1. Political Science 3170 University of Lethbridge Geoffrey Hale September 16, 2010

2. Outline Factors shaping the repositioning of Canada’s international trade policies (1980s) Long-term trends in international trade and investment “Revealed Comparative Advantage” – Canada and the World

3. Factors Shaping Emergence of Modern Canadian Trade Policies (Macdonald Comm.) Canada traditionally relatively open, trade-dependent economy  growing trade dependence : 1960-80 Moving up value-added chain, but still commodity-driven. Growing dependence on U.S. export markets despite sporadic efforts to diversity  1954: 60%1984: 76%

4. Factors Shaping Emergence of Modern Canadian Trade Policies II Growing international competition Japan + “Newly Industrialized countries” (NICs)  growing factor in international trade Growth of international investment  changes in industrial organization... growth of “related party” trade  Major adjustment challenges for Canadian industry  growing consolidation of traditional “branch plant” manufacturing built primarily to service Canadian markets (except auto sector)

5. Factors Shaping Emergence of Modern Canadian Trade Policies III Growth of “Regionalism” Trend towards emergence of regional trading blocs characterized by discrimination against non-members  European Community, Japan + ASEAN, smaller groups Canada “one of few major industrial countries lacking free access to market of over 100 million people”. Growing trend towards coordination of negotiating positions among members of trade blocs.

6. Long-Term Trends in Structures / Flows of International Trade and Investment 1) Long term decline in tariff levels in industrial countries Reflects series of multilateral trade negotiations expanding from Europe to include developing countries under GATT, WTO after 1995. Average tariff levels (industrialized countries): 1950: 20-30% 2006: 4%

7. Long-Term Trends in Structures / Flows of International Trade and Investment II 2) Growth of trade regionalization Emergence of formal and informal trading blocs European Common Market (1958)  Community (1973)  Union (1992) North America  CUFTA (1988), NAFTA (1994) East Asia  industrialization of S. Korea  Indonesia between 1960s and 1990s... reinforced by opening of China and Vietnam to elements of market economy in 1980s.

8. Long-Term Trends in Structures / Flows of International Trade and Investment II Intra-regional trade as major expression of “globalization” 2006 – Intraregional trade - 53% of world trade 2008 – Intraregional trade as % of total trade Europe 72.1% North America49.8% “Asia”50.1% Excl. China58.3% Source: WTO Trade Stats, 2009.

9. Long-Term Trends in Structures / Flows of International Trade and Investment III 3) Shift in share of exports in developing countries from resources to manufactured goods. 30% in 1980* 70% in 2005. Reflect spread of “production sharing” (aka “supply” and “value” chains) Shift of developing country exports “up” the value chain  Growing importance of technology, skilled labour

10. Long-Term Trends in Structures / Flows of International Trade and Investment IV 4) Growth of Foreign Direct Investment in most regions Vertical networks – specialized components in internationally integrated supply chains Horizontal networks – full spectrum of production facilities located in foreign countries Growth in intra firm trade Contribution to greater productivity, export orientation and growth.

11. Long-Term Trends in Structures / Flows of International Trade and Investment V 5) Growth in Trade has Largely By-passed “LDCs” 1.7% of world trade in 1970  1% in 2006 Small, often landlocked countries with per capita GDP under $US 900 (2009) Substantial human and economic deprivation Mainly sub-Saharan Africa (31 of 33 countries) Asia (9) – Afghanistan, Bangladesh, Bhutan, Cambodia, Laos, Myanmar, Nepal, Timor-Leste, Yemen Pacific / Indian Ocean Island States (6) Haiti

12. Trade Liberalization not Panacea Requires complementary domestic policies Stable fiscal, monetary policies Investment in education, infrastructure. Policy regimes not biased against exports Reduced barriers to creation of new firms, more flexible labour markets Quality of institutions (relative transparency, integrity, rule of law).

13. Canada’s Trade with Countries Outside North Aemrica Revealed Comparative Advantage (RCA) RCA indicated when Canada’s share of exports of specific goods (or services) to a particular country is greater than the share of all global exports of that product (service) Key concept in identify existing, rather than potential, competitive advantages.

14. Canadian Comparative Advantage U.S. Markets Rest of World Large Automotive Wood / Paper Energy Sectors Small Chemicals “Misc.” manufacturing Disadvantage Machinery, electrical equipment Varies by region, but overall… Agri-food (esp.cereals, oil seeds) Aerospace Metals and Minerals Wood and Paper Fertilizer (moderate) Disadvantage Automotive products Energy Machinery, electrical equipment (major)

15. Factors contributing to relative comparative advantage, disadvantage Country may have similar pattern of competitive advantage to Canada (e.g. Australia – minerals) Relative abundance, scarcity of commodities in importing country (domestically, among neighbours) Importance increases with transportation costs Bilateral / regional trade agreements providing preferential access Canada – or other countries at Canada’s expense (trade diversion) Differential effects of non-tariff barriers Lack of business, cultural awareness in Canada re: business practices, market opportunities. Weaknesses in Canadian or domestic infrastructure to service particular markets (e.g. capacity limits on energy pipelines to West Coast)

16. Major national, regional differences in Canada’s comparative advantage China India Strong Organic chemicals Minerals Agri-food (fats, oils, feed) Rubber, related products Weak Inorganic chemicals Power-generating machinery Paper and print Precious stones, metals Strong Vegetables, pulses, plants Paper and print Construction, mining, heavy machinery Fertilizers Weak Meat, fish, animal products Inorganic Chemicals Power-generating machinery Precious stones, metals

17. Major national, regional differences in Canada’s comparative advantage Brazil Mexico Strong Fertilizers Sulfur, salt, minerals Paper and print Weak Power-generating machinery Inorganic chemicals Meat, fish, animal products Wood / woodpulp Strong Fruit and veg. preparations Paper and print Energy Weak Power-generating machinery Fertilizers Inorganic chemicals Wood / woodpulp

18. Summary Canadian access to North American markets key factor in overall competitiveness, but also barrier to diversification Large (e.g. BRIC) and medium-sized developing countries provide potential for growing markets, but: Major differences among countries in market awareness, penetration, conditions Major differences in current, evolving areas of comparative advantage. One size does not fit all! Trade liberalization helpful  but development of new markets is largely industry, business-specific responsibility.