Canada Needs to Foster International Supply Chain Trade, CBOC Report Says

Ottawa – Canada must foster domestic firms’ integration into global supply chains in order to secure a better standard of living for its citizens and to stay competitive, says a new report by the Conference Board of Canada. North American supply chain trade growth has plateaued in recent years, following dramatic increases in the 1990s, says a CBOC report titled 'Stuck in Neutral'. The study argues that governments continue to view trade in outmoded terms of sales of finished goods from one country to another, but the new trans-national nature of corporations means goods and services flow across multiple borders around the globe before a finished product comes to market.

As a result, the paper argues, governments must adopt policies that recognize the new reality and help domestic firms to take advantage of lower cost labour and other efficiencies abroad, something that just isn’t happening to the extent it should, says the board.

“In aggregate the trend suggests that whereas there are rapidly growing opportunities Canadian firms are only taking small advantage of those opportunities,” said Danielle Goldfarb, associate director of the CBOC’s international trade and investment centre.

“After 2000, Canada’s overall trade data show a drop in Canadian companies’ engagement in global and regional supply chains. That did not pick up in any significant way by 2006,” the report says. In the post-free trade agreement era of the 1990s, trade between Canada and its North American partners almost tripled, but tapered off between 2000-2003 and only regained lost ground from 2003-2006, the report says.

“(North America) represented 84 per cent of Canada’s exports and 60 per cent of its imports in 2006 (with inflation removed). Mexico accounts for only a small fraction of this trade,” the report says.

Goldfarb said that when Canada's trade with North America is removed from the equation, it becomes clear that Canada has become somewhat more integrated in other regions' supply chains. But while Canadian firms have increased their trade in supply chains in other parts of the world, that increase has not been enough to offset the stagnation in growth in North America trade, she said. When it comes to Asia, Canadian trade is heavily weighted toward the export of raw materials and the import of finished goods. Goldfarb said Canada should be aiming to grow its trade in middle-stage goods.

"Trade in (supply chain) inputs is dominated—especially in the case of Asia—by the use of imported inputs, with Canadians not supplying significant inputs into regional supply chains elsewhere,” the report says.

Goldfarb said that U.S. firms that import information technology components for assembly into finished products were able to reduce their prices by 30% and significantly boost U.S. GDP. The failure of Canadian firms to similarly embrace emerging economies and the lower costs those countries offer could be partly to blame for Canada’s lagging productivity statistics, the board says. While importing finished goods has made some Canadian businesses more competitive, other Canadian firms could increase their competitiveness by trading in middle stage goods, she added.

Breaking production down into components across borders has been shown to be more efficient, Goldfarb said, adding Canada should be looking to attract higher value activities in the production chain such as engineering and design services. While commodities trade is important, she said that the country would be better served by having a diversified economy that can withstand a downturn in resource prices.

Goldfarb said the while much of the adjustment to the global economy will have to come from individuals and businesses, governments can help by eliminating trade barriers and investing in education to help workers adapt to rapid change.

“Examining the facts I don't think we have a complete answer for why businesses are not taking advantage of these opportunities in other regions,” Goldfarb said. “It just isn’t clear.”

Source: economicnews.ca