Canadas Expanding Trade Agenda Europe, Asia and implications for - - PowerPoint PPT Presentation

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Canada’s Expanding Trade Agenda

Europe, Asia and implications for business and the economy

Glen Hodgson Senior Vice President and Chief Economist The Conference Board of Canada December 2015

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1.Demographics and aging 2.Globalization 3.The Internet and digitization 4.Climate change

Four big global drivers today

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• Expansion of global trade and investment
• Dominance of global value chains
• Rise of emerging markets
• Integrative trade – integrated two-way flow of goods,

services, investment

• Role of FDI and foreign affiliates

Globalization

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• Coined the term “integrative trade” in 2004 while at EDC
• Essentially modern international business, build around the

integration of all key components to create value: – exports – imports used to create exports – both goods and services – FDI, into Canada and abroad by Cdn business

• Global supply or value chains a key aspect of integrative

trade

• EDC and DFATD use integrative trade as foundation of their

business strategies

What is integrative trade?

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• Builds global value chains and helps to make firms more

competitive

• Conference Board research in Asia and Europe the

importance of all components to business success

• In past decade, Canadian trade had evolved toward:

– weaker trade growth compared to 1990s – more trade diversification, less with U.S. – stronger growth in services trade than goods – greater role for FDI, especially abroad – firms seeking access as supplier to global value chains

Impact of integrative trade

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Add Value to Products

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Early 20th century:

• high tariffs to shield Cdn manufacturers
• result: US capital leaps over barriers
• foreign control of manufacturing
• branch plant economy, inefficient scale

Post WW 2:

• multilateral system and GATT
• slow reductions in trade barriers thru trade rounds

Stylized facts on Canadian trade

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1980s-90s:

• shift to bilateral / regional focus -- 1985 Shamrock summit
• 1989: FTA w U.S. -- largest ever bilateral deal

–focus on tariffs, dispute settlement

• 1993: NAFTA – Canada joins U.S. & Mexico
• early 1990s: WTO Doha Round begins...

– breaks down over agriculture – and is still going … ever to be completed?

Stylized facts on trade (cont.)

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1990s-2000s:

• strong trade growth with U.S. after FTA & NAFTA
• Canada goes into trade policy hibernation
• only minor bilateral agreements - Chile, Costa Rica

2006-07:

• Quebec pushes for EU engagement
• Feds get nudged into negotiations
• renewal of broader interest in free trade agreements

Trade policy stagnation & restart

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80 100 120 140 160 180 200 U.S. Non-U.S.

Sources: Industry Canada; Statistics Canada; The Conference Board of Canada.

Canada’s Two-Gear Trade

Canadian bilateral trade, index 2001=100.

11 Source: Statistics Canada; The Conference Board of Canada.

Canada’s Sub-Par Export Performance

real export index, 2000q1=1 0.80 0.85 0.90 0.95 1.00 1.05 1.10 1.15 1.20 1.25 Services Goods

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• 1.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Japan Euro zone North America Latin America Asia Pacific Asia Pacific (excl Japan) 2014 2015 2016

Source: Consensus Economics

Developing Asia Leading the Way

Per cent change, real GDP

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0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 India Brazil China EU Japan Mexico UK 2014 2025

Sources: Industry Canada; The Conference Board of Canada

Canadian trade: changes to come

Canada’s goods exports, share of total. .

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The European Opportunity

World’s largest importer of products Source of great technologies, ideas, products, and services The EU market is the world’s largest economy EU is a huge market with wealthy customers: Population of 509 million Per capita GDP 34,500 $US (PPP) Europe is also a gateway to world

15 Source : OECD StatExtracts.

European Growth Prospects Improving

Eurozone potential output, constant prices, % change from previous year 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

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• Regulatory and other non-tariff barriers
• Barriers to people movements
• Regional and sub-regional markets differ
• Market uncertainty given ongoing crisis
• Highly sophisticated, competitive markets

Challenges Canadian Companies Face

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• Breaks the mold - most expansive Canadian or EU deal
• Catch up with those that have an EU deal -- and stay ahead
• f the U.S.
• Tariffs mostly gone, but about more than goods
• Services, people, investment, intellectual property
• Access to huge government contract market

CETA: beyond the headlines

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• Mechanism to prevent future non-tariff barriers, e.g.

regulations (Canadian and EU regulators to work cooperatively)

• Canadian body can assess whether meeting EU standards
• Expands agricultural quotas but no fundamental reform --

preserves supply management

CETA: beyond the headlines (cont.)

19 Sources: The Conference Board of Canada; The Conference Board Inc.

Tap Into European Demand: No Single Europe

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Challenges: Tariffs High in Some Sectors

trade weighted tariff rate on Canadian exports to the EU, per cent 2 4 6 8 10

Crude metals and minerals Pulp and paper Mineral fuels Other transp. equip. Industrial M&E Other consumer goods Primary metals Electronics Aerospace Wood products Chemicals, rubber and plastics Agriculture Motor vehicles and parts Food & beverage

Post-CETA Pre-CETA

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Most Tariffs Eliminated Immediately

(per cent)

1 2 3 4 5 6 7 8 9 10 Other transportation equipment Industrial machinery and equipment Other consumer goods Primary metals Computers and electronics Aircraft and parts Wood products Chemicals, rubber, and plastics Agriculture Motor vehicles and parts Food, beverage, and tobacco Prior to CETA 2016 2018 2020 2022

22 *Is comprised of wood products and other transportation and equipment. Source: The Conference Board of Canada

$1.4 Billion More Compared with No-CETA

(CETA scenario minus no CETA scenario, millions of $2007; level difference)

200 400 600 800 1000 1200 1400 1600 2016 17 18 19 20 21 22 Chemicals, rubber, and plastics Agriculture Other consumer goods Food, beverage, and tobacco Computers and electronics Industrial machinery and equipment Motor vehicles and parts Primary metals Aircraft and parts Other *

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Largest Percentage Gains for Food Products

impact of CETA tariff removal on exports, difference from baseline, per cent

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 Primary metals Wood products Aircraft and parts Industrial machinery and equipment Total Other transportation equipment Other consumer goods Agriculture Computers and electronics Motor vehicles and parts Chemicals, rubber, and plastics Food, beverage, and tobacco

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• Will remove tariffs, some industries will gain
• Non-tariff barriers – benefits less transparent, potentially

more significant

• Companies that expect trade deals alone to boost sales will

see limited gains

• For full gains, companies will need to innovate, add value
• Need to adapt to regional demands, do homework, pick

spots

Business implications of CETA

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Implications for business: Evidence-based keys to success

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Implications for business: winning strategies

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Strategy

What happens to EU sales? Does company remain in EU? Exporting once company has been well established Not significant Exporting to the US before EU Not significant Going to Western Europe First Small firms only Frequently introducing new products More important than for emerging markets

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Smaller Companies Can Succeed

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2 4 6 8 10 Small Large

EU sales per firm (C$ million, annual average) EU sales growth (% change, annual average) Number of years in EU

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• Small companies can succeed if they are prepared
• Different routes to success – may require on-the-ground

presence, or via foreign company in Canada

• Competing on cost alone not enough, must differentiate
• Key ways for companies to differentiate themselves:
• Target niche markets, develop in-depth expertise
• Integrate services and products, provide “solutions”

Summary: implications for business

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• Like CETA, TPP goes far beyond eliminating tariffs
• Talks led by Australia, NZ ambitions
• 12 countries, including U.S. and some Asian markets
• Canada and Japan late to join the party
• US: Administration has delegated authority from Congress

– an Obama legacy project

Trans-Pacific Partnership (TPP)

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TPP: implications

• TPP text has finally emerged
• Next: actions of a new federal government
• Limited choice: unlikely we will snub U.S. and TPP partners
• Others will now have comparable access to U.S. market

– so expect more competition

• Becomes all the more important to take advantage of

improved market access to Asia, Latin America

• Sleeper issue: Chinese accession and high standards

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• More trade may be priced in other currencies…
• But hard to see others rivaling U.S. dollar as dominant

reserve currency

• EU: not an optimal currency area

– very different levels of development

– no common fiscal policy or built-in transfers – financial regulations not harmonized – linguistic and cultural barriers to movement

• China: closed capital markets

– market forces still absent in FX market

Other issue: trade and reserve currencies

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• Trade is a key driver of Canadian growth and prosperity
• Canada has finally embraced regional free trade
• CETA is a big deal for Canada and EU – need to complete

ratification!

• Canadian firms can succeed in trading and investing in

Europe -- if they have a well-defined plan

• TPP offers the next major trade frontier – hard not to

complete

Conclusions

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