Political Science 3170University of Lethbridge

Geoffrey HaleSeptember 16, 2010

OutlineFactors shaping the repositioning of

Canada’s international trade policies (1980s)Long-term trends in international trade and

investment“Revealed Comparative Advantage” – Canada

and the World

Factors Shaping Emergence of ModernCanadian Trade Policies (Macdonald Comm.)Canada traditionally relatively open, trade-

dependent economy growing trade dependence : 1960-80Moving up value-added chain, but still commodity-

driven.Growing dependence on U.S. export markets

despite sporadic efforts to diversity 1954: 60%1984: 76%

Factors Shaping Emergence of Modern Canadian Trade Policies IIGrowing international competition

Japan + “Newly Industrialized countries” (NICs) growing factor in international trade

Growth of international investment changes in industrial organization . . . growth of

“related party” tradeMajor adjustment challenges for Canadian industry

growing consolidation of traditional “branch plant” manufacturing built primarily to service Canadian markets (except auto sector)

Factors Shaping Emergence of Modern Canadian Trade Policies IIIGrowth of “Regionalism”

Trend towards emergence of regional trading blocs characterized by discrimination against non-members European Community, Japan + ASEAN, smaller groups

Canada “one of few major industrial countries lacking free access to market of over 100 million people”.

Growing trend towards coordination of negotiating positions among members of trade blocs.

Long-Term Trends in Structures / Flows of International Trade and Investment1) Long term decline in tariff levels in

industrial countriesReflects series of multilateral trade

negotiations expanding from Europe to include developing countries under GATT, WTO after 1995.

Average tariff levels (industrialized countries):1950: 20-30% 2006: 4%

Long-Term Trends in Structures / Flows of International Trade and Investment II2) Growth of trade regionalization Emergence of formal and informal trading

blocsEuropean Common Market (1958)

Community (1973) Union (1992)North America CUFTA (1988), NAFTA

(1994)East Asia industrialization of S. Korea

Indonesia between 1960s and 1990s . . . reinforced by opening of China and Vietnam to elements of market economy in 1980s.

Long-Term Trends in Structures / Flows of International Trade and Investment IIIntra-regional trade as major expression of

“globalization”

2006 – Intraregional trade - 53% of world trade2008 – Intraregional trade as % of total tradeEurope 72.1%North America 49.8%“Asia” 50.1%

Excl. China 58.3%

Source: WTO Trade Stats, 2009.

Long-Term Trends in Structures / Flows of International Trade and Investment III3) Shift in share of exports in developing

countries from resources to manufactured goods. 30% in 1980 * 70% in 2005.Reflect spread of “production sharing”

(aka “supply” and “value” chains)Shift of developing country exports “up” the

value chain Growing importance of technology, skilled labour

Long-Term Trends in Structures / Flows of International Trade and Investment IV4) Growth of Foreign Direct Investment in

most regionsVertical networks – specialized components in

internationally integrated supply chainsHorizontal networks – full spectrum of

production facilities located in foreign countries

Growth in intra firm tradeContribution to greater productivity, export

orientation and growth.

Long-Term Trends in Structures / Flows of International Trade and Investment V5) Growth in Trade has Largely By-passed “LDCs”1.7% of world trade in 1970 1% in 2006Small, often landlocked countries with per

capita GDP under $US 900 (2009)Substantial human and economic deprivation

Mainly sub-Saharan Africa (31 of 33 countries)Asia (9) – Afghanistan, Bangladesh, Bhutan,

Cambodia, Laos, Myanmar, Nepal, Timor-Leste, Yemen

Pacific / Indian Ocean Island States (6)Haiti

Trade Liberalization not PanaceaRequires complementary domestic policies

Stable fiscal, monetary policiesInvestment in education, infrastructure.Policy regimes not biased against exportsReduced barriers to creation of new firms,

more flexible labour marketsQuality of institutions (relative transparency,

integrity, rule of law).

Canada’s Trade with Countries Outside North AemricaRevealed Comparative Advantage (RCA)

RCA indicated when Canada’s share of exports of specific goods (or services) to a particular country is greater than the share of all global exports of that product (service)

Key concept in identify existing, rather than potential, competitive advantages.

Canadian Comparative AdvantageU.S. Markets Rest of WorldLargeAutomotiveWood / PaperEnergy SectorsSmallChemicals“Misc.” manufacturingDisadvantageMachinery, electrical

equipment

Varies by region, but overall…Agri-food (esp.cereals, oil

seeds)AerospaceMetals and MineralsWood and PaperFertilizer (moderate)DisadvantageAutomotive productsEnergyMachinery, electrical

equipment (major)

Factors contributing to relative comparative advantage, disadvantageCountry may have similar pattern of competitive

advantage to Canada (e.g. Australia – minerals)Relative abundance, scarcity of commodities in

importing country (domestically, among neighbours)Importance increases with transportation costs

Bilateral / regional trade agreements providing preferential access Canada – or other countries at Canada’s expense (trade diversion)

Differential effects of non-tariff barriersLack of business, cultural awareness in Canada re:

business practices, market opportunities.Weaknesses in Canadian or domestic infrastructure to

service particular markets (e.g. capacity limits on energy pipelines to West Coast)

Major national, regional differences in Canada’s comparative advantageChina IndiaStrongOrganic chemicalsMineralsAgri-food (fats, oils, feed)Rubber, related productsWeakInorganic chemicalsPower-generating

machineryPaper and printPrecious stones, metals

StrongVegetables, pulses, plantsPaper and printConstruction, mining,

heavy machineryFertilizersWeakMeat, fish, animal products Inorganic ChemicalsPower-generating

machineryPrecious stones, metals

Major national, regional differences in Canada’s comparative advantageBrazil Mexico

StrongFertilizersSulfur, salt, mineralsPaper and print WeakPower-generating

machineryInorganic chemicalsMeat, fish, animal productsWood / woodpulp

StrongFruit and veg. preparationsPaper and printEnergyWeakPower-generating

machineryFertilizersInorganic chemicalsWood / woodpulp

SummaryCanadian access to North American markets key factor

in overall competitiveness, but also barrier to diversification

Large (e.g. BRIC) and medium-sized developing countries provide potential for growing markets, but:Major differences among countries in market awareness,

penetration, conditionsMajor differences in current, evolving areas of

comparative advantage.One size does not fit all!

Trade liberalization helpful but development of new markets is largely industry, business-specific responsibility.