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Thank you for having us.
Mr. Chairman, this is a great privilege. I think this is the third time I've been back to this committee in the last three months or so.
What we're going to do today is walk through the fairly standard presentation we've been doing on our report. I'll warn you right now, what's on the screen is not identical to what you have in hard copy in English only.
[Translation]
The slides are being translated into French, but you can consult the presentation, because it contains all of the slides that appeared in the report. This presentation is broader.
[English]
This is actually the presentation I gave to the Public Policy Forum about three weeks ago now, responding to Advantage Canada, which the government, of course, put out in November. There are a lot of crosswalks between Advantage Canada and our report, but they're not identical. There's an alignment on thinking, but they're not identical.
So very quickly, we've published our report now. It's in four volumes. This is what volume one looks like. It's called Mission Possible: Stellar Canadian Performance in the Global Economy. It's available on our website. We'd be very happy to give you hard copies of all four volumes.
Gilles, you have the executive summary as well, if people would like to see that.
Mr. Gilles Rhéaume: Yes, I've passed it on.
Mr. Glen Hodgson: The core hypothesis—and we have the evidence to show this—is that Canada has been slipping in terms of wealth creation within our economy for at least 15 years now.
We believe we're slipping for two reasons: one is the structural change on how the world economy is organized—what I call the shifting tectonic plates of the global economy—and two is the fact that the model for international business has changed. I came up with a phrase to describe this about five years ago. I call it integrative trade, which is really businesses repositioning parts of their supply chain around the world because of lower barriers to trade over the last 20 to 25 years.
Here's some of the evidence. This shows you Canada's productivity growth rate compared to the other countries in the OECD, the major industrial countries, since 1999. You can see where we are: we're the red bar pretty close to two-thirds of the way across the chart. The United States has stronger productivity growth. You can see that countries like Slovakia, Korea, and Ireland have double or even triple our annual growth rate for productivity. That, accumulated over time, of course, turns into things like real wages not going up very rapidly.
Mr. Julian last time talked about income disparity and the fact that family incomes don't go up. That flows directly back to very weak productivity performance relative to most other countries. It becomes even more striking when you compare Canada to the United States. This gives you a 25-year comparison of Canada-U.S. productivity performance. There's where we are and there's where the Americans are. That translates to a gap of probably about $8,000 to $9,000 per capita across the country. That's equivalent to Ontario's spending on education per student.
So it shows you that basically if we could close the productivity gap somehow, you could have a health care system and an education system functioning at a very high level. It really translates into the wealth of the society. The 2006 data, which are very preliminary, show that Canada has again fallen well below the United States. It's very striking—the only period on that whole chart for 25 years when Canada actually matched the United States was in 2005, and that was as America was going through a serious adjustment in the value of their currency.
I personally believe that the idea of closing the gap with the United States is folly. I think we should be trying to stop the gap from growing any further. If we set that as a first step, that would be a significant step ahead. We are now at 83% of U.S. levels of productivity. We have years of analysis showing that. In fact, there's very strong consensus. Almost all economists in the country agree on the data and on the prognosis.
On the integrative trade side, this just gives you some evidence for why I believe so strongly and why in fact the Conference Board believes so strongly that foreign investment is such a key driver of international business today. The two bars show you annual growth rates in FDI—foreign direct investment—exports, and GDP. It's fairly simple to see what the driver is today, what the fastest growing component is: it's international investment at pretty close to double exports and more than double GDP.
So rather than thinking about trade and investment, arguably, we should be talking about investment and trade, creating an investment climate in Canada that attracts our fair share of global investment and at the same time does things to encourage Canadian businesses to use outward investment to position themselves around the world.
This is just another piece of evidence of integrative trade. This shows you—and it's a very busy slide, but I'll walk you through it very quickly—the domestic content of our exports by various sectors.
On the far left we have mineral fuels—oil and gas—and you can see that domestic content, of course, is very high. We import a little bit of technology machinery to support the oil and gas sector, but it's very high.
On the far right you have the auto industry; it's below 50%. In fact, Canadian content in many of the vehicles manufactured in Canada is only about 32% or 33%. The majority of the vehicle actually consists of parts and services that come from abroad. That's evidence of very deep integration within North America and the global economy.
It's almost like a saddle. You have high Canadian content for resources and for services, and then for manufacturing you have much lower levels of Canadian content—much higher levels of integration—largely within North America.
Again, this is part of the evidence as to why I thought the concept of integrative trade was so important. Of course, I spent 10 years of my career at Export Development Canada. It's now quite fundamental to their business model to try to figure out how to support Canadian business internationally, mindful of the fact that we're deeply integrated on investment and on imports as a key element of exports.
In volume one of our report, we then point to some immediate challenges, and as you'll note, we've put sustainability at the top of the list.
Our project went on for three and a half years. This didn't emerge yesterday; it is something the board has thought about for a long time. In fact, Gilles has led that business over the last 15 years. We really think we have to find a way to get the balance right between economic growth and environmental protection. Recommendations in the report address that issue directly.
Second, the huge global economic imbalances that exist are an immediate risk. The last time I checked the numbers, the United States had a current account deficit of almost $900 billion. That is 6.5% of the U.S. GDP. They are massively dis-saving—they're consuming more than they earn—but the rest of the world, because the rest of the world is in a cash surplus, has the liquidity available to actually keep feeding American consumption and investment habits. That money has come from Japan; then China was added to the list; and now it's the gulf states and the oil exporters who are the sources of funds.
For the moment it looks like it's in balance, but the scale of the disequilibrium is so large that one day investors could wake up and decide to no longer keep such a massive stock of savings flowing to the United States. At that point, adjustment would have to happen; it wouldn't be pretty, and it wouldn't be an easy, direct thing, so we've flagged that.
Third on the list is the suspension of the Doha Round. There is a little glimmer of opportunity between now and July, when the U.S. President's negotiating mandate expires, but we think the likelihood of that round being completed is probably one in three, even one in five.
Because of the imbalances and because of the surplus we have with the United States, if the Doha Round fails, we go back to a very protectionist U.S. Congress, and we have to think immediately about Canada's economic interests. We've seen the whole round of softwood lumber. You know that far better than I do, and what it translates into in terms of economic cost and job losses. We have to be very mindful of the fact that if we can't proceed multilaterally, we go back to bilateral trade deals.
Last, we have the emerging markets themselves, which are competition every day. China has now surpassed Canada as an exporter to the United States in one month. Three years from now that'll be the trend: China will be more important to the United States than Canada. The flip side is that there is a huge market of consumers there, and Canadian business has to find a way to tap into it.
I'll just give you a little graphic as to how big the U.S. current account deficit is. It's gone on for a long time. It actually started with Bush, the father, and it's gone on to Bush, the son. My fear is that it'll be the next president who will have to actually solve the problem. The scale of the imbalance is unprecedented, really, in economic history.
Again, I think there's a very strong consensus among economists. We know what the problem is. How do we solve it, then? Over the three volumes of our report, we point to seven strategies. I'll go through them very quickly because I've talked about them already.
Strategy number one is to embrace productivity and competitiveness as a national priority within Canada. I spent six months coming up with this picture to try to give you a graphic image of what a national productivity strategy would look like.
At the core are human capital, physical investment, and innovation. Every business, every organization, and government policies all have to be wrapped around that, but around it you have to put a national operating environment. The Canadian economy is highly balkanized; we've created barriers at the provincial boundary lines, we have misalignment between federal and provincial regulations, we have all sorts of tiny barriers to competition that have really made it hard for our business to achieve optimal scale and to compete in the world.
Around that, we're now integrated within North America, and of course we're part of the global economy, so a national strategy has to have a plan for all of those; you have to find a way to incorporate all those elements into a national strategy.
Strategy two, therefore, of the five in volume one, is that we believe it's critically important, as we say, to create a single Canadian market. And that means reform and adjustment on many fronts, improved alignment of regulations, and reduced barriers between provinces—barriers to human beings, to goods, and to capital.
We need to develop innovation strategies within businesses and governments to foster knowledge creation and innovation within Canada.
We need to reform the tax system for productivity. There we point to things like working income tax credits, as the municipal task force in Toronto recommended, and the removal of capital taxes, but also to improved alignment of our tax system at all three levels. And cities, arguably, are the victims right now in terms of fiscal imbalance in the country. Cities don't have the same fiscal capacity as the other two levels of government, so our third volume focuses on that to a huge degree. There's been tremendous media pickup in the last week on our cities work.
Last are investment in infrastructure and of course keeping the border open. We're doing a very interesting study right now at the Conference Board, looking at how trade has been affected since 9/11 and whether the border is working as efficiently as it should. As you can see, this shows you Canada's relative R and D performance within the OECD. We're, sadly, the little black line at the bottom. We are so far behind the field it's very striking—little countries like Finland are now blowing us away in terms of investment in research and development—and too much of that is public sector investment. The private sector makes up only about a third of overall R and D investment within Canada.
Strategy three is to rethink the workforce. We've done a lot of work on immigration policy and on the need to retain older workers, change our attitudes towards older workers, raise the level of investment in education, and ultimately, embrace the concept of lifelong learning. So we have a very complete agenda there. I won't address that in more detail now.
Strategy four, and this is what you care most about, is that we need to rebuild international trade and investment into the national productivity strategy.
I see that some of you are flipping pages right now. This presentation is not identical to the one you have, but it's all in the report, if you take a look at the report.
The elements of a national trade investment strategy for us include re-becoming a major player in foreign investment. Gilles, maybe you want to speak to this, because you actually did the research on this.
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Now I am going to link that to trade in services, because our share of trade that is services is actually in decline while the rest of the world is seeing services grow. There's a huge irony there. Services are 70% of our domestic economy. They're only about twelve and a half percent of our exports. Part of that is because resources are so important, but we believe part of it is because we haven't really focused on services in a strategic way. It flows back to the balkanized domestic economy. We have insufficient scale. We have too much protection, and if you protect too much at home, your firms are not positioned to go out into the world and be able to compete internationally. It's no surprise there that the services aren't doing better, and really there's very little national debate or discussion around trade in services, and yet that's what most of us do. Seventy percent of our workforce is in services.
That flows to the third point, embracing integrative trade. We have to now understand that you can't treat exports and imports as separate pieces. You can't separate inward investment from outward investment. You can't separate sales from foreign affiliates from exports. They're all really part of the package, and when our business community thinks about international business, they're trying to make themselves as competitive and as efficient as possible, and government policy has to align around that. We have to ensure that all the instruments of government policy are supporting integrative trade rather than the traditional model where exports were good but we really didn't want to import too much because that was then competing against domestic industry.
The fact of the matter is imports are critical to exports and critical to the operation of our domestic economy. So if we put up artificial barriers to imports, all it does is raise costs and make us less competitive.
Fourth, and perhaps more importantly, we've got to reposition Canada as a leader in multilateral negotiations. Our strong view is that we've been pushed out of the inner circle of the trade negotiations. We're not part of what was called the “quad”, the quadrilateral. We've been pushed aside by Australia, and the frank reality is that our inability to address some of the sacred cows in our economy, things like supply management—and Gilles can talk more about that than I canvand even sectors like shipbuilding—If you can't offer something up in a trade negotiation, you can't expect to win something back in terms of improved market access, and that's where Canada is now. We're really not seen today as a serious player in trade negotiations because we have not been as forthcoming in our willingness to open up our national economy to others. If you can't open up, you're not going to be part of the story.
We also think that if Doha does not succeed, we have to have an alternative strategy. Think about deepening the NAFTA relationship, expanding it to more sectors, looking at things like non-tariff barriers and our alignment on regulations with the United States, and again, regulation is a very insidious and clever way of keeping goods out of markets. And we should also be thinking about other priority markets, liberalizing with other markets in the world, because the United States under George W. Bush has actually signed 13 bilateral free trade agreements and we haven't signed any. We've signed three since NAFTA.
So we're not really part of the game right now. Countries like Australia, and the EU, and China are busy pursuing bilateral regional free trade. Canada has to get back in the game.
Fifth, foreign policy has to support that. Our thinking on this is that clearly the U.S. is job one. That's the most critical relationship. We have to think about our relationship with the United States every day, but we also have to develop a parallel track around China and emerging markets, because they are the new centre of economic growth, without forgetting Japan and the EU, which are traditional relationships. We think it's critically important that Canada now think through all the aspects of its foreign policy with China, with India, with Brazil, and other major emerging markets.
Then in terms of our advice on where to start, we think option two is the best way, which is harder. We understand entirely that for you elected officials it's much harder to go to the public and suggest dealing with the sacred cows and areas of resistance, but that's where the greatest payback is, creating a single market within Canada, making our national economy more efficient, defining a trade and investment policy for the long term, and also the issue of the aging labour force.
Now at this point, Gilles, I think I should turn it over to you briefly to talk about volume two.
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First of all, when we're looking at it in terms of economic performance and the export opportunities we've seen in the last few years, for at least the next 10 to 15 years it will have to do with our rich natural resources. There are global market opportunities being offered; however, we have major challenges in tapping into these opportunities.
On the forest products side, the mill towns are suffering and will continue to suffer as long we cannot renew our forest products industry. Renewal is going to be key. To make that happen further, mills will have to be shut down, which means we'll need to have a strategy for those communities that will be affected. We'll need to focus on investing in more modern, larger mills moving forward.
One thing we found when looking at the pulp and newsprint mills in Canada was that they're old and small compared to the competition abroad. We have to do something about that. We have to encourage the industry to do something about it. We also have to try to diversify the products being produced in the forest products sector and open up new opportunities. We're looking at opportunities for using that fibre to produce biochemicals and bioenergy products. Bioenergy could also offer an opportunity when we're dealing with issues like climate change.
In the agrifood sector, the biggest hurdle has to do with the suspension of the Doha Round. As long as we cannot fix and liberalize our trade in that area we'll have limited opportunities for our agrifood sector. Internally there's a major issue in innovation and the capacity for the industry to produce value-added products.
We're seeing the greatest opportunities in processed foods, higher-quality foods, and foods with specific types of attributes, like low-carb, high-protein, and pre-packaged. That's where the business will be in the future, not only in the industrialized world but also in the emerging economies, as you have growing middle classes seeking higher-quality foods. We have to tap into that, but there are some regulatory barriers that need to be overcome. The regulatory approval processes are slow and cumbersome and are preventing the industry from being as innovative as possible.
On mining, metal prices have been increasing quite substantially. There are great opportunities for Canada in the global marketplace. The biggest problem is that our reserves have been depleting for the last couple of decades. We need to be able to discover new mines. That means we have to permit and help bring about additional exploration so we can make these discoveries. There will be some environmental challenges, which we address in the report. Strong environmental stewardship programs will be required, because they will most likely be in environmentally sensitive areas.
On energy, because we have rich energy resources, we could become an energy superpower, but in the long term that will have major environmental consequences. We have an opportunity to become a clean energy superpower, meaning that as we develop our energy resources, we also have an aggressive strategy in developing new environmental technologies. There are already some pilot projects in existence, and we have to tap into those and build on the skills resulting from research and development in this area. If we can make this happen, it will offer great opportunities for Canada, not only in the coming decade but at least until 2030 or 2040.
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Thank you very much, Mr. Chair.
It's good to see you again. You're both very articulate.
Some hon. members: Oh, oh!
Mr. Peter Julian: I disagree with much of what you have to say and agree with some of what you have to say, but I do want to state for the record that this will be your fifth and sixth hour before this committee. Many folks from British Columbia who wanted to testify before this committee during the hearings on the softwood lumber sellout were pushed away or refused by the government. So the government has actually provided more time to the Conference Board—three times as much—as to the entire province of British Columbia before this trade committee. I think that's a fundamental problem, because with Ottawa there's a tendency to drink its own bathwater, and we continue to have the same kinds of ideas recirculated, and recirculated again.
We've had 20 years, next year, of the so-called free trade agenda. Let's downsize government. Let's focus just on establishing a relationship with the United States to the exclusion of all other countries. What we're seeing now, of course, is record corporate profits, but most Canadian families are earning less. So on the bottom line, this ideology that's being put forward has failed. The bottom line is that it has failed.
What I see from your report is that you're trying to identify other factors, rather than looking at some of the core causes. You talk about productivity, and of course that's an element in terms of investment, no doubt. But when you compare us with the United States, saying that the United States is much more productive, the United States has seen the same kind of tendencies: the loss, as Monsieur André mentioned, of manufacturing jobs, the erosion of the middle class. Even though they're much more productive, you did mention the whole question of paying for health care. Well, in the United States, there are 60 million Americans who have no health care at all.
So we have an agenda where there is more and more wealth going to fewer and fewer people, and continuing that as a strategy doesn't make any sense for most Canadians. In the United States it was a major issue—he major issue—n the mid-term elections, and Republicans were thrown right out. Democrats campaigned very heavily on re-establishing manufacturing jobs, re-establishing a middle class.
Given all that, I come back to your report. There are some aspects that I certainly support, that are NDP ideas, investment in education, investment in infrastructure. No doubt about that. Some of the other ideas--just throwing away our agricultural sector and continuing deep integration, when NAFTA demonstrably hasn't worked for most Canadians--I have much more difficulty with. In the two weeks since the last time you came forward, we've heard from Chile, which is a progressive government, and we had Norwegian and Swiss representatives in front of us as well. Those countries define trade in a completely different context. They may use the word, and the Conservatives will say, “Oh, they've used the word 'trade', so they think like us”, but what they have is very strong protection for certain sectors, like agriculture, as you know. They have a much more public-policy-oriented investment in research and development. In other words, the public sector plays a crucial and important role.
So I guess my question is very simple: in terms of thinking outside the box, when the last 20 years demonstrably haven't worked, what are the lessons we can learn from countries that have a strong public sector and that protect their sectors, like their agricultural sector, when it's in the national interest, and why aren't those components more reflected in your report?
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We didn't get into specific markets from either an import or an export side. We established the principle. Part of the challenge with freer trade, going down the road, is that it's no longer about tariffs. We pretty much have a world now where tariffs are down to rock bottom, with certain exceptions. Tariffs are low; they're no longer the barrier they were 25 years ago.
Then you start looking at non-tariff barriers, which are all about standards and regulatory process. They bring us back to the question of whether we are ready domestically for this and whether we actually understand the very subtle forms of protection that exist in other markets.
If you're thinking about imports, you're obviously looking to people who can provide things cheaper. The Chinese have no trouble at all right now exporting a lot of stuff to Canada. We have a $20 billion trade deficit with China now.
Clearly there aren't barriers from markets where you can actually procure fairly basic stuff, whether it's raw materials or basic steel products—things like that. The barriers aren't really there; they're getting into much more sophisticated forms of trade.
I would look to things such as the underlying growth potential of the export market and the degree of cultural alignment. These are the things that will determine where we want to trade.
I'll give you an example. We in Canada have tried to pursue free trade with the European Union for perhaps 25 years and have made absolutely no headway, even though we would be huge beneficiaries in terms of more imports and huge beneficiaries in terms of access to their markets.
Why have we not made progress? It's for two reasons: because we're small potatoes compared with the United States, let's say, where the Europeans would really like to trade, and because it's all about non-tariff barriers.
There isn't really an easy answer to your question. You'd have to think about what the real drivers are of freer trade bilaterally and regionally to go ahead. I'll give you Europe as an example, though. My hypothesis is that it's highly unlikely Canada will ever have a true free trade agreement with the EU unless we do it as a partner with the United States, because only then would there be the alignment of regulatory interests on both sides of the Atlantic, and only then could we make real progress on non-tariff barriers.
It's easy to identify particular markets. There was something in the newspaper this week about EFTA, the European free trade area, and how Canada is pursuing something there. EFTA is, what, two countries, four countries? It's a tiny fraction of our overall trade. Frankly, given the scarcity of human resources out there to negotiate, why bother?