June 3, 2010
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, to the Investing in Canada (Policy and Practice) Symposium
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Vice Chairman, Ambassador, honoured guests, it’s a pleasure to be back in China once again. As the Ambassador mentioned, this is my third visit as Canada’s Minister of Finance in a little more than four years, which emphasizes the importance that we place on this relationship. I consider these trips to be an essential part of my job. Canada places a high priority on stronger trade and investment ties with China as an increasingly important member of the global economy. These trips matter and they deliver results for both countries.
In my last trip to China less than a year ago, I met with Vice Premier Li, my counterpart, Finance Minister Xie, Governor Zhou of the People’s Bank of China, and Chinese banking and insurance regulators. One of Canada’s key objectives at the time was to be designated as a destination for Chinese banking wealth management under the Qualified Domestic Institutional Investor program. A similar designation is already in place for securities.
In April, the China Banking Regulatory Commission gave Canada that important designation. This was a strong vote of confidence in Canada’s economic prospects and the soundness of our financial system.
This announcement builds on the long history of Canada-China partnership in the financial sector that began when Manulife first invested in China in 1897. Today, those connections only grow stronger. Later this afternoon, I will participate in an event commemorating the ongoing success of the TEDA-Manulife Fund Management Company. It is a true testament to the growing economic interaction between our two countries in all areas.
In the past five years, Canada’s exports to China have surged nearly 55 per cent, as Canadian firms continue to seek out new and growing overseas markets. China is now Canada’s second largest merchandise trading partner and our third largest export market.
I made my first visit to China as the federal Minister of Finance back in January 2007. At that time, I said that the global economy will, to a considerable extent, be shaped by what China does and by the leadership it provides as it assumes greater responsibilities.
That visit, of course, occurred before the recent economic and financial crisis. Both of our economies have held up well compared to the rest of the world. This was no accident.
We each introduced extraordinary stimulus into our economies when it was apparent that private sector business investment was in short supply. We also weathered this global storm thanks to resilient and stable financial systems.
Our infrastructure investments in Canada include the Pacific Gateway—Pacific coast infrastructure that links Asia deep into the heart of the North American marketplace. This investment recognizes and builds on our growing trade relationship with China and other Asian markets. Our countries have both recognized that trade protectionism must be avoided at all costs, as history has taught us.
Now I’d like to say a few words about the G-20. I’m going to Busan tomorrow for the meeting of the G-20 finance ministers and central bank governors in preparation for the G-20 Leaders Summit in Toronto. As you probably know, Canada is co-chairing the G-20 this year with Korea.
It is to the credit of China and Canada that we have been strong contributors to the collective efforts of the G-20 to foster a global recovery. Such leadership will be crucial less than a month from now when we meet in Toronto. We can and we must build on an investment relationship that has grown since Canada negotiated the first wheat sales to China more than four decades ago.
In good times and bad, Canada is and will remain a safe, reliable source of the resources the world demands. Canada is, as our Prime Minister has often said, an emerging energy superpower. We have the second largest known oil reserves on the planet next to Saudi Arabia, and we rank third in global natural gas production. We’re the largest producer of potash and uranium, the second largest producer of nickel, the third largest producer of aluminum, and the largest exporter of forest products in the world, as you can tell from that lovely exterior on the Canada Pavilion in Shanghai at Expo 2010.
In the years to come, Canada will become an increasingly attractive choice for trade and investment. We also have sound fiscal management. We were the last of the developed nations to enter into recession. Our real GDP decline was the least. Our real GDP grew 6.1 per cent in the first quarter of this year. The IMF says Canada will have very strong exit growth.
We also have tax advantages. We’ve been lowering personal income taxes as part of the stimulus program. We encouraged the provinces and territories in our federal structure to join us in 2007 and lower their business taxes.
By 2012 we will have reduced the federal business tax from a little over 22 per cent when we took office in February 2006 to 15 per cent. Most of the provinces will have reached the challenge which we posed for them to get to 10 per cent by 2012–2013, which means that the combined business tax rate in most of Canada by that time will be 25 per cent.
As I mentioned, Canada has also been at the forefront in the G-20 fight against trade protectionism. In terms of investment, this year Canada will have an overall tax rate on new business investment that is the lowest in the G-7 and below the OECD average.
We believe in free trade. This year in my budget we eliminated input tariffs on machinery and equipment—more than 1,500 tariffs in all. This makes Canada the first tariff-free zone for manufacturers in the G-20. We did this unilaterally, eliminating all remaining tariffs on manufacturing inputs in order to encourage investment and trade.
Our financial system is solid and stable. It is one of the reasons nations like China are increasingly interested in building partnerships with Canadian banks and insurance companies.
It has led to further financial inroads as well. I referred earlier to the designation of Canada as a destination for Chinese banking investment. We hope to conclude a similar agreement on the insurance side soon.
Canada’s financial sector came out of a global crisis as a role model—the world’s soundest, according to the World Economic Forum. Long before the hard times began, Canada’s financial system was well capitalized, with one of the most effective regulatory frameworks in the world. None of Canada’s banks required taxpayer bailouts during the crisis. The same practical, prudent—perhaps even boring—way of doing things became much more admired during the crisis.
We went through a difficult time, as you know. In October 2008 I was in Washington. Bear Stearns and Lehman Brothers had failed and credit spreads were widening. European banks failed and British banks were nationalized. These were very trying times.
It is encouraging now that we are in a better period. But the events in October 2008, particularly the annual meetings of the G-20 on the weekend of October 10-11, were very important in making clear that the countries of the G-20 can work together in a cooperative way in a time of crisis and be effective. This is a very important role for the G-20.
The financial sector reforms that are being recommended are from a group of the G-20 that Canada co-chaired. They are very similar to the Canadian system that has served us so well. They include improved quality and quantity of bank capital, strengthened liquidity standards and a curb on excessive leverage. When G-20 finance ministers met in the middle of April just a little more than a month ago, I was pleased to see that finance ministers remained united behind this proven approach.
Now we have to see our plans through. We must create a global financial system that is better prepared to withstand adverse shocks.
Canada and most countries agree with the principle with respect to financial sector reform that, where a financial institution contributes to a financial crisis, it is the institution that should bear the cost of the bailout and not taxpayers. Each country should be given the flexibility to consider whatever measures are appropriate under the circumstances for that country.
Some have suggested that some sort of global ex ante bank levy is appropriate. In our view, a global levy in fact would remove capital from financial institutions. This could in turn weaken their ability to absorb losses and possibly restrain credit availability. It could also result in the same kind of excessive risk-taking that brought us to the brink of financial collapse. Risk-takers would naturally consider such a tax to be a government pledge to bail them out again.
In recent pre-summit meetings, Canada’s message was clear that a global financial levy or tax is not the way to go. Canada would like to see our proposal of embedded contingent capital considered, as a useful tool to reduce moral hazard in the financial system and aid in the effective resolution of financial institutions. This approach would create a security that converts to common equity when a bank is in serious trouble. It would increase the core capital of the bank without the use of taxpayers’ dollars and it would create a kind of self-insurance pre-funded by investors to protect the solvency of the bank.
Last week, I wrote to my G-20 counterparts to describe in more detail how this proposal might work. I expect this discussion will continue this weekend in Korea and later in Toronto as well.
We do need to keep our eye on the ball in terms of financial sector reform, important reforms with respect to the quality and quantity of capital and leverage standards—that is, caps on leverage to avoid excessive risk-taking.
The Toronto Summit’s theme, Recovery and New Beginnings, reflects our goal to work collectively toward a sustainable recovery. We also expect discussions to turn to exit strategies and much-needed fiscal reforms.
The Toronto Summit has four key priorities: taking collective action to secure sustainable and balanced economic growth; maintaining momentum to complete the financial sector reforms required to fix a flawed global financial system; strengthening international financial institutions to meet the needs of today’s global economy; and promoting liberalization of trade and investment.
In achieving these G-20 goals, Canada calls on the help of partners like China to implement the G-20 Framework for Strong, Sustainable and Balanced Growth. The framework aims to fix the imbalances in individual countries that, if ignored, can throw the international economy to which we’re all connected off track.
The recent financial developments in Europe and the increased concern about sovereign risk only make it more urgent that we each adjust our own policies to achieve shared global objectives. Of course, the pace and the timeframe for the return to fiscal sustainability will depend on conditions in each country. But it is imperative that all countries coordinate their policies to ensure consistency with the Framework for Strong, Sustainable and Balanced Growth.
Failure to achieve our goals would endanger the fragile recovery on which all of our countries depend. It could well lead to a vicious cycle of higher interest rates, lower growth, reduced potential output and higher debt. It could even call the very credibility of the G-20 into question.
That’s why we all have a collective responsibility to see this framework through. Success is only possible if everyone follows the same rules.
Where imbalances exist, in emerging and advanced countries alike, we must fix them. Of course, that must include fiscal reforms in those countries with unsustainable and growing debt loads.
The message from bond markets has been unmistakable: advanced countries will need to accelerate fiscal consolidation. Likewise, if we are to sustain the global recovery, other nations will need to reduce their savings and combine this with structural reforms and exchange rate adjustments.
In the run-up to the Toronto Summit and beyond, the world will be looking to China to continue to play an increasingly influential role in the global effort to create prosperity for all of our nations. When the international economy was in crisis, China’s response was pivotal to minimizing a global downturn.
In playing an increasingly important role in the global economy, I’m here today to assure you that China will continue to have a friend and partner in Canada. The economic and social ties between our countries will serve us well. Our growing trade and investment ties will bring us further mutual prosperity.
In recent years, our two countries have shown what is possible in challenging times. I look forward to the additional accomplishments our growing partnership will make possible. It will make for a better future for both of our countries.
Thank you very much.