In an effort to demonstrate their commitment to

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1 Briefing March 2007 If We Can Fix It Here, We Can Make It Anywhere Effective Policies at Home to Boost Canada s Global Success At a Glance Changes that Canada makes to its own policies are likely to result in greater trade and investment gains than are policy changes other countries make. Once leaders better align standards and practices within Canada, trade promotion and negotiation abroad will be better able to boost Canada s global economic performance. Barriers to Canada s global economic success that are within Canadians control include labour mobility and infrastructure restrictions, and regulatory differences between provinces. In an effort to demonstrate their commitment to Canada s global economic success, politicians at all levels tend to invest heavily in trade and investment missions, fairs, and negotiations abroad. While trade and investment promotion and negotiation may matter for global economic success, they put the cart before the horse. Making changes to Canadian policies such as trade and mobility barriers between provinces is likelier to result in greater rewards, and is therefore a critical first condition for international success. Federal, provincial and municipal governments spend a lot of time and energy on trade promotion and negotiation. For example, in January 2007, Canada s Trade Minister David Emerson travelled to China to promote Canada China economic ties, and his parliamentary secretary led a trade mission to India in Trade, Investment Policy and International Cooperation

2 March As well, in January 2007, Ontario s Premier Dalton McGuinty visited India and Pakistan to promote trade and attract investment to the province. Many other provincial and municipal governments attend trade fairs and industry trade shows. As well, over the past few months, Canada has reopened long-stalled free trade negotiations with Central America, the European Free Trade Association and Singapore, has continued its free trade negotiations with Korea (which started in 2005) and has stated that a free trade agreement with India is a long-term goal. According to the Department of Foreign Affairs and International Trade s website, Canada is also considering free trade deals with several other country groupings, as well as additional investor protection agreements. The objective of these promotion and negotiation efforts is to improve Canada s trade and investment performance, a laudable goal. International trade and investment expand Canada s economic growth prospects beyond the size of its relatively small economy. Trade may mean some job losses in the short term. But in the long term, the evidence suggests that trade will benefit all Canadians by spurring dramatic increases in productivity. This, in turn, drives higher living standards for Canadians, which enable Canadians to pay for those things that make this country a desirable place in which to live. And, as products are increasingly made and services delivered using inputs from all over the world, international investment and trade complement each other. It therefore makes sense for leaders to take actions to boost both. Why start with reform at home? First, negotiating trade agreements depends on other countries being motivated by the prospect of improved access to the Canadian market. Reducing Canadian barriers to global engagement is, by contrast, entirely within the control of Canadians. Also, planning and traveling to promote trade and investment, or negotiate free trade and investment deals, is costly and time-consuming. Recent U.S. bilateral free trade agreements, for example, took up 37 per cent of the travel budget of the U.S. trade representative. 2 Canada s current long and unfocused list of free trade negotiations does not always make sense in terms of core Canadian interests. As well, while free trade agreements can and have had important benefits, the size of these benefits hinges on deals being comprehensive, the same rules applying to a large enough economy or group of economies, and Canadian companies ability to take advantage of greater market access. The benefits of such deals will be much larger if Canada s domestic house is in order. Canada s current long and unfocused list of free trade negotiations does not always make sense in terms of core Canadian interests. The federal government has not managed to sign any new deals in a number of years, despite opening up many new negotiations. And current multilateral negotiations appear to be moving slowly, while negotiations for western hemispheric free trade are stalled. In the long term, trade will benefit all Canadians by spurring dramatic increases in productivity, which in turn drive higher living standards. But in order for Canadians to boost trade and investment by taking full advantage of greater access to other markets and successfully promoting Canada abroad, leaders need to ensure that our companies are competitive by establishing the conditions for global success at home. Perhaps more importantly, the available evidence suggests that changes Canada makes to its own policies are likely to result in greater Canadian trade and investment gains than policy changes other countries make. A recent Organisation for Economic Co-operation and Development (OECD) study, for example, estimates the effects of all developed countries reducing their competition-restraining rules, cutting tariffs, and easing foreign direct investment restrictions to what they deem to be best-practice standards. The study estimates that Daniel Trefler, The Long and Short of the Canada U.S. Free Trade Agreement, American Economic Review, 94, 4 (2004), pp United States General Accounting Office, Intensifying Free Trade Negotiating Agenda Calls for Better Allocation of Staff and Resources. Report to Congressional Requesters. (Washington, D.C.: GAO, January 2004). The Conference Board of Canada

3 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Canada would see dramatic gains in exports, of which almost three-quarters would come as of result of changes to Canadian policies, with the rest due to changes in other countries policies. 3 Similarly, other recent studies find that improvements in domestic procedures required to trade goods (such as customs and port efficiency) are likely to have a far larger effect on exports than policy changes elsewhere. Another study confirms that Canada would reap larger GDP gains from the elimination of its own non-tariff barriers than it would if all other countries eliminated theirs with the exception of U.S. non-tariff barrier removal which would produce greater gains for Canada. 5 Recent research by The Conference Board of Canada and others demonstrates that Canada s existing barriers to trade, competition and investment prevent businesses from innovating and making efficient decisions that enhance their global competitiveness. Canadians then pay higher prices both for final goods and for imported parts. Such barriers therefore penalize Canadian prosperity and lower Canadian living standards. Canadians safety or security, or the environment. These are important and legitimate aims for public policy; policymakers must balance these non-economic goals against economic objectives. They might, however, ask if there is a way to meet those same goals through less competitionand trade-reducing means. For example, more coordinated professional accreditation rules between provinces could meet the same policy goals as the current system of different provincial rules, while promoting greater trade and foreign investment in Canada. Other barriers to competition and trade aim to protect domestic industry (either explicitly or in the form of unduly restrictive safety regulations, for example). The cost of protection is high, however. Such policies tend to protect a small number of jobs at the expense of all citizens in that country. U.S. taxpayers, for example, paid on average US$170,000 per job protected by U.S. trade barriers from global competition. 7 Moreover, such policies no longer make sense in an environment where labour shortages not unemployment are the dominant policy concern. How does Canada rank? Canada s existing barriers to trade, competition and investment prevent businesses from innovating and making decisions that enhance their global competitiveness. Of course, Canadian rules that restrict trade, competition and investment were put in place for a reason. Some of those reasons no longer apply. Others aim to protect Organisation for Economic Co-operation and Development, The Benefits of Liberalizing Product Markets and Reducing Barriers to Trade and Investment in the OECD. Working Paper No (Paris: OECD, 2005). 4 See Simeon Djankov et al., Trading on Time [online]. (Washington, D.C.: World Bank, December 2006). [cited Feb.20, 2007]. Documents/TradingOnTime_1206.doc, and John S. Wilson, Catherine L. Mann and Tsuneduro Otsuki, Assessing the Potential Benefits of Trade Facilitation: A Global Perspective. In Philippa Dee, Ed. Quantitative Methods for assessing the effects of non-tariff measures and trade facilitation. APEC Secretariat and World Scientific Publishing Co., Singapore: Scott Bradford. The Extent and Impact of Final Goods Non-Tariff Barriers in Rich Countries. In Philippa Dee and Michael Ferrantino, eds., Quantitative Methods for Assessing the Effects of Non-Tariff Measures and Trade Facilitation. (Singapore: APEC, 2005), pp See, for example, Glen Hodgson and Anne Park Shannon, Mission Possible: Stellar Canadian Performance in the Global Economy. The Canada Project, Final Report, Volume 1. (Ottawa: The Conference Board of Canada, 2007). It is difficult to quantify the relative effects or importance of these barriers, and much analysis remains to be done. Still, the available evidence suggests that, despite low average tariff barriers, Canada still ranks as having important trade, competition and investment barriers relative to its peers. In December 2006, OECD ranked Canada as one of the most restrictive OECD countries in terms of investment controls such as barriers to foreign personnel, operational freedom, screening and foreign ownership. As well, in an earlier study Canada ranked as quite restrictive relative to its peers both in terms of the barriers all businesses face in Canada, and the extra barriers foreign firms face in Canada over and above those faced by domestic firms. For example, for telecommunications services, Canada ranked as one of the most restrictive developed economies with respect to the 7 Gary Hufbauer and Kimberly Ann Elliott, Measuring the Costs of Protection in the United States (Washington: Institute for International Economics: January 1994). 8 Takeshi Koyama and Stephen Golub. OECD s FDI Regulatory Restrictiveness Index: Revision and Extension to More Economies: Economics Department Working Papers No December The Conference Board of Canada

4 extra barriers faced by foreign companies. Extensive Conference Board interviews in 2005 also confirm that businesses have serious concerns about non-tariff barriers to competition. 10 What are the range of barriers we might address? There is no comprehensive list of barriers that limit Canada s global economic success that are within Canadians control. If there were, it would be long and wide-ranging. What we do know is that Canada has many more non-tariff barriers on goods relative to other developed countries on clothing, textiles, agriculture, and iron and steel. 11 To give readers a sense of the types of barriers that exist, here are examples of five types of barriers 12 that are within Canada s control, and their likely effects. 1. Regulations, especially those that differ among provinces or between Canada and trading partners: Conference Board interviews of business executives in 2005 identified standards and regulations as the most important barrier to competition companies faced. About one-quarter of respondents confirmed that provincial regulations impeded their global competitiveness. 13 The way regulations are implemented rather than the regulatory objectives themselves appears to be the root of the problem. Regulations often overlap and inadvertedly restrict trade and competition even though that may have nothing to do with the original public interest objective. Overlapping regulations are so problematic that, as a criterion for lending to companies that want to expand, some banks consider whether companies have enough capital to absorb the costs of complying with regulations across multiple jurisdictions. 9 D. Nguyen-Hong, Restrictions on Trade in Professional Services. Australia Productivity Commission Staff Research Paper. (Canberra: Ausinfo, August 2000). 10 Paul Darby et al., Death by a Thousand Paper Cuts: The Effect of Barriers to Competition on Canadian Productivity (Ottawa: The Conference Board of Canada, 2006). 11 According to 2006 Conference Board of Canada research from the UNCTAD TRAINS Database. That database does not include barriers to services. 12 A number of these examples are taken from Paul Darby et al., Death by a Thousand Paper Cuts: The Effect of Barriers to Competition on Canadian Productivity. (Ottawa: The Conference Board of Canada, 2006). 13 Darby et al., a) Regulations that differ among provinces: There is no national securities regulator, requiring businesses to meet rules in each province (recent proposals by national regulators attempt to address this). This needlessly inhibits investment in Canada, and makes Canadian businesses less competitive, as they need to comply with rules across multiple jurisdictions. In general, international executives interviewed by the Conference Board said that interprovincial barriers often prevent large-scale plants from gaining economies of scale. 14 b) Regulations that differ with trading partners: For example, in Canada, cheese-flavoured popcorn must contain no more than 49 per cent real cheese; in the U.S., it must contain no less than 53 per cent. 15 This difference requires Canadian and U.S. companies to have different product runs for each market. This reduces their global competitiveness and increases prices, without an obvious difference in policy objectives or consumer satisfaction between the two countries. One study found that if Canada had the same level of regulatory restrictiveness as the U.S, Canada s per capita income would have been, on average, 1.9 percent higher Government purchasing restrictions: Quebec government departments open public relations contracts worth $100,000 or more only to companies from Quebec and the State of New York. This likely means less competition and higher costs for Quebec taxpayers. Conference Board interviews identified government purchasing restrictions as the second most important barrier to competition Canadian businesses face Lack of credential recognition and restrictions on labour mobility: Provincial professional associations often do not recognize professional credentials from other provinces and countries. This results in a smaller labour pool from which businesses can draw, likely increasing the cost of services and reducing the incentive to invest in Canada. Business executives ranked 14 Gilles Rhéaume, Open for Business? Canada s Foreign Direct Investment Challenge (Ottawa: The Conference Board of Canada, June 2004). 15 Michael Hart. Steer or Drift? Taking Charge of Canada US Regulatory Convergence, The Border Papers. C.D. Howe Institute Commentary No. 229 (March 2006). 16 Fidèle Ndayisenga and André Downs. Economic Impacts of Regulatory Convergence Between Canada and the United States. Policy Research Initiative. Working Paper 8. Ottawa: October Darby et al., The Conference Board of Canada

5 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. these as next most important barriers to competition, after regulations and government purchasing. 18 Given current differences in regional performance in Canada, particularly the resource boom out west, it is now even more critical to allow workers to move easily between provinces, in order to better adjust. 4. Transportation and infrastructure restrictions: Trucking from point to point within Canada is restricted to Canadian companies employing permanent residents as drivers and using Canadianbuilt or duty-paid trucks. This could raise the cost of trucking, potentially making Canada a less attractive investment location to serve the North American market, and may make it more difficult to get goods to the U.S. and elsewhere. There are also few dedicated access lanes at major border crossings, causing backlogs for goods and services trade, and also reducing Canada s attractiveness as a place to locate investment to serve North America. 5. Border policies: Since the terrorist attacks of September 11, 2001, Canada has implemented new security policies that apply to goods and people entering this country. Other policies apply to trading across the border as well. If the cumulative effect of such policies is unnecessarily restrictive or costly, over the medium term companies will choose to make investments on the U.S. side of the border or outside of North America, rather than investing in Canada to access the North American market. policies within Canada s control that affect Canada s global performance include tax and education polices; sanitary and phyto-sanitary rules; state-owned enterprises that control trade or pricing; quotas or controls for drugs, medical devices, or endangered species; restrictions on personal duty-free amounts bought abroad; and the paperwork required to trade. IS CHANGE POSSIBLE? A first step would be to create a one-stop website that lists the various federal, provincial, and municipal regulations a business must meet in each jurisdiction. Some U.S. states do this. In addition to making it easier for businesses to comply, this would helpfully reveal any regulatory overlap and could point to priority areas for change. Some other promising initiatives appear on the horizon. For example, a recently signed British Columbia Alberta free trade and labour mobility agreement commits to eliminating many interprovincial trade barriers (with a few exceptions). Businesses will have to register in either B.C. or Alberta, not both. The agreement comes into effect on April 1, 2007 and allows for other provinces to accede. Some including the Atlantic provinces, Ontario and Saskatchewan are considering joining. In 2006, Ontario and Quebec signed a labour mobility agreement for their construction sectors, as well. Improving alignment of standards and practices within Canada, along with reducing barriers to competition, should be policy-makers starting point. Other obstacles to Canada s global success that Canadians control include anti-dumping duties mostly in the steel sector that penalize imports and therefore Canadians who depend on those inputs. Carbon and specialty steel are also subject to import monitoring. Remaining tariffs in the dairy sector restrict competition and innovation, and result in higher dairy prices for Canadians. Other Trips abroad to promote Canada, or to negotiate agreements with other countries governments, take up considerable government resources. They also make good headlines. But the pursuit of better policies at home may reap greater rewards, and may even be easier to achieve. Therefore, improving alignment of standards and practices within Canada, along with reducing barriers to competition, should be policy-makers starting point. Their next questions should be which barriers to address first, and how to balance economic interests against other public interest objectives. Once barriers have been addressed at home, promotion and negotiation abroad will pay much larger dividends. 18 Ibid. The Conference Board of Canada 5

6 Acknowledgements The authors would like to thank Glen Hodgson, Mario Iacobacci, Louis Thériault and the members of the International Trade and Investment Centre for helpful comments on a previous version of this paper. International Trade and Investment Centre MEMBErs The Conference Board of Canada is also grateful to the champion and lead members of the International Trade and Investment Centre who, through their membership, support the Centre s research program*. champion members Export Development Canada Foreign Affairs and International Trade Canada Lead Members Alberta International, Intergovernmental and Aboriginal Relations Bank of Canada British Columbia Ministry of Economic Development Canada Mortgage and Housing Corporation Federal Express Canada Ltd. Forest Products Association of Canada Industry Canada Natural Resources Canada Ontario Ministry of Economic Development Purolator Courier Ltd. Ministère du Développement économique, de l Innovation et de Exportation du Québec RBC Financial Group Scotiabank Sun Life Financial Inc. TD Bank Financial Group TransAlta Corporation *These organizations do not necessarily endorse the research conclusions of this paper. About THE International Trade and Investment Centre The Centre aims to help Canadian leaders better understand what global economic dynamics such as global and regional supply chains mean for public policies and business strategies. The Centre brings together business and government leaders in an off-the-record forum to discuss successful trade and investment strategies. The Centre s independent, evidence-based reports propose effective policy and business solutions for improving Canada s trade and investment performance. For more information visit If We Can Fix It Here, We Can Make It Anywhere: Effective Policies at Home to Boost Canada s Global Success by Danielle Goldfarb About The Conference Board of Canada We are: A not-for-profit Canadian organization that takes a business-like approach to its operations. Objective and non-partisan. We do not lobby for specific interests. Funded exclusively through the fees we charge for services to the private and public sectors. Experts in running conferences but also at conducting, publishing and disseminating research, helping people network, developing individual leadership skills and building organizational capacity. Specialists in economic trends, as well as organizational performance and public policy issues. Not a government department or agency, although we are often hired to provide services for all levels of government. Independent from, but affiliated with, The Conference Board, Inc. of New York, which serves nearly 2,000 companies in 60 nations and has offices in Brussels and Hong Kong. Publication Smyth Road, Ottawa ON K1H 8M7 Canada Tel Fax Inquiries The Conference Board, Inc. 845 Third Avenue, New York NY USA Tel Fax The Conference Board Europe Chaussée de La Hulpe 130, Box 11, B-1000 Brussels, Belgium Tel Fax The Conference Board Asia Pacific 2802 Admiralty Centre, Tower 1, 18 Harcourt Road, Admiralty Hong Kong SAR Tel Fax The Conference Board of Canada* Printed in Canada All rights reserved ISSN ISBN Agreement No *Incorporated as AERIC Inc. For more information, please contact us at the numbers listed above or contactcboc@conferenceboard.ca. This publication is available on the Internet at Forecasts and research often involve numerous assumptions and data sources, and are subject to inherent risks and uncertainties. This information is not intended as specific investment, accounting, legal or tax advice.