Join the Value Chain

More and more, firms use parts made around the world. That makes the old hostility to foreign competitors outdated

Michael Hart And Bill Dymond, Financial Post
Published: Tuesday, April 01, 2008

Canadian trade policy is preoccupied with yesterday's priorities: bilateral trade agreements with minor partners and multilateral negotiations that provide scant benefit, while ignoring pressing problems in Canada's most important trading relationship. Tempting as it is to blame the political caution of a minority government and wait for political fortunes to change, the problem is deeper and of longer standing. Canadian trade policy has become detached from its economic moorings.

Conventional trade policy assumes that international trade consists of the flow of nationally identifiable goods and services across borders and that states have an interest in influencing the size and direction of such flows. Politics translates this into a focus on increasing export opportunities while disparaging the import side of exchange.

Yet as national boundaries recede as key determinants in international trade, the national identity of products becomes difficult to divine. In today's world of value chains and global production, the conventional tools and instruments are at best irrelevant and at worst dysfunctional, yielding perverse results for contemporary trade and investment.

Global value chains are the new paradigm of international trade. More and more transborder transactions take place within firms, among related parties, or within integrated networks. As firms' abilities to disaggregate and geographically disperse production have grown, parts and components have grown to form a greater share of international trade. Production is geared to a wider market, and the range of goods and services that are exchanged internationally has widened considerably.

Capital and technology move between nations to promote export-oriented production, not to substitute for imports. International exchange now involves a much more complex and sophisticated range of economic transactions. Vertically integrated firms have given way to much more flexible, horizontally organized enterprises making creative use of regionally and globally organized value chains.

If the government appears to understand that Canada's future prosperity depends upon effective participation by Canadian firms in this new economy, its policy preferences remain firmly rooted in the past. Trade Minister David Emerson stresses that access to export markets remains Canada's highest priority, to be achieved through successful completion of the Doha Round of multilateral trade negotiations, the development of strategic partnerships with China, India and Japan, and the negotiation of bilateral free trade agreements.

A successful Doha Round and trade agreements with Peru, Colombia and the Dominican Republic offer, at best, marginal new opportunities for a few Canadian firms, but will have little impact on the economy as a whole. Trade missions to far-flung places that offer limited new prospects may similarly serve political or foreign policy imperatives, but make few, if any, economic contributions. What Canada needs is a trade policy that recognizes the increasing importance of global value chains and the critical role of Canada-U.S. integration in gaining full benefit from their exploitation.

There remain barriers to realizing the full trade potential of the Canadian economy. Some of them lie in foreign markets; more of them reside in Canada. In its latest report on Canada, the World Trade Organization observed that significant trade barriers still protect certain agricultural activities, and foreign investment restrictions remain in areas such as telecommunications, financial services, the cultural industries, and air and maritime transport.

Reform in those sectors could lower costs to Canadian taxpayers and consumers while increasing productivity and competition in the domestic market. Ultimately, addressing remaining policy-induced distortions would help ensure that Canadians continue to enjoy one of the highest living standards in the world. A serious contemporary trade and commerce strategy would start by hacking away at these barriers.

Canada also needs to move decisively to pursue a bilateral initiative with the United States, to design and implement a border regime that eliminates much of the detritus of past customs administration for bilateral trade. We should implement a joint regulatory agenda that seeks, over time, to move toward much higher levels of convergence through a combination of mutual recognition, joint rule-making, and similar programs. And we should establish the joint institutions and decision-making procedures that will achieve these goals. A modernized Canada-U.S. treaty that reflected the reality of the dynamics of value-chain-based trade and production patterns would help point the way toward a renewed and revitalized trade policy.

The benefits to Canadians of such a reordered agenda are potentially enormous. Success in reducing the direct and indirect costs of administering the border, for example, would alone be worth the effort. Reducing overlap and duplication in Canada's increasingly costly regulatory regimes would put further dollars in the pockets of Canadians and increase their capacity to pay for other priorities, from health care reform to education.

Redirecting productive private resources to more-rewarding activities would lead to even larger benefits, strengthening the Canadian economy and adding further to the capacity to focus on other priorities. The only cost that would arise is political: in Canadians' exaggerated preoccupation with ephemeral concepts of sovereignty and nationhood.