1. Global Value Chains and Canada’s Trade with Russia, India and China Presentation to the Standing Senate Committee on Foreign Affairs and International Trade Patricia Fuller Chief Economist Foreign Affairs and International Trade Canada May 27, 2008

2. 2 Dramatic changes in the global economy are fundamentally reshaping Canada’s economic relationships with the rest of the world. The growing importance of large, low-wage countries, most notably India and China, imply: Vast new markets for Canadian companies, and A new source of competition for Canadian companies. At the same time new business models are emerging; the way that businesses organize themselves is changing – to form vast global value chains. These two developments are related: Fast growth of China, and to a lesser extent India, has shown to the world the benefits of integrating supply chains across borders. Global Value Chains and the rise of the RICs

3. 3 How Canada responds to these changes will have significant implications for the future prosperity of all Canadians. Advanced countries are increasingly competing for the same high value activities of value chains (R&D, skill intensive manufacturing and services). Competition for these high-value activities is also increasingly coming from developing countries who are moving up the value chain. These new pressures were motivations behind both Advantage Canada, the government’s long-term economic plan, and the Global Commerce Strategy. Challenge to policymakers is to make Canada the location of choice for those high- value activities that are essential for maintaining and improving the standard of living of Canadians. Implications for Canada

4. 4 A Value Chain is the full range of activities that are required to bring a good or service from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer. A Global Value Chain describes a state of the world in which different stages of the value chain are scattered across the globe and inter-connected through complex production networks, often with different stages of production being carried out by different companies. This is in contrast to how trade and production were carried out in the past, with the complete production of end products in one country and often one firm, for export into international markets, or through branch-plant production. What is a Global Value Chain?

5. 5 A simplified value chain … Distribution After Sales Service Assembly R&D Intermediate Input Services Intermediate Input InputsAssemblyDistributionSalesService Sales Corporate Services Finance HR/ Payroll Marketing Logistics IT Headquarters

6. 6 Distribution After Sales Service Assembly R&D Intermediate Input Services Intermediate Input InputsAssemblyDistributionSalesService Sales Corporate Services Finance HR/ Payroll Marketing Logistics IT Headquarters …individual functions become separable R&D Intermediate Input Services Intermediate Input Inputs Assembly Distribution Sales After Sales Service Service

7. 7 Company HQ Lawyers Manufacturing Call-Centre & IT R&D Which can then be located anywhere in the world

8. 8 Driving forces of global value chains Declining costs of transportation (air transport, containerization) Improvements in ICT technologies Reduced barriers to trade and investment (Multilateral, regional, bilateral and unilateral) Movement toward outward oriented market economies Individual stages in the value chain can be controlled/monitored from greater distances Network costs have declined Markets can be served from greater distances Competition is increasing

9. 9 Other drivers of global value chains New players Low wage countries have become increasingly important – both South-South and South-North trade and investment have increased at a faster rate than North-North. South has been growing faster – even excluding China, there has been some convergence in income levels in recent years. Services have become more tradable, and all activities are becoming increasingly internationally mobile. As of 1990, there were 37,000 MNEs with at least 170,000 foreign affiliates. By 2004, the number of MNEs had nearly doubled to 70,000 and foreign affiliates expanded four-fold to 690,000. German MNEs established more R&D facilities outside of Germany in the 1990s than in the previous 50 years combined. Now reaching a ‘critical mass’.

10. 10  While it is clear that some countries are participating more heavily than others in Global Value Chains, measuring this shift poses challenges.  Currently available surveys on trade and investment were not designed to capture the increasingly complex trade relationships that make up Global Value Chains  We are not able to trace value chain activity directly through trade and investment statistics  Until new data sources become available we have to infer from existing statistics indicators of GVC activity Measuring Global Value Chains is difficult

11. 11 Evidence of growth in global value chains * 1982 to 2005 for exports and FDI, 1982 to 2004 for FA and Royalties. Data: UNCTAD WIR and WTO Growth in Nominal GDP Growth in Global Value Chains - World Growth Relative to GDP*

12. 12 Years are as close to 1982-2005 period as possible given data limitations and world growth is often for different years. Data: Statistics Canada Growth Relative to GDP* Growth in Nominal GDP World Growth Relative to World GDP Canada is not keeping pace

13. 13 The Policy Implications of Global Value Chains There will be increased competition among regions and countries for the high-value activities in value chains. Activities are much more mobile… small policy differences appear to be becoming increasingly important. Policy environment has to contribute to Canada becoming the location of choice for ‘high-valued’ internationally mobile activities. Both Advantage Canada and the Global Commerce Strategy were developed in this spirit.

14. 14 Canada’s Trade and Investment with RICs in a Global Value Chain context.

15. 15 Trade There has been strong growth in both imports and exports with the RICs over the last ten years; however, overall levels of trade with Russia and India remain small. Trade growth with China has been significant, with China becoming Canada’s second largest supplier of merchandise imports. The strong growth in imports into Canada from China has outpaced Canadian exports, resulting in a trade deficit. However, this may be an indication that Canadian companies are making better use of lower cost inputs. Services trade with the RICs remains small Canada’s trade and investment relationship with RICs Investment Direct investment between Canada and the RICs remains low; however, Canadian direct investment in China has picked up in recent years.

16. 16 China is by far the most important export market for Canada among the RIC countries… $ Billions Canada’s Merchandise Exports to RIC Countries (by value) Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canadian merchandise exports to China are more than three times as large as exports to Russia and India combined. China Russia India

17. 17 …as well as the fastest growing Percent Growth in Canada’s Merchandise Exports to RIC Countries (1997-2007) Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canadian merchandise exports to China increased nearly four-fold since 1997 India and Russia were not far behind but started from much smaller bases, meaning that the total value of Canadian exports to China increased by far the fastest.

18. 18 But Canada’s share of Chinese imports has declined by almost half… Percent Canada’s Share of Chinese Merchandise Imports Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canada’s share of Chinese imports has declined from 2.0% in 1995 to 1.1% in 2007.

19. 19 …although much of this is due to growth of regional value chains Many countries within Asia have shifted assembly production to China as part of global (regional) value chains and thus Chinese imports of intermediate inputs from these countries have grown quickly. Chinese imports from these close-by countries suggests the increasing importance of regional value chains. Value of Exports (2007, US$ Billion) Share of Chinese Imports (2007) Export Growth (1997- 2007) Japan$133.914.0%361.9% South Korea $104.010.9%599.1% Taiwan$101.010.6%514.5% U.S.$69.97.3%328.9% Germany$45.44.7%634.5% Malaysia$28.73.0%1056.4% Australia$25.82.7%693.8% Philippines$23.12.4%6972.4% Thailand$22.72.4%1029.9% Russia$19.62.1%380.6% Canada$11.01.1%448.3%

20. 20 Canada’s growth is not bad when compared to other OCED countries … Percent Growth in Chinese Imports, Select Countries (1997-2007) Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canada’s export growth to China is about the middle of the pack for a selection of comparator countries. The U.K., France and the U.S. all witnessed roughly similar rates of growth – below that of Canada. Germany and Australia stand out as having done better. Some of Canada’s growth is a recent commodities price effect.

21. 21 …as well as level of exports Percent Value of Chinese Imports as a Share of Exporting Country’s GDP Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas and OECD Measuring exports to China as a share of each supplier country’s GDP, Canada again seems to be performing about the middle of the pack.

22. 22 Canada’s share of Indian imports has declined slightly… Percent Canada’s Share of Indian Merchandise Imports Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canada’s share of Indian merchandise imports is down from its peak in 2001 and down slightly from 1999, but the trend is not as clearly downwards as it is for China. Canada’s share of Indian merchandise imports is somewhat lower than it is for China.

23. 23 …but growth has been comparable to that of like countries… Percent Growth in Indian Imports, Select Countries (1999-2006) Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas As in China, Canada is performing about the middle of the pack for Indian merchandise imports. Also as was the case with China, Australia and Germany are the two comparator countries ranked higher than Canada

24. 24 …although Canada is under-performing in terms of value of exports Percent Value of Indian Imports as a Share of Exporting Country’s GDP Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas and OECD For value of exports scaled by GDP, Canada ranks somewhat worse in India than in China, coming in the bottom half of the pack of comparator countries Canada also has a much lower share than the next higher country…the U.K.

25. 25 Canada’s small share of Russian imports has not fallen… Percent Canada’s Share of Russian Merchandise Imports Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canada’s share of Russian merchandise imports does not show the downward trend seen in other RIC countries. Canada’s share of Russian merchandise imports is our lowest share in any of the RIC countries.

26. 26 …although our growth has been poor… Percent Growth in Russian Imports, Select Countries (1997-2007) Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canada ranks towards the bottom of the list of comparator countries in terms of growth in merchandise exports to Russia. Once again Australia ranks first.

27. 27 …and the GDP-scaled measure of exports is mediocre Percent Value of Russia’s Imports as a Share of Exporting Country’s GDP Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas and OECD For Russian imports, scaled by the GDP of the exporter, Canada ranks in the bottom half of the group and much lower than the third place U.K.

28. 28 Canada’s share of China and India’s imports is falling; our export growth rate is middling among comparator countries For India, the value of exports is low relative to comparator countries Canada’s share of Russia’s imports is not falling, but growth of exports is poor relative to comparator countries Summary of Relative Export Performance

29. 29 China is by far the most important supplier for Canada among the RIC countries… $ Billions Merchandise Imports from RIC Countries Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Merchandise imports from China have grown significantly in recent years; there is some evidence that Canadian companies are using more inputs from China China is now the second largest merchandise exporter to Canada after the United States Imports from both Russia and India remain small China Russia India

30. 30 … Imports from China have also grown the fastest Percent Growth in Canada’s Merchandise Exports to RIC Countries (1997-2007) Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Imports from China have increased five-fold since 1997 There has been significant but slower growth in imports from India and Russia, which also started from much smaller bases.

31. 31 Services trade with the RICs remains small for both exports… $ Billions Commercial Services Exports to the RIC Countries Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canadian exports of commercial services to the RICs combined was around $450 million in 2005 China Russia India

32. 32 …and imports of services $ Billions Canadian Imports of Commercial Services from the RICs Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Canadian imports of commercial services from the RICs were around $300 million in 2005 combined. China Russia India

33. 33 China has moved into second place overall among suppliers of imports into Canada Canada's merchandise exports and imports by area Export by area ($ billion and per cent)Import by area ($ billion and per cent) Country2007 Share in 2007Country2007Share in 2007 World 449.7100 World 406.7100 U.S. 354.678.9 U.S. 220.454.2 U.K. 132.9 China 38.39.4 China 9.32.1 Mexico 17.24.2 Japan 9.22 Japan 15.53.8 Mexico 4.91.1 Germany 11.52.8 Netherlands 40.9 U.K. 11.52.8 Germany 3.90.9 Korea, South 5.41.3 Norway 3.70.8 Norway 5.31.3 France 3.10.7 France 5.11.3 Korea, South 30.7 Italy 5.11.3 EU-27 35.67.9 EU-27 49.412.2 Source: Statistics Canada

34. 34 Canadian direct investment in the RICs is low, but growing in China… $ Billions Canadian Direct Investment in RIC Countries Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Direct investment can play an important role in value chains. Canadian direct investment in China more than doubled in the last 5 years, but still represents less than.35% of Canadian direct investment abroad (CDIA). CDIA in Russia and India was only $540 million combined in 2007, putting them towards the bottom of destinations for Canadian direct investment. China Russia India

35. 35 … While FDI from the RICs into Canada remains small… $ Billions Direct investment in Canada Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas Direct investment into Canada from the RICs remains small China is the largest at $616 million in 2007, but this is only a 0.1% share of Canada’s total FDI stock. Russian investment has been negligible, and stood at $160 million in 2007. China India

36. 36 Conclusions The rise of global value chains has changed the global economy, creating both challenges and opportunities for Canada. Canada’s ability to compete for the high-value activities in value chains will be important for future prosperity. Canada’s economic integration with the RICs, particularly China, is growing, but lags behind some countries such as Australia.

37. 37 Annex – Canada’s Top Ten Exports and Imports with RICs

38. 38 Top exports to China

39. 39 Growth in Top-10 Merchandise Exports to China Sector% Growth 07/06 Motor vehicles-22.4 Plastic-1.6 Oilseeds92.3 Electrical machinery-5.9 Fertilizers69.9 Mineral Ores-3.4 Machinery15.4 Nickel42.8 Organic chemicals23.0 Woodpulp32.0 Other21.8 Growth rates for top exports to China

40. 40

41. 41 Growth in Top-10 Merchandise Exports to India Sector% Growth 07/06 Vegetables130.0 Fertilizers48.5 Machinery39.4 Woodpulp14.5 Paper & Paperboard-34.8 Electrical machinery11.4 Ores,slag, and ash-27.3 Cereals-60.9 Iron and steel102.3 Aerospace-57.4 Other27.3 Growth rates for top exports to India

42. 42

43. 43 Growth in Top-10 Merchandise Exports to Russia Sector% Growth 07/06 Machinery60.7 Meat0.7 Motor vehicles and parts14.3 Fish And Seafood51.3 Optical Equipment8.2 Electrical Machinery18.2 Plastic42.1 Aerospace21.1 Live Animals1110.7 Tools & cutlery of base metals273.6 Other8.1 Growth rates for top exports to Russia

44. 44

45. 45 Growth rates for top imports from China Growth in Top-10 Merchandise Imports from China Sector% Growth 07/06 Leather products10.3 Plastic12.7 Footwear7.7 Iron & steel products8.1 Knit apparel16.5 Woven apparel11.3 Furniture & bedding15.1 Toys & sports equip.25.0 Machinery-1.4 Electrical Machinery16.9 Others11.5

46. 46

47. 47 Growth in Top-10 Merchandise Imports from India Sector% Growth 07/06 Textile floor coverings1.5 Fish & seafood19.4 Electrical machinery18.1 Iron & steel products6.7 Textile articles4.9 Machinery8.9 Woven apparel-13.2 Knit apparel-5.7 Precious stones & metals2.0 Organic chemicals81.6 Other-12.4 Growth rates for top imports from India

48. 48

49. 49 Growth in Top-10 Merchandise Imports from Russia Sector% Growth 07/06 Rubber-28.8 Wood28.3 Inorganic chemicals-22.4 Aluminum10.4 Fish & seafood17.3 Iron & steel-79.0 Beverages-27.3 Fertilizers66.0 Precious stone & metals-7.5 Mineral Fuel & Oil41.3 Other-35.8 Growth rates for top imports from Russia