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Chapter 6
At the Centre of Global Commerce and Networks

Overview

By almost every measure, the economies of the world are now more deeply integrated than ever before. Goods, services and capital—and increasingly people and ideas—move more freely across borders. Firms think, plan, invest and produce in terms of opportunities around the world. Production is now global and sliced into finer, more specialized processes. The scope of international commerce continues to increase at a pace that shows no signs of slowing.

The evidence of our interdependence is everywhere. Since the 1970s world exports have grown more quickly than world GDP, and foreign investment has grown more rapidly than trade. Economic weight is shifting and competition intensifying as emerging giants such as China and India open their economies and increase their presence on the world stage. Countries that have open markets, an outward orientation, and the agility to seize opportunities at an early stage will succeed.

Governments play an important role in opening markets and facilitating the global reach of business. They do this through a combination of policies aimed at reducing barriers to trade and capital flows, attracting investment and supporting commerce through modern transportation and communication networks. Over the next few years, Canada needs to broaden and deepen its commitment to openness. Global supply chains will require frictionless exchange of people, capital, goods and ideas. Pursuing globally focused policies will help Canadian industries to achieve a central role in the growing international networks that are essential to our future prosperity.

Relationship to Prosperity

In a major study,^[1] the OECD identified openness to trade and investment as an important source of competitive strength, stimulating efficiency and, in turn, contributing to economic growth and rising incomes.

The case for openness to foreign investment is as compelling as the case for openness to trade. More open economies enjoy higher rates of private investment, a major determinant of economic growth. Foreign direct investment, in particular, is actively sought by successful economies, not just to augment domestic investment but also because it has the potential to transfer better technologies and improved management practices.

Market Openness Drives Growth and Raises Living Standards An open trade and investment regime:  Provides better access to global markets for firms to both buy and sell products and services. Counters the disadvantages of a small domestic market by achieving economies of scale and greater specialization of the production process. Ensures a more efficient allocation of resources so that each country can specialize in what it does best. Increases the incentive to innovate , as rewards from innovation are much greater in a larger market. Transfers new technologies either directly through goods and services that incorporate new technologies, or indirectly through new production processes and techniques. Strengthens industries through exposure to foreign competition. Connects firms to global networks through partnerships, alliances and other forms of organization. For Canadian consumers, open markets and free trade mean a wider range of goods and services of a higher quality at better prices, effectively raising the real standard of living.

Recent Performance and Broad Policy Directions

Canada is one of the world’s most open economies, and trade is a key foundation of our prosperity. We are the world’s fifth largest trader and our exports account for close to 40 per cent of our GDP. Compared to both our North American Free Trade Agreement (NAFTA) partners and other G7 nations, trade accounts for a larger share of Canada’s output. Our exposure to trade is also growing more quickly than that of other major developed countries.

While Canada has long benefited from trade, including the economic gains of NAFTA, many Canadian industries still lag behind their U.S. counterparts in terms of productivity (see Chapter 3). Of note, many sectors where Canada’s productivity is well below U.S. levels are characterized by a weaker competitive business environment, which is in turn partly the result of above-average tariffs and other barriers to trade and investment.

Canada’s future success will depend, in part, on policies that open the domestic market to competition. This will help promote innovation, jobs and growth.

1. Opening Canada to the World

Trade Liberalization

The economic case for improving market openness is strong. Canada, as a founding member of the General Agreement on Tariffs and Trade (GATT) in 1947 and its successor, the World Trade Organization (WTO) in 1994, has reduced its tariffs in exchange for reciprocal reductions by other countries. As a result of successive rounds of trade liberalization over the last 60 years, the average trade-weighted tariff of developed countries is less than 3 per cent.

A successful conclusion of the current WTO Round of multilateral trade negotiations, known as the Doha Round, would further open markets and allow Canadian industries to expand and diversify their sales internationally. But success is not guaranteed. Strong leadership and political will by the United States and the European Union will be required to make progress in removing trade distortions in the agricultural sector, which is key to a successful outcome. Canada is working hard to do its part to secure an ambitious result that will reflect the interests of all segments of Canada’s business and agricultural communities.

While global progress in trade liberalization is often slow and incremental, there have been encouraging developments. China joined the WTO in 2001 and has since significantly opened its market. Average tariffs in China are now only slightly higher than in developed countries and much lower than in most other developing countries. Other countries, such as India, have recognized the benefits of open markets and have moved unilaterally to liberalize their markets without seeking reciprocal concessions from their trading partners.

Canada also cannot afford to stand still. Despite having one of the world’s most open economies, Canada continues to maintain tariffs on many goods imported from outside North America, including on inputs and capital goods. There is a need to further modernize our tariff structure to improve our competitiveness. Beyond the obvious market access benefits, an ambitious result in the Doha Round would go a long way in improving our existing tariff structure. However, depending on the outcome of the Doha Round, further steps may be required to enhance the competitive position of Canadian firms, in particular by reducing tariffs on inputs and capital goods.

Making Trade Agreements Work  Canada’s prosperity depends on our ability to compete in international markets. For this reason Canada has always been a strong supporter of market liberalization and a rules-based trading system. Current efforts are focused on the successful completion of the Doha Round of the WTO, enhancing trade with our most important partner, the United States, working with our NAFTA partners to increase North American competitiveness, and pursuing bilateral trade and investment agreements with key partners. Free trade negotiations are currently underway with important trading partners such as South Korea, which is a strategic gateway to Asian markets, and Foreign Investment Promotion and Protection Agreements are being negotiated with China, India and Peru. A rules-based trading system means that Canada, like all of our trading partners, must take action to ensure that countries abide by the rules and obligations as set out in international agreements. This includes, on occasion, invoking dispute settlement procedures to address differences and, as a last resort, exercising our international rights to obtain appropriate remedy from countries that are not abiding by the rules. When countries have to take retaliatory action in response to illegal measures by other countries, as Canada and other countries did against the U.S. on the so-called Byrd legislation, the benefits of the system are put at risk, to the detriment of all. Given their importance and benefits, it is vital that our trading partners abide by the rule of law and the principles of international agreement. Only in this way can we ensure the willingness of all countries to engage in the bargain of multilateral trade liberalization.

Improving North American Opportunities

The North American market remains Canada’s priority, and continued success in this market is vital to our prosperity. The Canada-U.S. Free Trade Agreement and NAFTA created a liberalized North American market space, and the United States remains by far our largest trading partner, accounting for around 80 per cent of Canadian exports. At the same time, we must look outward from our position within the integrated North American market to ensure our proper place in global markets. This requires that we continue to make progress on a range of trade and border efficiency issues, so that we can compete from a position of strength. The Security and Prosperity Partnership of North America, announced by Prime Minister Martin, President Bush and President Fox in March 2005, is an important initiative in this regard.

Security and Prosperity Partnership of North America The task is "to create an architecture which would further enhance the security of North America while at the same time promote the economic well-being of our citizens and position North America to face and meet future challenges." Security and Prosperity Partnership of North America— Report to Leaders , June 2005

The Partnership provides a pragmatic and forward-looking agenda for action that will promote a more coordinated policy approach based on the mutual dependence and complementary nature of our security and prosperity.

The first report to leaders under the Partnership identified initiatives centred around a range of key objectives: expanding trade liberalization, enhancing competitiveness in key sectors, streamlining regulatory processes, supporting the e-commerce marketplace, strengthening capital markets and ensuring faster and more efficient border crossings.

This Partnership is a significant step forward in our NAFTA relationship. It reflects the fact that the vast majority of trade within North America flows freely. But differences do occur and when these cannot be resolved through consultation, dispute resolution processes are employed and their conclusions must be respected. Canada has challenged U.S. actions on softwood lumber using the NAFTA dispute settlement process. Despite a unanimous victory for Canada in a final and binding NAFTA decision, the United States continues to impose duties on Canadian softwood lumber. Canada continues to press the United States to abide by the NAFTA rulings and to maintain the integrity of the NAFTA. In the meantime, the federal government, along with its provincial partners, will continue to vigorously defend the interests of our softwood producers. This will include continuing our challenges in U.S. courts to remove the illegal duties and reimburse Canadian softwood exporters.

Foreign Direct Investment

Since the early 1980s, global capital flows have been growing tremendously. The accumulated stock of world FDI is now over US$8 trillion.

Canada has long been a net recipient of international investment. In recent years, however, Canadians have been investing more abroad than foreigners in Canada. As a result, Canada’s position as a net international investor has been steadily improving.^[2] In terms of FDI, Canada is already a net foreign investor. This strengthening position in terms of direct investment abroad is important in order to effectively connect Canadian firms to global supply networks and create opportunities at home and abroad.

While the United States remains the major destination for our international investment, Canadian direct investment abroad has become more diversified since the late 1990s, in part reflecting the growing dynamism and market openness in Asia.

As Canadian firms increase their investments in foreign markets, Canada will need to ramp up its Foreign Investment Promotion and Protection Agreement program to safeguard Canadian interests and ensure a level playing field for Canadian firms.

Canada continues to attract FDI; however, international competition has intensified and our share of North American inward FDI stocks has declined. While this trend is expected to improve as a result of FDI inflows to Canada’s oil and gas sector, the challenge for Canada is to maintain a modern FDI regime and the right investment environment (discussed in Chapter 7).

Currently, foreign investors perceive Canada as having a less attractive investment environment than most other OECD countries, in part due to investment-screening requirements and restrictions on foreign personnel and operational freedom.^[3] The high level of foreign ownership in the Canadian economy (as measured by the share of FDI in our GDP) would suggest that the effective differences between Canada and its G7 partners with respect to investment restrictions are more perception than reality. Nonetheless, perceptions often drive behaviour, so we need to improve the signals we send to international investors.

Canada needs to ensure that our relatively stringent ownership restrictions in telecommunications and transportation—two important "enabling" sectors—do not put us at a disadvantage vis-à-vis our major economic partners. Recently, the Government tasked the Telecommunications Policy Review Panel to provide recommendations, which may include consideration of foreign ownership limits in the telecommunication sector. The Government has also indicated its intention to review foreign ownership restrictions in the airline sector.

The free flow of global portfolio capital is an important feature of today’s economy. It is the consequence of increased liberalization but also reflects changing investor preferences and better information. Vast improvements in information and communications technologies have broadened investors’ scope for investment. At the same time, the increased international tendency for open, transparent financial systems that support strong investor protection appears to be reducing home bias. Canada needs to capitalize on and reinforce these trends. In Budget 2005, the Government eliminated the Foreign Property Rule, which limited the foreign content of Canadian registered pensions and registered retirement savings plans to 30 per cent, thereby removing an important and outdated restriction on capital.

Canada’s tax treaties are also an important part of the global environment for Canadian business, with the Canada-U.S. income tax treaty having a particular significance. The Government is seeking to update that treaty and others to ensure that they continue to facilitate international investment.

Broad Policy Directions Opening Canada to the World The Government will review Canada’s tariff regime to improve competitiveness and attract investment, for example by reducing tariffs on manufacturing inputs. The Government will continue to pursue trade negotiations that open key international markets for Canadian business. The Government will move forward with the Security and Prosperity Partnership of North America to make our societies safer and more secure, our businesses more competitive and our economies more resilient. The Government will ramp up its Foreign Investment Promotion and Protection Agreement program to assist firms in connecting to global supply networks. Ongoing negotiations with India and China are a priority. To improve our trade and investment climate, the Government intends to conclude negotiations with the U.S. on tax treaty changes, review Canada’s restrictions on foreign investment in the air transportation sector and act on the findings of the telecommunications review.

2. Positioning Canada in Global Business Networks

The shifting balance of economic power in the world is one of the fundamental forces reshaping Canada’s economic future. Emerging economic giants like China and India are positioning themselves in the ranks of "knowledge superpowers," aiming to join the U.S., the European Union and Japan as poles of production, innovation and investment. In the not-too-distant future, China and India will not merely participate in global supply chains based on Western technology or managerial know-how, they will increasingly shape them.

Canadians rightly celebrate the successes of these countries. They have overcome enormous obstacles to set themselves on a strong path of growth and development. Through our position in the G7 and our role in creating the G20, Canada has done much to assist integration of these emerging giants into the global economy and to encourage them to fulfill their associated responsibilities. As stressed in the Martin-Zedillo report on unleashing entrepreneurship in developing countries, wich was co-authored by the Prime Minister, and the Commission for Africa report co-signed by the Minister of Finance, private sector development is essential to lift nations out of poverty. Canada is committed to helping developing countries create the institutions and the capacity to build vibrant private sectors.

Canadian industry has already benefited economically from the rise of China and India. Global commodity prices have strengthened as a result of increased demand from these countries and China is now Canada’s fourth largest export market (over $6 billion in 2004). While this economic relationship is small in comparison to our economic ties to North America, the potential for Canadian business is enormous.

Our ability to capitalize on trade opportunities in these markets is largely a function of our vibrant private sector, though government has an important role to play in supporting Canadian industry. The challenges are not insignificant. The Government will respond with a strategy aimed at assisting Canadian firms, especially small and medium-sized enterprises, in identifying market opportunities, showcasing Canadian strengths and winning results. These actions will build on our ongoing efforts to expand market access through trade and investment negotiations.

Taken together, our efforts to expand commercial opportunities in these markets will require a rethinking and refocusing of the Government’s efforts and resources dedicated to trade promotion, advocacy and other trade-related programs and services. Instruments such as science and technology cooperation agreements, as well as efforts to protect Canadian intellectual property, are key examples of the new types of tools government must promote in assisting industry in effectively linking to expanding global supply networks. Getting more people on the ground in China, India and Brazil will also be necessary to gather market intelligence and work with local authorities on regulatory or other business requirements so that Canadian firms can focus on commercial results.

Canada must move now to make this happen. Many other countries have already expanded their support of small and medium-sized businesses through new export promotion and market development services.

To assist in redefining our approach to these markets, Canada is fortunate to have a diverse multicultural population that is a competitive advantage in accessing opportunities in emerging markets. Many Canadians have cultural, family and business ties to China, India and other emerging economies. Their knowledge of the language, culture and business environment can be key to building lasting commercial relationships. Both businesses and government need to draw more effectively on this pool of talent to build trade and investment ties and help modernize the image of Canada in emerging markets.

The importance of corporate social responsibility cannot be lost in our quest to expand economic opportunities abroad. We must take action to ensure our economic ties foster social, economic and environmental progress for communities in emerging countries. In this regard, the Government has a role to play in working with the private sector to promote appropriate norms of corporate behaviour.

Promoting New Markets for Canadian Companies and Environmental Technology The Kyoto Protocol, under which Canada committed to reducing its emissions of greenhouse gases to 6 per cent below 1990 levels by 2008–12, includes as a compliance option the purchase of international credits. These credits will contribute to the economies of developing countries and provide new markets for Canadian companies and technologies. The Government of Canada will use the $1-billion Climate Fund, announced in Budget 2005, to purchase domestic and international carbon reduction credits to help Canada meet its greenhouse gas emission targets. Canada’s investments in international emission reduction projects will support other policy objectives by having at least one of the following characteristics: Apply Canadian technology. Improve Canada’s international competitiveness. Expand Canada’s trade or otherwise advance our national interest. Advance Canada’s international development objectives. The use of innovative instruments such as international credits to help address climate change demonstrates that dealing with environmental issues can also present significant economic opportunities for companies that develop and implement environmental technologies.

 

Broad Policy Directions Positioning Canada in Global Business Networks A government-wide network of services and programs will be developed to identify opportunities in key emerging markets, showcase strengths and achieve results through successful commercial strategies. To better position Canadian small and medium-sized enterprises in emerging markets, the Government will increase its export promotion efforts. The Government will work to further the integration of emerging economies into the global economy through bilateral initiatives and our leadership position in the G7 and G20. The Government will also work with Canadian businesses in emerging markets in promoting issues of corporate social responsibility. Facilitate global market opportunities for Canadian companies to develop and deploy environmental technologies through the United Nations Framework Convention on Climate Change and other international processes.

3. Creating World-Class Gateways

To succeed, firms must operate in networks where information is rapidly exchanged and where sourcing, production and distribution decisions can be made seamlessly. Canada needs to have state-of-the-art transportation and telecommunication services and to exploit more fully both its privileged location vis-à-vis the United States and its proximity to emerging Asia-Pacific countries.

Strategic Transportation Gateways

Countries are linked to their trading partners by "gateways," where land, marine and air transportation networks converge to connect centres of economic activity. One of Canada’s key gateways involves the border crossings at Windsor, which account for about 35 per cent of Canada-U.S. trade by truck. The transportation facilities situated on Canada’s Pacific Coast represent another important trade gateway. The Pacific gateway is well positioned to play an especially important role in facilitating future trade between Asia-Pacific countries and North America. Further development of these gateways will benefit not just local economies and those who use their facilities, but all Canadians will benefit as well from more efficient trade and increased economic activity.

The private sector and the provinces are planning substantial investments to enhance the capacity and the quality of infrastructure at these gateways. Capitalizing effectively on linkages to expanding markets will require a broad approach, involving issues such as trade strategy, the flow of people, border management and transportation. For its part, the Government of Canada can support the efficient functioning of key gateways by ensuring that appropriate policies are in place and by making strategic investments in transportation infrastructure. This will involve close coordination between all levels of government, other jurisdictions and the private sector to select the most productive investments and to ensure that facilities in place are used efficiently.

Air transportation also has a crucial role in trade since it is essential to the transportation of people and time-sensitive cargo over long distances. Because of this critical role, Canada will endeavour to make its international air transportation markets more accessible. Fewer restrictions in these markets would provide new opportunities for airports and air service providers, as well as more choices and lower prices for travellers and shippers alike.

Broadband and Connectivity

It is important that all regions of Canada have access to the telecommunication networks that enable the rapid exchange of information among firms, suppliers and consumers that increasingly characterize the global economy. Canada is among the most connected nations in the world, measured by access to broadband and other Internet services. Nearly all Canadian households now have access to high-speed Internet services—over 85 per cent in 2003. The Conference Board also ranks Canada second in terms of availability of information and communications technology services among the G7 countries, behind only the U.S.

While access is high overall in Canada, there remains a significant difference between availability of broadband services in urban and rural areas, with 95 per cent of urban markets having access to broadband services compared to less than two-thirds in rural areas. This is of concern, because it limits the ability of those living in rural areas to participate fully in the new economic relationships and productivity gains offered by the networked economy.

Broad Policy Directions Creating World-Class Gateways To promote trade opportunities with the United States and emerging Asia-Pacific economies, the Government will work with public and private partners to support the further development of Canada’s Pacific gateway and Windsor-Detroit corridor through strategic infrastructure investment and supporting policy initiatives. Air liberalization encourages enhanced market access, service and competition in the air transport sector. The Government will explore further liberalization of its air transport agreement with the United States and, over time, with other countries. To improve Canada’s access to global telecommunication networks, the Government will invest to better connect remote, rural and Aboriginal communities to broadband networks where private service is lacking.

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¹

OECD, Open Markets Matter—The Benefits of Trade and Investment Liberalisation (1998). [Return]

²

International investment includes direct investment, portfolio investment, loans and official international reserves. Direct investment requires a degree of control by the investor, defined as 10 per cent or more of the ordinary shares of voting stock. Portfolio investment excludes shares which confer such control, but includes a wide range of other assets, including bonds. [Return]

³

OECD, Economic Survey of Canada (2004). [Return]

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