International Trade Committee on Feb. 13th, 2007

[Eric Siegel]

Political risk insurance takes two forms. It either insures the equity investment of a Canadian business abroad or it could insure the bank's participation in a foreign project for which they're comfortable with the commercial risk, but the political risk is something they're concerned about.

We insure three risks. One is the risk of expropriation, the loss due to expropriation, without getting adequate compensation from the host country. The second risk is the inability to transfer or convert earnings, be it in the form of dividends or fees, the repatriation of profits from that country back to Canada. The third is political violence that will either restrict one's ability to get access and therefore operate the investment or that damages the investment.

As I said, if you're a Canadian business and you're going to make an investment abroad, you can insure the investment against those risks. Alternatively, if you're a bank, you're could be trying to support a project.

For example, out west Agrium is building a fertilizer facility in Argentina for which EDC was a lender and a political risk insurer, a lender to help the project actually acquire the goods and services to build the project, and a political risk insurer because the banks were also lending on that project. They liked the commercial risk of the project, and it made sense to them, but in Argentina they were worried about an expropriation of the project ultimately leading to non-payment of the loans, so they asked the EDC to insure them against the political risks.

For examples of high political risk, I think Venezuela right now is certainly raising concerns, through some of its actions, that they could potentially engage in expropriation action. A bank, like Scotiabank, that is operating under a bank licence could worry about losing that licence without adequate compensation. It could be a mine that's operating there, and you're worried about the Venezuelans ultimately expropriating the mine without paying for it.

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

How do you work with the actual value of what it is you're insuring? There are the actual infrastructure and the capital, but then there are business opportunities, contacts, etc. Do you only deal with the capital investments?

[Eric Siegel]

Yes. We're insuring the book value. We determine in advance what the accounting guidelines would be and the jurisdiction for determining what the value of that investment is at the time it faces loss due to one of those particular risks.

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

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Lemieux.

We'll go now to the New Democratic Party, Mr. Atamanenko, for seven minutes, please.

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

Thank you very much for being here. Once again, congratulations on your appointment.

Before we move on, you have a very extensive background with EDC that spans almost 30 years. Out of curiosity, what did you do before?

[Eric Siegel]

I joined EDC after completing my business degree. I'd worked before then, but I joined after my business degree.

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

Thank you.

My colleague posed a question about vision. We have some specific questions that we'll obviously be asking later on, but I would like to pursue that, if you don't mind.

I know that Mr. Poloz referred to Friedman and his flat world scenario. In this flat world scenario, with increased globalization, there are obviously many challenges. You've touched on some, but I wouldn't mind if you could elaborate on some of those. What obstacles do you foresee in the future for our country in the area of trade as we look at these challenges? For example, we want to keep Canadians employed and working, and we want to have a prosperous economy. We have the threat of global warming and the environment and the idea of a closer working integration with the North American union and WTO bilaterals in agriculture, for example.

Could you use the rest of your time to elaborate a little on some of this? I think it would be very useful for us to hear that.

[Eric Siegel]

My colleague will speak about integrative trade in more detail, but I think this is a phenomenon that is only going to intensify as opposed to there being a period of time before we go back to a trading environment we are more familiar with, which we tend to think about in terms of Canada and how it exports to the rest of the world. I think we've now entered into a long-term and more intensifying phase where we are part of an integrated global trade network. Our success is going to be based on how well we integrate into that and identify the key supply chains that Canada has competence to offer, and then work to both get in those chains and expand within them.

That means we need to be looking at countries not as competitors, but to see what benefit they can ultimately bring to Canada. When you look at a market like China, on the surface it represents potentially a very competitive threat. At the same time, it represents a huge opportunity for Canadian companies to work at increasing and enhancing productivity, retaining here in Canada the expertise it takes to ultimately design the product and manage our participation in the supply chain, but at the same time benefiting from economies that can be derived from greater participation of emerging markets.

So we need to engage in that as an opportunity and less as a threat. I think we're making that transition in some markets and sectors; in others it's a more difficult transition. At the same time, we need to make the transition from a focus on manufacturing to one that gives greater recognition to the services and manufacturing in the larger sense, as opposed to manufacturing in the fabrication sense of the word. At EDC we've been experiencing that for some time.

What constitutes benefit for Canada? Many export credit agencies out there--EDC's competitors--still follow a concept of determining what content is coming out of their respective countries in order to qualify goods for their support. EDC works on the basis of the benefit Canada is deriving, which is a wider network. Then we take into account things like what R and D is going into that, since that's really a benefit that is being created, and it's a high-end benefit that Canada wants to maintain. For instance, Nortel Networks no longer manufactures in this country, but it's still eligible and still draws on EDC's support by virtue of the benefit it creates through its footprint here.

More and more I see EDC focusing on understanding the footprint of the business in Canada and how it can be enhanced through greater participation in the integrative trade model, and then doing whatever it can to help those companies get into various supply chains to be able to reap that benefit.

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

Do we have the power to demand that research and development take place in Canada? If we provide assistance, do we have the power to have agreements on how many jobs will be created? Is that something EDC gets into?

[Eric Siegel]

We do get into it. In order for business to qualify for EDC support, it has to meet what we call Canadian benefit policy. So we look at the transaction from the standpoint of what benefits are going to be created here in Canada to qualify it initially for our support.

My point is only that the benefit has now moved away from merely identifying jobs created through manufacturing employment and is now extending to take into account things such as R and D or the overall administration that a company may provide to operate internationally. If they can gain a world mandate in a particular industry sector, what is the benefit that ultimately will be derived back here in Canada? In our Canadian benefit policy we will provide additional benefit to a small or medium-sized enterprise that is engaging in business, because we want to see them expand into the international marketplace.

So we do have a qualification criterion, but it has evolved in order to be more flexible in order to reflect the fact that sectors are not the same, that services are now becoming a much bigger component, that manufacturing or fabrication itself is only one component of the benefit model that Canada derives.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Atamanenko.

Thank you, Mr. Siegel.

The time for this part of the meeting is up. I believe Mr. Bains has a motion to bring to the committee.

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

Yes, I do, Chair. Thank you very much.

I'd like to bring forward this motion: that the committee finds that Eric D. Siegel possesses the qualifications and competencies to perform the duties of the post of the president of the Export Development Corporation and that the chair report the findings to the committee of the House.

[The Chair, Conservative, Leon Benoit]

I believe we have a seconder from the Bloc Québécois. Is that correct?

[Serge Cardin, Bloc, Sherbrooke, QC]

Yes.

[The Chair, Conservative, Leon Benoit]

It is seconded by Mr. Cardin.

Is there unanimous consent to support this appointment?

(Motion agreed to)

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Siegel.

We've kind of strayed into the second part of the meeting already, but that's fine. It certainly does test your knowledge and competency. Congratulations.

[Some hon. members]

Hear, hear!

[The Chair, Conservative, Leon Benoit]

We will now continue with the second part of the meeting. We have as witness Mr. Stephen Poloz, who is senior vice-president and chief economist, corporate affairs, of Export Development Canada.

Mr. Poloz, you have an opening statement to make, I believe, before we move to questioning.

Please proceed, Mr. Poloz.

[Stephen Poloz, Senior Vice-President and Chief Economist, Corporate Affairs, Export Development Canada]

I do, Mr. Chairman, just a few remarks. Thank you very much. I won't duplicate what I sent in my submission, but just elaborate on a couple of things.

Thank you very much for the opportunity to talk to you this morning.

I will make my presentation in English, but please feel free to ask your questions in French.

It's very important that we understand well how international trade is changing. I'd go far enough to describe this as a new paradigm of international trade, because it just isn't the way we used to think of it.

Mr. Siegel mentioned quite a lot of things about EDC. As I pass on to the next topic, I want to mention a couple of things that didn't come out in the discussion. Last year, in 2006, EDC facilitated $66 billion worth of transactions for Canadian companies that operate abroad, be they exports or investments, and 90% of this was with small and medium-sized enterprises. In total, 6,800 companies were helped this way.

As we touched on at the end, all those transactions must pass a Canadian benefits test for us. We have to be able to see where they will benefit Canada. We estimate that the transactions we facilitated helped to contribute 3.9% of Canada's GDP last year. That's with no fancy economist multipliers, Mr. Chairman; it's just the nuts and bolts of the transactions.

The international trade paradigm is evolving, as I described in my submission. I thought I might emphasize a couple of points by telling you a 50-year story.

The story begins in 1955 when the economies of the United States and Canada looked rather similar, at least in terms of their manufacturing sectors. Thirty per cent of the workforce in the United States was in manufacturing, and in Canada it was 26%. In the United States—let's focus on them—there were 15 million manufacturing workers in 1955, which was 30% of those working. Today 10% of the U.S. workforce is in manufacturing, and there are 14 million workers. There are fewer total workers in U.S. manufacturing today than there were 50 years ago.

What is important about this story is that those 14 million workers today are six times as productive as they were in 1955—a factor of six. This was done by embracing the integrative trade model that we talk about in the submission. Today trade is four times as important to the U.S. economy as it was in 1955, and the trade that has grown is not just exports. We don't really think of the U.S. as a big exporting nation. They are a pretty big exporting nation, but it's not really that important—not like it is to us. But the embrace of trade has two dimensions. It's not just exporting, but using trade as a tool of supply to make your company more efficient and able to do the same thing, but with fewer workers, or perhaps growing other dimensions of the business. So that has happened in spades in the United States during the last 50 years.

I tell you this story because a lot of people think, including when I made reference to Mr. Friedman's book, The World is Flat, that this is not that new a phenomenon. This is a trend line. If I look at the manufacturing workers in the United States, it's a straight line for 50 years.

Of course, none of us would say that the past 50 years have been bad for the U.S. economy; they've been extraordinarily good. So this is a picture of progress.

Indeed, you'll see in the newspaper tomorrow that the U.S. trade data came out for December, which gives us a full year, and in the articles I'm picking up on my BlackBerry—a great Canadian product, by the way—it says that during the Bush presidency three million manufacturing jobs have been lost, and there are people who say it's because of unfair trade. It's blamed on the trade deficit with China. On the contrary, what has happened in the U.S. during this time is that they've continued to globalize and increase their productivity. They've had a “productivity miracle”, as we call it, and in fact they've created more than eight million other jobs in the process. Approximately seven million of those jobs are in higher-paying categories than the ones lost during the manufacturing restructuring. That suggests to me that this was a pretty important success.

If I can go to Canada for a moment, there is a difference. We had 26% of our workforce in manufacturing in 1955—1.4 million workers—and today we have 14% of our workforce in manufacturing. It's a very similar story to the U.S. However, our productivity has risen by five times, not six times as in the U.S. Our use of trade as a tool has doubled during those 50 years, whereas it has quadrupled in the U.S. This, I think, is the most important difference between the two economies and the reason we have a productivity or competitiveness gap, which we so often discuss. That suggests to me that Canadian companies are embracing this new paradigm, but they have done so more gradually than their American counterparts. Nevertheless, we can see that is happening.

I want to briefly turn to EDC's role in this. As Mr. Siegel mentioned, we facilitate many aspects of that. Very often it's just a matter of breaking into new marketplaces. Twenty-three per cent of what we did last year was in emerging markets--something like $15 billion of new business for Canadian companies.

It also may involve investing in a foreign economy in order to set up a foreign affiliate or to have a supply chain provider that improves Canadian companies' efficiency. For instance, the pieces of our famous BlackBerry come from seven different countries. Even though the idea, the R and D, and some of the manufacturing happen in Waterloo, there are seven other countries involved in supplying the parts for this fantastic product. Indeed, last year EDC helped Canadian companies invest about $6 billion in those foreign countries in order to build those kinds of supply chains. That will have a direct contribution to our productivity.

In our corporate plan for the next five years, which has been approved at Treasury Board but will be tabled this spring, we have three pillars. First, this is connecting with our exporters and investors. That's why Mr. Siegel talked about putting more people on the ground, to make sure we are intimate with the Canadian companies' business and understand how they have to deal with this foreign competition and how to capitalize on it.

Second, we have facilitating integrative trade, which is a broader, more high-dimensional picture than traditional exporting. There's much more to it today, and we need to facilitate all the dimensions to help a company truly prosper and grow their employment here in Canada--their footprint, as we described.

Finally, there is leveraging of EDC's resources; in other words, to use our partnerships, in particular our capital, for sure, and our partnerships with financial institutions, to get even more mileage out of the things we do. Over 60% of the transactions we did last year were in partnership with commercial financial institutions.

As you can tell, we're very proud of this. But we are trying to do many other things. I'll mention a couple of them before I conclude.

One is increasing our global footprint. To give a recent success story, for instance, 15 months ago we established a representation in New Delhi. The business volume for Canadian companies in 2006 tripled compared to 2005. We're very pleased with the way that started. We of course know that there's a great deal of potential for Canadian companies in that market space.

Another example was jumping in when the need was there. As you recall, during the year the auto sector was under considerable stress, and the suppliers to the big participants in the auto sector were therefore also under stress. These of course are mostly exporters. EDC introduced new tools during that time: new insurance programs specifically aimed at that gap in the marketplace. At the time, the private marketplace was actually drying up.

Those are some examples of what we can do. I look forward to your questions about integrative trade and other things connected to that.

I will conclude with a few concrete proposals that I think might be of interest to the committee. I think the illustration from India is a good one. We have a lot of other places where there are great opportunities for Canada. I think, in general, Canada needs more feet on the ground in the world--both Foreign Affairs and International Trade people and EDC people, who are their partners. We need to facilitate that as best we can. EDC has a plan for this, but it could be much broader and more embracing. We could have an important increase in resourcing on the ground out there; other countries do.

With respect to foreign investment protection agreements, I mentioned that the integrative trade model is usually driven by an investment. Indeed, just to illustrate, Canada has about $460 billion worth of exports per year, but we also have over $400 billion worth of sales from our foreign affiliates that are operating abroad. So there is another Canadian economy operating out there that is just as important to Canada as its export base, and that is, of course, financial institutions, insurance companies, companies like Bombardier and Nortel--global companies.

For those companies to do that, free trade agreements would be wonderful, but they're very difficult to do. Foreign investment protection agreements are narrower, more focused, and easier to accomplish, and so it wouldn't be a bad idea, I think, to take a two-track approach as much as possible and get as much investment freedom as we can.

We need more collaboration among the provinces. Often I'm told that our branding is dispersed, as we have out in these marketplaces visits from groups from Ontario, from Quebec, and from Canada. We have everybody trying to capitalize on these new markets. That's excellent, but the brand can sometimes become a little bit fuzzy.

Another suggestion is to build industrial parks in strategic markets, in places Canadian companies could call home. They could actually lease a small place in a Canadian industrial park, let's say, somewhere in India or in China, where they would then have an atmosphere in which everybody's in the same boat. That sort of thing, I think, can work well. Other countries have tried this.

Finally, I'd like to suggest that we overinvest in our trade infrastructure. By trade infrastructure I mean a variety of things, but one of the important things would be ports, rail, and bridges--the actual physical connections that are necessary for trade. One of the things that Canada can capitalize on is its unique relationship with the United States. Canada could actually become an important trade hub for the United States. We see some evidence that this is happening, and I think it's something that we could encourage. Even if we aren't adding value to the goods as they pass through, we can earn, say, a thousand dollars per container as a service for handling that trade, and that's a good business to be in.

I'll stop there, Mr. Chairman. Thank you very much for the time. I look forward to the committee's questions.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Poloz.

This committee, as you know, is currently conducting a study to examine the opportunities and challenges that Canadian businesses face in various regions around the world. In particular we're interested in markets where two-way trade and investment flows with Canada may be underdeveloped and where there is good potential for growth. The committee is specifically interested in identifying and removing obstacles that stand in the way of stronger economic ties in these markets.

The question we're trying to answer as a committee is what the Government of Canada can do to help Canadian businesses take better advantage of trade and investment and other international business opportunities around the world. You have, in your presentation, focused on that, and I do appreciate that.

We'll now start the questioning on this round with Mr. Bains, from the official opposition.

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

Thank you very much, Chair.

I appreciate the presentation. There are a couple of issues you mentioned that I'd like to discuss with you and get your feedback on.

The first has to do with trade and productivity. You talked specifically about the importance of emerging markets and the fact that 23% of your business is attributed to that, which translates to about $15 billion worth of trade. I think one of the most important emerging foreign markets that we need to work with is China. That has been well documented and extensively written about, and there have been many analyses along those lines.

Last month Mr. Emerson visited China, and he made some remarks and observations about his trip. He indicated that we're losing ground in terms of market share of exports, and he also indicated that we're losing ground in terms of foreign direct investment, in the share that's coming to Canada in a North American context. So that was his observation. He indicated that first-hand. I want to get your feedback on how EDC could help improve that situation.

Secondly, you talked about branding. You talked about how Canada needs to brand itself internationally. I think one of the misconceptions that exist is that we're a country of natural resources, and that you can come and take our natural resources, and you can then manufacture goods from them. That's something we really have to work hard on.

Again, just this weekend, Mr. MacKay said that China needs Canada's natural resources and noted that Canada has a huge trade surplus with China.

So how do we change that paradigm? We had the Minister of Foreign Affairs talking about our natural resources. We had the Minister of International Trade talking about our eroding trade and investment. So how does EDC help fix our trade situation with China, and how do we help brand ourselves better with China, not simply as a supplier of natural resources but as a country that can also provide high-value-added goods and service?

[The Chair, Conservative, Leon Benoit]

Mr. Poloz.

[Stephen Poloz]

Thank you very much for those two questions.

The minister is right in the sense that it does appear that other countries are having a disproportionate success with China. However, I wouldn't be quite that negative perhaps, because I do think we have to take to heart some of the lessons of my submission--for example, that trade has become triangular, that the bilateral relationship is not a good way necessarily to summarize the total relationship.

For instance, a smaller Canadian company might have a great deal of difficulty breaking into the Chinese market directly; however, it may be quite a global company by breaking into the supply chain of a major American company that is actively exporting to China. Some of our trade with the United States may actually represent global trade, because we are one of the links in the supply chain. In fact, I'm certain that is true, because we actually speak to those companies. So that's one thing to bear in mind.

I see China at the moment, of course, as the major opportunity for us, but also as an important place for us to use the integrated trade model to supply ourselves. It may be that China is one of our biggest suppliers today, as it is for the United States, for instance, a supplier of low-cost inputs to some of our products, such as this one. And then we export those things everywhere...whereas five or ten years from now China may become our biggest customer.

I would remind everyone of our experience with Japan. Back in the mid-1980s people were sending people to Japan to find out what the secret was. How was it they were taking away all of our business? That was very instructive, but by 1992 or 1993 that story had gone away, because Japan had reached its full maturity and now was one of our biggest customers as opposed to that ultra-competitive manufacturing machine. They have moved decidedly up-market. And of course they compete with us on those fronts, but it's not like it seemed back in those days.

Coming around to how EDC can help, first of all, I hope I've helped you to understand some of those numbers, but how can we actually help to develop trade? We have our feet on the ground. We have two representatives in China, one in Beijing and one in Shanghai. We expect that is going to grow over time. We of course collaborate directly with our trade commissioner colleagues from the embassies and consulates. As I said in my presentation, that's exactly how we need to grow those things. It's that face-to-face nature of the business that is very important. It isn't just people buying something over the Internet and ordering it; it's a relationship business, especially in the services end of the business, which is growing so rapidly. EDC helps in the form of facilitating. In the past year, for example, EDC did facilitate $1.3 billion worth of transactions in China. It's not insignificant, but we know, of course, there is a great deal of potential for growing that.

Turning to the branding question very briefly, I think the representation is the way to do that. I think the Canadian success stories are starting to get around. It's amazing just how widespread this one is, and when people see that as a Canadian story of a global company, that is the kind of success story.... And there are others: Husky, Nortel, Bombardier, and SNC-Lavalin. Those kinds of companies have gone global and are right in the actual trenches where the transactions occur creating that Canadian brand.

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

I'm glad you mentioned Japan. I think that's an area I want to discuss going forward as well. It's a very important market to us. So is Russia, I believe.

You mentioned in your presentation that we need more people on the ground, that we need a stronger representation of Canada, and one of the ways to do that is through our consular services. We want to make sure we have that representation.

You're probably aware that at the end of next month, on March 31, there's going to be the closure of four consulate offices--two in Japan, one in Russia, and one in Italy.

I just want your thoughts. In light of the importance of Japan, and in terms of its market size, do you think that is a strategically smart thing to do, from your perspective, in terms of trade and business and so forth? Specifically, Russia also is another key emerging market. I want your thoughts on that as well, because that's something that contradicts what you said. You suggested initially that we want more people. Now the question is, is it strategically smart for us to close those consulate offices?