A progressive trade agenda for inclusive growth

22 September 2017
ITC News
Address by ITC Executive Director Arancha González at the Ontario Ministry of International Trade
22 September 2017, Toronto - Canada

Good afternoon, it is a pleasure to be here with all of you.

Thank you for the warm welcome and many thanks to the Ontario Ministry of International Trade for organizing this talk today on trade in the 21st century. This city is a good place to think about trade and globalization in the 21st century. Over the past few decades, Toronto has become deeply integrated into global networks for finance, manufacturing, technology, research and development, and culture.

Over the next few minutes, I’ll share some thoughts on why I think Canada is doing a lot of things right, and how provinces and territories will shape whether this remains the case. I’ll examine why small and medium-sized enterprises are so important for a progressive trade agenda, both here and elsewhere in the world. Finally, I’ll tell you where my own organization, the International Trade Centre, fits in to it all.

The mechanics of trade in the 21st century: the rise of value chains

First, the mechanics of trade. The division of labour has gone global or at least partially global. Breaking down production into individual tasks boosts efficiency. About 250 years ago in Scotland, Adam Smith observed the effects of specialization and scale on the manufacture of pins. He figured that one man working to make a simple pin from start to finish - cutting and sharpening wire, making and attaching pinheads, and so on – would struggle to make even a single pin a day, let alone twenty. But that ten workers, working in what we would now call assembly line fashion, could make 48,000 pins a day.

For a century and a half after the start of the industrial revolution, factories and industrial clusters brought together raw materials, investment, workers, and know how to manufacture goods. These goods were sometimes produced behind national tariff walls, as was the case in Canada under Sir John A. MacDonald’s National Policy. Finished products were increasingly traded across national borders. Most of the factories were in places like Western Europe, the United States, Canada, and later, Japan – a big part of the reason these countries dominated the global economy and were so much richer than the rest of the world by the 1970s.

Over the past thirty-odd years, transport and communication costs have fallen dramatically. Meanwhile, governments everywhere have lowered tariffs and opened their markets to foreign investment. Entire new classes of services have become globally tradeable, from computer programming to accounting.

Together, these phenomena made it viable for companies to do two things at scale. One: they could outsource individual tasks like component production or assembly to specialized subsidiaries or independent firms. Two: they could locate each step of the manufacturing process wherever the world production costs are most advantageous.

Trade in intermediate goods took off. Around half of global trade in goods and services now occurs within value chains. The phone in your pocket, your car, probably even the sofa you sit on while binge-watching Netflix – all of them are the product of multi-country value chains involving cross-border flows of goods, services, data, and investment. Trade in tasks has replaced trade in finished products.

Back in the 1920s, Henry Ford’s River Rouge Complex in Michigan made nearly everything that went into a Model-T. A few decades later, the 1965 Canada-US Auto Pact helped Ontarians become pioneers in cross-border supply chains. Today, factories effectively span not just borders, but oceans. The typical pattern involves Northern capital, R&D, and other skill-intensive activities, with labour-intensive work done in poorer countries. But major developing countries are becoming major sources of outward investment and cutting-edge ideas.

The rise of international value chains has implications at multiple levels.

For the developing countries that received the bulk of labour-intensive tasks, most famously China, the process has driven rapid growth, job creation, and poverty reduction. Growth in these countries has in turn enriched commodity producers from Brazil to Nigeria to Fort McMurray.

For individual companies, value chains lower the bar for entry into world trade. Firms no longer need to produce shiny, well-branded final products. Instead, small and medium-sized enterprises can make parts or perform processing tasks for multinationals. They can provide services over the internet to customers across the world. This only works, however, if they can meet the quality requirements of lead firms.

Value chains have also transformed trade policy. When access to imported inputs and services is a key determinant of export competitiveness, protectionism no longer protects. Consider Magna: had it ended up making tariff-protected doors and drive trains for Canada’s modestly-sized market, it would almost certainly not be the world-leading auto parts maker it is today. Efficient border procedures, enabling just-in-time delivery, are now major factors in trade competitiveness. That’s why the WTO’s Trade Facilitation Agreement was a big deal.

Tariffs have not disappeared as an issue in 21st century trade. And even low tariffs add up fast when components cross borders several times. But with a few notable exceptions, tariffs are now just the tip of the trade-impeding iceberg. The bulk of the iceberg is non-tariff measures like product standards, regulations, licensing requirements, and rules of origin. Some of these measures serve a necessary function: to safeguard consumer safety or other public policy objectives. Yet they can be needlessly complex, and generate unnecessary costs and delays for businesses seeking to obtain the requisite certification or other paperwork.

Modern trade negotiations focus on regulatory cooperation related to non-tariff measures. It’s worth noting that the details in these agreements really matter: get them wrong, and you might even increase trade frictions. For instance, in the current NAFTA renegotiation, one of the issues up for discussion is the so-called ‘rules of origin’. These rules determine whether goods qualify as sufficiently North American to benefit from duty-free market access.

Let’s think through what might happen if the rules end up becoming much stricter than they are now. A company in Mexico that had been importing a few components from East Asia might find that its products are no longer eligible for export to the US and Canada under NAFTA terms. It would have two options. It could send the products north under WTO terms – paying an import duty, and kind of defeating the point of the whole NAFTA renegotiation. Or, it could pay more to source the same components from a NAFTA supplier, if there’s even a company that makes them. In either case, prices would likely rise, hurting North American purchasing power, and weakening the global competitiveness of Factory North America.

The politics of trade in the 21st century, and what Canada gets right

What brought us to this point, as you well know, is the strange politics of trade in the 21st century.

The open global economy has enabled the fastest reduction in worldwide poverty ever. It has increased your purchasing power and mine. Yet even though opinion polls suggest that large majorities of people still see trade as a good thing, there has been an undeniable backlash against economic globalization in some advanced economies, most significantly one Canada knows well.

This backlash is in considerable measure the result of a generation-long political failure. Domestic policies that failed to ensure the gains from trade and growth were more widely shared. Political leaders who failed to acknowledge that trade would hurt some people even as it benefited societies overall. Instead of using tax, labour, and education policies to remedy these negative effects, governments too often did the opposite. Instead of countervailing low-skilled workers’ exposure to job insecurity and income volatility, policy frequently exacerbated it. The result: in too many places, some groups have borne the worst of the pain of economic adjustment, while the biggest gains have accrued to too few. And because foreigners are far more tangible than quietly-improving machines, trade has become a scapegoat for technological change.

In Canada, anti-trade populism is conspicuous today by its relative absence. I suspect Canada’s temperate politics has a lot to do with the fact that policymakers in Canada have been doing their job. Tax policy has pushed back against growing inequality in pre-tax wages. Researcher Miles Corak has demonstrated that children born in this country to parents in the bottom income quintile are about twice as likely as their American or British counterparts to go on to earn at least a middle-class income.

Recent Canadian census data showed that real median incomes grew by over 10% between 2005 and 2015. At barely 1% annually, this is slower than what one might hope for – but it compares favourably to places where median incomes have stagnated or even declined.

Last year, when she was still trade minister, Chrystia Freeland spoke at the London School of Economics on ‘growing trade the progressive way’. Despite the title, much of her speech had little to do with trade. She talked about middle class purchasing power, then about immigration policy and multiculturalism. Only after that did she turn to the nitty-gritty of trade agreements.

The progressive trade agenda and ITC

The message is clear: a progressive trade agenda starts at home. In Canada, because of the federal-provincial distribution of responsibilities, this means the provinces and territories. Even on an issue as critical as gender equality, Ottawa can set the tone, provide some funding, and regulate pay equity for a relatively modest number of workers. But it’s provinces and territories that are in charge of workplace conditions and investing in the social policies needed to enable women to play a truly equal role across the workforce. In this regard, I note that Ontario alone is responsible for equipping more than a third of Canadians with the education and skills they need to cope with change and thrive in the modern economy.

But a progressive trade agenda doesn’t end at home, of course. It extends to an. active support for multilateral trade. How can we respond to global economic integration if not with a leveling of the global playing field?

A progressive trade agenda also stresses the importance of inclusive trade rules and rule-making procedures. Canadian and EU negotiators working on the Comprehensive Economic and Trade Agreement made a point of safeguarding governments’ right to regulate more explicitly than similar accords have in the past.

Defining the boundaries of the playing field is one thing. Ensuring everyone can play on it is another. Businesses that export tend to become more productive, grow faster, pay higher wages, and create more jobs than comparable firms that don’t. But breaking into world markets isn’t straightforward, especially for the small and medium-sized enterprises that account for the lion’s share of employment in Canada and elsewhere. The same can be said of women entrepreneurs. Only one in five exporting companies are women owned businesses.

For this reason, the progressive trade agenda has a strong supply-side component. It’s why the Canadian Trade Commissioner Service works to help Canadian businesses understand foreign market opportunities and build overseas sales networks. It’s why Ontario launched its ambitious going global strategy, providing financial and institutional support to help the province’s SMEs break into world markets. In fact the Ontario Investment and Trade Centre, was set up in support of that very goal.

This brings me to ITC. You could think of us as the international complement to the supply-side agenda I’ve just described. As you are well aware, even in Ontario, SMEs find it harder than their bigger competitors to connect to international market opportunities. In most developing countries, the competitiveness gaps between small and large firms are far wider. The hurdles to international markets – of information, financing, connections – loom even larger. And low productivity translates into poor wages and working conditions.

ITC’s job is to help make trade happen for SMEs in developing countries by enabling them to become more competitive and connect to international market opportunities. We work with governments on the policy environment, with trade and investment promotion agencies – including Global Affairs Canada – and with SMEs themselves.

ITC has surveyed tens of thousands of businesses in dozens of countries to understand the practical obstacles businesses are facing on the ground. Among the lessons we have learned:

One, non-tariff measures weigh more heavily on small businesses than on bigger ones. This is especially true for businesses owned by women.

Two, solving businesses’ NTM-related problems doesn’t always require the cooperation of trading partners: some of the worst obstacles are unnecessary red tape at home.

Three, e-commerce helps SMEs internationalize. A recent ITC survey showed that women-owned businesses outnumbered men-owned businesses 4 to 1 in cross-border e-commerce – the exact inverse of the figure for offline trade.

And finally, four, “information transparency issues” are among the biggest obstacles faced by would-be traders.

Providing trade and market intelligence has always been at the centre of ITC’s work. But I want to tell you about a new tool, called the MSME Trade Helpdesk, that we think will be as useful for a Bangladeshi shrimp producer seeking to export to France as for a Niagara vintner looking to sell ice wine to Korea.

The Helpdesk, which will launch later this year, is designed to be a simple online one-stop shop. It will provide information to prospective traders on applicable tariffs, value added taxes, relevant health and safety standards, regulatory agencies and fees. It will give them step-by-step explanations for trade-related procedures, paperwork and documentation requirements. And because meeting market entry requirements is only part of the story, the Helpdesk will contain information about upcoming trade fairs and related B2B events.

ITC’s work with Canada, and implications for Ontario

Before concluding, I also wanted talk about what the future of trade might hold not just for Canada in general, but for many of you in this room.

Last year, ITC worked with Global Affairs Canada to benchmark Canada’s Trade Commissioner Service against comparable agencies elsewhere. TCS scores well for leadership, processes, services, and results measurement. It saves money by making effective use of partnerships with sector business associations. Companies using TCS services export 18% more, to 36% more markets, than companies that don’t.

On the downside, TCS has lower international brand recognition than other top trade promotion agencies like AusTrade and UK Trade and Investment. Part of this is because TCS is embedded in a large and complex system, which broadens its reach but weakens its ability to concentrate resources on high-potential sectors and markets.

By way of conclusion, I wanted to share some lessons which are particularly relevant to Ontario:

Firstly, helping SMEs diversify into new products and markets could help the province reduce its deep reliance on intra-firm trade with the US. In the longer term, this would entail linking the province’s colleges and universities to an ecosystem of business support starting with incubators connected to financing, networks, and advisory services.

Meanwhile, sub-national trade promotion organisations are growing in ambition and influence around the world, as cities and regions grow in importance as economic actors. The experience of such agencies suggests that for a jurisdiction like Ontario, acting in concert with federal institutions would maximize the return on investment.

Thirdly, effectively managing such complexity demands strong federal-provincial relationships, shared planning and regular communication. Our experience suggests investing in fostering connections between the different levels of trade and investment promotion agencies more than pays off.

Finally, success is greatest when agencies function as a trusted and respected bridge between government and businesses; when they are agile, future-focused promoters of the country and sub-national brands. Above all, they need to be seen as purpose-driven and even-handed in support of inclusive growth.

Ladies and gentlemen, thank you for your attention.

Thank you.