Conference Board Economics

Revamp Our Trade Policy

Forecasting and Analysis — Tue, 09 Mar 2010 11:00:00 GMT

		Glen Hodgson Senior Vice-President and Chief Economist

Recent attention surrounding the "Buy American" plan underscores the need to revitalize our international trade strategies to secure a place among the world's pre-eminent trading nations. Canada's economy was built through international trade, all the way back to the fur trade, but weak recent performance is keeping us from reaching our potential.

Many of us may still believe Canada is a world leader in international trade and investment, but the facts say otherwise. Real export growth has been flat since 2000, and Canada-U.S. trade and economic integration has long since peaked. In fact, when the impact of rising prices (such as for oil and gas exports) is removed from the trade numbers, Canada's volume of trade with the U.S. was actually lower in 2008 than in 2000.

The global recession made things much worse -- Canada's international trade collapsed in 2009. The value of Canadian exports plunged by 14.8 per cent and imports are estimated to have declined by 15.6 per cent. More important, trade growth is not guaranteed to bounce back to normal once the global economy fully rebounds and demand growth resumes.

The global economy is undergoing profound structural changes. America faces enormous economic and fiscal challenges; we should not assume it will automatically regain its full leadership status. Western Europe and Japan have high incomes, but are aging quickly and will grow much more slowly in future.

And China, India and other emerging markets are pushing their way to the front, both as trade competitors and as markets for export sales and investment.

Successful trade players know that standing still is a recipe for slipping backward. Active steps are required to strengthen Canada's competitive position in the global marketplace. The conference board has therefore proposed a three-pronged strategy to revitalize Canada's international trade and investment.

Strategy one: Create more internationally competitive Canadian firms, which can no longer rely on a weak Canadian dollar to be competitive. Firms must determine where international trade and investment fit in their corporate strategies and how they can improve their core competitiveness. In particular, they should incorporate global value chains, opportunities in emerging economies and shifting global trade patterns into their business strategies.

Strategy two: Adopt stronger and more forward-looking international trade policies. Canada has some clear trade strengths, based both on natural resource endowments and brain-power. But it is also up against some hard-nosed and well-armed competitors who are not waiting for us to act.
Canada's trade policy must recognize changing trends in international trade, such as global and regional value chains and the role of foreign direct investment as a trade enabler. Our position in relation to the U.S. market needs to be refocused on better aligning regulations with our southern neighbour. A comprehensive strategy is required to succeed in emerging economies. And Canada needs to strengthen its profile in the evolving World Trade Organization, which will require a full reassessment of some of our trade sacred cows, like supply management.

And strategy three: Foster a more supportive national operating environment. Re-energized trade strategies are unlikely to succeed without improving the underlying competitiveness of Canada's economy.

Canada needs to remove obstacles that discourage foreign investors, such as interprovincial barriers and excessive regulatory requirements, and deal with poor productivity growth. More emphasis needs to be placed on the building blocks for competing effectively in the global economy.

This calls for investment in Canada's aging urban and transportation infrastructure, retooling immigration policies to attract more entrepreneurial talent and address labour market needs, and developing a culture of innovation.

Adopting all three strategies outlined here is a tall order, and would require an exceptional degree of collaboration among governments and with business. But without deliberate and re-energized action, Canada should not expect any improvement from the mediocre trade performance of the past decade. A new trade strategy is needed for a post-recession era.

As posted in the Windsor Star on March 9, 2010.
Based on a recent Conference Board report, Re-Engergizing Canada's International Trade: Strategies for Post-Recession Success.

How The People Saved The Vancouver Olympics

Forecasting and Analysis — Thu, 04 Mar 2010 10:39:21 GMT

Brent Dowdall
Senior Communications Specialist

Amid the euphoria Canadians displayed from coast-to-coast during the final days of the Vancouver 2010 Olympic Winter Games, it was easy to forget how the Games got off to a very rocky start. The remarkable turnaround in perception came from an unexpected source-the people in Vancouver (and Whistler) who embraced the Games. Having spent more than two weeks as an Olympic volunteer, I can state unequivocally that the people made the Games.

The early flaws are well-known-the tragic death of a luger, the continuous headache known as Cypress Mountain, the placement of the Olympic cauldron behind a security fence. While the Vancouver organizers never deserved the tag of "worst Games ever" from the British press (most venues, infrastructure and logistics were running smoothly even in the early days), there was real concern that the Olympics might not be able to overcome its early struggles.

Somewhere around the middle of the first week, however, something changed. Vancouver embraced the Olympics. A city where many people had much ambivalence about the Olympics threw away their reservations, and joined-or in some cases, created-the party. A completely unexpected six day stretch of sunshine and spring temperatures brought Vancouverites and visitors together, not only to the venues, but the exhibits, pavilions and the nightlife. Where something wasn't happening, people made their own fun, like impromptu�road hockey games�on downtown streets.

Irritants were transformed into experiences.�Lineups,�instead of being a symbol of organizational disarray, became a badge of honour. Nine hours to touch a medal in the Royal Canadian Mint pavilion. Seven hours for a 25 second zipline ride over Robson Square. Three hours to get inside Sochi house, a preview of the 2014 Games. Even the lengthy waits to enter every venue were tolerated- imagine going through an airport screening (empty pockets, metal detector, body search) at every sporting event. Yet there was surprisingly little grumbling about the lineups-strangers struck up conversations, children played together off to the side, people organized themselves to get coffee for their groups. This atmosphere could not have been organized; it was created and shared by those who were part of it.

The experience was not generated by wins either. The Olympics atmosphere turned the corner for good during the second weekend (Feb. 20-21), at the same time as Canadian athletes were going through a multi-day medal drought that had the media tossing around creative phrases like�Blown the Podium and�Flown the Podium. Yet that didn't matter to the people who flocked to LiveCity Downtown or Yaletown, Robson Square, the Aboriginal pavilion, Canada's Northern House, the German, Irish, or Swiss houses, or a multitude of other locations. The phrase "Olympic spirit" is overused, but it does exist and it did emerge in Vancouver.

Quantifying the value of the Olympics has turned into a running debate. Opponents of the Games cite the $6 billion cost (the most-widely quoted figure) as money that could be better spent elsewhere. Proponents cite the economic benefits such as new infrastructure, such as the upgraded Sea-to-Sky highway and the Canada Line Skytrain, the tourist or investment opportunities open to visitors, to the promotional value of a two-week advertisement for the city, province and country.

The Conference Board estimates an�economic gain for British Columbia of $770 million this year, which will add about 0.6 percentage points to the province's gross domestic product. This is the Board's estimate of the economic impact generated by extra tourism and public spending associated with the Olympics in 2010; it does not include the economic activity generated in previous years by the construction of Olympic and transportation infrastructure. $770 million in one year is a significant amount of money, but it is a one-time boost, and the Olympics remain a small component of the provincial economy that is poised to come out of the recession with the strongest growth in the country this year.

What is far less measurable is the vibrancy, the excitement and the joy that the Olympics brought-not just to the athletes, the organizers and the volunteers, but the people who took it on themselves to be part of an experience whose value didn't have a price. That has to count for something.

China's Challenge to Canadian Exporters

Forecasting and Analysis — Fri, 26 Feb 2010 08:25:25 GMT

Michael Burt
Associate Director
Industrial Outlook, Trade & Investment

Canadian exports to the United States over the past decade have been generally stagnant. This indisputable fact has been the source of growing angst and speculation as to its cause. An easy justification is "border thickening", but as is often the case, complicated problems belie simple explanations or solutions. Previous work done by the Conference Board of Canada has found that the border has had a minimal impact on trade in goods; instead it was found that the exchange rate and industry specific supply and demand factors were far more important in explaining this phenomenon. However, another factor is at play-China.

China surpassed Canada in 2007 to become the largest source of merchandise imports into the United States and at some point in the not too distant future, China will supplant Canada entirely to become the U.S.'s largest trading partner. Since U.S. trade with Canada has been stagnant while it was growing by leaps and bounds with China, Canada has lost market share to China for virtually every major product it sells in the U.S. market. This is even true for products where you would think Canada had a comparative advantage, such as forest products. In fact, wood and paper products are among the industries where Canada has experienced the largest drop in market share over the past decade.

For example, in 1999 73 per cent of wood products imported into the United States were sourced from Canada. By 2009 that share had fallen to 46 per cent. Over the same period, China's share of U.S. wood product imports rose from 4 per cent to 23 per cent. China has been increasingly importing raw logs from other countries in Southeast Asia, processing them and then shipping these wood products to export markets. Other Canadian industries that have experienced a major loss of market share to China over the past decade include furniture, paper products, printed materials, plastics and fabricated metal products. The effect on these industries has varied depending on how dependent they are on the U.S. market, but it has been a factor contributing to the malaise in Canada's manufacturing sector in recent years.

China's rise as the workshop of the world has not been universal. Its market share for products like food and beverages, petroleum products, chemicals, primary metals and transportation equipment remains small. A key reason for this is that it is still a net importer itself for many of these products, with domestic production unable to meet domestic demand.

It is also important to note that Canada is not alone in its loss of market share in the United States. Most developed countries and even some developing ones have lost market share over the past decade. For example, Canada has never been a major source of imported textiles and apparel for the United States, so it did not have much market share to lose. However, China's share of U.S. textile and apparel imports has steadily climbed, with the largest declines occurring in a variety of locales including Mexico, Hong Kong, South Korea, the Dominican Republic and Taiwan.

So, not surprisingly, China represents an increasing competitive threat to Canada and other countries. As China's role in the world economy grows, these competitive pressures will only increase, so how should Canadian businesses respond? Protectionism is not the answer. Although Canada should continue to seek equal and/or preferential access to the U.S. market, limiting imports from China is not a permanent solution. Instead, Canadian businesses must continue to adapt by finding new markets, creating new products, and improving their competitiveness.

This process has already begun. For example, between 1999 and 2009 the share of Canada's merchandise exports destined for the United States has fallen from 87 per cent to 75 per cent. In its stead, a variety of countries in the European Union, as well as China, Mexico and India have all experienced an increase in market share. In fact, although exports to the U.S. have been stagnant over this period, they have nearly doubled to the rest of the world. Thus, Canadian exporters have already begun to diversify amongst the markets to which they are selling. Part of this process entails altering the products that we are making so that they are adapted to the market conditions in countries outside of North America.

The other thing that businesses can do is improve their international competitiveness by increasing their productivity. On this count Canadian manufacturers have been less successful. Multifactor productivity in Canada's manufacturing sector has been stagnant over the past decade. Although, this is better than the Canadian average for all sectors, which recorded a decline, it is not sufficient if producers are to overcome the effects of the strong Canadian dollar and increasing international competition. More investment in productivity enhancing equipment and better integration into international supply chains are potential means to this end.

The rise of China does pose a challenge to Canada's manufacturing sector and its strong relationship with the U.S. market. However, there are means to address this new competitive environment. Exporters have already begun to undertake the necessary transformations, but more will need to be done in the coming years. As a result, what we produce in Canada, how we produce it, and who we sell it to, is expected to change considerably over time.

Global Recovery Curtailed by Savvy Households

Forecasting and Analysis — Tue, 16 Feb 2010 13:15:50 GMT

		Pedro Antunes Director National and Provincial Forecast

Are households too smart for the economy's good? According to a poll conducted by Opinion Search, nearly all Canadians believe that public deficits will, sooner or later, result in a larger tax bill. These results bring up an age-old question among economists: Does fiscal stimulus get muted by a negative effect on household spending? According to what is called "Ricardian Equivalence" (based on an idea first proposed by 19th century economist David Ricardo) if governments lift spending by increasing their debt, consumers will see this as a future tax, and reduce their current expenditures. The "equivalence" pertains to a mathematical formulation that suggests that households have "perfect" foresight, such that if governments increase spending by taking on debt or increasing taxes, the effect on the economy is the same-households will perceive the debt load as a future tax and reduce their spending by an equivalent amount as if taxes had been immediately raised.

Fascinating that households could be so calculating! But the truth is that Ricardo himself didn't believe in equivalence. The math was just a tool to demonstrate that when governments take on debt, consumers are likely to save more-but how much more they save can have important implications for fiscal policy and for our current medium-term forecast. The impact of fiscal stimulus as a recession fighting tool might be muted if household spending declines as spending on infrastructure ramps up. More importantly, what will happen to household spending in light of the huge fiscal deficits that much of the developed world is now facing?

As Ricardo might have predicted, consumers are saving more. We recently polled 1,000 Canadian households asking whether federal and provincial government deficits would result in their paying higher taxes in the future-and a resounding 86 per cent said yes. In tax-averse British Columbia, over 91 per cent believe that higher taxes are on their way. Is Ricardian equivalence then partly responsible for higher savings? In 2009, Canadian households chose to augment their savings by an additional $13 billion, boosting the aggregate household savings rate to nearly 5 per cent last year. If the potential for higher future taxes is responsible for the recent increase in savings, the repercussions for the near term economic outlook are disheartening.

In 2009, municipal, provincial and federal governments in Canada will produce a combined deficit of over $84 billion (on a national income accounts basis) and not much improvement is expected for 2010. While $84 billion in deficits may seem huge, we've been there before. As a share of gross domestic product (GDP) this combined deficit will reach 5.5 per cent in 2009, in line with levels last seen in the mid-1990s and well below what occurred in the early 80s. And in comparison to other developed economies, you could almost say that we're in pretty good shape. Take the U.S. for example; their federal deficit is estimated to have reached 8.7 per cent of GDP in 2009 and is expected to climb to 9.5 per cent of GDP this year. Moreover, given the President's plans to increase spending on health and other social programs, the deficit as a share of GDP is not expected to recede from these high levels over the next few years. If the buildup in debt is also partly responsible for the lift in household savings in the United States, U.S. consumers will likely continue their frugal behavior.

The difficulties don't end there. The 2008-09 recession has left many other governments scrambling. While stimulus was needed to bring confidence and growth back to the global economy, the repercussions for government accounts, especially in developed countries, have been harsh and will be long-lived. Japan, the U.K. and many European countries are swimming in debt and struggling with deficits. Over the next few years, much of the developed world will continue to face rising debt, even as they seek to bring balance back to government accounts. The combination of rising debt and rising interest rates (as monetary stimulus is also removed) is likely to keep household savings rates high and growth in consumer spending soft. This, combined with fiscal restraint, will soften the Global economic recovery for years to come.

It's clear from our poll that Canadian households are aware and concerned about government deficits, more importantly though, they are convinced that the buildup in debt will result in future tax hikes. Still, Canadian consumers might not be badly affected given our (believe it or not) relatively good fiscal stance. However, if households are as savvy in the U.S. and other developed economies facing high deficits, the impact of the current recession on household spending will linger and the typical post-recession rebound in consumer spending will be muted.

The 2000s: They Were the Best of Times; They Were the Worst of Times

Forecasting and Analysis — Wed, 10 Feb 2010 10:00:00 GMT

Kip Beckman
Principal Research Associate
Economic Services

Ask any American or Canadian what they thought about the past ten years and a positive response is highly unlikely. The decade included the 9/11 terrorist attacks and two wars, one in Afghanistan and another in Iraq. In addition, Americans put up with two recessions; a relatively mild one in the early 2000s followed by a brutal downturn, the effects of which are still being felt today. Incomes adjusted for inflation for most Americans barely budged over the past decade or so and the unemployment rate ended the decade at 10 per cent and rising. Our close economic linkages with the United States meant that Canadians couldn't avoid the economic difficulties from spilling over the border and affecting our lives.

Yet, for most countries in the developing world, the past decade was a huge success. Four of the largest countries in the world --China, India, Indonesia and Brazil -- account for around 40 per cent of the world's population and they made significant strides in economic development. We all know about the success stories in China and India but many are not aware of the progress made in Indonesia and Brazil. Indonesia's growth over the past decade has averaged around 5 per cent per year compared with the disastrous 1990s that saw standards of living plunge. Brazil recorded 3 per cent average annual growth, managed to tame inflation and is currently dealing with a currency that is too strong - a rather unique development in that part of the world.

Elsewhere in Latin America, countries like Columbia and Peru have made tremendous advances, while Chile is on the verge of joining the exclusive OECD club. Notwithstanding the attempts by Venezuela's Hugo Chavez to accumulate power, polls show most Latin Americans have increasingly favourable views about globalization and democracy. This at a time when globalization is not too popular in the developed world.

There has even been progress, albeit uneven, in Africa. While life in many parts of the continent remains miserable, the continent has attained annual growth of 5 per cent in recent years and countries like Botswana, Mauritius and Ghana are fairly successful. Essentials like electricity, water and sanitation are more common and cell phones have become more popular. The move to democracy in Africa, while not necessarily what Thomas Jefferson envisioned, is also gaining momentum.

Except for maybe China and India, most of us are unaware of the progress that has transpired in many parts of the developing world. According to Economics Professor Tyler Cowen, this is mainly because the media doesn't focus on the small steps that have been taken to improve the lives of people. For instance, an extra percentage point of growth in one year may not seem like a big deal. Yet, a 1 per cent difference in annual growth can have a major influence on a country doubling its standard of living in 35 or 70 years. Sustaining economic growth of 5 per cent per year, Africa's current growth rate, would result in a doubling in the standard of living in less than 15 years. This is huge for people currently living in extreme poverty.

While many Americans and Canadians may lament the lack of economic progress made in the past ten years, the fact that emerging countries have become wealthier is a good thing and a development that can help the West. Richer developing countries consume more of our products, including Canada's vast supply of natural resources. Also, Cowen contends that China is using some of its growing wealth to conduct research in important areas including solar power, scientific instruments and engineering. If Chinese scientists manage to make a breakthrough in the development of green energy, this benefits everybody. The dramatic improvement in cell phones recently may be, in part, linked to the fact that the number of customers have exploded as cell phones gain popularity in the developing world, notably Africa.

Viewed from the prism of a lingering economic downturn, it is easy to view the past ten years as a disaster at least from the perspective of many Western countries. However, if we look a bit beyond the economic situation in most developed countries, it is possible to conclude that the past decade was not so bad after all.