Monday, May 12, 2008

Finding Canada's 'Missing' Trade With Asia

Finding Canada's 'Missing' Trade With Asia

Canada's trade numbers, cited regularly by politicians and in the media, are out of step with global realities—especially when it comes to trade with Asia.

The Apple iPod illustrates how the trade numbers that the media, politicians, and analysts cite may artificially inflate the value of imports from China. The iPod appears in trade statistics to be yet another import from China, but when U.S. researchers took one apart, they found that only $3 of its components are produced in China—a mere one per cent of a product valued at $300. More than half the value of the iPod is produced or created in the United States, and the remainder comes from elsewhere in Asia.

Similarly, official statistics record a DVD player as an import from China into North America. But Europeans, Americans, Japanese and Koreans create a DVD player's core technologies and design, Americans, Taiwanese and other Asians manufacture the chips, and Chinese workers only assemble the final product.

These are but two examples of how our official measures are out of touch with the way businesses operate globally today.

The recent Conference Board report "Canada's 'Missing' Trade with Asia" estimates the amount of trade with Asia that is overlooked in the outdated numbers. This measure covers a broader range of business transactions, including sales of foreign affiliates and undercounted services.

The findings of the report are not intended to criticize Statistics Canada, which is doing a good job of measuring traditional trade: cross-border trade in goods that go from one country to another and stop there. Rather, it is a call to rethink the relevance of the measures that form the basis of our trade policy decision-making, both in Canada and globally.

In the modern global economy, most trade takes place between multiple partners, at different stages of an overall process. Instead of determining the best place to create an entire product or service, companies look for the best place—be it within a region or anywhere in the world—to locate specific activities, such as design, engineering, manufacturing, and marketing.

Canadian companies also trade increasingly in non-traditional ways, especially with geographically distant partners. For example, instead of trading in a traditional sense by sending goods across borders, Canadian insurance companies sell through branches they set up in Asia, while still conducting their risk analysis through computing systems in Canada. And thanks to the Internet, services such as design, and engineering, and products such as music downloads can be sold globally.

Although the U.S. market still dominates Canada's trade—79 per cent of goods exports in 2007—Canadian policy-makers and business cannot afford to ignore opportunities in flourishing regions such as Asia. Another Conference Board report, "Stuck in Neutral: Canada's Engagement in Regional and Global Supply Chains", shows that Canadian companies are becoming more integrated into Asian supply chains and vice versa. These activities are still modest, however, and not nearly enough to offset stagnating Canada-U.S. supply chain integration. While Canadian companies are taking greater advantage of Asian inputs to make their own supply chains more globally competitive, they are not doing nearly as well in identifying opportunities to contribute inputs into Asian supply chains—leaving considerable untapped potential for Canadian companies.

These overall results tend to run counter to conventional wisdom. Despite the almost exclusive fixation on goods trade by policy-makers, statisticians, and academics, by these broader measures, Asia sold more services to Canada than Canada sold goods to Asia between 2000 and 2005. In addition, current Canada-Asia trade numbers are far too low. By our conservative count, sales and purchases to and from Asia were at least double official exports and imports in 2005, at $58 billion and $156 billion.

The bad news is that, based on these enhanced trade measures, Canada's performance is far weaker than official numbers indicate. Services sales to Asia actually fell between 2000 and 2005, at a time when the opportunities in the region were growing.

This information-reality gap is not just an academic exercise. Leaders are forced to make policy and business decisions based on outdated information, which undermines the development of sound policies to enhance Canadian living standards.

A number of steps need to be taken to close this information gap and take advantage of opportunities for greater trade with Asia:

Governments, businesses, academics and media should promote the use of relevant metrics for international trade.

Business and government leaders should draw attention to Canada's underperformance in services trade and in overall trade with Asia.

Policymakers need to redirect their historical focus on goods trade toward policies to enhance services competition and trade.

Government should eliminate barriers to foreign direct investment and trade in Canada and elsewhere through negotiations and acting as an information broker, particularly for smaller businesses.

Businesses need to do a better job at identifying their global competitive strengths and identifying opportunities to improve their own competitive positions by using global inputs.

Federal and provincial trade promotion mandates should explicitly encourage outward investment. The federal government has recently taken some steps along these lines, which should be supported.

Reorienting the historical focus on goods trade toward services trade instead would shift the attention of governments. For example, current regulations actually require importers of woven fibres to declare in which of more than 100 statistical categories their fibres fall. Officials might better spend their time removing barriers to services competition and trade within Canada and elsewhere.

Both government and business leaders need to move away from narrow measures of trade to a language more aligned with the growth of global and regional supply chains, the sale of goods and services through Canadian affiliates abroad, and the growing role of services trade.

With our broader trade measures indicating Canada's underperformance in Asia is even worse than we thought—at a time when opportunities in that region are multiplying—future Canadian living standards are at stake.

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