1. Industry Industrie Canada Canada Canada-U.S. Trade and Investment Linkages Presentation to the Standing Senate Committee on Foreign Affairs Someshwar Rao Industry Canada October 07, 2003 Canada

2. The Canadian economy has become much more outward oriented... Ratio of Exports and Imports to GDP Ratio of Foreign Direct Investment* to GDP Exports Inward Imports Outward Source: Industry Canada compilations based on Statistics Canada Data *Stock Source: Industry Canada compilations based on Statistics Canada Data

3. ...largely as a result of closer linkages with the U.S. in trade... U.S. Share of Canadian Goods and Services Trade, 2002 Canada-U.S. Trade Exports Other countries Imports Source: Industry Canada compilations based on Statistics Canada Data Other countries

4. U.S. Share of Canadian Direct Investment, 2002 Inward Stock Canada-U.S. Foreign Direct Investment Stock Other countries Outward Stock Source: Industry Canada compilations based on Statistics Canada Data Other countries …direct investment

5. Share of Canadian Exports* going to the U.S., by Province 2002 1993 *Merchandise exports Source: Industry Canada compilations based on Statistics Canada data Increased Canada-U.S. trade linkages are pervasive across all provinces...

6. Canada-Mexico Trade* Mexico Share of Canadian Trade* Imports Exports 02 02 *Merchandise trade Source: Industry Canada compilations based on Statistics Canada Data Canada’s trade links with Mexico are still not very strong but have increased considerably

7. More than 80 percent of Canada’s manufacturing output growth in the 1990s can be attributed to exports Exports Contribution to Manufacturing Output Growth,1992-1999 Clothing Electrical Machinery Furniture Misc. Chemicals Textile Mills Computers & Electronics Wood Products Mineral Transportation Equipment Textiles Paper Rubber & Plastics Food Primary Metals Petrol & Coal Fab. Metals Printing Beverage Tobacco 0 50 100 150 200 250 Percent Source: Industry Canada compilations based on Statistics Canada Data

8. The FTA raised manufacturing productivity Increase in Value Added per Workerin Manufacturing due to the FTA: 1988-95 Net Exit of Firms in Manufacturing: 1988-95 Control Low Tariffs Control Low Tariffs Medium Tariffs Medium Tariffs High Tariffs High Tariffs -6 -5 -4 -3 -2 -1 0 1 -2 0 2 4 6 8 10 12 % per year % Note: "Control" refers industries with a net effective tariff reduction equal to 0, "Low Tariff" refers to 0-3%, "Medium Tariff" refers to 3-6% and "High Tariff" refers to > 6%. "net effective tariff reduction" refers the relative change of the Canadian tariff against the U.S. to the rest of the world between 1988 and 1995. Source: Trefler, D., 1998, The Canada-U.S. Free Trade Agreement: an Assessment for Canadian Manufacturing

9. Foreign-controlled firms on average are more productive than Canadian controlled firms Relative Multi Factor Productivity Level of Foreign Affiliates in Canada, 1993-95 (Manufacturing) Domestic Controlled Firms = 100 *Includes Tobacco; Furniture & fixtures; Printing & publishing; Leather industries; and Other manufacturing. Source: P.S. Rao and J. Tang "Are Canadian-controlled Firms Falling Behind Foreign-controlled Firms in the Canadian Manufacturing Sector?", Industry Canada, Working Paper, No. 31. 2002

10. Share of U.S. Imports 1990 1996 2002 1990 1996 2002 1990 1996 2002 Source: Industry Canada’s compilations based on data from the U.S. international Trade Commission Competition from Mexico and China in the U.S. market is rising

11. The booming U.S. economy was the main driver of our export success in the 1990s U.S. Imports and the Canadian Exports to the U.S. Percent Canada’s export growth to the U.S. U.S. import growth 20 15 10 5 0 -5 -10 1990 1992 1994 1996 1998 2000 2002

12. The depreciation of the Canadian dollar was another reason for the expansion of exports Change in Competitiveness-Manufacturing 1990-2002 (in percent)* Value of Canadian Dollar vis-à-vis an U.S. Dollar 18.7% Gain Change in Unit Labour Cost (in $U.S.) U.S. Canada Hourly Compensation Growth Labor Productivity Growth** Depression of Canadian dollar Source: Industry Canada compilations based on Bank of Canada * Based on logarithmic decomposition ** Growth in real value added per hour worked Source: U.s .Bureau of Labor Statistics 10.7% Gain 21.7% Loss 29.7% Gain

13. Canadian Productivity Relative to the U.S. U.S = 100 Labour Productivity* Total Economy Labour Productivity** Manufacturing *Real GDP per hour worked, PPP based **Real GDP per hour worked, based on the methodology of the Centre for the Study of Living Standards Source: Industry Canada compilations based on data from Statistics Canada, U.S. Bureau of Labor Statistics, and U.S. Bureau of Economic Analysis Canada needs to address the productivity challenge

14. North American economic linkages on balance have been beneficial for Canada. But, to fully realize the benefits of increased Canada-U.S. economic linkages, Canada needs to: reduce border risks and impediments; facilitate the efficient operation of markets; encourage private sector entrepreneurship and dynamisms; attract and retain highly qualified people and investment in key sectors of the knowledge economy; and improve Canada’s innovation and productivity performance. We need to maximize the full benefits of Canada- U.S. economic linkages

15. Industry Industrie Canada Canada Canada-U.S. Trade and Investment Linkages Canada