CIIT Committee Report

CANADA – INDIA TRADE AGREEMENT

LIBERAL PARTY — SUPPLEMENTARY REPORT

The premise of entering into trade agreements should be to increase the net benefit to Canada and Canadians. This should be demonstrated in not only an increase in exports but an increase in the value added exports and associated employment and productivity associated with that trade.

The government has – as it has with all previous trade initiatives – attempted to present this trade initiative based upon the generalized assumptions which their own officials have challenged. The Liberal Party has noted in previous Supplementary Reports that the government has produced economic analysis of a potential agreement, prior to the commencement of actual negotiations, must be noted.

This Conservative government has once again, as it has with all its FTA’s provided only a best case scenario will result in terms of economic benefits to Canada and Canadians. They fail to present any analysis as to how Canada can take best advantage of such trade agreements. 

In order to place that assessment in its proper context, the statements of the Assistant Deputy Minister of Trade for International Trade, Don Stephenson are worth noting. In testimony on September 29, 2011 and again on December 1, 2011 he described the joint study prepared on an FTA between Canada and India – an analysis prepared in advance of negotiations in the following terms in September stating, “I want to make the point these are theoretical econometric studies. I’d like to say that these are absolutely accurate but they can’t be.” In December he described the study as “an economic modelling exercise.” 

It is this uncertainty that the committee should take note of in the report submitted to the House.

The director of International Economics at the School of Public Policy at the University of Calgary published a short paper in November on the Canada – India trade agreement found that:  “It is difficult to be optimistic in expecting much to come out of the mission to India – or even expecting a significant outcome from the ongoing trade negotiations with India over the short run.” The paper went on to state, “One of Canada’s goals it to improve market access into India, something India has no interest in.” 

In a recent analysis by the Eurasia Group, the prospects for the Indian economy are quite uncertain:

“while India sustained generally substantial growth rates the tough political choices on reform were continually left for the next parliamentary session, and the breakthrough to higher growth was not achieved. Instead, corruption issues tainted the government, coalition partners proved less compliant than expected, and most importantly, the anti-reform elements within Congress showed that they still had considerable political clout and influence with the “ruling family. In 2013, the ability of the government to implement robust economic policies will decline even further, perpetuating India’s “stalling or falling” outlook.” (Eurasia Group, Top Risks for 2013, January 2013, p.10)

A recent article for the Carnegie Endowment (Six Reasons for India to look east, February 26, 2013) the point was reinforced that economic growth which India had experienced in the recent past of more than 8% annually was unlikely to return without substantial internal economic reforms being acted upon. 

This concern was shared by Professor John Harriss of Simon Fraser University with the committee, “India is not likely to sustain the sorts of rates of growth it hopes for.” (Evidence, #65, February 27, 2013, p. 13).

These observations concerning the evident slowing of the Indian economy stand in contrast to the optimistic declarations of government officials who continually used the term “explosive” when describing the Indian economy. Again, the government should take careful note of these contrasting statements.

In any trade arrangement with India, concern has to be taken of the pervasive subsidy issues which are a major feature of the economy. In this regard it was noted that in the wake of the 2008 economic crisis, India undertook stimulus spending in conjunction with its already established subsidy structure which has required the country to “implement a macroeconomic ‘exit’ strategy which should include the entrenched domestic subsidies.” (India: An Emerging Economic Power, Kevin Lynch, Policy Options April 2010, p. 48).

While Canada is seen as a source of raw resources for the Indian economy. India is "shifting their industrial production away from labour intensive and commodity intensive product lines to sophisticated technology intensive output..." While Canada stands to benefit through the provision of natural resources such as potash, wheat, coal, and energy products", (Policy Options, September 2012).

JOBS AND OUTSOURCING

The committee was reminded by Professor Beaulieu from the University of Calgary that there is no direct assumed correlation between trade and jobs.

There's a very loose connection between a trade agreement and actual employment or jobs. One of the things you see a lot are comments that it's going to generate jobs. The economic evidence on job creation from trade agreements is that there's not a big employment effect—maybe in the short run, but not in the long run. There's potentially some economic growth effects and that kind of thing that in the longer term can translate into a stronger economy. On actual employment effects, it's fairly dubious to make arguments that it's going to generate jobs. (Evidence, #59, December 11, 2012, p. 3)

The issue of the out-sourcing of Canadian jobs did arise during the proceedings of the committee and this issue merits further consideration

When Foreign Affairs and International Trade officials were asked if the issue of the outsourcing of jobs to India was a concern, their response was interesting and should be of some concern to the committee:

You also talked about the outsourcing of jobs. As representative of the Canadian Trade Commissioner Service, I would say that the general advice we give Canadian companies is to keep focusing on their international competitiveness and their cost structure. In some cases, that could mean dealing with foreign service providers. Earlier we talked about call centres for lost luggage, for example. This might also affect value-added services, such as those in computer engineering.

I think you have raised a valid point when you talked about the protection of jobs in Canada. But we also have to make sure that Canadian companies pay attention to their international competitiveness and their cost structure. They have to see what their competitors are doing, be they American or otherwise, in order to monitor and reduce costs for computer services, for example. (Evidence, #16, December 1, 2011, p. 8)

This line of thought was supported by the testimony of the International Business Chair, Laval University when he told the committee:

I believe that, inherently, outsourcing, especially controlled outsourcing could actually be beneficial for businesses to some extent…domestically our cost structures are extremely high. If we could outsource certain steps, while endeavouring to strengthen our competitiveness at other steps, those two things combined could give us a certain competitive advantage. (Evidence, #70, March 27, 2013, p. 4) 

When officials were asked to respond to the clear issue of the lower standards in India in terms of worker safety and wages, the response demonstrated the limited ability of the federal government to take action in this regard:

“Canada cannot prevent Canadian firms from taking advantage of low-cost services—call centres, or software development, or other kinds of services—in other countries. If it's available to them, that helps them remain globally competitive, because that's what their competitors are doing, and it still provides for a lot of quality jobs in Canada. In the medium- and longer-term, one of the principal obstacles to economic growth in Canada is labour shortage. So accessing services in other countries, either cross-border or through temporary entry of professionals into Canada, is actually accessing the labour that we need for our companies to operate.

With respect to labour and environment, Canada's approach is relatively well known. We try to promote in our trade discussions adherence to international standards for labour and environment protection, and we will do so in the discussions with India.” (Evidence, #56, November 27, 2013, p. 6)

When it comes to India’s expectations from Canada officials from International trade were quite emphatic – for the most part the major interest of India in terms of exports are in the area of semi-processed raw materials and direct investment from Canada – neither of which are significant contributors to value added jobs in Canada.

“India's interests are indeed, as you say, principally in investment, as they can't reach any of their development goals without foreign investment, and in technology, and that applies pretty much in all of those sectors, but in all sectors generally speaking. So in terms of the Indian interest, I would say that it is more in investment than in imports from Canada, but in certain sectors the imports are extremely important to India. For example, potash and lentils contribute to their food security, one of their highest priorities. That would be my guess.” (Evidence, #56, November 27, 2012, p. 3)

While the interest from India in direct investment from Canadian sources is evident, concerns should be noted. A recent report by the Carnegie Endowment raised some troubling concerns in relation to the Indian situation:

“the overall liberalization of FDI thus far has been uninspiring and in many instances has included counterproductive components that betray a poor understanding of a market economy. A good example of such unhelpful policies is the ‘local content requirements’ that litter many otherwise sensible Indian efforts at increasing FDI.” (Opportunities Unbound, Carnegie Endowment, 2013, p. 20)

According to the report from the University of Calgary market access within India remains – in spite of the fact India has signed five bilateral and two regional FTA’s – a significant problem.  The report states that according to a WTO study India continues to employ non-tariff barriers including prohibitions, licences, and restrictions to restrict imports as well as anti-dumping measures. To what extent will these restrictions have to be eliminated in order to ensure that any FTA is worthwhile engaging in?

Again from the University of Calgary paper there is the following concern: “Canada is interested in negotiating the liberalization of services and procurement these are off the table as far as India is concerned.”

In testimony before the committee, the VP for international business development of the Export Development Corporation indicated that the extent of corruption within the Indian economy is not to be under-estimated:

“I think we would be sugar-coating things if we didn’t say there were corruption concerns and issues still present in India at multiple levels and in multiple locations in the country… this is very much something I would classify as a non-tariff barrier and one that dissuades Canadian companies that have a choice of where to put their hard earned capital.” (Evidence, December 6, 2012, #58, p. 17)

The committee was informed that there are concerns Canadians must be aware of with respect to doing business in India which are not prevalent in Canada.

“Indians themselves have to deal with a lot of red tape, archaic and obstructive administrative and bureaucratic policies and lastly, corruption. It would be naïve for Canada to think that in doing business with India our values somehow will be readily adopted… Canadians will have to be patient and mentally ready to take on those challenges…” (Evidence, #55, November 20, 2012, p. 4)

Professor Harriss of Simon Fraser University put forward the following observation with respect to the manner in which influence is exerted within the Indian economy:

India, of course, ranks pretty low on the World Bank's index of the ease of doing business, and very low, indeed, in the area of contract enforcement. Those are facts that are probably pretty well known… the stranglehold that is exercised by a small number of very big companies in India, companies like Reliance, SR, indeed Tata, as very powerful companies that actually do exercise a great deal of influence on the actions of government as importantly as on policy. The advice that my friend was suggesting to me yesterday was that it would be important to avoid areas where powerful vested interests are involved, to avoid areas such as telecom and pharmaceuticals, where the big boys have very strong interests. (Evidence, #65, February 27, 2013, p. 10)

As with the previous trade agreements this government has entered into there is a lack of an understanding or acceptance of the need for the federal government working with all stakeholders across the country in developing an industrial and economic strategy which will ensure that Canada and Canadians can take the best advantage of any agreement. The key component of this strategy being enhanced value added activity within Canada.

RECOMMENDATIONS

1. That the government ensures that there is a full reciprocity in trade included in any agreement between Canada and India with specific focus on our value added manufacturing sector.

2. That the government undertake a full cost/benefit assessment related to the outsourcing of jobs to India and the impact this practice has on the Canadian labour market.

3. That the Government of Canada consider the establishment of a worker trade-adjustment program, similar to the NAFTA-TAA in the United States, in order to assist workers in Canada who may be displaced by increased trade with India.

4. That, concurrently with the negotiations between Canada and India for a Comprehensive Economic Partnership Agreement (CEPA), the Government of Canada develop a national trade and industrial strategy. A focus of the strategy should be strengthening the domestic manufacturing base in order that, once a CEPA is concluded, Canada’s businesses that participate in value-added production chains are able to maximize the benefits resulting from the CEPA.