Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 12 - Evidence, March 26, 2003
OTTAWA, Wednesday, March 26, 2003
The Standing Senate Committee on Foreign Affairs met this day at 3:46 p.m. to examine and report on the Canada- United States of America trade relationship and on the Canada-Mexico trade relationship.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we have with us Mr. Tim O'Neill, Mr. Bruce Campbell, and Mr. John Wiebe. We look forward to brief presentations from each of you and then questions from the senators.
Mr. Tim O'Neill, Executive Vice-President and Chief Economist, BMO Financial Group, As an Individual: This is the first time that I have appeared before the committee with respect to trade relations or Canada-U.S. relations.
I will focus on the economic links between Canada and the U.S. We recently produced a document on North American economic integration. I promise I will not speak at length from that, but I will give you as brief a synopsis as is reasonable in the circumstances. There are two main areas: What are the elements of linkage and integration between the two countries, and what are the consequences?
We have talked generally about globalization, but, in fact, with respect to trade relations, globalization is really regionalization.
That is to say, if you take the three large regional blocks which compose about 80 per cent of total global output — North America, the NAFTA region, the European Union, Asia, Japan and developing Asia — what you find is that exports within the region, among the countries of the region, exceed 50 per cent of total exports of each of those regions. That figure is up significantly from the early 1980s. In the early 1980s, the figure was about 34 per cent; it is now 56 per cent. What has happened in this period of increasing globalization is that trade has become more regional in its orientation.
Part of the regionalization is due to the inherent role of geographic proximity. Transportation costs are also part of it, but they have become less and less important. Driving this regionalization are two sets of factors. One is that you tend to have a similarity in, and a greater knowledge about customer behaviour among the firms that are engaging in trade; they understand their customer base. For example, Canadian firms know the customer base in the U.S. because it is far more like the Canadian base than it would be the case for European or Asian markets.
The second is institutional structures, regulatory, legal and other, and practices, such as ``business culture'' and labour market behaviour, which tend to be more similar within geographic regions than between them. On the other hand, investment patterns tend to be less regional in their orientation. That is primarily because investment does more than expand the market area for trading firms. That is what trade does. Foreign direct investment, obviously, can involve the acquisition of strategic assets, access to specialized inputs, et cetera.
The reason I raise this particular point is that regionalization is particularly relevant when we try to deal with the concerns in this country about the domination of or the dependence on the U.S. and the U.S. economy. It is also relevant in the context of the periodic interest that emerges in Canada with respect to trade diversification outside of North America. The fact is that this is not unique to North America; regionalization is a global phenomena.
If you look at the specifics of Canada-U.S. economic integration, I am sure you have heard lots of data. Thus, I will be mercifully brief on this part. Clearly, what has happened in the last 40 to 50 years is that both Canada and the U.S. have become more open economies, more trade dependent. In Canada, the export-to-GDP ratio has more than doubled in the last 40 years. The same thing has happened in the U.S., although the U.S. is less trade dependent than we are. In fact, it has become more dependent on trade in the last 40 years.
Obviously, the links that are specific to the two countries are increasing. The U.S. is our largest trading partner in both exports and imports; but it is also the case that Canada is the largest trading partner for the United States. The two-way trade between Canada and the U.S. exceeds the trade between the U.S. and the entire European Union. The trade that crosses the Ambassador Bridge is larger that the U.S. trade with Japan.
Let us look at another measure of integration, which is not, I suspect, one that you have discussed here. I refer to the degree of integration that we see within industry sectors. If you look at the 21 manufacturing sectors in Canada and consider the two measures of integration, ``export intensity'' and ``import penetration,'' you will see that 10 of the 21 manufacturing sectors have an export intensity higher than 50 per cent. That is up from two, 10 years ago. Export intensity is simply the share of total shipments that exports constitute. Import penetration is the percentage of domestic purchases, which are purchases of imports.
Import penetration exceeds 50 per cent for eight sectors, compared to three, 10 years ago. If you have sectors that have both a high export intensity and high import penetration, essentially, you are talking about sectors that are functionally operating as if there were no border. We know that, literally, that is not true; but, functionally, that is the way they are behaving. That is true for five key sectors — machinery production; transportation equipment, autos and auto parts; computer and electronic products; plastics and rubber products; and electrical equipment.
While we tend to think of the North American integration within sectors as being predominantly the case in auto assembly and auto parts, in fact it is second. It is the second highest compared to machinery manufacturing.
The other point is that while many people feel that what has caused this intra-industry activity is trade within firms, multinationals that operate on both sides of the border, in fact, intra-firm trade has declined as a share of total trade over the last 20 years. We are not talking about the dominance in industry sectors in this growing integration, the dominance of firms, because that has actually declined in relative terms.
I will skip over the discussion of investment patterns. Prime Minister Pierre Elliott Trudeau's used a metaphor about a mouse and an elephant to describe the relations between Canada and the U.S. What is it that keeps the mouse awake at night worrying about economic integration?
One of the highest profile issues is the brain drain. Does greater integration lead inexorably to the net movement of Canadians into the U.S. to work?
What is interesting is that that fear, on the basis of the evidence available, is quite unfounded. Even more interesting, if you look at the net migration on a per capita basis, the emigration to the U.S. from Canada has actually declined since the mid-1970s. It is about one-third of the rate we saw in the 1950s and 1960s.
If anything is surprising about the brain drain, it is that it is so low in the 1990s, given that the U.S. outperformed Canada for most of that decade and we had, as a result of the free trade agreement more liberal provisions for labour mobility.
A second issue is concern about the effectiveness of domestic economic policy, macro and industrial policy. On macro policy, in the past 15 years, it is quite clear that monetary policy in Canada and the U.S. have had episodes when they are markedly different. We are currently in the midst of one. The Bank of Canada has been tightening over the last eight months, while the Federal Reserve Bank has actually lowered rates in the same period.
You can look at the late 1980s, early 1990s, when Bank of Canada policy was far more restrictive than that of the Federal Reserve Bank. In the late 1990s, Bank of Canada policy was less restrictive than that of the Federal Reserve Bank.
We have gone through periods when it is quite obvious that monetary policy in the two countries can, and does, follows an independent track.
A similar case can be made for fiscal policy. In the first half of the 1990s, Canadian fiscal policy was far more restrictive than was the case in the U.S. We can debate the merits of that policy. The fact is that, in my view, Canada was forced to reign in the deficit more aggressively because we had had a more serious problem emerging. In the current case, Canada continues to operate, at least at the federal level, with modest surpluses. We know that in the U.S. they have quickly moved into a deficit position that is likely to get larger.
The one area in which it might be argued that Canada has been affected by competitiveness concerns with the U.S. might be in tax policy. Even there, the evidence is mixed. Certainly, we have lowered capital gains tax to U.S. levels. We have lowered corporate income tax rates to the point where, if we follow the schedule, and the U.S. does not changes their rates, we will move below U.S. rates. Personal taxes are higher and are likely to remain so than those in the U.S.
A third area of concern is productivity and living standards. There is a general concern that Canada is not keeping up to the U.S. on productivity growth and on living standards improvement.
I would like to make a general point here. If you look at productivity and living standards over a long period of time, which is the way to do that because we are talking about structural, not cyclical issues, it is true that Canadian- U.S. productivity growth rates and living standards have diverged at different periods of time.
There have been periods when we have been growing at a faster rate than in the United States. It is nonetheless true that over the five-decade period, the productivity growth rates are remarkably similar. That is not surprising given the degree of increase in integration that we have seen in the two economies over that period.
In the last decade, labour productivity and manufacturing have lagged behind the U.S. but that is almost entirely attributable to the fact that the high-tech sector was faster in the U.S. than in Canada in productivity growth and had a higher weight to begin with; they were larger in terms of their share of total manufacturing activity.
If we look at living standards, growth was faster in the United States in the first half of the 1990s but slower than that in Canada in the second half of the 1990s. The key reason for the switch was that in the first half of the 1990s we had a higher unemployment rate than in the United States. In the second half of the 1990s our labour market performance significantly improved. As a consequence, living standards improved at the same time.
In Canada we also focus on the sensitivity to the U.S. economy in general growth and cyclical terms. The Canada- U.S. economies have flown similar flight patterns over the last 40 years but there have been periods when we have been flying at different altitudes. Currently we are flying at a higher altitude than the U.S. Generally speaking, the correlation between the two economies' growth rates, while it has shown some volatility, has shown an upward trend over the last 40 years.
We can point to three periods, in particular, that demonstrate the point that we do not necessarily grow completely in sync. In the first half of the 1990s, Canadian growth exceeded that of the U.S. We were an energy exporting country and we benefited net from the rising oil prices.
In the first half of the 1990s, U.S. growth exceeded growth in Canada because we were faced with tighter monetary and fiscal policy. From 1999 to 2002, Canadian growth has outpaced the U.S. by about 1 percentage point and we do not expect to see a similar performance this year.
I will speak to that in my final set of points. The current divergence that we are seeing between Canada and the U.S. could be the longest period of sustained outperformance by one of the two countries since the 1960s. If Canada outgrows the U.S. this year, as I expect it will by about one-half percentage point, that will make it five years. Cumulatively it will not have been the largest gap between the two countries. The recent outperformance is due to four factors, none of which is directly traceable, in my view, to free trade agreements or to North America integration.
First, we have had more stimulating monetary conditions over the past four years, not primarily through interest rates but through the combination of interest rates and a declining Canadian dollar.
Second, going into the downturn in 2000-01, Canada had what I could describe as a less exuberant stock market. With the sharp rise in the net worth of U.S. households, compared to those in Canada, when the correction occurred in equity markets it was substantially downward in the U.S. That certainly affected consumer spending in the U.S. to a greater extent than it did in Canada.
Third, high-tech business investment in Canada was slower and comprised a smaller share of the GDP than was the case in the U.S. When the high-tech wreck occurred in 2000 in the U.S., it demolished the entire train and Canada took out the caboose.
In the late 1990s boom, the labour market became overheated in the U.S. but in Canada, we never quite reached full employment. As a consequence, when the U.S. went through the adjustment process in its recession, it shed jobs at a substantial rate in 2001 and it continued to do so in 2002. In Canada we did not loose jobs net in 2001 and we grew them at the fattest pace last year that we have in past 15 years.
Those are the elements that caused the Canadian outperformance relative to the U.S. It will not continue. This is not a structural phenomena but it is a cyclical phenomena. It will not last forever because we have not seen a structural change. We have seen a couple of key factors that have converged to make it possible for Canada to outperform temporarily but not permanently.
I will conclude by saying that there may be concerns about the extent to which integration with the U.S. can and does create problems for Canada in economic terms. You would be hard pressed not to conclude that I believe, based on the comments that I have made, that the Canada-U.S. Free Trade Agreement, which is the culmination of the process of integration over a much longer period of time — at least one century, has been a positive, on balance, for Canada and for Canadians.
The Chairman: Mr. Campbell, please proceed.
Mr. Bruce Campbell, Executive Director, Canadian Centre for Policy Alternatives: Thank you for inviting me to appear before the committee to discuss issues relating to the economic relationship between Canada and the U.S. in a NAFTA framework.
Inviting me suggests that you are also open to hearing the views and the voices of critics, which I have been for a long time.
You have copies of my presentation. You will receive from me an abridgement so that I stay within the 15-minute period. I have left a table for your reference, with the clerk, because the investor state mechanism is the record of disputes under that provision. It is a significant table that you may look at over the course of your hearings. I thought I would leave that with you, although it is not central to my presentation.
There has been a great deal of talk these days about moving to levels of economic integration. I want to begin by describing Canada-U.S. integration as a process with a variety of possible tracks and speeds from small steps to quantum leaps.
You should know that ``integration'' is defined by the Oxford dictionary as ``a process where two or more entities come together to form a single entity.'' Implied in the definition is an equality of the separate entities and a new entity that combines equal elements of the pre-existing entities.
In a process of coming together where one entity is dominant, the resulting combination tends to resemble that of the dominant entity. This is called ``assimilation.''
The distinction is relative because we are talking about a process that often more closely resembles assimilation than it resembles integration. Nevertheless, I will stick with the latter term because that is the common usage.
Integration is happening incrementally through the actions and decisions of corporations within the NAFTA policy framework. It is also occurring explicitly within a number of created NAFTA-established bodies. The Chapter 20 NAFTA commission has 20 of those or more on a whole variety of issues. It is also happening through explicit harmonization measures taking place in forums outside of the NAFTA apparatus, most notably in the post-September 11 measures to harmonize security, immigration, refugee policy and practices, et cetera.
It is happening implicitly through social policy harmonization and tax policy harmonization. NAFTA does not mandate this kind of harmonization and it is not inevitable. However, it facilitates the tax cut agendas of neo- conservative governments.
A second track is the FTA negotiations, which is currently on; that is proceeding very much in the NAFTA mould. In the same way that NAFTA was an extension and deepening of the original bilateral FTA, so the FTAA, as it seems to be shaping up, is not only an extension but also a deepening of the NAFTA model.
A proposed integration track, which is characteristically or variously characterized as piecemeal or gradualist, envisages a series of leaps, some big, some small, toward deeper levels of integration. I am sure that people have appeared before you on several of these, from customs union to common trade policy to common security perimeter, et cetera, the most radical of which is so-called ``common currency.''
Finally, the proposed track, which I am sure you also are well aware of since it has been discussed broadly, is the notion of the big idea or the grand bargain. I will not go into that in any detail except to say that the essence of that is to trade economic security, which is Canada's goal, and homeland security, which is the United States' goal. For Canada, that means putting the remaining components of our sovereignty on the table in one mother of a negotiation — from culture, energy, customs union, agriculture, you name it — in return for enhanced access and secure access, which we still do not have, for Canadian goods, services and for mobility, for knowledge workers and for full citizenship for Canadian investors in the United States. That is the big idea.
The proponents stress the window of opportunity, although, in light of recent events, I am not sure that opportunity is there. However, it is a serious proposal and the full weight of the business lobby is behind it. We may see it come back, probably in a post-Chrétien government.
There are those like myself who do not think the Canadian government should be actively pursuing deeper levels of integration with the United States along the tracks outlined above. My approach is a minimalist one. I think further integration should be avoided or reshaped where possible, and reversed where feasible.
In my view, the impact of nearly 10 years of NAFTA and 15 years of the FTAA has been negative when measured against the only criterion that ultimately counts. When evaluating public policy we must ask: Has it bettered the lives of our citizens?
These agreements imbed neo-conservative structures and policies. They radically change the balance between the market and government, between investor and citizen rights; and, worse, they freeze this imbalance in a constitutional arrangement, which is difficult or impossible to reverse.
In looking at NAFTA's impacts, it is important to stress, though, that causality is complex, that not all bad things that have happened can be attributed in whole or even in part to NAFTA. However, there is a fundamental dynamic that operates between a government pursuing neo-conservative policies and operating within a NAFTA framework, which tends to magnify the negative pressures.
The complexity of causation and the interaction between NAFTA and neo-conservative policies, all on a varied landscape of social and labour market institutions, do affect social and economic outcomes differently. Even if one were to deny the negative effects of the result of NAFTA, one can surely ask why it did not deliver on its own promises: the promise of secure market access, the promise of enhanced productivity, the promise of more and better jobs, of stronger social programs and generalized prosperity.
What have been the major NAFTA-related impacts? What problems has it helped to create or exacerbate? In what areas has it not solved the problems it was supposed to solve? I am assuming that some of these questions are questions that you are trying to answer in this committee.
I put forward a list that is by no means exhausted or exhaustive. I will not go through all of them, but I will go briefly through some of them as my time is limited.
The period of economic and social restructuring has been long and painful. It has been marked by income loss, employment loss, growth of insecure and precarious employment and, though the worst is over, the restructuring continues. These are not unintended consequences of NAFTA, since NAFTA and its policy siblings were designed to transfer power from workers to management and investors, from wages to profit and from the public sector to the market.
What have been the net employment effects? Despite the much improved job creation record of the last few years, and I would say it is driven mainly by demand within the domestic economy, unemployment is as high now as when the FTA came into effect. I would cite a little-known Industry Canada study that came out a few years ago, which showed that in the first eight years of free trade, new jobs from increase in exports were actually more than outweighed by jobs displaced or destroyed by the growth of imports. The net effect of the increase in exports and imports was, in fact, negative. It is not something that is greatly talked about, however.
Negative social adjustment and harmonization is most dramatically evident in employment insurance. This has taken place under cover of the war on the deficit; and a cut in taxes, largely for upper income groups and corporations, has taken place under the cover of competitiveness. I do not think either was necessary or inevitable under NAFTA. Neo-conservative governments pursued an agenda that is reinforced, and not mandated, by NAFTA.
Though still much less extreme than in the United States, 15 years of free trade has seen major increases both in income inequality and wealth inequality. There also has been a deepening of poverty, homelessness, hunger and the use of food banks. NAFTA alone did not produce these effects; they are the product of a neo-conservative policy package as a whole, of which NAFTA is a key component.
NAFTA contains protections for social services such as health care and education, but these exemptions, as the Romanow Commission noted, are seriously flawed. In tandem with GATTs, they constitute a threat to domestic policy flexibility and options around health care reform. As yet, foreign penetration in this sector is limited. However, this is beginning to change; some governments, after years of financially starving health care, are opening the door to more for-profit delivery and financing. The very commercialization of health care weakens the effectiveness of the exemption and increases the possibility of a challenge from a foreign investor. The investor state dispute mechanism poses the most immediate danger since it is not subject to NAFTA's social service exemptions. Serious efforts need to be made to eliminate or limit the scope of investor state.
The gutting of the Auto Pact, namely the elimination of its ability to use the stick of mandated minimum content requirements to secure investment, has greatly intensified the competitive race for auto assembly and auto parts plants among the many jurisdictions of North America. As the Government of Ontario has recently learned, if you want to stay in the game, you have to make huge expenditures, both in direct and indirect subsidies and other incentives, to attract and maintain these investments. These have a huge fiscal impact. They reduce resources available for health, education and other social priorities.
There have been productivity increases in some sectors but not over all. The productivity gap that was supposed to close as a result of these agreements has not lessened, and there has been a disconnect between productivity increases and wage increases.
Canada has lost out to other NAFTA partners, notably Mexico, as a preferred location for foreign investors that want to produce for the North America market.
There has been no significant diversification of Canada's industrial structure. The weight of resource and resource manufacturing is still about where it was before the outset of free trade. Although there has been some growth in the high-tech sector, the deficit in high-tech product remains high and Canada's poor record in private sector research and development remains.
Finally, as anticipated, the huge increase in north-south trade weakened east-west commercial linkages, and our national transportation and communication structures have weakened. When combined with the weakening social bonds via federal cutbacks, et cetera, the questions must be asked: How much has this affected national unity? To what extent has North American economic integration, which has clearly produced economic disintegration relatively, weakened national, social, cultural and political ties?
I will conclude by saying that, except that NAFTA cannot be fundamentally renegotiated, at least in the foreseeable future, what should a progress Canadian government do to reverse the social decline that has occurred under free trade and to manage its economic relationship with the United States more or less within the existing framework and do it in such a way as to slow down, reshape or reverse the integration process? Again, I have a list that I really do not have time to go into in detail.
The first point is to put the emphasis on strengthening the national economy through a variety of macroeconomic, labour market, industrial policy pools. They have been affected variously — some a little bit, some significantly — by NAFTA. Although there are constraints, there is still a lot of national policy space remaining under the NAFTA. The government should identify and maximize that space, test the limits of it, where appropriate and, adopt a more activist economic policy. I have included a number of specific measures as they relate to NAFTA.
Second, we should deal with bilateral issues and irritants as they arise. For example, we must ensure minimum delay for goods, services and people crossing the border. We should push NAFTA partners to strengthen the social security exemption and constrain or eliminate the investor state mechanism. We should act multilaterally in commercial and other areas to contain United States unilateralism through international laws, although we well know there are limits to that.
The WTO dispute settlement mechanism was one of the goals in NAFTA and, although we did not achieve it, we achieved something greater in dispute settlement. We got more of what we wanted in dispute settlement in the WTO. We got a definition of subsidies; we got some common rules. We never got that in NAFTA and that is why most disputes of that kind are going to the WTO.
I would also like to emphasize the need to work in multilateral fora in areas of human rights, environment, health and culture.
I will stress a number of conventions, which I have listed. The last of those is the cultural diversity instrument, which is designed to constrain and circumscribe commercial agreements. Happily, Canada is taking a lead in that respect.
The tendency among those who have brought us NAFTA is to dismiss its negative effects and to forge ahead with the agenda. I want to quote John Ralston Saul, who observed that the memory of the 1998 election has been suppressed. He talks about a kind of induced Alzheimer's. He says:
We seem to be unable to allow ourselves the dignity of engaging in this sort of straightforward reconsideration of our acts. After all, questioning is the great strength of democracy; the ability to doubt without losing face. Instead we charge on, chanting `Free Trade - Prosperity'.
I submit that NAFTA has not done what it was supposed to do. There should be an honest debate before proceeding down the road to deeper integration, whether by quantum leaps or small increments. Questions need to be asked.
Senator Corbin: Would the witness tell us briefly what the Canadian Centre for Policy Alternatives is?
Mr. Campbell: Established in 1980, the Canadian Centre for Policy Alternatives is an independent policy research organization. It has roughly 8,000 individual and organizational members who also make up the basis of our funding. We produce policy analysis and research on a wide range of economic and social policy issues. We have offices in Ottawa as well as in British Columbia and Manitoba, with new ones starting out in Saskatchewan and Nova Scotia.
The Chairman: Please proceed with your presentation, Mr. Wiebe.
Mr. John Wiebe, President and Chief Executive Officer, Asia-Pacific Foundation of Canada: Thank you for inviting me here this afternoon. I will not get into a debate with my colleagues here about NAFTA. Suffice it to say that our relationship with the United States in terms of economic trade is probably the most important one we have.
I want to make the point that we ought to look at diversifying our trade with other countries. Canada's exports to the U.S. are about 87 per cent of our total exports. In fact, if you add Canada, the United States and Mexico, NAFTA represents 89 per cent of our total exports, which amounts to about 31 per cent of our GDP, so we are very dependent at this point on the United States. Whether or not the NAFTA agreement has fulfilled all of its obligations, I would argue that the reason we have a trade surplus of the magnitude we have is the United States. We run deficits with practically every country other than the U.S.
I would like to make the case for us to look at the Asia-Pacific for trade. I would like to speak briefly to the opportunities we have and conclude with a plan of action, and I will do all of that in 10 minutes.
Why the Asia-Pacific? Asia is recovering from the financial crisis of 1997. While the notion of the Pacific century may have been over-hyped at the time, I believe it has simply been delayed. The facts speak for themselves. Asia-Pacific accounts for two thirds of the world's population; it accounts for 40 per cent of the world's trade; and it has the fastest growing economies in the world.
Our total trade with the Asia-Pacific amounts to only approximately $70 billion annually, but it is the highest after the United States. We do run approximately a $30 billion deficit in trade. In that sense, we have an opportunity.
In terms of sheer size, Northeast Asia, Greater China, Korea and Japan represent the bulk of our past, present and future Asian commercial interactions. Add to this list India, more for potential than for existing commercial ties, and we have a reasonable short list of the geographical locations that we ought to be looking at.
I will quickly review the highlights of the countries with which I am dealing.
China is probably in the midst of one of the most profound economic transformations in the modern era. The process is provoking commensurate changes in virtually every other country in Northeast Asia. Chinas' economy is enormous. In dollars terms, its GDP is the sixth largest in the world. If we use purchase power parity, it is the third largest after the U.S. and Japan.
Its growth rate is extraordinary. Last year's official figure of 8 per cent makes it the most dynamic economy in the world. Some would argue with that, but even if we cut it down by 2 per cent, it is still a very large number.
China is the world's workshop. With manufacturing wages in China averaging about 60 cents an hour, that is 5 per cent of the American average, and a seemingly infinite supply of labour, it can produce practically anything. In fact, 70 per cent of China's exports today are in areas where cheap labour is useful.
In 2001, China's exports rose by 23 per cent to $266 billion. That accounted for 4.4 per cent of all the world's exports. Its trade surplus increased to over $30 billion.
China is also becoming a consumer. Sales of cars in China last year exceeded $1 million for the first time, and that figure is growing by 20 per cent per year. China already imports more from the rest of Asia than does Japan.
China has $1 trillion in household savings. Most of it is lying fallow, if you will, in sprawling, dysfunctional state banks. A mere $16 million is invested in mutual funds. The Bank of Montreal would like to get hold of some of that money. If the Chinese introduced a funded pension scheme, their mutual funds could grow to $400 billion by 2010.
Last year China surpassed America as the world's largest recipient of foreign investment at $53 billion. That is not anywhere near where the U.S. inflows have been traditionally, but they have gone down substantially. Notwithstanding that, figures for China in the next few years are looking at $50 to $60 billion annually in FDI.
We have a country that is growing fast and that provides an opportunity for Canadians to diversify trade. Our trade with China, if we look at it today, and I do not have graphs with me, is increasing every year by 10 per cent to 15 per cent.
Japan is our second largest trading partner. We think of Japan as a country in crisis, and we think of it as being stagnant. However, it is still the second largest economy in the world, representing 13.5 per cent of the world's GDP.
Its per capita income is amongst the highest in the G7 countries. As a percentage of current GDP, the value of Japan's two-way foreign trade was only 16 per cent. It is not as trade dependent as Canada, which is around 60 per cent. Germany is around 57 per cent. China is about 40 per cent. The U.S. is around 12 per cent.
As we can see, Japan, as a consumer economy is potentially enormous. Its GDP is mostly internal. Restructuring is underway, although the pace and depth of reform in Japan are less impressive than what is being observed in China. We feel that it would be a serious error to dismiss these efforts as inconsequential.
Signs suggest that Japan is on the verge of a major transformation that will be important to Canada. There is an influx of foreign investment. In 1981, the share of foreign ownership in the Japanese stock market was 5 per cent; today it is 20 per cent. That is changing the dynamics of the Japanese economy.
The takeover by Nissan of Renault and the long-term credit bank by Ripplewood are changing the corporate culture of Japan. Again, this is having an effect on our potential.
The job market in Japan is evolving. Traditionally, we had the iron rice bowl, where people were not laid off. We do now have unemployment. That is not good, but that is a recognition of the opening market.
We are seeing political change. There is a realignment between the civil service, the legislature and the PMO and the rise of civil society.
Japan is changing and coming back. Japan holds a great opportunity for Canada.
Let me look quickly at Korea, which has also rebounded strongly following economic difficulties of the 1990s. Its per capita income last year exceeded $10,000 U.S, which shows how quickly Korea has moved. Twenty years ago the per capita income was around $3,000. Korea is becoming an opportunity for Canada.
In India, our current trade is only $2 billion but increasing rapidly. It was $900 million in 1991 and is $2 billion today and moving up quickly. Services are the most dynamic sector that we would look to for India.
This was a quick overview of the region, one in which we have a great deal of opportunity.
Mr. O'Neill mentioned that one of the trends that we are seeing is intra-regionalization or intra-region trade. That is very true.
The Asian region is trading more with itself today than before. Japan, for example, is exporting less to Canada and more to China. Chinese trade with other Asian nations is increasing. Part of that is a desire, frankly, to be less dependent on the United States. Part of it is an understanding of failing markets in the U.S. Part of it is China's accession to the WTO.
All of those reasons, amongst others, are making those countries look inward rather than outward. The other part they are looking at is the regionalization in the EU and in North America. They are reacting to it. We think we need to spend time ensuring that we are not left out of that particular activity.
Indeed, our NAFTA partners, the U.S. and Mexico, are ensuring that they are not left out. The U.S. is moving fairly aggressively in looking at free trade agreements with Asian countries. Mexico is in negotiations with China and other Asian countries. One of the attractions that Asian countries have for a free trade agreement with Mexico might be access to NAFTA.
While Canada has had one foray into FTAs in Asia with Singapore, we believe we ought to look very seriously at doing more.
I will not go through sectors of opportunity. The Department of Foreign Affairs has many more resources than we do. However, it is important that we do have a sense of where our comparative advantage is in terms of the Asian marketplace and that we spend some time and effort focusing on those areas in terms of developing our brand and our marketing channels.
Environmental goods and services is an area where Canada has a good brand with the potential to develop in a real sense in that marketplace. We have the opportunity to become the number-one supplier to Asia.
Education and training is another area of opportunity. We already have an increasing number of foreign students from the region in Canada. We are increasingly taking education out to them.
There are opportunities in the fields of tourism, film and entertainment. Canada's technologies are world-renowned. We recently had an Oscar for our animation work. This is an area that we need to develop further.
Biotechnology, medical sciences and natural resources are also areas in which we could seek opportunity.
How do we do this? There is a case for Canada engaging Asia in a greater way than we have in the past. There are opportunities for us to diversify our trade with the region and increase our economic activity.
What should we do? Engage, engage, engage. We must initiate discussions on free trade agreements. A couple of years ago we suggested it was time to devote a commensurate amount of effort to liberalization outside North America as we had inside. At that time, we suggested Japan and Korea, given our Asian focus at the Asia-Pacific Foundation.
We also pointed out that many bilateral initiatives should be designed as intermediate steps towards broader economic liberalization. That is a means rather than an end.
In May of last year, we added some structure to the suggestion. With specific reference to Japan, we suggested that rather than attempt to negotiate a formal FTA with Japan, Canada should think about adopting a comprehensive economic agreement similar to the one we have with Singapore.
We also believe that we need to develop a better brand or image in the region. We have indicated in previous reports that Canada is losing market share in Asia. In fact, as our trade goes up with Asia and we sell more in real dollar value, we are losing market share. That means we are not keeping up with the growth in the region. Image or brand-wise, we are widely regarded as a friendly, clean country with plenty of clean, natural resources and a willingness to tolerate diversity. However, we are manifestly not seen as purveyors of high technology, nor generally associated with the provision of high-quality goods and services in many industrial categories. That is an old image of Canada, but it is also a real one. Our exports to the region are dominated by natural resource products and unfinished goods.
The idea is to brand Canada as something beyond that image. We do have areas of comparative advantage, which I laid out earlier, that we need to work on. We also need to build a better brand for Canada in the region.
We need to strengthen and coordinate the people-to-people links. We have an opportunity, with the immigration from Asia to this country, to use what we have called in the Asia-Pacific Foundation, our ``hidden advantage.'' The Asian community is not yet engaged with the Canadian community in a way that benefits long-term exports, or business development in this country. We need to work on that.
Government needs to continue to participate in its multilateral activities and undertake a lot of coordination, because we have a lot of activities going on in Asia these days through different departments and agencies, but little coordination in terms of track two activities. We think that is important.
Finally, we should promote investment in Asia. Canadians do not generally recognize outward investment as an economic development tool, but it is. We should be looking at opportunities in the region. Given that they are just on the upswing, we think it is an opportunity. Manulife has taken the opportunity and done well in Japan. We think that kind of example should be followed.
In summary, there is real potential in the Asia-Pacific for Canada to diversify its trade. It will require government leadership in terms of trade facilitation, tariff reduction, mutual recognition agreements and a host of other path- clearing activities. It will require coordination and cooperation between the governments, communities and businesses.
The Chairman: This is our twenty-second meeting on this subject. We have acquired a bit of information. The bell in the background is the House of Commons bell and not the Senate bell.
Senator Graham: I thought all the witnesses were very interesting and rather divergent in their views.
I have to confess that Mr. O'Neill and I have something in common, because we come from the same part of the world, where some people regard their birth as a personal accomplishment rather than a biological accident. However, I shall restrain from discussing the complexities of trade between Canada and Cape Breton.
I welcome you here, Mr. O'Neill. Both verbally, and in this economic integration report, you note that the share of intra-firm trade and total trade between U.S. and Canada declined in the 15 year period of 1983-98. Today you told us that the U.S. intra-firm exports dropped from 51 per cent to 36 per cent of total exports. What does this result say about the ability of Canadian firms, not possessing large U.S. parent companies, to supply the U.S. market?
Mr. O'Neill: If you see a decline in the intra-firm trade, and for the most part intra-firm trade occurs in very large corporations, like the auto assembly firms, it suggests two things. First, they are doing a lot more outsourcing, and second, the competitive capacity of smaller firms to break into markets where larger firms have traditionally been dominant, clearly exists. We do not have direct evidence. We do not have enough detailed data on the firm-by-firm export activity and we cannot get it because it is confidential information. However, the inference that would logically flow from this is that Canadian firms clearly have been able to complete effectively with larger firms, both in general markets and trading with or selling to those larger multinational companies.
Senator Graham: We have heard concerns about a so-called ``hollowing out'' of corporate Canada could occur, if corporate head offices shift location to the U.S. Should we be worried about that occurring?
Mr. O'Neill: In my view, no. The evidence does not suggest that that is what we are seeing. The fact that companies are listing on the New York Stock Exchange is not evidence of hollowing out.
There are two facts. One is that Canadian investment in operations in the U.S. is now almost equal to the flow in the other direction. That might give rise to the concern, but what you see happening is that Canadian firms are setting up operations in the U.S. market, and the share of total activity and output of those operations, is actually quite a bit higher than the share of total employment. Companies are setting up operations, but they are still using their head offices in Canada. The centralized back-office operations, for example, would continue to occur here in their home country. To this point, at least, any concern about hollowing out, based on the admittedly limited evidence we have available, is not actually occurring.
We have only one other element of indirect evidence. If there really were evidence of hollowing out, it should show up in what could be regarded as high-end jobs. Those include managerial and professional employment, highly technical and skilled jobs. In Canada, beginning in the second half of the 1990s and up to the most recent period for which we had data, we were growing jobs in those categories as quickly, or more quickly, than they were in the U.S. If you were looking for evidence of hollowing out, you cannot find it in the types of jobs that you would expect to see Canada losing.
Senator Graham: I know Mr. Wiebe is concentrating on Southeast Asia. I would like to ask a wider question of the panel. Do you think that decision-makers in Canada have focussed too much of their investment and trade attention on the U.S. market, at the expense of emerging markets in Asia?
We have heard from excellent witnesses about a customs union with the U.S. We heard from witnesses, some saying it is not on, some saying it is unrealistic, and some saying we should work towards a customs union.
One of the first witnesses we had was very much in favour of that.
The Chairman: Mr. Dunn.
Senator Graham: Perhaps the witnesses could share their views on the merits of entering into a customs union with the U.S.
Mr. Wiebe: Let me start with the first question about government concentrating too much on the U.S. The increase in trade with the United States has had the unintended consequence of diverting our attention from other areas. I believe the government should encourage other free trade agreements. I am saying government ought to lead in this one, in the context of saying there are other places we can go, not to say that we should not be continuing with the U.S.
Mr. Campbell: I believe in trade diversification and that the government should promote it.
We hearken back to the 1970s and the third option that was attempted not very successfully. I do not think that is a reason not to revisit it, and to examine what went wrong. We should examine why it was not successful and consider what measures we can take to ensure it is more successful this time around. Our trade relationship, which has become so concentrated in the last 15 years, has reversed itself, to some extent. Let us be realistic about what the possibilities are, but surely there is a great deal of room for diversifying. I am totally in agreement on that item.
We have just commissioned a study of the customs union proposal regarding its feasibility, desirability and possible implications.
Part of the difficulty is defining a customs union. Are we talking about common tariffs or trade policy positions? Does it mean we do not have an independent position at the WTO or the Americas negotiations? What does it mean, and what are the implications for our sovereignty, our ability to make independent decisions in the economic realm, and in pursuing a different economic and social path. They are interconnected. It is a serious question. It has been on the table and it deserves study. I gathered the Commons committee in its report committed itself to looking at that issue in more detail.
The Chairman: We have been looking at it, too, Mr. O'Neill, and we have developed some thoughts on it.
Mr. O'Neill: There are two components concerning diversification. First, is it practical and achievable? My earlier comments about the regionalization of trade suggest that it is not a likely path that would be successful. Second, would it be desirable? I do not know that you would you want to seek diversification for its own sake, that is, try to divert trade for a more diversified trade pattern. If you thought it would generate greater benefits for Canadians, presumably, that is what you would do. If we are linked to what has been, at least over the last decade, if not more, the strongest growing economy in the world, I would think that is a wagon we would want to be hitched to. We have benefited, but I do not want to cover that same ground again.
Mr. Campbell is quite right regarding a customs union. It depends on how you define it. A customs union in the technical language of economists and trade specialists is a common tariff structure with the rest of the world; it does not mean much more than that. It does not mean a common labour market or what the European Economic Community has.
It could well be defined as ``the big idea.'' The big issue is practicality. I suspect we may not be ready to take those particular steps. Whether or not it is desirable depends upon the analysis of the consequences.
I have suggested that with the integration we certainly have not seen any significant problems: the hollowing-out issue or the brain drain problem. We have continued to run effective and separate macropolicy. We have separate industry policies, to the extent that we have any left, whether it is marketing boards or domestic policy with respect to airlines, and so on. We retained all those in the context of a free-trade agreement with the U.S.
With respect to social policy, Canada is near the top of the league tables in the share of resources that it devotes to the two primary social policy areas of health care and education. If you look at the structures of two areas, you would be hard pressed to see any demonstrable changes over the last 15 years in the structure of how they are administered and delivered. Certainly, there have been changes in resources, but would not regard that as a consequence of the Free Trade Agreement. It is as a result of the provincial and federal governments having to come to grips with fiscal problems.
If you are going forward, a customs union is worth debating. I am not sure that at the margin any increased benefits would be that substantial. After all, the Free Trade Agreement was a culmination of liberalization between Canada and the U.S. that had been going on for several decades. When you look at the amount of reduction in tariffs that occurred as a consequence of it, it was rather small. That is one of the reasons you did not see a big impact on jobs, because we had liberalized and adjusted significantly over the previous 40 years.
If the question is whether you see much of a change, it depends on how you define it and what the components are. If you narrowly circumscribe it as a common tariff structure, I am not sure that the impact, for good or ill, depending on the side of the debate you want to stand on, will be that substantial
Senator Andreychuk: Mr. O'Neill, you indicated that you did not think there was a brain drain. Can you comment on competitiveness? How competitive are we in our relationships with the United States and around the world? Do you think we have, as the Canadian Manufacturing and Exporters have said, an ``excellence gap,'' in that we have some excellent companies, niche markets and people working in them, whereas for the rest, we are less productive and competitive? What is your comment on that?
Mr. O'Neill: The only direct data that we have to make that judgment is productivity data. When you look at the data on sector productivity, you have about 70 per cent to 75 per cent of the economy that you cannot measure directly; that is the services sector. If you look at manufacturing, which is where the focus has been, for the organization that you referred to, the data indicates that with respect to the U.S., the productivity growth in the vast majority of the manufacturing sectors has been approximately, in some cases, equal to, better or worse than in the U.S.
The gap in productivity growth in manufacturing that we saw in the 1990s was directly attributable to one or two sectors that were producing high-tech products. They were growing faster than in Canada and they were a larger share of total activity to begin with, so in that sense, those sectors were ``more competitive and productive'' than the Canadian equivalents on that basis alone.
The evidence is that the other sectors were as competitive as required to sell effectively and competitively into the U.S. and other markets. Look at the growth in trade. That suggests that we are very competitive. That is the inferential data that we can use. If we saw a slide in trade that would suggest that we have a problem on the competitiveness front.
Are there individual firms? Of course, there are. However, with the high-tech sector specifically, the key problem that we faced there was that we had such a poor economic environment in the first half of the 1990s, we did not invest in those sectors to the same extent as the U.S. did. We began to catch up in the late 1990s. Growth in investment in the high-tech sector was faster in the last several years before the wreck. I suppose what we were then wringing our hands over we can now be thankful for — namely, that we had not grown as quickly as the U.S. through the 1990s — because we would have seen a much bigger impact than we actually experienced.
I do not see any sector of the Canadian economy that is either fundamentally impaired from a competitive point of view or, if it is less competitive than we would like it to be, that there is anything preventing it from engaging in the investment that would be required to do it.
I do not see any role here, if I may be permitted to say so, for government policy to ``help'' those sectors catch up competitively. The people who own those firms and those who work in those firms know how to become more competitive, and are doing so.
Senator Andreychuk: Senator Setlakwe and I have just returned from another part of the world. We tried to track trade patterns outside of the U.S, and we found the embassies forthright in giving us their trade statistics with other countries. They told us however, that they undervalue the figures because the trade does not come directly into those countries.
Let us take Poland as an example. Much of the trade is as a result of Canadian business being elsewhere in the world and then moving goods and services into Poland. In one case, we were told that about 50 per cent more trade was occurring with these sectors and countries than we see in the statistics.
Do we have to find a different ways of collecting our statistics and doing our trade? We have seen examples of companies setting up their business in one country and sending goods through another country to a third country.
Mr. Wiebe: We do not have the accurate numbers for most of the countries we deal with. We estimate that our trade with Asia is probably underestimated by 20 per cent to 30 per cent. We do not have a good handle on services. Some of our merchandise trade goes through the U.S. into those countries. It is a measurement issue that Statistics Canada is aware of. We are all aware of it. I am not too sure how to deal with it. We could make the point that we are underestimating our trade.
We can see, too, that the numbers for the countries that we are trading with are different from our numbers. Japan says that it is importing more from Canada than we say we are exporting to Japan. If we use their numbers, we will get a closer idea of what we are looking at.
Senator Andreychuk: Mr. Campbell, you do not seem to like free trade. It seems that you prefer the third option. I am old enough to remember that third option. The world was a different place then.
If we are to trade elsewhere, we will still be talking about trade agreements of some sort, whether they are regional or otherwise. I do not see the distinction between trade with the U.S. or another country. We will be trading under a World Trade Organization system with its agreements and concessions. Please comment.
Senator Kelleher is not here to remind us that we have not done well to break down the costs and the structures. Have you done any work on that issue?
Mr. Campbell: No, I have not done any work on that particular subject.
There is no doubt that going with market-centred approach within the NAFTA structure has caused certain changes that are quite dramatic. The decision to go into the FTAA and to expand it into the NAFTA was a radical policy shift. The dramatic result is evidenced in terms of the trade flow and the proportion of our GDP that is accounted for by exports, in terms of the proportion of manufacturing production that is exported and imported. All of those things have been quite dramatic. We have seen a consequent disintegration in relative terms of east-west trade.
I cannot see liberalizing east-west trade further, because it is already more liberalized than the north-south trade. There has been a relative shift in the trading patterns. Breaking down whatever barriers remain will lead to a reversal of that pattern and it will lead to a continuation. How far do we go before that affects our national, social, cultural and political bonds? That is a question that deserves to be asked.
I support the trade diversification argument, but I would not put many eggs in that basket. Industrial policy shifted in the 1980s and it was formalized with NAFTA towards a market-centred approach. The American market was supposed to do great things for our economy in terms of modernizing and diversifying the industrial sector and closing the gap, and so on. It has not fulfilled that promise.
I suggest we look at a more activist industrial policy, and at the options that were used in the Trudeau era. There were some great successes during the Trudeau years. One of my pitches would be to re-examine the space and there remains a lot of space within the NAFTA structure, even though it is not positive to an activist industrial policy. Look and see what you have, maximize it and test the limits of it, and employ it and focus on the national market.
The Chairman: Some original members of this committee dealt with the original Free Trade Agreement. I remind people that Donald Macdonald was in favour of the original Free Trade Agreement because of increasing legal disputes with the United States. The United States was becoming more protectionist at the time. It was not a trade promotion project so much as a trade protection project because of the increasing legal fees.
Professor John Helliwell of the University of British Columbia told us that the Free Trade Agreement has had little effect on our trade with the United States; that figure is 85 per cent. He said that it is the exchange rate that has been far and above the largest factor in our increase in trade with the United States. Professor Harris of Simon Fraser University said that the Free Trade Agreement has gone about as far as it will go. It will not go any further. He also discussed the exchange rate.
Please comment.
Mr. O'Neill: The Free Trade Agreement was the final step in a process of trade liberalization.
The Chairman: You have said the tariffs were not large, and that is correct.
Mr. O'Neill: If you wanted to set the timer at a point where you want to examine the effect of trade liberalization, you would not set it at 1988, you would set it at it at 1948. The point is that global trade has grown faster than global output. This is a phenomenon everywhere. Integration has been going on with free trade agreements or without free trade agreements.
We can debate about whether or not the level of trade since 1988 has been affected in any significant way by the Free Trade Agreement. Certainly when you start with a high exchange rate, as we did in the early 1990s, and then drop it, you will have a big impact on the volume of trade. In some respects, that is almost irrelevant.
The key impact of the Free Trade Agreement is on the composition of trade, not on the level. That is where the real impacts are. We saw the largest impact occur, not surprisingly, in the sectors that were most protected to begin with. In fact, if you look at the productivity numbers the most impacted industries in the manufacturing sector achieved a growth in labour productivity, an increase, of almost 3.5 per cent.
The Chairman: What sectors are you referring to?
Mr. O'Neill: You are talking about textiles and furniture.
The Chairman: They are not major sectors.
Mr. O'Neill: My point is that if you look at the low end of the manufacturing sector, low value added, they had a significant boost from the Free Trade Agreement. That is exactly what you would expect to happen, and that is what you would be looking for. Overall, productivity in the manufacturing sector was increased on an annualized basis by about 0.5 per cent. That is not trivial when you accumulate that over 15 years. That is not an insignificant consequence.
If you look at the sectors that have been growing fastest in trade, it is not, the commodity sectors. The fastest growth has been in the high-end sectors of the economy: electronics, electrical products and computers. Those are the sectors that have started from a small base, and grown fairly quickly, which is what you would expect from an agreement that removes the distortion that favours low-value-added commodities.
The Chairman: My question is about the effect the exchange rate.
Mr. O'Neill: The exchange rate did not affect the composition of trade. That is what the Free Trade Agreement did. The exchange rate, in combination with the free trade agreement, expanded the level of trade with the U.S. You have both effects occurring. I agree with John Helliwell and Mr. Harris that if you trace the change in the volume of trade during the 1990s, the effect that would dominate is dramatic fall from a near 90-cent Canadian dollar to a 65-cent dollar. Of course that had a big impact; how could it not have?
Senator Austin: Professor Helliwell made the point that there were no new net economic benefits to be earned by Canada in creating a customs union. I would appreciate a comment, if you have one.
Mr. O'Neill: John Helliwell was one of my professors and I will defer to his wisdom in this regard. I have not done an examination to the extent that he has. I am not sure how he defined a customs union in his testimony, but if he defined it as the creation of a common tariff structure around North America, I would have to agree with him. Most of the trade impact in shifting trade from third parties to the U.S., to the extent that that has occurred, has already occurred. There is not much more to be gained in that regard. We could debate whether it is a gain or loss, but there is not much more change that would occur.
You could be talking about a different definition that incorporates labour market policy, with a free flow of people across borders, and one that was free of customs and immigration officials. That system is common in Europe and the result is lower costs of moving goods and people across the border.
The fact is that we have liberalized labour market policy under the Canada-U.S. Free Trade Agreement. My guess is that the impact would be relatively modest if you expanded it to include labour market policy and the elimination of border crossings.
There may be an issue as to whether you can, in that process, further strengthen the dispute resolution mechanism. If you eliminate the border, you have moved a fair distance towards eliminating disputes. Let us be clear. Since the mid 1990s, the number of disputes between Canada and the U.S. has declined.
The disputes that exist have largely been in areas that you would widely expect them to be, that is, the industry sectors which have over the last 50 to 100 years, been declining in relative importance. Where does it occur? It occurs in agriculture, forestry and the steel industry and is where we see the bulk of the disputes. It is a simple fact that those sectors have been declining in relative contribution to economic activity in this and virtually every other country in the world. It is hardly surprising that they are trying to protect their turf. That is where the disputes emerge. They do not emerge in the computer and software sections or in the production of electrical equipment.
Mr. Campbell referred to the Auto Pact. The reason it was eliminated was because it was no longer necessary; the minimums had long since been exceeded in Canadian production in the North American market. We have more than doubled what had been the minimum in the Auto Pact. We do not need in anymore. You do not see a dispute there.
Where you see disputes is in a relatively few sectors that are less important than they used to be. I will not refer to them as ``sunset industries'' because that is an unfair and colourful description.
Senator Austin: We would never let you back into British Columbia if you called them sunset industries.
My own conclusion in this committee is that the U.S. has no mind to concede any sovereignty in the countervail and dumping area. If that were on the table for largely non-economic reasons we might be interested in moving ahead.
Mr. Wiebe, while I agree with the value of the presentation we received about intra-regional direct investment and intra-regional activity, I have something else on my mind.
China is the most significant market in the world economy after the United States and, perhaps, in over a decade or two, it will be nearly as significant. While the intra-regional phenomenon may be a reality, it does not solve the problem that we are not players in the Chinese market to the degree that our capacities, our talents, education and our products would allow us to be.
How do we get there from here? Of the G7, we are the slowest growing in percentage of trade growth. We are around $11 billion Canadian in two-way trade to the advantage of the Chinese two-to-one. We have enormous problems getting Canadians to invest in the China market. However, China's FDI at about $50 billion a year currently indicates the world is not frightened to invest; is it just Canadians? Is there a particular Canadian problem because China is motoring the world trade system by its two-way trade performance and we are not even passengers on the bus?
Mr. Wiebe: Let me take issue with Mr. O'Neill who has said we do not need trade diversification. Let me use an ecological analogy; a monoculture is extremely sensitive to outside influences. To the degree that we are 90 per cent dependent on the United States for our exports, we are extremely sensitive to anything that happens in the U.S. If there is a slowdown at the borders because of what is going on in terms of the war in Iraq and other issues where we would be very vulnerable, then, yes, a customs union could be beneficial to us simply because it would allow us to continue that trade.
Notwithstanding that, the fact that we are in this position today suggests to me that we ought very much to look at diversifying our trade, not to divert trade as Mr. O'Neill said, but to diversify trade so that we enhance the pie rather than split it.
Coming to your question about China, let us start with investment. Much of the investment going into China right now is coming from Japan, Taiwan, Hong Kong and the countries around it, and some from the United States.
Traditionally, Canada has not invested outside of Canada. I do not know whether the argument is that by investing outside we are actually exporting jobs or not. We have not been very aggressive in international investment.
We think Asia presents us with a tremendous opportunity for investment because of the discounted assets that are there due to the hangover from 1997. This situation presents a great opportunity for us. If we do so, we will also increase our opportunities for trade.
China still has its problems, but the fact that it has joined the WTO suggests to me that the solution to those problems will accelerate. In other words, we will get more transparency and more opportunities for Canadian companies to participate in that economy and to retrieve their profits.
How do we do that? I think we need to engage more. We need more than Team Canada going once a year or every two years. We need to engage across the spectrum of the business community, government, and our private institutions. It will take some time and effort.
As Mr. O'Neill said, our trade relationship with the United States has taken many, many years to develop. It will take a number of years to develop with China, but we cannot or should not be left out because it will be the economy that we will all be looking to 20 years from now. It is one that we ignore at our peril.
Senator Setlakwe: Mr. O'Neill and Mr. Wiebe both spoke about the increase in intra-regional trade. To what extent do you fear the economic consequences of trade wars developing because of regional trade pacts?
Mr. Campbell, with so many reservations with the North America Free Trade Agreement, why would you want us to pursue increased trade with Europe?
Mr. Campbell: My concern with NAFTA and its successor in the FTA really has to do with the terms of integration that it sets out.
If one could conceivably structure an agreement with Europe that did not have what I would characterize as the negative effects of NAFTA or of the emerging FTA, I would see that as a positive thing.
In terms of our relationship with the United States, my inclination is to focus on the multilateral aspect, on the WTO. I have concerns with the direction of the WTO but I think those should be addressed within the WTO. Some positive things have happened within the WTO, and I mentioned the disputes that we talked about earlier. An inferior deal on disputes was negotiated in the FTA and NAFTA in comparison with the one negotiated in the WTO.
The Chairman: The WTO did not exist when NAFTA was set up.
Mr. Campbell: They were pretty much concurrent.
The Chairman: The WTO came along after NAFTA.
Mr. Campbell: That is right. We surrendered a lot of economic manoeuvrability in the course of negotiating the FTA and the NAFTA.
Senator Grafstein: Keeping in mind our current mutual dependence on the United States for trade, do you have any concern about the problems we face in light of the ambassador's comments about trade dislocation? Should we see this as a bump, as someone has suggested? Do you see it as a serious problem in the intermediate run?
Please make your comment short, as I want to deal with some matters that are more relevant to your evidence.
Mr. Wiebe: I think you do business with people that you know and trust. I also think that there is a certain issue of trust that has come about and so it will affect us in the intermediate run.
Mr. O'Neill: In the short-term, it is highly unlikely to have any immediate impact, and we cannot estimate what the impact might be in the longer term.
Over our history, Canada and the U.S. have had other areas of irritation and disagreement concerning geo-political issues. Yet, the track record has been that trade has continued to expand and the integration has continued to pace.
I am optimistic, that self-interest will win out and that mutually positive trade relations in the best interest of both countries will prevail.
Mr. Campbell: Mr. Thomas d'Aquino and company are going to Washington because they are concerned and will probably take along some proposals to secure the relationship. Mr. d'Aquino is a proponent of the ``the big idea.'' Whether it will affect trade in the long-term is hard to say. There are many American companies that rely on the two- way trade as well. It is a complex question. Whether it would have affected the outcome of the softwood lumber negotiation, I do not know but I doubt that it would have. That issue is totally separate.
Senator Grafstein: I will deal with the trade diversification question and targets of opportunity. It has been my view that we should have, as Mr. Wiebe suggested, made a forward press for a free trade agreement with Japan, Europe and with Mercosur. We should have made one also with the non-European Union members, such as Poland. We should have made an agreement with the Indian countries in the way that we did with Chile. However, Japan and Europe have rebuffed us and the Brussels bureaucrats are against a free trade agreement. Mercosur has also rebuffed us. Mexico has developed a free trade agreement with Europe, and is negotiating positively with Japan, and is in constant, probable free-trade relationships with Mercosur. This is a serious problem and we have received evidence to support it.
I am in agreement with Mr. d'Aquino about getting Canadian big businesses to come on side in this issue. How do we deal with this when we are being rebuffed on all those fronts? What mistakes have we made?
Mr. Wiebe: I am not familiar with the exact details of our approaches. I do not think that Japan has rebuffed us. I have spoken with a number of representatives and although they are not interested in what we traditionally called an FTA, they are interested in an enhanced trade agreement and we should be quite flexible about what we agree to.
The other issue for me is that it is the ends that are important. We want to reach an agreement that enhances trade with those countries and we do not really care, or should not care, if it turns out not to be a traditional FTA or if it does not mirror NAFTA. It needs to be an agreement that signals to our businesses that we are interested, and signals to their businesses that we are interested in them; it is a two-way street.
I argue that we should do it; we should continue to discuss the issue with them. If we have been rebuffed then I fear that it may have been a traditional negotiation tactic. Many of them are not interested in that because they have issues of agriculture that they do not want to put on the table and that we do not want to put on the table. Let us look at it as an enhanced agreement.
Mr. O'Neill: I have no quarrel with trying to seek greater trade liberalization, whether through a multilateral agreement or through bilateral agreements. If the consequences of those actions are that we are able to gain access to other markets at lower costs than we currently can, then it is a benefit, recognizing, of course, that it is a reciprocal arrangement. Other countries will have greater access to the Canadian market and I am in favour of that. I would not put a high expectation on seeing the dials move very much if you measure the success by the shares of trade with various countries.
Mexico may have a free trade agreement with other parts of Latin America, but it has not reduced, in any way, the share of activity that they have with the U.S. If anything, it is increasing. We have a free trade agreement with Chile but I would not suggest that the data would indicate that we have had much of an increase in the two-way trade between the two countries as a direct consequence of that.
I am a full and firm proponent of trade liberalization to as great an extent as is possible. I suggest looking to multilateral agreements rather than bilateral agreements, and would not count on either agreement to be a source of change in the shares of trade that we currently experience.
Mr. Campbell: To what extent do we need these kinds by bilateral agreements to diversify? If these are tools, and the goal is economic development prosperity, do we need to increase our trade openness, the trade component of our economy? We are, at the moment, one of the most trade-dependent, open economies in the world. Is that going to do it for us?
Trade can be a tool of economic development. Trade liberalization may be, but not necessarily. I would take that kind of an approach. I am leaning toward revisiting the national economy. How can we use our national markets and resource to strengthen that component of our economic development?
Senator Grafstein: Two of you have suggested that multilateralism is the better way to go. However, we have been told that the Doha Round will fail. In effect, it is late and it will not be effective. Mr. Roy MacLaren, who is our high commissioner in England, says if we really want to accelerate diversification, even if it is a minimalist way to go, bilateralism is the best choice.
I make that as a comment. Does anybody disagree with Mr. MacLaren?
Mr. Wiebe: There are currently somewhere around 20 to 30 bilateral discussions going on, including those between the U.S. and other countries and Mexico. I tend to think that we ought not to be left out of those discussions.
The Chairman: I have a stinger here. I am told that this is a zinger from Senator Graham, who wants to ask a question about the Philippines.
Senator Graham: Dr. Wiebe, please give us a quick comment on the state of the Philippine economy.
Mr. Wiebe: These are difficult times for the Philippines. I tend to characterize it as a country that is just getting back on its feet when it gets hit by something else and gets knocked back down again. Their economy is in trouble. They are not creating the jobs that they thought they would, and a result the president is in trouble and may not be around that much longer. I do not have any details for you, but I can get them. In general, however, I would say the Philippines is in a sorry state.
The Chairman: I would like to thank our witnesses. We only have about three more meetings on this issue. We are drawing to a close, and may soon have some conclusions.
The committee adjourned.