CIIT Committee Report

LIBERAL PARTY - SUPPLEMENTARY REPORT TO THE NEGOTIATIONS OF AN
ECONOMIC PARTNERSHIP AGREEMENT BETWEEN CANADA AND JAPAN

While the report of the committee covers a number of issues related to promotion of trade with Japan through an Economic Partnership Agreement (EPA) there remain some points which the committee should have placed more emphasis upon. First, we should recognize that we are not doing as well within signed trade agreements as we could and secondly Canada should develop an internal strategy to complement and take advantage of trade agreements.

In the International Trade publication Canada’s State of Trade 2011 the department provided a forecast for Canadian merchandise exports. It listed the top twenty destinations for 2009 and 2040. Japan, according to the government’s own analysis would slip from fourth to eighth in terms of destination for our merchandise exports. This is a point that should be placed at the forefront of this supplementary report, the fact that the government itself has conceded that “newly emerging economies are becoming global powers, while advanced economies are beginning to see their influence wane.”

International Trade ADM,  Ian Burney in his testimony before the committee placed this EPA in an interesting context when he said  he was pleased to speak to the committee about the “launch of the Canada – Japan free trade agreement or to use Japan’s preferred terminology, economic partnership agreement.” (#33, p. 1) It would appear that the two countries have a very different interpretation as what is being negotiated, and Canada has adopted the more limited language of the Japanese. As a point of reference, the European Union describes their initiative with respect to Japan as “negotiations on a Free Trade Agreement between the EU and Japan.”

The reality of concluding an FTA – or as the Japanese have insisted an EPA with Canada is not one easily concluded. The final report of the committee fails to make note of the fact that the first initiative toward entering into an agreement  between Canada and Japan extends back to 2005 when the Prime Ministers of Canada and Japan released a joint statement announcing the commencement of the effort toward achieving an EPA. This time frame is similar to that of the U.S. when in June 2001 the US President and Japanese Prime Minister made a similar announcement with respect to a US – Japan EPA. The point being that an EPA between Canada or the US with Japan have not been easily or quickly achieved – and remain elusive.

The premise upon which an effective “partnership” arrangement should be established is one of reciprocity. This is a principle which this arrangement with Japan and which the report of this committee fails to address.

The Canadian Manufacturers and Exporters Association, which represents 10,000 manufacturing and service related industries across Canada with sales last year of $571 billion, made the following statement to the committee (#35, p. 5):

“We want reciprocity. It’s okay for Japanese companies to come here and compete with us, but only to the extent that we can actually go to their market and compete on the same basis.”

The government has placed far too much reliance upon the economic projections prepared in advance of negotiations. While government may use the studies to boast about the supposed advantages which will befall Canadians as a result of an agreement those projections are at best nothing more than projections.

During the course of the committee’s hearings on Canada – India, Assistant Deputy Minister for Trade Policy with International Trade, Don Stephenson made the following observation regarding the pre-negotiation studies:

“I want to make the point these are theoretical econometric studies. They are projections… I’d like to say that these are absolutely accurate assessments and predictions, but they can’t be.” (September 29, 2011,  p. 8). During the course of a later hearing of the committee, Mr. Stephenson repeated this observation, stating, “The joint study is just an economic modelling exercise.” (December 1, 2011, p. 10)

The Report of the Joint Study on the Possibility of a Canada-Japan EPA, found on the International Trade website references the fact the computable general equilibrium (CGE) model was used to reach the conclusion that “both countries would derive significant economic benefits from a possible EPA.”

With respect to the projections of the government study Wendy Dobson, stated that the “joint study reveals very small benefits” (#37, p. 9). The degree to which for example, agricultural trade will derive a significant benefit, Ms. Dobson stated: “I have no idea. It will be revealed in the negotiations. It’s very hard to discern from the joint study.” (#37, p. 9). She continued by stating that “I don’t expect huge returns from this effort with the Japanese. It will not be a free trade agreement” (#37, p. 10)

The concerns stemming from the optimistic projections are reflected in the expectations for specific sectors of the economy. Another example, is the impact of the EPA on our auto industry.

The ADM for International Trade in his testimony stated that the department viewed an EPA with Japan as an opportunity for the auto sector even though the department was told by the Canadian Vehicle Manufacturers Association (CVMA) that the non-tariff barriers in Japan are the issue – not tariffs. However, he also told the committee (#33, p. 4) that the projected benefits to the auto sector would be “very minimal”, which came as a surprise even to Conservative MP’s representing ridings in which the auto sector is very active. (#33. p. 4).

The representative for the CMEA went on to inform the committee (#35, p. 5) that it is the scope of the Japanese non-tariff barriers which impose a serious restrictive regime limiting the ability of Canadian manufacturers to have access to their domestic market:

The optimism expressed by International Trade’s ADM for Trade before this committee prompted a substantive and contrary response from the CAW’s Jim Stanford where he pointed out the imbalance in terms of the auto sector whereby Japan allows so few automotive products in, “is not the result of tariffs or other explicit trade barriers. In fact, Japan charges no tariff at all on imports of finished vehicles, so a free trade agreement is not going to change that imbalance. How do we explain the lopsided nature of automotive trade with Japan? A range of structural factors are clearly at play, including the aging demographic makeup of Japanese society, falling automotive purchases, stagnant incomes in recent years, consumer tastes for vehicles that are not always like the ones we make in North America, and of course the structural impact of regulations, marketing practices, and other non-tariff barriers that are very hard to identify and, I would argue, impossible to credibly eliminate.” (#37, p. 6)

With respect to the balance of trade between Canada and Japan the issue of Canadian exports of resources versus exports of value added, manufactured goods was raised.

Canada’s energy resources are considered a priority for the Asian market. In a recent article in Policy Options (September 2012, p. 16) the former Clerk of the Privy Council, Kevin Lynch stated the following:

“Canada is very much on the global energy radar, not just as a potential supplier but in many respects as a preferred choice over other suppliers in troubled parts of the world.”

Lynch reinforced the point with respect to Asia’s interest in our natural resources over our manufactured goods by placing this in a very specific context (Policy Options, September 2012, p. 14):

“Canada was spared a more severe recession in 2009, in part because of robust demand from Asia – especially China – for our natural resources. 

When asked to speak to the point that Japanese imports from Canada are most heavily in the resource as opposed to the manufactured sector, the ADM for International Trade began by declaring that total trade between the two countries was currently equal but when pressed on the individual sectors he told the committee he didn’t have “the detailed breakdown in terms of sector by sector.” (#33, p. 3)

In their presentation to the committee the Canadian Manufacturers and Exporters had no difficulty in informing the committee as to the reality of trade between Canada and Japan on a sectoral basis (#35, p. 1):

“Coal, canola, copper, lumber and pork are our top five exports to Japan, and they account for 58% of our exports to that country. Autos, auto parts, heavy equipment, printing equipment, tires, aerospace parts, and telecommunications equipment – these seven products taken together account for 52% of Japan’s exports to Canada. As you can see, the majority of our exports to Japan are natural resources.”

In a recent article in Policy Options, Charles McMillan using data compiled by among others, the WTO, Industry Canada found that Canada’s main exports to Japan consisted of coal and seeds while our main imports comprised autos, parts and electronics. (Policy Options, September 2012, p.  61).

The fact is that our relationship in terms of value added exports with Japan has and will likely remain unbalanced in favour of Japan.

In looking at the recommendations of the report it speaks to the need to conclude an EPA with Japan which will provide “a net benefit to Canada”.

Even the committee report confirms that to the Japanese energy security is one of the most critical issues the country faces and that Canada “is seen as a reliable supplier”.

In a recent article Roger Gibbons former President of the Canada West Foundation (Policy Options, August 2012, p. 35) asked a question key to the reality of the declining manufacturing base within Canada:

“How do we handle a future where the western Canadian hewers of wood and drawers of water seem to be doing very well and where the manufacturing sector struggles?”

What Gibbons is referring to is the “commodification” of our export economy an export policy driven by Asian demand for resources – not for manufactured goods.

“Expanding Canada’s gateway to Asia,” said Gibbons, “is seen in unabashedly positive terms in the west, whereas the possibility of greater and more unfettered Asian trade is at best a mixed blessing for a manufacturing sector already struggling with international competition.”

The observation put forward by Roger Gibbons appears to be supported in an internal federal government document produced by officials at Environment Canada. According to news reports the document indicated that while manufacturing remains a critically large component of the Canadian economy the oil and gas resource sector is outperforming it in terms of growth. “the oil and gas sector was growing, on average, by 0.2 per cent per year over the past decade, while the overall manufacturing sector was averaging annual declines of 1.7 per cent over the same period.” (Manufacturing leads growth: memo (Ottawa Citizen, January 16, 2013)

“Canada’s comparative advantage,” Wendy Dobson told the committee, “lies in natural resources and energy, unless we work with judicious policies, some of which have been outlined by Mr. Stanford.” (#37, p. 9)

The question remains, to what purpose should any enhanced trade initiative whether with Japan or any other country be directed – resource exports, value added exports, or a balance of both?

In his testimony, Jim Stanford supported the observation of Ms. Dobson with respect to the role of our natural resource exports (#37, p. 5):

In terms of the composition of our trade, I think free trade agreements have also reinforced a tendency for Canada to export resources and import more technically sophisticated value-added products. I view this as a losing proposition for Canada in the long run. And as was just mentioned by the previous witness, our bilateral trade with Japan very much conforms to that pattern. It is what I would call structural under-development in our export relationships.

And what were those judicious policies?

Here is what Jim Stanford suggested specifically in relation to our resource sector (#37, p. 5):

The true reasons for Canada's poor trade performance do not have to do with a lack of free trade agreements, or even the existence of trade barriers in our trading partners. I think it is a failure of Canadian-based companies to develop and sell innovative, high-value products and services the rest of the world wants to pay good prices for. That's a structural weakness in our economy that will not be helped by signing free trade agreements, and I think it could be harmed by it.

Other countries in the world that are successful exporters to date—places like Germany, Scandinavia, Korea, Brazil, and China—have not built their success by signing as many free trade agreements as possible. Rather, they have focused on developing and nurturing domestically based, globally oriented companies that can sell things the rest of the world wants. That's where I think Canada's policy should be directed, instead of trying to sign as many free trade agreements as possible.

Later in his testimony, Mr. Stanford re-emphasized that earlier point (#37, p. 7)

“On your question with regard to what sorts of policies should be implemented, there is no magic bullet to this. If we look at the experience of other successful exporters in the world—as I mentioned, Germany, Japan, Korea, Brazil today, Scandinavia—we'll see they've all involved a range of proactive interventions involving government, business, and other stakeholders, running the gamut between technology and innovation policy, directed flows of capital into particular strategic industries, proactive integration of training efforts with the needs of innovative export-oriented businesses, protection and support and nurturing for domestically based companies to produce high-value products.

The fact that this government enters into an almost endless series of trade negotiations does not minimize the growing evidence that what is lacking is a policy whereby value added exports take precedence over the export of unprocessed or at best semi-processed resources. The key to a strong and reciprocal trading relationship with Japan is one based upon reciprocity of goods and commodities traded.

Recommendations:

1. That the Canadian government negotiate an agreement on the premise of reciprocity of access to each countries markets.
2. That, concurrently with the negotiations between Canada and Japan for an economic partnership agreement (EPA), the Government of Canada develop a national trade and industrial strategy. A focus of the strategy should be strengthening the domestic manufacturing base in order that, once an EPA is concluded, Canada’s businesses that participate in value-added production chains are able to maximize the benefits resulting from the EPA.