Confronting Global Economic Uncertainty: International Trade and Investment Priorities for Canada

January 19, 1999

Dear Prime Minister,

When the Business Council on National Issues (BCNI) wrote to you last September, it was to offer our advice on fiscal policy at a time of turmoil and rising uncertainty in the global economy. We urged greater attention to reducing the public debt, tight control of spending and commitment to broadly based tax reduction. We were heartened by your early responses, especially your commitment of the surpluses last year and this year to debt reduction. We look forward to further positive developments in your government’s upcoming budget.

In this memorandum addressed to you and your Cabinet colleagues, we are pleased to offer our views on another critical element in the growth of Canada’s economy — the matter of international trade and investment policy. As you know, global financial turmoil has fanned public anxiety about worldwide economic integration. The overcapacity and weak demand which exists in many industries throughout the world threatens to set in train new protectionist measures in many of Canada’s core markets. It also has slowed progress in regional negotiations such as the Asia Pacific Economic Cooperation (APEC) forum and the Free Trade Area of the Americas (FTAA).

As one of the world’s most open and export-oriented economies, Canada cannot afford to sit back and run the risk of seeing major markets closed or limited. Nor can the country ignore the vast new opportunities presented by global integration as we become a more knowledge-based economy. Yet not enough attention has been given in Canada or around the world to the enormous contribution which a strong and effectively functioning international trade system can make towards a lasting solution to today’s financial crisis. More open markets worldwide will play a critical role in helping to restore growth and bolster weak demand on a global basis.

We believe that the forces driving globalization — technological change, faster and cheaper transportation and communications, the freer flow of goods, services, people, capital and ideas — have had an enormously positive impact overall. They have boosted economic growth, raised standards of living worldwide, accelerated the spread of technology, expanded consumer choice, raised environmental standards and contributed to social progress and democratic development.

However mistaken the fears of those who believe that globalization leads to a "race to the bottom" in standards affecting the environment, health, labour and human rights, the rising level of economic uncertainty has prompted a renewed chorus of scepticism. It is important to acknowledge that globalization is not always an unmitigated good. We need to address any negative effects of globalization with the same energy as we bring to harnessing the enormous benefits of a more integrated world economy. We also must ensure that the international organizations responsible for administering trade and investment rules become more transparent and accountable.

Canada has a huge stake in making globalization work. As a mid-sized power with 80 percent of its economy linked to imports and exports, it must in the short term try to prevent any backsliding toward protectionism. On the other hand, more open and strengthened markets worldwide, underpinned by strong and enforceable international trade rules, will continue to improve the competitiveness of Canadian enterprises. Looking forward, Canada must consolidate its efforts around core strategic trade and investment priorities in order to have a meaningful impact on the issues that matter most to Canadians.

RESISTING THE SCOURGE OF PROTECTIONISM

The protectionist threat has deepened because of the ongoing financial turmoil. The devaluation of many currencies in relation to the United States dollar is accelerating exports to the American market. As its trade deficit balloons and more American companies are hurt by cheap imports, we will see more protectionist responses. Canada is partly shielded by the North American Free Trade Agreement (NAFTA), but we know from experience that this will not prevent Canadian companies from being affected.

Softwood lumber is the best example of how Canada can be negatively affected by American protectionist interests. We must do everything we can to prevent this debilitating protectionism in the future. When the present five-year interim agreement on quotas expires, Canada should press strongly for softwood lumber to revert to a free trade — rather than managed trade — regime.

Where Canadian trade interests are covered by international rules, Canada must act quickly and aggressively to defend its rights, both within the NAFTA and the World Trade Organization (WTO). It must do its best to persuade politicians both in the United States and other markets not to respond to rising trade deficits by restricting imports. At the same time we need to be prepared to defend ourselves against subsidized or predatory imports. The global community must avoid repeating the mistakes of the past, when a wave of competitive devaluations and beggar-thy-neighbor policies simply added to the worldwide damage.

Canada should pursue an active campaign to channel the pressures for protectionism in a positive way. This means arguing for even further market opening as a proven means of dealing with the problems of overcapacity and weak demand facing many industries throughout the world. The forces of protectionism in the United States are on the rise, and efforts on the part of the Administration to combat these forces need support. There is therefore both real urgency here and a real opportunity for Canada to show leadership on the world stage.

The BCNI, which played the leading private sector role in the realization of the Canada-United States Free Trade Agreement, is convinced that the time is ripe for Canada to press for ambitious multilateral trade negotiations under the WTO. These could begin in the year 2000 and conclude by 2003.

The time for Canada to act is now, since the final decision on the scope of multilateral talks will be made in the fall of 1999. Even the prospect of broadly-based negotiations could help Canada and its trading partners to cope with today’s financial and trade uncertainties and the resulting protectionist pressures. We certainly would support such an effort enthusiastically.

SETTING STRATEGIC PRIORITIES

Prime Minister, you and your Cabinet colleagues have made a strong commitment to making Canada a truly knowledge-based economy. Many of the BCNI’s international trade and investment priorities support this objective. We recommend that the government focus its efforts in a limited number of areas in order to achieve real results. The following are the issues we think are most important to the country.

Strengthening key relationships

We must focus more intensely on our core trade and investment relationships. Canada’s exports and investments in the United States, the European Union and Japan are vital to our economic performance in their own right. But the experience gained in these markets often is crucial to subsequent success in emerging markets as well.

The United States is and will remain Canada’s dominant trading partner, but our two key overseas relationships must not be neglected. As European integration has now grown to include a common currency, Canada must engage European business and political leaders in a more meaningful dialogue to protect and promote our interests. And despite Japan’s current troubles, we should not underestimate the continuing importance of our historically strong relationship. The BCNI underscored the value and potential of this relationship during a recent mission to Japan.

While we focus our efforts on these core markets, we must not lose sight of critical and rapidly growing trade and investment partners for Canada — especially in China, India and many countries throughout Latin America. We have spent decades building solid business relationships with these countries, and today’s financial crisis should not blind us to the ongoing, growing opportunities with these trading partners.

Trade barriers: inside the border

Tariffs have been reduced dramatically over the past 50 years to an average rate of about four percent for industrialized countries. In place of high tariffs, however, we have seen complex internal barriers to trade emerge. Domestic regulatory regimes such as product standards and customs procedures, licencing and accreditation requirements, investment and competition policies and even tax rules — all have become critical dimensions of international trade and investment negotiations.

Such non-tariff barriers can be much more difficult to measure and control. They also can prove much more difficult politically, precisely because they are rooted firmly in the domestic policies of individual countries. But because of their pervasive influence on trade and investment, these issues must be addressed aggressively in order to strengthen the effective functioning of global markets.

As Canadians, we would have much greater credibility in pressing for the elimination of tariff and non-tariff barriers internationally if we, as a country, were able to break down our own inter-provincial trade barriers. Such a step would not only be of benefit to Canadian consumers, but it would aid in making Canadian firms more competitive internationally. It would also be a firm lynchpin in Canada’s economic union, strengthening Canadian unity overall.

Trade in services

While service industries represent 70 percent of Canada’s economy, they account for a much smaller percentage of the country’s overall trade. This percentage must grow significantly if Canada is to become a leading knowledge-based economy. High quality, low cost services should also be seen as an increasingly important contributor to innovation and a catalyst for higher levels of productivity growth.

Canada must press for much greater liberalization and effective functioning of services markets throughout the world. This also means that Canada must be prepared to adopt, where warranted, more open trade and investment policies in highly regulated service sectors. Core priorities for liberalization abroad include financial services, information technology, telecommunications (including electronic commerce), transportation, professional services, and the movement of personnel.

Intellectual property

Shifting to a knowledge-based economy will bring with it difficult problems involving the protection of intellectual property rights. Canada should work hard to ensure that creators of intellectual property have adequate incentives and effective protection.

Culture

The BCNI has long been on record as a strong supporter of Canadian culture. But the fact is that many of Canada’s present cultural policies are too inward looking and timid. In many if not most cultural products, Canadians can compete with the world, and our ability to nurture Canadian culture will be increasingly dependent on our ability to access other countries’ markets. If we try to retain domestic cultural policy frameworks based on protection and inwardness, we should not be surprised if we are shut out of an exploding global market for cultural products. To support Canadian culture more fully, we should be looking at developing more effective rules-based approaches to trade in cultural products, rather than simply trying to exclude or exempt culture from any rules.

Investment and competition policy

We are very concerned that Canada’s share of world investment, both inward and outward, has fallen much too steeply over the past twenty years. Part of the problem may be that successive Canadian governments, and Canadians more broadly, have not fully understood the benefits of both inward and outward investment. Canadian foreign direct investment often faces discriminatory treatment that could be reduced through multilateral rules coalescing around the principle of national treatment. Stronger multilateral rules covering investment will also help to make Canada a more attractive location for inward investment. We urge that Canada give high priority to the development of a multilateral agreement subjecting foreign investors and suppliers of goods and services to national treatment based on effective and enforceable national competition policy. Canadian firms need a level playing field to expand globally, and they do not have one today.

Agriculture

Canada is a major exporter of agricultural products. We need an international trading environment that supports open borders, allowing natural comparative advantages to prevail. Canada should try to eliminate all export subsidies and reduce the level of spending permitted on domestic subsidies that distort trade. We should work for clearer rules on sanitary and phytosanitary requirements. We should ensure that science is the only acceptable basis for assessing genetically modified products. And we must ensure that labeling requirements are not used as a trade barrier. Within Canada, we must move to reform our highly protectionist marketing boards, in the recognition that these supply management schemes often harm not only our domestic economy in those products, but that they undermine our efforts to achieve greater market access for our agri-food exporters.

Industrial tariffs

Although average tariff levels in industrialized countries have been reduced to quite low levels, there are still nuisance tariffs and high tariffs in particular industries. Industrial resource products for instance, face such barriers and are still of great importance to Canadian living standards, accounting for close to 15 percent of GDP and 40 percent of exports. These tariff levels must be brought down, and the members of the BCNI are prepared to work with government officials to identify sectors in which tariff negotiations should be pursued.

Environment, labour, health and safety, human rights

Many highly emotive issues that were not traditionally part of negotiations on trade and investment are finding their way into such discussions. History shows that more open trade and investment, through its contribution to economic growth, goes hand in hand with the promotion of democratic rights and stronger protection for the environment and more robust standards for health, safety and labour.

Business leaders agree that trade and investment agreements should be sensitive to these concerns, and the BCNI looks forward to working with other members of "civil society" to this end. At the same time, we feel that the development and enforcement of standards in such fields should be pursued first in the international institutions that already have a mandate to do so. Trade and investment agreements are not the best vehicles for attaining higher standards in areas not directly related to trade.

CONCENTRATING CANADA’S EFFORTS

No matter how much progress we make in improving global trade and investment rules, we need to do a much better job of explaining the new realities of the Canadian economy to potential international partners. Canada has undergone huge structural changes and is a far more effective base for competitive trade and investment than it was ten years ago. But too many international investors do not appreciate the way our industrial mix has shifted, the extent to which we have become a cost-competitive base for the NAFTA market or the degree of progress governments have made toward sound fiscal management.

The BCNI already plays an active role in telling Canada’s good news story abroad, and we intend to continue and expand our efforts. While portraying Canada as it is, we are careful not to ignore or distort elements in our economic structure and policies that could be improved. To be credible, we do and must tell the truth plainly. And where Canadian policies are not yet world class, we will continue to work toward that end.

Prime Minister, the strategic priorities listed above are all important, but the list itself shows just how diffuse the trade and investment agenda has become. Canadians have great difficulty following the plethora of initiatives represented by the alphabet soup of the WTO, NAFTA, FTAA, APEC, Transatlantic Business Dialogue (TABD), European Free Trade Area (EFTA) and many others.

The BCNI was a strong advocate of the Canada-United States Free Trade Agreement and then the NAFTA because they met two critical conditions. First, these negotiations promised and delivered much faster results than could be expected multilaterally through the General Agreement on Tariffs and Trade (GATT). Second, they promised and delivered much stronger disciplines and commitments than could be expected multilaterally. The BCNI would like to see the same criteria applied to the bilateral and regional initiatives underway today.

We must make the NAFTA and WTO the core international instruments through which Canada pursues its trade and investment interests. The NAFTA is in place, but unlikely to be reopened for years. In the meantime, therefore, our support for initiatives such as APEC, FTAA and EFTA must be based on how much they can add to the substance and momentum of improvements to the global rules of the World Trade Organization.

No matter what the topic, our objective must remain worldwide trade and investment liberalization. We believe that the most effective path toward this objective is to launch wide-ranging multilateral trade negotiations with a focus on "inside the border" non-tariff barriers. Priority areas would include services, investment and competition policy, intellectual property and agriculture as well as industrial tariffs. Such an initiative would also highlight Canada’s commitment to deal with global problems of overcapacity and weak demand through a rules-based approach. In pursuing this objective, we must be inclusive in our approach. Countries presently pursuing accession negotiations in the WTO, such as China, Russia, and Saudia Arabia need to be fully involved from the outset.

For Canada to be most effective in attaining its objectives, a "Team Canada" approach to negotiations is needed. The federal government, the provinces, the private sector, interested groups and individuals from across this country must be involved at an early stage. We are heartened that the federal government has established parliamentary hearings to seek the views of Canadians on both the upcoming WTO negotiations and the ongoing FTAA negotiations. The Business Council will be a keen participant.

As we define, clarify and pursue specific Canadian trade objectives, let us not forget that we are pursuing Canadian interests and values. Restoring growth and contributing to economic development in Canada and throughout the world will strengthen democratic development, respect for human rights and protection of the environment worldwide.

This is an ambitious strategy. But it would provide an opportunity for Canada once again to take a leading role in multilateral trade and investment negotiations. It would prepare Canada more effectively to take advantage of an increasingly integrated world economy. And in doing so, this approach would support your stated objective, "to improve Canada’s long-term productivity so that, over time, Canadians will see a sustained increase in their incomes, standard of living, levels of employment, and their quality of life".

Prime Minister, we hope that you find these thoughts a constructive contribution to the discussion of your government’s international priorities. We look forward to working with you, the Minister for International Trade, the Minister of Industry and all interested Cabinet colleagues in any way that may be helpful.

Sincerely,

On behalf of the Board of Directors
Business Council on National Issues