Thank you, Mr. Chair.
Good afternoon, everyone.
Thank you for the opportunity to meet with your committee by video conference from Toronto. I see that it's blue sky behind me. Rest assured that it's not blue sky in real life. That's a backdrop to make Toronto look pleasant, which is a high task.
I would like to start by making a few comments about the positioning and the context of this set of negotiations with Japan. They are being done in the middle of what is clearly a broader strategy on the part of our federal government, which is a multi-faceted push to sign many trade agreements with partners large and small.
In addition to carefully reviewing the features of each of those particular agreements, I think the general merits of the overall strategy of signing free trade agreements also must be evaluated.
I recognize that Canada’s performance in international merchandise trade has been disappointing in recent years. Our overall level of exports has been weak. It's lower, in absolute terms, than it was before the global financial crisis of 2008-09. It's much lower, as a share of our GDP, than it was a decade ago. Measured by the ratio of exports to GDP, Canada’s economy is in fact de-globalizing, because the importance of exports in our overall demand portfolio is shrinking.
In addition to the quantity of exports, the composition of our exports has shifted in what I consider a regressive direction. We've become much more dependent on the extraction and export of resources—unprocessed or barely processed resources—than at any time in past decades. At present, close to two-thirds of our exports consist of unprocessed or barely processed resources, compared to well under half of our exports at the turn of the century.
On top of all that, our overall trade balance has deteriorated. We now experience a large and chronic deficit on our current international payments that's equivalent to around 3% of GDP. That's a significant drain on our income and employment opportunities and represents growing indebtedness to the rest of the world.
I do not believe that signing more free trade agreements, either with Japan or with other partners, will alter this trajectory in our favour. In fact, I think more free trade agreements will make those problems worse. In practice, bilateral trade liberalization has tended to increase imports into Canada more than our exports from Canada, and this is for a number of reasons.
In general, Canadian tariffs, on a trade-weighted basis, were generally larger than those of the trading partners we negotiated free trade agreements with. Therefore, bilateral liberalization gave a bigger boost to imports than to exports.
Second, in most cases we started from a trade deficit position. Even if there was equivalent liberalization on the two sides, that would still translate into a larger absolute boost for our imports over our exports.
Finally, structurally, Canadian-based companies have proven less capable of expanding into markets for high-value, innovative products than our competitors in Europe, Asia, or even America.
I've arranged for a table to be distributed to the members of the committee, in English and French, that summarizes research I've done on the impact of bilateral free trade agreements on our exports, our imports, and our trade balances. I'll just briefly refer to that table.
The top part of the table shows the proportionate increase, on an annualized basis, in our exports and imports with the five countries we had longstanding trade agreements with when I performed this research. First of all, you see that our imports from our free trade partners grew much faster than our exports to our free trade partners. Moreover, our imports from free trade partners grew faster than our imports from the rest of the world. That might be expected, but our exports to free trade partners grew more slowly than our exports to the rest of the world.
The lower part of the table summarizes the impact on the bilateral trade balance in each of those five cases, measured as a proportion of Canadian GDP. In four of the five cases, and on a cumulative total basis, the trade balance deteriorated against Canada by a combined total of about a third of a point of GDP.
So by both approaches, the proportionate growth in exports and imports and the impact on our net trade balance, free trade agreements have hurt our trade performance, not helped it.
In terms of the composition of our trade, I think free trade agreements have also reinforced a tendency for Canada to export resources and import more technically sophisticated value-added products. I view this as a losing proposition for Canada in the long run. And as was just mentioned by the previous witness, our bilateral trade with Japan very much conforms to that pattern. It is what I would call structural under-development in our export relationships.
The true reasons for Canada's poor trade performance do not have to do with a lack of free trade agreements, or even the existence of trade barriers in our trading partners. I think it is a failure of Canadian-based companies to develop and sell innovative, high-value products and services the rest of the world wants to pay good prices for. That's a structural weakness in our economy that will not be helped by signing free trade agreements, and I think it could be harmed by it.
Other countries in the world that are successful exporters to date—places like Germany, Scandinavia, Korea, Brazil, and China—have not built their success by signing as many free trade agreements as possible. Rather, they have focused on developing and nurturing domestically based, globally oriented companies that can sell things the rest of the world wants. That's where I think Canada's policy should be directed, instead of trying to sign as many free trade agreements as possible.
The current structure of our bilateral trade with Japan, as I mentioned, very much reflects both the quantitative and the qualitative imbalances in our overall trade performance. We have experienced a significant trade deficit with Japan every year for decades. Chronically, we import more from Japan than we export there. In a demand-constrained world where unemployment exists, this means we lose jobs as a result of our bilateral trade. By our research, we estimate about 25,000 Canadian jobs lost as a result of the bilateral chronic trade deficit. This is consistent with Japan's traditional strategy of promoting ongoing trade surpluses and export-led growth.
Of course the tsunami and some of the other changes in Japan have impacted that policy in the short run, but Japan's long-run strategy is very much still consistent with the effort to export on a net basis, and thereby support domestic jobs and incomes. That's very different from the traditional model of mutual specialization and balanced trade that is built into traditional economic models of free trade. This can work for countries. Japan has used it effectively, as well as Germany, Korea, and China today. But there's a flip side of the coin for the partner countries who maintain trade deficits as a result of those surpluses.
The Japanese success in generating ongoing trade surpluses reflects deliberate policy strategies involving the whole tool kit of proactive industrial policy that has been a feature of Japanese industrial development since World War II. Japan's economy has not functioned structurally like a traditional liberal, market-oriented, Anglo-Saxon economy, and the impacts of trade liberalization will be very different in the case of Japan as a result.
Our trade with Japan is unbalanced qualitatively as well. Some 99% of our imports from Japan consist of manufactured products, generally very sophisticated technology-intensive products. Most of our exports to Japan, as has already been noted, consist of resource-based products. The gains from trade liberalization on those exports are going to be modest, because Japan, quite sensibly, does not generally charge large tariffs on its imports of raw materials, again with the exception of agriculture.
Let me make a few comments regarding our automotive trade with Japan. That's of special interest to my organization, of course, and auto is still Canada's second-largest export industry and a crucial source of our prosperity.
Japan's exports of automotive products have been a centrepiece of their overall strategy of export-led growth. That has worked with Canada as well. They sold over $5 billion in automotive products to Canada last year, despite the tsunami and the associated supply disruptions. In return, Canada exported only $37 million worth of automotive products in the other direction. That is an imbalance of 137 to one, one of the most unbalanced auto trade relationships you will see anywhere in the world. Our auto exports to Japan have never been large, but they have been declining sharply. They have fallen by over 80% since 1999. So Japan's automotive market, effectively closed since the war, has actually become effectively more closed in recent years, and our almost non-existent exports to Japan have actually shrunk.
This is not the result of tariffs or other explicit trade barriers. In fact, Japan charges no tariff at all on imports of finished vehicles, so a free trade agreement is not going to change that imbalance. How do we explain the lopsided nature of automotive trade with Japan? A range of structural factors are clearly at play, including the aging demographic makeup of Japanese society, falling automotive purchases, stagnant incomes in recent years, consumer tastes for vehicles that are not always like the ones we make in North America, and of course the structural impact of regulations, marketing practices, and other non-tariff barriers that are very hard to identify and, I would argue, impossible to credibly eliminate.
It's not realistic for me to understand any scenario in which a free trade agreement with Japan would generate benefits for our auto industry. I suspect that in the wake of a free trade agreement we would see a widening of the bilateral auto trade imbalance to the order of $7 billion to $8 billion, instead of $5 billion, and tens of thousands of lost jobs as a result.
My recommendation would be to exclude the auto sector entirely from any free trade negotiations with Japan, if in fact those negotiations were deemed worthwhile to pursue at all.
Finally, I just make note to the committee that I've referred some previously published research to your clerk: a couple of articles on the structural features of Japan's economy, the history of state-directed industrialization in Japan and other East Asian economies, and more details on the impact on our employment situation of our unbalanced trade with Japan today.
I'll leave it at that.
Thank you for your attention, and I look forward to your questions and discussion.