Global Value Chains and Canada’s Trade with Russia, India and China

1. Global Value Chains and Canada’s Trade with Russia, India and China Presentation to the Standing Senate Committee on Foreign Affairs and International Trade Patricia Fuller Chief Economist Foreign Affairs and International Trade Canada May 27, 2008

2. Global Value Chains and the rise of the RICs • Dramatic changes in the global economy are fundamentally reshaping Canada’s economic relationships with the rest of the world. • The growing importance of large, low-wage countries, most notably India and China, imply: • Vast new markets for Canadian companies, and • A new source of competition for Canadian companies. • At the same time new business models are emerging; the way that businesses organize themselves is changing – to form vast global value chains. • These two developments are related: • Fast growth of China, and to a lesser extent India, has shown to the world the benefits of integrating supply chains across borders.

3. Implications for Canada How Canada responds to these changes will have significant implications for the future prosperity of all Canadians. Advanced countries are increasingly competing for the same high value activities of value chains (R&D, skill intensive manufacturing and services). Competition for these high-value activities is also increasingly coming from developing countries who are moving up the value chain. These new pressures were motivations behind both Advantage Canada, the government’s long-term economic plan, and the Global Commerce Strategy. Challenge to policymakers is to make Canada the location of choice for those high-value activities that are essential for maintaining and improving the standard of living of Canadians.

4. What is a Global Value Chain? AValue Chain is the full range of activities that are required to bring a good or service from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer. A Global Value Chain describes a state of the world in which different stages of the value chain are scattered across the globe and inter-connected through complex production networks, often with different stages of production being carried out by different companies. This is in contrast to how trade and production were carried out in the past, with the complete production of end products in one country and often one firm, for export into international markets, or through branch-plant production.

5. Headquarters Corporate Services R&D Inputs Finance Intermediate Input HR/ Payroll IT R&D Services Marketing Intermediate Input Logistics A simplified value chain … Assembly Distribution Sales Service After Sales Service Sales Distribution Assembly

6. Headquarters Corporate Services R&D R&D Inputs Inputs Assembly Distribution Sales Service Finance Intermediate Input Intermediate Input HR/ Payroll IT After Sales Service R&D R&D Sales Distribution Assembly Services Services Marketing Intermediate Input Intermediate Input Logistics …individual functions become separable Assembly Distribution Sales Service After Sales Service Sales Distribution Assembly

7. Which can then be located anywhere in the world Company HQ Manufacturing Lawyers R&D Call-Centre & IT

8. Driving forces of global value chains • Declining costs of transportation (air transport, containerization) • Improvements in ICT technologies • Reduced barriers to trade and investment (Multilateral, regional, bilateral and unilateral) • Movement toward outward oriented market economies • Individual stages in the value chain can be controlled/monitored from greater distances • Network costs have declined • Markets can be served from greater distances • Competition is increasing

9. Other drivers of global value chains • New players • Low wage countries have become increasingly important – both South-South and South-North trade and investment have increased at a faster rate than North-North. • South has been growing faster – even excluding China, there has been some convergence in income levels in recent years. • Services have become more tradable, and all activities are becoming increasingly internationally mobile. • As of 1990, there were 37,000 MNEs with at least 170,000 foreign affiliates. By 2004, the number of MNEs had nearly doubled to 70,000 and foreign affiliates expanded four-fold to 690,000. • German MNEs established more R&D facilities outside of Germany in the 1990s than in the previous 50 years combined. • Now reaching a ‘critical mass’.

10. Measuring Global Value Chains is difficult • While it is clear that some countries are participating more heavily than others in Global Value Chains, measuring this shift poses challenges. • Currently available surveys on trade and investment were not designed to capture the increasingly complex trade relationships that make up Global Value Chains • We are not able to trace value chain activity directly through trade and investment statistics • Until new data sources become available we have to infer from existing statistics indicators of GVC activity

11. Evidence of growth in global value chains Growth in Global Value Chains - World Growth in Nominal GDP Growth Relative to GDP* * 1982 to 2005 for exports and FDI, 1982 to 2004 for FA and Royalties. Data: UNCTAD WIR and WTO

12. Growth in Nominal GDP Canada is not keeping pace World Growth Relative to World GDP Growth Relative to GDP* • Years are as close to 1982-2005 period as possible given data limitations • and world growth is often for different years. • Data: Statistics Canada

13. The Policy Implications of Global Value Chains • There will be increased competition among regions and countries for the high-value activities in value chains. • Activities are much more mobile… small policy differences appear to be becoming increasingly important. • Policy environment has to contribute to Canada becoming the location of choice for ‘high-valued’ internationally mobile activities. • Both Advantage Canada and the Global Commerce Strategy were developed in this spirit.

14. Canada’s Trade and Investment with RICs in a Global Value Chain context.

15. Canada’s trade and investment relationship with RICs Trade • There has been strong growth in both imports and exports with the RICs over the last ten years; however, overall levels of trade with Russia and India remain small. • Trade growth with China has been significant, with China becoming Canada’s second largest supplier of merchandise imports. • The strong growth in imports into Canada from China has outpaced Canadian exports, resulting in a trade deficit. However, this may be an indication that Canadian companies are making better use of lower cost inputs. • Services trade with the RICs remains small • Investment • Direct investment between Canada and the RICs remains low; however, Canadian direct investment in China has picked up in recent years.

16. China is by far the most important export market for Canada among the RIC countries… Canada’s Merchandise Exports to RIC Countries (by value) • Canadian merchandise exports to China are more than three times as large as exports to Russia and India combined. $ Billions China India Russia Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

17. …as well as the fastest growing Growth in Canada’s Merchandise Exports to RIC Countries (1997-2007) Percent • Canadian merchandise exports to China increased nearly four-fold since 1997 • India and Russia were not far behind but started from much smaller bases, meaning that the total value of Canadian exports to China increased by far the fastest. Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

18. But Canada’s share of Chinese imports has declined by almost half… Canada’s Share of Chinese Merchandise Imports Percent • Canada’s share of Chinese imports has declined from 2.0% in 1995 to 1.1% in 2007. Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

19. …although much of this is due to growth of regional value chains • Many countries within Asia have shifted assembly production to China as part of global (regional) value chains and thus Chinese imports of intermediate inputs from these countries have grown quickly. • Chinese imports from these close-by countries suggests the increasing importance of regional value chains.

20. Canada’s growth is not bad when compared to other OCED countries … Growth in Chinese Imports, Select Countries (1997-2007) • Canada’s export growth to China is about the middle of the pack for a selection of comparator countries. • The U.K., France and the U.S. all witnessed roughly similar rates of growth – below that of Canada. • Germany and Australia stand out as having done better. • Some of Canada’s growth is a recent commodities price effect. Percent Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

21. …as well as level of exports Value of Chinese Imports as a Share of Exporting Country’s GDP • Measuring exports to China as a share of each supplier country’s GDP, Canada again seems to be performing about the middle of the pack. Percent Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas and OECD

22. Canada’s share of Indian imports has declined slightly… Canada’s Share of Indian Merchandise Imports Percent • Canada’s share of Indian merchandise imports is down from its peak in 2001 and down slightly from 1999, but the trend is not as clearly downwards as it is for China. • Canada’s share of Indian merchandise imports is somewhat lower than it is for China. Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

23. …but growth has been comparable to that of like countries… Growth in Indian Imports, Select Countries (1999-2006) Percent • As in China, Canada is performing about the middle of the pack for Indian merchandise imports. • Also as was the case with China, Australia and Germany are the two comparator countries ranked higher than Canada Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

24. …although Canada is under-performing in terms of value of exports Value of Indian Imports as a Share of Exporting Country’s GDP Percent • For value of exports scaled by GDP, Canada ranks somewhat worse in India than in China, coming in the bottom half of the pack of comparator countries • Canada also has a much lower share than the next higher country…the U.K. Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas and OECD

25. Canada’s small share of Russian imports has not fallen… Canada’s Share of Russian Merchandise Imports Percent • Canada’s share of Russian merchandise imports does not show the downward trend seen in other RIC countries. • Canada’s share of Russian merchandise imports is our lowest share in any of the RIC countries. Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

26. …although our growth has been poor… Growth in Russian Imports, Select Countries (1997-2007) Percent • Canada ranks towards the bottom of the list of comparator countries in terms of growth in merchandise exports to Russia. • Once again Australia ranks first. Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

27. …and the GDP-scaled measure of exports is mediocre Value of Russia’s Imports as a Share of Exporting Country’s GDP Percent • For Russian imports, scaled by the GDP of the exporter, Canada ranks in the bottom half of the group and much lower than the third place U.K. Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas and OECD

28. Summary of Relative Export Performance • Canada’s share of China and India’s imports is falling; our export growth rate is middling among comparator countries • For India, the value of exports is low relative to comparator countries • Canada’s share of Russia’s imports is not falling, but growth of exports is poor relative to comparator countries

29. China is by far the most important supplier for Canada among the RIC countries… Merchandise Imports from RIC Countries • Merchandise imports from China have grown significantly in recent years; there is some evidence that Canadian companies are using more inputs from China • China is now the second largest merchandise exporter to Canada after the United States • Imports from both Russia and India remain small $ Billions China India Russia Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

30. … Imports from China have also grown the fastest Growth in Canada’s Merchandise Exports to RIC Countries (1997-2007) Percent • Imports from China have increased five-fold since 1997 • There has been significant but slower growth in imports from India and Russia, which also started from much smaller bases. Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

31. Services trade with the RICs remains small for both exports… Commercial Services Exports to the RIC Countries $ Billions • Canadian exports of commercial services to the RICs combined was around $450 million in 2005 China India Russia Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

32. …and imports of services Canadian Imports of Commercial Services from the RICs $ Billions • Canadian imports of commercial services from the RICs were around $300 million in 2005 combined. China Russia India Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

33. China has moved into second place overall among suppliers of imports into Canada

34. Canadian direct investment in the RICs is low, but growing in China… Canadian Direct Investment in RIC Countries • Direct investment can play an important role in value chains. • Canadian direct investment in China more than doubled in the last 5 years, but still represents less than .35% of Canadian direct investment abroad (CDIA). • CDIA in Russia and India was only $540 million combined in 2007, putting them towards the bottom of destinations for Canadian direct investment. $ Billions China India Russia Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

35. … While FDI from the RICs into Canada remains small… Direct investment in Canada $ Billions • Direct investment into Canada from the RICs remains small • China is the largest at $616 million in 2007, but this is only a 0.1% share of Canada’s total FDI stock. • Russian investment has been negligible, and stood at $160 million in 2007. China India Source: Office of the Chief Economist, DFAIT Data: World Trade Atlas

36. Conclusions The rise of global value chains has changed the global economy, creating both challenges and opportunities for Canada. Canada’s ability to compete for the high-value activities in value chains will be important for future prosperity. Canada’s economic integration with the RICs, particularly China, is growing, but lags behind some countries such as Australia.

37. Annex – Canada’s Top Ten Exports and Imports with RICs

38. Top exports to China

39. Growth rates for top exports to China

41. Growth rates for top exports to India

43. Growth rates for top exports to Russia

45. Growth rates for top imports from China

47. Growth rates for top imports from India

49. Growth rates for top imports from Russia