Remarks by: Stephen Poloz
President and Chief Executive Officer
To the: Le Conseil des relations internationales de Montréal (CORIM) / Montreal Council on Foreign Relations
Montreal - April 5, 2011
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Good morning and welcome.
I’d like to thank CORIM for inviting me here today to speak to you about what I see on the horizon for Canadian global business, and the challenges and opportunities we face.
Thank you, Elliot and Pierre, two long time friends, for the warm welcome. And thanks to you all for being here. I especially would like to acknowledge some of Canada’s future exporters who have joined us today. I also welcome the students with us today.
What is Globalization?
Today I will focus on globalization - its evolution and the implications for Canadian businesses. The word globalization means different things to different people, so I’d like to begin with a definition.
When we talk about globalization, we tend to think in terms of the trade liberalization and the spread of technology that has been increasingly evident during the last 30 years or so.
But the collection of activities that form the basis of what we call “globalization” actually dates back to the very roots of human civilization. Trade began when the evolution of agriculture permitted human beings to spend time developing more specialized skills, thereby increasing the technology, arts, etc. Trade was essential to the development of civilization, and has continued to be an essential part of raising the quality of life for people everywhere. This process is very well explained in the book “Guns, Germs, and Steel”, by Jared Diamond. I highly recommend it.
This phenomenon is still present today, but on a global scale: fragmentation of supply. That means rather than one company producing an entire product from end to end, we have dozens of specialized companies engaged in a supply chain that allows them to focus on the tasks they perform best, while outsourcing the tasks at which they are less efficient. The fact is, globalization has been on a continuous forward march since the beginnings of civilization – it is a force of nature.
Let me repeat that: globalization has been on a continuous forward march since the beginnings of civilization – it is a force of nature. Today a globalized company uses the world to produce, engaging in what we call “production trade”, using facilities in foreign countries that they own, and then engage in traditional export trade to sell their products and services throughout the world. This bigger picture we at EDC have labeled “Integrative Trade”.
The end of globalization?
However, in the aftermath of the global financial crisis, while the global economy is showing signs of recovery, many are wondering whether the forces of globalization will recover with it. I believe that, in the words of Mark Twain, news of its death has been greatly exaggerated.
Some say that the volatility of oil prices will spell the end of global trade, as transport costs become unmanageable. While oil prices may certainly have an effect on the way we do business, it is unlikely that the force of nature that is globalization will be held back by this one factor. Instead, it is far more likely that we will see an increase in foreign direct investment as a means to access emerging markets with less transportation costs than traditional export trade. In other words, globalization continues, but may manifest itself differently.
Others, like Joseph Stiglitz and Gideon Rachman, are predicting a retreat from globalization in the near term, in part due to the popularity of the view that trade liberalization led to the policies that contributed to the spread of the financial crisis, and that the boom in Asia is coming at the expense of jobs elsewhere.
But protectionism is a straw man: history shows that trade barriers will hurt the recovery. They are simply an updated version of the policies that wound up prolonging the Great Depression of the 1930s, as countries responded in kind to protectionist measures.
We must harness history to guard against the rehabilitation of protectionism as an economic philosophy, and be wary of those who argue that tariffs and
other obstacles to trade can protect jobs.
History shows that obstacles to trade will temporarily hinder the globalization process. Supply chains have become much more global – the tightly interwoven net of production and supply would be very difficult to undo. All would suffer.
Globalization has taken root, and its progress will continue, whether or not we choose to participate. By opting out at this point, we can only set ourselves back. In other words by opting out we engineer our own setback.
What to expect from the “new normal”
While reports of the death of globalization may be greatly exaggerated, there is no doubt that we are currently facing some conditions that are not conducive to increased trade.
The ‘new normal’ that is emerging in the wake of the credit crisis is one where growth is unbalanced, with emerging markets far outpacing the developed world.
Also, political risks will continue to be a significant factor; as we’ve seen in the last couple of months in Egypt, Libya and Tunisia, we must expect the unexpected.
In the face of these conditions, some have chosen to predict a withdrawal from increased integration, but I’m more encouraged by the approach that Japan is taking to overcoming its 20-year economic slump.
The Japanese government might very well have been the first to use the liberalization of trade as a strategy to stimulate the economy. I think that that is a good option. And I don’t want to mention Japan without recognizing the challenges the country is now facing. We hold it dearly in our heart.
The fact is, integrative trade has become the way business gets done. And recognizing that reality is the first step towards positioning ourselves to take advantage of the benefits that it presents.
So what does this mean for Canada? Our economy is built on trade; it supports jobs and competitiveness, and is vital to Canada’s future prosperity. In fact, Canadian exports maintain nearly one in five jobs and generate more than 20 per cent of national income. In short we are simply too small to go it alone.
Over the next few years, economic growth will remain moderate in our traditional export markets. The U.S. is continuing to struggle with high unemployment and a massive deficit. European governments are waiting to see what the fallout of the recent bank bailouts will be, and some are imposing austerity measures, which may further slow economic growth in the near term.
Meanwhile, growth in emerging markets is forecast to remain strong. These markets are home to a growing middle-class that is fueling strong growth in housing and consumer goods. However, inflationary pressures may play a role in moderating growth, and while governments in many of these markets are in a relatively strong fiscal position, they cannot afford to continue to support stimulus measures indefinitely.
So how should Canadian companies respond?
Strategies for Canadian companies
We have been observing that Canadian companies are making strategic moves into emerging markets in response to sluggish growth in the U.S. Exports and investments in China, Brazil and India are leading the way. Emerging markets now make up one-third of EDC’s business, and we want to keep growing that number, because it makes sense for Canadian companies to diversify their sales to protect them against slumps in their traditional markets.
But this doesn’t mean that trade with the U.S. can’t be a good strategy; in fact, the U.S. is home to a large number of global corporations, whose growth over the next few years will outpace U.S. economic growth, thanks to their global reach. Canadian companies that become part of their supply chains stand to share in that growth and to benefit from connections to other suppliers the world over.
Take, for example, a company like Pratt and Whitney – a big player in the aerospace industry here in Quebec. When they sell engines to a U.S. plane manufacturer, they are part of a supply chain that will see those aircraft distributed all over the world, even though their deal is with a company based in the U.S.
But traditional export sales are not the only way to tap into new markets. Integrative trade is increasingly the way the world works, and Canadian companies are on board. Canadian exports of goods and services totaled about $450 billion 2010. But what many people don’t realize is that foreign affiliates of Canadian companies are already generating sales in that same range, of more than $400 billion. The Canadian economy is really spilling out of our frontiers. In other words, there’s a whole other Canadian economy out there.
In fact, during the last 10 years, Canadian foreign affiliate sales grew at twice the rate of Canadian exports. What this shows is that Canadian companies are taking advantage of a strong dollar to invest in foreign markets and plug in to global supply chains.
While some may argue that this approach takes jobs away from Canada, the fact is Canadian Direct Investment Abroad generates significant income for Canadian companies, much of which is repatriated to Canada.
In addition, we know that Direct Investment Abroad creates opportunities for follow-on exports from Canada to the host country. It is very difficult today to sell goods out of a suitcase. It can create a virtuous circle, whereby investment in an emerging economy creates a middle-class with the buying power to purchase the products they are helping to manufacture – it’s what we’re seeing now in China and India.
Take a Canadian company like RIM for example. The Blackberry is a Canadian product, that I’m betting many of you have in your pocket right now. RIM has created an efficient, fragmented supply chain to manufacture the Blackberry, where low-productivity jobs are carried out cheaply in emerging markets and more specialized jobs are kept here in Canada. The creation of those jobs in emerging markets has in turn created a market for wireless technologies, including smart phones. So you can see how the fragmentation of supply is a rising tide that floats all boats – your supplier may one day become your best customer.
Most importantly, a more efficient supply chain means a more competitive company in Canada, which means more global sales and a bigger, more specialized workforce here in Canada. This is the chapter of the globalization story that is not often told. We know that companies who engage in trade, both production trade and export trade, are more productive, more profitable and do more R&D, which sets them up for the next product cycle.
Great examples here today: Peerless, SNC-Lavalin, Bell Helicopter, many others.
The fact is, different approaches work for different companies, and that’s a good thing, because Canada needs both production trade and export trade – both sides of the supply/demand equation – to ensure our future prosperity. Whether through opening a foreign affiliate, partnering with a foreign company, or exporting goods or expertise, there are many ways to plug in to global supply chains.
EDC’s Role
And EDC can help. We’ve got people on the ground in 16 representations around the world who have built expertise and relationships that can help open doors for Canadian companies looking to grow their business. We`ve got people all across Canada and nearly 1000 people at head office, all equipped to serve your needs.
We have a wide range of tools at our disposal to help you succeed in foreign markets, no matter what your strategy. For example, we can provide accounts receivable insurance to foreign affiliates of Canadian companies, as a way of encouraging Canadian Direct Investment Abroad. Or political risk insurance, to protect against the unpredictability of the “new normal,” covering everything from currency fluctuations to civil unrest to expropriation.
Aside from our traditional insurance and bonding offerings, we are also taking on projects of a more strategic nature. For example, take what we call “pull” transactions, where we provide financing to a foreign buyer, with the understanding that they will increase their procurement from Canadian companies. Match-making trips are often conducted as part of pull transactions, bringing foreign buyers to Canada to see our capabilities, and taking Canadian business leaders abroad to familiarize themselves with the needs of new markets. This program creates new Canadian trade out of thin air – nearly 1000 Canadian companies have found new foreign clients through this program.
Another example is our equity program, which invests in funds that can create opportunities for Canadian companies with export potential. Through this program, we have partnered with the Business Development Bank of Canada (BDC) and a number of private investors on investments like the Tandem Expansion Fund.
It is a great example of EDC’s “partnership preferred” business model – we view our role as adding capacity to the private sector, helping enable financial institutions to come to the table and work with Canadian companies.
In fact, EDC works with a wide range of private-sector and public-sector partners, including domestic and foreign banks, insurance companies and sureties. In 2010, we saw record partnership transactions and volumes; for example, 80 per cent of our loans were done in partnership with financial/commercial institutions. This percentage is a record for EDC, as much for the amount of transactions as for their value. In short, we have a partnership preferred philosophy, which I think is good policy making. The other 20 per cent of our loans were in pretty exotic places.
The world market is acclimatizing to the new norm, and we continue to do our best so that Canadian companies can take advantage of the progress in globalization and integration trade.
Conclusion
There’s no doubt that Canadian exporters are facing numerous challenges – the stronger dollar, increased global competition, rising input costs, the threat of protectionism, etc.
But these challenges can be overcome by recognizing that globalization is not going away – it is, as I have said, a force of nature. A global approach to doing business – one which takes into account global supply chains and looks for opportunity in emerging markets, can help companies meet these challenges head on.