses, and the other panels of witnesses over the last several meetings, is that we're trying to develop some direction in which Canada should be heading in our foreign policy. The bottom line is that we know companies have to adapt or perish, as you've indicated, and one of the ways to be successful is to specialize. Our government put $591 million into the Pacific gateway. Our ports are important. We're putting tens of millions of dollars into the border crossings for the movement of goods and services. I'm thinking, from your comments, that we need to specialize.

What would you recommend our committee focus on to help Canada be more competitive and successful in our trading policy? You know that we have to prioritize, so where should we start first?

[Stephen Poloz]

If I had to pick a favourite to specialize in, it would be this: the business model I've described is evolving in such a way that it's face-to-face business. One needs a presence in Saudi Arabia in order to take advantage of the great growth possibility. One needs a presence in China to take advantage of this. It is that presence and the ability to have an ongoing conversation that creates the business.

For that, we need more feet on the ground, and we particularly need more feet on the ground from our International Trade people. I'm sure you could increase the trade commissioners by 50%. That would make an enormous difference to this picture, because of the numerous meetings they must try to orchestrate. They're just run off their feet, and we see this directly when we visit them. We organize events with them, and we get more people in the room. We participate in these things; they are the kinds of resources that make those things actually happen. A Canadian company has a body when they show up in town to take them to the right meetings, see the right people, and get a transaction done.

My second one is FIPA, the foreign investment protection and promotion agreements, because once you get there.... When people look at the benefits from NAFTA, the biggest one came from the investment protection side, because then people in the automotive business could invest in Mexico without concern that they would be treated differently from any other company. It was the bit of extra assurance that makes an important difference: that their government has negotiated something with the other country making them equal. That would be the big facilitator.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Cannan.

Thank you very much, Mr. Poloz, for coming today, and for your presentation and your answers.

Mr. Siegel, congratulations again for your appointment, and for getting such ready support for that appointment from this committee.

Thank you very much, gentlemen. I look forward to seeing you in the future.

On Thursday we have the Conference Board of Canada for their second appearance. That should be very interesting.

The meeting is adjourned.