Canada-U.S. Trade and Investment Linkages Presentation to the Standing Senate Committee on Foreign Affairs Someshwar Rao Industry Canada October 07, 2003 Canada IndustryIndustrieCanada

2 The Canadian economy has become much more outward oriented... Source: Industry Canada compilations based on Statistics Canada Data Exports Imports Ratio of Exports and Imports to GDP *Stock Source: Industry Canada compilations based on Statistics Canada Data Inward Outward Ratio of Foreign Direct Investment* to GDP

3...largely as a result of closer linkages with the U.S. in trade... Exports Imports U.S. Share of Canadian Goods and Services Trade, 2002 Other countries Source: Industry Canada compilations based on Statistics Canada Data Canada-U.S. Trade

4 …direct investment Source: Industry Canada compilations based on Statistics Canada Data Canada-U.S. Foreign Direct Investment Stock U.S. Share of Canadian Direct Investment, 2002 Inward Stock Outward Stock Other countries

5 Increased Canada-U.S. trade linkages are pervasive across all provinces... Share of Canadian Exports* going to the U.S., by Province *Merchandise exports Source: Industry Canada compilations based on Statistics Canada data

6 Canadas trade links with Mexico are still not very strong but have increased considerably Mexico Share of Canadian Trade* Exports Imports 02 *Merchandise trade Source: Industry Canada compilations based on Statistics Canada Data Canada-Mexico Trade* 02

7 Clothing Electrical Machinery Furniture Misc. Chemicals Textile Mills Computers & Electronics Wood Products Mineral Transportation Equipment Textiles Paper Rubber & Plastics Food Primary Metals Petrol & Coal Fab. Metals Printing Beverage Tobacco Percent Exports Contribution to Manufacturing Output Growth, Source: Industry Canada compilations based on Statistics Canada Data More than 80 percent of Canadas manufacturing output growth in the 1990s can be attributed to exports

8 The FTA raised manufacturing productivity Control Low Tariffs Medium Tariffs High Tariffs % per year Net Exit of Firms in Manufacturing: Increase in Value Added per Worker in Manufacturing due to the FTA: Control Low Tariffs Medium Tariffs High Tariffs % Note: "Control" refers industries with a net effective tariff reduction equal to 0, "Low Tariff" refers to 0-3%, "Medium Tariff" refers to 3-6% and "High Tariff" refers to > 6%. "net effective tariff reduction" refers the relative change of the Canadian tariff against the U.S. to the rest of the world between 1988 and Source: Trefler, D., 1998, The Canada-U.S. Free Trade Agreement: an Assessment for Canadian Manufacturing

9 Foreign-controlled firms on average are more productive than Canadian controlled firms Domestic Controlled Firms = 100 Relative Multi Factor Productivity Level of Foreign Affiliates in Canada, (Manufacturing) *Includes Tobacco; Furniture & fixtures; Printing & publishing; Leather industries; and Other manufacturing. Source: P.S. Rao and J. Tang "Are Canadian-controlled Firms Falling Behind Foreign-controlled Firms in the Canadian Manufacturing Sector?", Industry Canada, Working Paper, No

10 Competition from Mexico and China in the U.S. market is rising Share of U.S. Imports Source: Industry Canadas compilations based on data from the U.S. international Trade Commission

11 The booming U.S. economy was the main driver of our export success in the 1990s Percent U.S. import growth Canadas export growth to the U.S. U.S. Imports and the Canadian Exports to the U.S.

12 The depreciation of the Canadian dollar was another reason for the expansion of exports * Based on logarithmic decomposition ** Growth in real value added per hour worked Source: U.s.Bureau of Labor Statistics Labor Productivity Growth** Change in Unit Labour Cost (in $U.S.) Hourly Compensation Growth U.S.Canada Depression of Canadian dollar Change in Competitiveness-Manufacturing (in percent)* 18.7% Gain 10.7% Gain 21.7% Loss 29.7% Gain Value of Canadian Dollar vis-à-vis an U.S. Dollar Source: Industry Canada compilations based on Bank of Canada

13 Canada needs to address the productivity challenge U.S = 100 Labour Productivity** Manufacturing Labour Productivity* Total Economy *Real GDP per hour worked, PPP based **Real GDP per hour worked, based on the methodology of the Centre for the Study of Living Standards Source: Industry Canada compilations based on data from Statistics Canada, U.S. Bureau of Labor Statistics, and U.S. Bureau of Economic Analysis Canadian Productivity Relative to the U.S.

14 We need to maximize the full benefits of Canada- U.S. economic linkages North American economic linkages on balance have been beneficial for Canada. But, to fully realize the benefits of increased Canada-U.S. economic linkages, Canada needs to: reduce border risks and impediments; facilitate the efficient operation of markets; encourage private sector entrepreneurship and dynamisms; attract and retain highly qualified people and investment in key sectors of the knowledge economy; and improve Canadas innovation and productivity performance.

Canada-U.S. Trade and Investment Linkages Canada IndustryIndustrieCanada