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Canada’s Trade in a Digital World—Page 2

by Danielle Goldfarb | April 2011

Where Canada Stands

In the past few years, entrepreneurs in downtown Toronto have created a host of apps for sale or use globally. Examples include Crowdreel (which categorizes photos on Twitter), Sudoku3D (a 3D take on the classic Sudoku puzzle), Shape Collage (which creates instant photo collages of any shape), and Many come out of innovation incubators such as Extreme Venture Partners or Ryerson University’s Digital Media Zone.

Such success stories abound. And it is not surprising to find these examples on university campuses—particularly those that have invested in digital media—and in digital media incubators. But how widespread are they? Are Canadian businesses, as a whole, adopting digital technologies? Are they using such technologies to access global markets to sell both digital and non-digital goods and services?

We have little solid data to answer this question, so we need to take a step backward and first look at where Canada stands in the digital economy. The digital economy can be defined to include all economic activities that the digitization of information permits. This broad definition includes not just digital media-related activities and not just the Internet, but all digital technologies, including mobile technologies.

Canada in the Digital Economy

Table 1: 2010 Digital Economy RankingsThe evidence is mixed. The Economist Intelligence Unit’s (EIU’s) digital economy rankings (PDF) placed Canada 11th out of 70 countries in 2010.20 (See Table.) That ranking reflects both the quality of our technology infrastructure and the ability of consumers, businesses, and governments to use that infrastructure to their benefit. (Like any ranking, the method is imperfect, but the result nevertheless gives us a sense of how Canada stacks up.)

Let us first look at the quality of our infrastructure. According to a study (PDF) by Wolfe and Bramwell, Canada was once a world leader in broadband infrastructure.21 But the EIU noted that all countries have steadily worked to improve their broadband, mobile, and Internet connectivity levels. Many Scandinavian and Asian countries, in particular, now rank higher than both Canada and the U.S. in terms of connectivity and technology infrastructure. And the EIU analysis showed Japan and South Korea as the clear “broadband quality” leaders, due to their widespread adoption of fibre-optic access. Moreover, Canada is one of the few countries in the EIU’s top 20 that has a mobile penetration rate (number of active mobile phone numbers as a share of the population) of less than 100 per cent.

American businesses invest in information and communications technologies at a higher rate than Canadian businesses do, which partly accounts for the Canada–U.S. productivity gap.

How well are Canadians using the technology infrastructure? Canadian consumers are heavy Internet users relative to their global peers, as research organization comScore has reported.22 Still, compared with consumers in the U.S.—a world leader when it comes to adopting technology—Canadians are less likely to buy items online. (One study attributed this largely to the fact that Americans are more likely to have a university degree than are Canadians.23) And in terms of digital skills and literacy, the EIU report (PDF) gave Canada only a mediocre ranking.24

On the business side, businesses as a whole do not appear to be adopting leading-edge technology practices. The Institute for Competitiveness and Prosperity found that, on average, Canadian companies invest only about two-thirds as much in information and communications technologies as U.S. companies do.25 This lag partly accounts for the Canada–U.S. productivity gap. In addition, our peers in Northern Europe and parts of Asia appear to be leaders in terms of e-payments and e-invoicing systems (as replacements for cheques and paper invoicing). On the bright side, the EIU noted that Canada ranks well—ahead of the U.S., in fact—in terms of creating a solid business environment.

According to the Wolfe and Bramwell study (PDF), Canada was one of the first countries to develop an information economy strategy in the 1990s. However, most countries now have digital economy strategies, and Canada has “failed to update this strategy in response to dramatic technological and market changes.”26 Ottawa said it would announce a new digital economy strategy in the spring of 2011 and included a few digital economy‑related announcements in its March 2011 budget. However, the May 2011 election makes that budget irrelevant, and may delay or derail the overall digital economy strategy.

In short, Canada has a relatively solid foundation in terms of both its technology infrastructure and its ability to use it. However, concerted investments by others mean that this country has lost its role as a clear global leader. Technologies continue to change rapidly. Moreover, digital tech-savvy Canadian entrepreneurs do not necessarily reflect widespread company practices.

Canada’s Relative Strengths

The challenges Canada faces in taking full advantage of the global trade opportunities presented by digitization are clear. The Wolfe and Bramwell study (PDF)27 (which drew on a range of studies, including reports from the Council of Canadian Academies,28 and the Institute for Competitiveness and Prosperity29) summarized the challenges clearly. Canadian businesses are less likely than their peers to adopt information and communications technologies; they also underperform on R&D and innovation, and lag in productivity. Moreover, the study noted that Canada has few flagship information and communications technology companies, experiences shortages of highly skilled workers, and lags in its digital infrastructure.

So we know what Canada does not do well. While leaders and researchers must understand the reasons behind these deficiencies and consider the best ways to address them, we should also think about Canada’s strengths. What does Canada bring to the table when it comes to taking full advantage of the global trade opportunities digitization presents?

Strengths in Digital Activities

The same synthesis study (PDF) that identified Canadian deficiencies also pointed to a number of areas of Canadian global strength in developing and selling digital technologies, 30 including the following:

  • wireless technologies and applications, including Wi-Fi and WiMAX;
  • satellite communications;
  • digital media and content, including animation and video games (e.g., Montréal’s Ubisoft);
  • mobile content for wireless handsets;
  • business software and computer services applied to supply chain management, IT security, and e-commerce; and
  • e-health technologies, including electronic health records and diagnostic digital imaging tools.

With a relatively well-educated population, and a geography that requires Canadians to communicate across vast distances, it is not surprising that Canada has developed areas of relative strength in these digital activities.

Strengths in Using Digital Tools in Other Activities

When we think about this country’s global strengths in the digital economy, we typically think about digital activities. But digitization allows us to benefit across all economic activities, rather than just specifically “digital producing” activities. What are Canada’s areas of potential strength in using digital technologies to open up global trade opportunities in other areas, including resources, services, and manufacturing?

These “digital-using” areas of potential strength may not be as obvious as, say, digital-producing activities such as creating video games. So a good place to start might be Canada’s traditional areas of relative strength. To take what many would consider a “non‑digital” example, let us start with Canada’s relative strength in resource extraction. As previously discussed, digitization now makes it easier to sell services globally and provides the tools to more effectively coordinate global supply chains. This means Canadian businesses can use digital tools to be more effective in global markets in activities such as mining, as well as to more easily sell their resource-related services in global markets.

To build on Canada’s existing strengths in the digital economy, Canadian businesses must invest more heavily in digital technologies and Canadian policy-makers must address a wider range of trade barriers.

Canada’s banking sector is another area of relative global strength. UNCTAD consistently ranks Canadian banks among the most globalized financial services companies in the world.31 During the recent global financial crisis, Canadian banks also proved to be among the most resilient. The small number of players in the sector is a benefit. It allows Canadian banks to invest heavily in technologies—such as those for online and mobile banking—and to test these technologies extensively on a large group of customers. (Canadians are relatively heavy users of online banking—they are, in fact, more likely than Americans to adopt it.32) Canadian banks can leverage this experience in new markets, where they are already expanding. Similarly, Canada can build on its professional services strengths in other areas in which it has global expertise—such as engineering and waste management services—now that the cost of coordinating such projects globally has fallen dramatically thanks to digital technologies.

A third example is Canada’s traditional expertise in making cross-border value chains work, as we have done for decades across the Canada–U.S. border. Canada could become a leader in cross-border logistics, adopting technologies and developing leading-edge practices that allow for better coordination of global value chains.

A final example of a relative strength—one that we do not often view as a strength—is the pre-eminent role smaller businesses play in the Canadian economy. Digitization makes it easier to break down production into smaller tasks and to coordinate these tasks globally. This means that many more opportunities are now available for smaller companies to link themselves into global value chains—even though competition is fiercer. Smaller companies that offer a world-leading product or service may not have been able to tap into global markets before. Now, companies that identify and fill a niche can use digitization to go global more easily. This strength cuts across a range of economic activities. (An upcoming Conference Board report will identify best practices and provide more insight into how smaller businesses are using digital technologies to go global.)

These ideas are only the tip of the iceberg. In other words, Canada has a lot to offer. But to seize on these and myriad other promising opportunities, Canadian businesses will need to invest more heavily in digital technologies and related skills than they do now. And for Canadian businesses to ensure the secure and wide-ranging access to global markets they need to capitalize on their relative strengths, policy-makers will need to address a wider range of trade barriers than they have in the past.

Trade Barriers in a Digital World

India, the United Arab Emirates, Turkey, and other countries have threatened to ban service for Canadian‑based Research In Motion’s (RIM’s) BlackBerry devices within their borders. This is an example of the new types of barriers Canadian and global companies face when buying or selling their products or services in a world that increasingly relies on digital information flows.

A ban—or simply the threat of one—would obviously create a barrier to selling BlackBerry products and services in those coveted, rapidly growing markets. But the repercussions would be much broader. Businesses and individuals have come to rely on access to smart phones, search engines, and other communications tools to conduct their businesses and enter new markets. Threats to ban such tools lead to self-censorship and uncertainty, both of which undermine global trade and investment (not to mention human rights). Banning such tools outright is likely to have an even stronger negative impact on the scope, efficiency, and stability of legitimate global business activities.

To be sure, there can be legitimate privacy or security reasons for countries to filter some types of cross-border data flows. Often, however, barriers to digital data flows are aimed at protecting domestic companies (“digital protectionism”) or at clamping down on dissent.

Digital Information Barriers Are Trade Barriers

Yet, typically, neither policy-makers nor members of the public think of barriers to digital information flows as barriers to trade and investment. Historically, Canadian and global trade policy-makers have focused on eliminating tariffs on goods trade, and almost all academic work on trade barriers has related to these tariffs.

Though tariffs have fallen considerably in recent decades, Canadian companies still face them in a number of global markets. And even relatively low tariffs can have significant effects. When each production task is done in a separate country, products cross multiple borders, potentially encountering tariffs at each one.

Canada must work with other countries to address the many non-tariff barriers that Canadian companies face, such as restrictions on foreign investment, barriers to the flow of information and people, and the threat of compromised cybersecurity.

But the ability to digitize information and send it anywhere means we also need to think beyond tariff barriers in our trade and related public policies. The use of digital technologies underpins all global trade and investment today. It has opened up new trade possibilities for digital products, such as music and video games, that are made using digital tools and that “travel” electronically. It has made it possible to trade virtual items, such as clothing and accessories, in virtual worlds. But it has also revolutionized the way physical goods are made and how they are tracked on their way to their customers. It has increased the ability to trade services globally, and it has made it easier to coordinate trade, investment, and information flows across global value chains.

Trade Barriers in a Digital World Go Beyond Tariffs

Trade barriers today include the following:

  • Barriers to data flows: The complete shutdown of the Internet and cellphone network in Egypt in early 2011 provided an extreme example of the uncertainty and difficulties caused by barriers to digital information flows. Similar bans or threats to ban search engines such as Google and Yahoo, or services such as those provided by RIM’s BlackBerry, can have wide-ranging repercussions for global business.
  • Barriers to trade in services: Digital technologies have made it more attractive and possible to trade globally in services—both IT services, such as computer services, and non-IT services, such as accounting, consulting, and financial services. Barriers to traded services are not tariffs; rather, they include barriers to movements of people, such as visa restrictions, as well as limits on digital data flows.
  • Barriers to new technologies: New technologies can help spur global trade, and barrier-free trade can help technologies spread widely. Since IT relies on hundreds of global inputs, it can be very sensitive to trade barriers.
    The World Trade Organization’s Information Technology Agreement (ITA) bans tariff barriers on many information and communications technologies. While a good start, the ITA has limits. For one, it applies only to technologies that existed—and that members agreed to include—when it was signed in 1996. Due to rapid technological advancement, many newer technologies are either not covered or caught in an uncertain middle ground. For example, since many products now combine functions that existed in 1996 (such as faxing) with new functions (such as scanning), it is not clear whether they are exempt from tariffs under the agreement. A recent report (PDF) to the European Union (EU) noted33 that the EU has imposed duties on some liquid crystal display (LCD) monitors, which are covered under the agreement, by classifying them as television sets, which are not covered under the agreement—another example of the uncertainty created by the original agreement.
    Another deficiency is that the ITA applies only to technology products, not services. And finally, the agreement does not ban non-tariff barriers, such as regulatory barriers. For example, China effectively keeps out imports of video recorders by subjecting them to a duty of over 40 per cent, plus a non-tariff barrier equivalent to over 60 per cent, making for an effective barrier of over 100 per cent, according to World Bank estimates in a recent report (PDF) by the European Centre for International Political Economy (ECIPE).34
  • Restrictions on investment: Some countries (including Canada) restrict foreign investments, particularly in communications technologies and digital content. This can be a trade barrier, as it can be easier to sell your technologies and content if you have a local presence. Moreover, research indicates (PDF) that international trade in services—including digital IT services—is positively related to foreign direct investment. As a result, any restrictions on direct investment are barriers to Canadian products and services being sold locally.35
  • Local presence requirements: While some governments limit foreign investment, others require companies to invest in order to sell in their markets. For instance, they may require search engines or mobile phone service to be hosted within a country. Governments may implement policies such as these in the hope of gaining spin-off jobs and more control over information flows. However, such policies could ultimately stifle the efficiency and vitality of the country’s business sector, while failing to generate spin-off benefits. As noted in its testimony (PDF) before a subcommittee of the U.S. Senate Committee on Finance,36 data centres may not spin off businesses because of the tight security controls that surround them, and because policies that lock data behind government firewalls or inside national borders erode the speed, flexibility, and cost advantages that cloud computing provides to local businesses.
  • “Buy local” requirements: Similarly, governments may require foreign companies operating in their jurisdiction to use local inputs, services, or content. While this might appear to boost economic prospects, in the long run it impedes local and foreign companies from adopting the best technologies at the best prices, reducing company competitiveness.
  • Compromised cybersecurity or communications infrastructure: Compromises to cybersecurity and security of communications infrastructure may also threaten Canadian and global trade flows. If criminals frequently use malware to steal information and identities, consumers and businesses will not have the confidence to pay electronically for their goods and services, putting a damper on international trade. And if communications infrastructure in an important trading country were attacked by terrorists, international business would grind to a halt.

These barriers can be far less straightforward to tackle than tariffs. But they may be even more important if Canada is to take full advantage of global trade and investment possibilities in a digitized world.

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20  Economist Intelligence Unit, Digital Economy Rankings 2010: Beyond E-Readiness (PDF) (London: EIU, June 2010).

21  David A. Wolfe and Allison Bramwell, Growing the ICT Industry in Canada: A Knowledge Synthesis Paper (PDF) (Toronto: University of Toronto, 2010).

22  comScore Inc., The 2010 Canada Digital Year in Review (Toronto: comScore, 2011).

23  Avi Goldfarb, Understanding Differences Between Canadian and American Internet Use: Geography and Education (Toronto: University of Toronto, 2009).

24  Economist Intelligence Unit, Digital Economy Rankings 2010.

25  Task Force on Competitiveness, Productivity and Economic Progress, Today’s Innovation, Tomorrow’s Prosperity (Toronto: Institute for Competitiveness and Prosperity, 2010), 38.

26  Wolfe and Bramwell, Growing the ICT Industry in Canada.

27  Ibid.

28  Council of Canadian Academies, “Innovation and Business Strategy: Why Canada Falls Short,” Council of Canadian Academies.

29  Task Force on Competitiveness, Productivity and Economic Progress, Today’s Innovation, Tomorrow’s Prosperity, 38.

30  Wolfe and Bramwell, Growing the ICT Industry in Canada.

31  United Nations Conference on Trade and Development, “Country Fact Sheet,” World Investment Report (Geneva: UNCTAD, 2010).

32  Avi Goldfarb, Understanding Differences Between Canadian and American Internet Use.

33  EU Trade Policy Study Group, A Modern Trade Policy for the European Union (PDF) (Brussels: European Centre for International Political Economy [ECIPE], January 2010).

34  Iana Dreyer and Brian Hindley, Trade in Information Technology Goods: Adapting the ITA to 21st Century Technological Change (PDF), ECIPE Working Paper No. 06/2008 (Brussels: ECIPE, 2008).

35  Mann, International Trade in the Digital Age.

36  Daniel Burton, Hearing on International Trade in the Digital Economy (PDF), testimony (Washington, D.C.: Subcommittee on International Trade, Customs, and Global Competitiveness of the Senate Committee on Finance, November 18, 2010).


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