International Trade Committee on May 6th, 2014

[The Chair, Conservative, Rob Merrifield]

I call the meeting to order.

Pursuant to Standing Order 108(2) we are doing a study of the positive effects of the global markets action plan.

We are just starting this study. As is tradition as we start a study, we have a budget to bring witnesses in. We have it before the committee. We would entertain a motion to accept that budget before we hear our witnesses this morning.

Mr. MacKenzie moves it.

(Motion agreed to)

We'll now get down to the more interesting parts of our study.

We have with us from the C.D. Howe Institute, Daniel Schwanen, assistant vice-president of research. We also have John Curtis, senior fellow of the C.D. Howe Institute, Toronto, and of the International Centre for Trade and Sustainable Development, and adjunct professor at Queen's University.

We want to thank you, Mr. Curtis, for being here. We'll yield you the floor first and we look forward to your testimony before we get into questions and answers.

Go ahead.

[John Curtis, Senior Fellow, C.D. Howe Institute (Toronto) and the International Centre for Trade and Sustainable Development (Geneva), Adjunct Professor, Queen's University, As an Individual]

Thank you, Mr. Chair. I'm delighted to have this opportunity to comment even briefly on the global markets action plan. I was in front of the committee in December and enjoyed that occasion.

The document, Mr. Chairman and members, is certainly a clearly and cogently set-out document. It's written in easily understood language, which for us trade economists and trade junkies is not always the case. We love acronyms, and this one spares you from that. The graphics and the tables are excellent, and many of the most important aspects of current Canadian trade priorities, including listing the key foreign markets, priority sectors, and the addresses and emails—all of it very useful information—are set out and described very well.

Canadian governments past and present and increasingly provincial and territorial governments, which have partial or full jurisdiction over many areas of contemporary international trade negotiations, have done a very good job, I would argue, since 1947—the founding of the General Agreement on Tariffs and Trade—in helping, with other countries, to establish a solid framework for trade and related matters, especially investment, on which every region of our country is so very dependent.

So let me say at the outset, if I might, Mr. Chair, that in essence I'm in general agreement with what's in the document. Trade and vigorous trade policy negotiation and implementation is, I would argue, a central pillar, a foundation, of Canadian economic growth and prosperity. The global markets plan provides a good description of what is going on internationally, who is doing what, what Canadian priorities are, and who benefits from all the concentrated, high-priority activity in this important area of public policy and commercial activity.

Although I hate to suggest it, Mr. Chairman and members of the committee, I think that Canada needs a global markets action plan 3.0 right away. The one we are discussing here today, as good as it is, I would argue is already dated. It tells half the story. We need the other half to address and to take advantage of the world that is evolving ever so rapidly.

The new world is a world of innovation, of creativity, of knowledge, of services, of the Internet, and of electronic commerce, none of which the current plan—which I call 2.0—is focused on. The new world is also a world of imports as well as of exports; of investment, which often replaces trade in goods and services; of massive flows of capital, which now overwhelm the volume of international trade and even investment at times. It's a world of highly mobile skilled labour, of entrepreneurs, and of venture capitalists who can invest and settle basically anywhere in the world. It's a world in which Canada has all sorts of advantages, I would argue, if we choose to deploy and to support them in the years ahead.

Given the size of the investments needed in this new, emerging world, this innovation and knowledge-intensive world, I'd suggest that it's very important that the private sector and the public sector in Canada—and indeed elsewhere—work together to get the results we need, especially for the next and succeeding generations.

My thought, then, is that the global markets action plan 3.0 will need to focus much more than the current document does on the domestic economy, to help exporters and investors be in a position to take advantage of all the doors that are so well described and that are being opened for them through our very current successful, vigorous, and ongoing program of trade negotiations and of trade promotion.

As the Governor of the Bank of Canada and others have been saying in recent days, exports and the jobs that are directly and more importantly indirectly related to our international trade have not been increasing as they should, as we expected them to increase. Indeed, if you look at the economy overall, trade is a drag on our economy at the moment, although the numbers, Chair, in the last two months have looked a little more promising again.

We thus have serious work to do in Canada, I would argue. It involves all forms of labour, every community, capital, education, and infrastructure to help our traders and our investors prosper and to contribute even more to our growth and prosperity in the years ahead.

I think further that, while understandable, we haven't paid enough attention in recent years to the United States. Distance, size, and economic growth count in trade—that's what we measure day by day—and our nearest neighbour has all three. It has growth, it has nearness of distance, and it has large size with respect to us in particular. We enjoy an extraordinary privilege, located where we are here in Canada, and I think we should take more advantage of it.

Finally, Mr. Chairman and members, we'll have to get our minds around exchange rate policy. The variability of exchange rates adds to uncertainty and to inefficiency, as every small and medium-sized business—which I know you will be focusing on in this committee—and even larger firms know. We also have to understand matters such as electronic commerce, online trade, and the digital economy more generally, as well as all the privacy and security issues related thereto.

Further, we'll have to address the important matter of how to innovate here or to buy technology and ideas from abroad more effectively, to commercialize these ideas and technologies in order to produce the goods and services that the world's consumers and businesses need in the years ahead.

All this is material, I would suggest, Mr. Chairman and members, for a global markets action plan 3.0.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Now, representing the C.D. Howe Institute, I guess, we have Mr. Schwanen. The floor is yours.

[Daniel Schwanen, Assistant Vice-President, Research, C.D. Howe Institute]

Thank you very much, Chair.

Maybe we should have reversed the order, because I'm going to talk about the current global markets action plan and not the future one, which John was contemplating.

Thank you very much. I really appreciate the opportunity to appear before the committee.

The global markets action plan is a fairly straightforward document. I'll just make some brief comments on each of its four key elements. The first one is priority markets.

It's nice to see some prioritization linked to the kind of good or service or the kind of business we can do in specific markets. Obviously a fair amount of thought went into this. Resources are tight for diplomats, and it makes sense to have a plan to allocate them or to prioritize the allocation.

I understand that the list of priority markets was put together after a ranking of country business potential was made using fairly basic economic indicators, on which was overlaid a set of “ease of doing business” indicators, an assessment of the potential for the Canadian government to be helpful to the growth of business between Canada and the particular market being ranked, as well as some non-economic considerations, such as good relations or broader geopolitical considerations.

I think the list thus put together is fairly solid. But I say this only because the plan emphasizes that it is flexible. I can think of a number of countries, even quite sizeable economies, even a G-20 country, even countries with which Canada has been trying to conclude trade agreements, that did not make the list of priority markets. It's not a concern, necessarily, but I think it's an interesting point. For most of these, there are very good reasons—I would say non-economic reasons—for their not being on the list, but we wouldn't want to write them off forever.

Of course, one country currently on the list, Russia, which in fact was initially selected precisely because it was not one of the “usual suspects”, to quote the original study behind this, has in the space of a few months become a bit suspect, I would say, and certainly distinctly less promising. Indeed, it is experiencing large capital outflows at the moment, for reasons we can all imagine.

So, having thought about a list and produced a list—which was the first part of the plan—of countries and priority markets is very useful, but flexibility going forward is key.

The second part of the plan focuses on economic diplomacy. Some have said that this plan puts economic diplomacy at the heart of foreign policy, but I'm not so sure. It puts it in the brain, maybe, but maybe not in the heart.

Given that this is a global markets action plan and not, say, a human rights action plan or a development action plan or a security action plan, I find it hard, looking at the plan as a global markets plan, to conclude that the commercial concerns, as central as they are in this plan, will override non-commercial or geopolitical considerations. Foreign policy will always influence trade, because like-mindedness or at least compatible-mindedness and dialogue influence both the desire and opportunities for mutual trade, investment, movement of people, etc. In turn, strong economic relations often underpin beneficial relations on other fronts.

People have seen an opposition here between economic diplomacy and perhaps more traditional Canadian foreign affairs concerns. Personally, I see less of that. We just published three or four weeks ago a study showing that there was a strong link, for example, between the strength of government-to-government relations between Canada and a country and trade links between that country and Canada. So I see the two as more intertwined, and not economic diplomacy as something strange or outside of normal diplomacy, necessarily.

This brings me to the plan's short but crucial section on trade and investment negotiations. Obviously it's a very busy period for negotiators, something John has alluded to. From being somewhat a laggard, Canada is becoming a leader again in concluding leading-edge trade and investment agreements. Mutually beneficial trade and investment links both with countries on the priorities list and those left out of it, some of which are pretty interesting countries, can be enhanced through bilateral, regional, and multilateral negotiations that are referred to in the plan.

Furthermore, what I really do like about this short section is that it integrates the trade negotiations with the other suite of negotiations that are really important to make a commercial or a trade relationship—or a relationship, period—work. Education agreements, investment agreements, air agreements, and regulatory cooperation: without these, trade agreements, or the traditional ones at least, would work far less well. So the integration of all these agreements—and including education in the process—I think is very important.

Finally, the last section talks about building on Canada's comparative advantage. I don't have the exact title in front of me, but that's the basic idea. It talks about building on our competitive advantages, and really, there it talks about two things that are of keen interest, at least to me.

One is the sectoral list. I've gone through it. I've analyzed it. I've looked at whether the list of countries corresponds to the list of industries, and actually, it all hangs together. I usually like to find fault with these kinds of analyses, but suffice it to say that I think the list of industries or sectors that are focused on here as part of the plan does highlight the fact that Canada is becoming a more diversified economy.

Yes, there's mining, absolutely. Yes, there's oil and gas. Yes, there's agrifood. But when you look at what we're targeting in terms of our trade with developing countries, you see that ICT, aerospace, and again, education are being featured in the vast majority of the countries that we're focusing on, as well as some R and D-intensive sectors such as life sciences. I think that's a positive story there that we're trying to develop through trade.

Finally, on SMEs, small and medium-sized enterprises, I think that's the right focus. They are facing barriers to growth, and challenges, and learning by exporting is one way that a small or medium-sized enterprise—and there's some literature on this that's quite striking—can learn to become innovative and grow, simply because otherwise you can't export. If you're forced to export or you're forcing yourself to export, you have to become more innovative and more productive and try to plug into the global value chains of some of the bigger companies.

Frankly, we've been having trouble growing SMEs in this country. I think trade is a promising way if we focus on them, as we do in this plan, to help them grow and to help our economy grow.

In short, I don't have a lot of criticism of the plan. It's clear. It goes in the right direction. It's flexible, and I think that's very important. It mentions ongoing consultation. It mentions tweaking the plan as required, and that's very important. Overall, I think it's a good platform for moving Canadian interests forward.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you.

That takes us to the questions and answers. It's going to be interesting. One of you is saying greater ties with the United States to exploit the opportunities, and the other is saying greater diversity. Let's see where it goes.

Mr. Davies, the floor is yours.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chairman.

Thanks to both witnesses for appearing before the committee. Welcome.

Mr. Schwanen, the GMAP identifies a number of goals. Some are fairly specific and some are more amorphous. One is to “help SMEs expand into new markets” and make the leap to exporting, and you commented briefly on that.

I've read some statistics recently that show most of Canada's trade is really conducted by very large corporations in this country and SMEs really do not tap into export markets. We all want that to happen, but I'm just wondering, do you have any specific recommendations for a concrete measure that the government could take that would help SMEs actually penetrate those markets?

[Daniel Schwanen]

That's a very good question. I think part of the answer is within the plan, and it is a greater focus on economic diplomacy on the needs of SMEs. When you meet diplomats abroad, the fact is that they are now more than ever—I think they've always done this—helping to build connections with businesses, whether it's in India, or in Africa, or in the United States. I've seen this happen, with a greater focus on not what the needs of our SMEs are, but on what they have to offer.

Part of it is being more knowledgeable about what we have to offer. In manufacturing, for example, obviously a big part of the future of manufacturing is niche markets. By definition, this starts with a small firm producing something extremely innovative and original. My view is that it's true the statistics show that there are not a lot of SMEs exporting, but for those that are, they are very enthusiastic and entrepreneurial about it. The idea is to connect those entrepreneurs that we do have with the growing markets, and that's the job of economic diplomacy.

That's still a very general answer, but I think part of it is information.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Picking up on the dilemma the chair mentioned, we have a bit of a dilemma in that we recognize that some developing countries have relatively low per-capita incomes and slow economic growth rates and relatively high poverty rates, so it leads to a question about what magnitude and types of benefits would accrue to Canada from enhanced trade and investment with them.

On the other hand, in a speech to the Greater Kitchener Waterloo Chamber of Commerce in April 2012, the previous governor of the Bank of Canada indicated that Canada's share of world exports has been declining since the turn of the millennium. He said that:

Since 2000, Canada’s export growth was almost 5 percentage points slower than global export growth on average per year. Our share of the world export market fell from about 4.5 per cent to about 2.5 per cent and our manufactured-goods export market share has been cut in half.

According to him, Canada's deteriorating export performance could be explained by the concentration of Canada's exports in slow-growing advanced economies, rather than in the faster-growing emerging markets, and to a lesser extent, by some competitiveness challenges, and at the time the high relative value of the dollar. I'm going to get to you, Mr. Curtis, on that in a moment.

What advice would you give the committee on where we should focus? Should we focus on the faster-growing developing countries that have the challenges or should we focus on the advanced economies that have slower growth but are larger markets?

[Daniel Schwanen]

I think we're big enough to focus on both. Some of the statistics—and I live in Kitchener-Waterloo and so we're well aware of that speech—reflect the fact that the U.S. went through a very deep recession, for example. It's now coming back up I think, in a nice way. The recent forecasts show this for the advanced economies, while the emerging economies slow down.

If you look at the plan and you look at the sectoral breakdown of countries and what we're trying to sell in each, they're very different. I think if you are in certain industries—very advanced manufacturing for example, some services industries, professional services—you would want to focus on large, established economies because there are some new markets opened by new trade agreements, like the CETA, for example. There's an opportunity to sell there in a very rich, albeit a bit more slowly growing, market.

In emerging economies, obviously there is a demand for resources. There is a demand for certain types of more infrastructure investment that we can also provide, but I think the two are different. I think we can do both.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Mr. Curtis, you mentioned the exchange rate. Recently, a number of U.S. congressmen made some very strong statements in the context of the TPP negotiations that their support for that agreement would depend on whether it contained an exchange-rate mechanism, something that Canada's trade agreements, in fact most trade agreements, do not contain.

Given the absolutely vital importance of the effect of currency on trade, and I think we all know the Canadian dollar plays a pivotal role in that, you mentioned the importance of that, what advice would you give the government in how we handle currency valuations and exchanges in the context of trade agreements?

[John Curtis]

Mr. Chair, and the critic, Mr. Davies, this is really a new and unmined area, especially when we tie it to trade. You're quite right. Right from 1947, we didn't build into any world trade agreement the management of currencies. It was kind of there. We knew through the financing of trade that money and levels of the exchange rate were important but not important enough to put it into a trade agreement, or we couldn't agree on that. That continues to this day, and this is why the Canadian government, for example, is still reluctant to have anything about exchange rates.

Going back to your question to my colleague, one reason small business has been unable to get involved in international trade, any more than it has been able to, is that they can't afford the risk of moving exchange rates. Big firms can hedge, and it's big firms that do most of the international trade, as you said. Smaller firms, SMEs, can't afford to predict the exchange rate, and the buy and sell exchange rate, looking ahead. This is a major factor in affecting the success or lack of success of small business.

To answer your question directly, I think in a trade agreement we probably cannot do what we wouldn't encourage American congressmen or others to do; that is, to tell anybody, including us, what exchange rate we should have, or what the Chinese should have, etc. We should, on the other hand—and there are other parts of our international economic policy—push our federal Department of Finance and the bank to begin working much more actively on redesigning the international financial system.

Mr. Chairman, as I mentioned to this committee in December, each week there's more value traded in financial assets than there is per year of trade in goods and services. The financial system has overwhelmed the trade system, and we're suffering from it to some extent. The Canadian dollar is no longer totally based on how well or poorly we're trading. It's based on the flow of financial assets coming into and leaving Canada. It's a whole new area to get at.

I don't have a direct answer, except to say that the financial system is an area this government is working through on its own, through the Federal Reserve, through the G-20, and through the G-7, where the former Minister of Finance was so strong and so interested. That's where we have to focus on because the bottom line is that it's disrupting the trade system, and hurting small and medium-sized business in particular.

[The Chair, Conservative, Rob Merrifield]

We're going to get into more of that, I'm sure, but we'll respect our time.

Mr. O'Toole, the floor is yours for seven minutes.

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

Thank you very much, Mr. Chair, and thank you both for appearing. Mr. Curtis, welcome back. Mr. Schwanen, I'm sure you've been here before, but maybe not during my tenure.

I have some comments and questions for both of you, and I'll start with Mr. Schwanen.

You gave a good overview of how, from a practical basis, it makes sense to prioritize, not only from a budgetary standpoint in terms of resources to be deployed for trade missions and that sort of stuff, but on a diplomatic basis as well, to prioritize the use of our diplomatic tools in developing relationships with countries. The C.D. Howe study, from a month and a half ago I believe, did talk extensively about how important those government-to-government relations were in establishing sustained market access for our exporters.

One interesting part of your study sort of juxtaposed our Conservative government approach of economic diplomacy—as we coin it—through the global markets action plan with the old Team Canada Liberal approach that had a number of political leaders piling on a plane for one visit, with some pre-arranged agreements or memorandums that were negotiated in advance, and almost signed. But studies have demonstrated that it did not lead to sustained market impact, and it was an ongoing full-court press by all parts of our foreign service to really sustain the growth of those markets. Would you care to comment a bit more on that aspect of your study?

[Daniel Schwanen]

I think the Team Canada approach, on a case-by-case basis, might work in certain markets where those kinds of representations are very important, where the kind of big-team approach is important. But what the study says is that really when you look at the two approaches overall, the one that really keeps a relationship on an ongoing basis and makes sure that the Canadians, the diplomats, and the economic diplomats who are on the ground really foster those sustained relationships is really the key—that and trade agreements. It's even more so the key when you deal with countries that are perhaps not quite as open as Canada, countries that perhaps have different systems, that are not quite as high ranking on the economic freedom index.

So the study clearly says that the traditional, if you like, more sustained diplomacy, with the presence of embassies and particular trade agreements and so on, really does have a sustained impact, which is not necessarily always the case with a Team Canada mission.

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

Thank you.

My colleague Mr. Davies brought up one thing that I'd like to explore a little further and that's the important role of SMEs. Small and medium-sized enterprises are embedded into the strategy of the global markets action plan. In particular, as parliamentary secretary to trade, I've lost count now of how many positive stories I've heard from exporters about how our trade commissioner service has helped non-global Canadian players. In the case of an SME that, for instance, exports to the U.S. but for the first time is looking at Germany or at a market in Europe, the trade commissioner service helps them to access the tools they need to find distributors, set the stage for sales, understand the regulatory environment, and that sort of thing. I find our plan also helps prioritize that spending and the deployment of the trade commissioner service.

With respect to SMEs in particular, I'd love to hear your comments on something. I don't know how familiar you might be with the trade commissioner service. Do you think that's an area we can continue to develop to help the SMEs grow their markets?

[Daniel Schwanen]

Yes, and that allows me to give a more specific answer, I think, to Mr. Davies' question.

I think it's pretty clear. There was an assessment of the previous global trade strategy or global commerce strategy, which went in that direction, that the trade commissioner service is very important and very useful, so we should focus more on that. I think this is a kind of follow-up to that earlier strategy and the assessment that the strategy was working. Perhaps it needed to be more focused on the trade commissioner service, but let me be more specific, because I had written down some notes in the margin.

As well as having country specialists, by virtue of their being on the ground, maybe we could also have sectoral specialists within that service, who understand an industry, the development, and the linkages that can take place. So that's one thing.

The other possibility would be for that service to help develop accelerator centres in certain key markets. Again, I'm from Kitchener-Waterloo, and those work fantastically well. We have old companies—well, some of them are not doing so well—and large companies that are already established, which, with the help of these centres, are helping the small companies grow. It's a wonderful way to help the smaller companies grow. The large companies want to help the small companies grow.

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

Very quickly, I have one last question for Mr. Curtis. I'm aware of my time.

Mr. Curtis, I admire your enthusiasm. We're here on GMAP 1.0 and you're already on GMAP 3.0.

[John Curtis]

I'm always looking ahead.

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

But what I might suggest to you—and I'd love your comment on it—is that GMAP does not stand alone. The global markets action plan is, I think, a very strategic and responsible way to deploy our diplomatic and trade assets to grow export markets. But at the same time we're modernizing our intellectual property regime here in Canada, from copyright to trademarks through some patent reforms. We have innovation culture and things like that. Is that not also going to help our traders in those sectors outside of the trade strategy?

[John Curtis]

The direct answer is, yes. I think it would help the public in general understand—those who don't follow trade by day and night—if those were all packaged in such a way that everybody understood. If it was clear to the broader public that education, intellectual property, infrastructure, skills development, and retraining of labour are all part of a successful international trade strategy, then it would help them understand what was going on and why it was going on, and I would suggest, it would improve the legitimacy of the whole operation.

At the moment I think, probably, trade negotiations seem a little remote from most people. Whereas, in fact, I would argue it's the basis of everything we do in this country. It's important for prosperity and human progress.

I think I'm answering in a long way to say “yes”. It is all part of the big package here, and that's what I'd like to see the next version of this encompass. Just in terms of the present document, I would suggest that the trade commissioners think of themselves as investment prospectors, in effect. They're not only linking up with what's going on now in country X and country Y, but a lot of trade also involves looking for new ideas, looking for new marketing, looking for new ways of doing things. They're already trade and investment and innovation counsellors, if we can call them that.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Pacetti, the floor is yours.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chair.

Thank you to the witnesses for coming today.

Mr. Schwanen, I have a couple questions for you. They're mainly overview.

On the priority market side, is there any country that you think is not in the priority that should be?

[Daniel Schwanen]

Some large countries that have a lot of economic potential are not there. I don't really feel like questioning the reasons why they're not there. It's probably not necessarily for economic reasons. I can think of Venezuela. I can think of Argentina. I can think of the Caribbean countries, which are not large, but we're negotiating trade agreements with them at the moment.

Looking much further down that road, one day Iran will emerge from where it's at today. It's a very large economy—

[John Curtis]

Innovative.

[Daniel Schwanen]

—that we can think of eventually down the road.

The Philippines is not there either, so there are some significant markets—