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 FullerChief Economist
Foreign Affairs and International Trade Canada
May 27, 2008
2
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.
Global Value Chains and the rise of the RICs
3
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.
Implications for Canada
4
A Value 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.
What is a Global Value Chain?
5
A simplified value chain …
Distribution After Sales Service
AssemblyR&D
R&D
Intermediate Input
Services
Intermediate Input
Inputs Assembly Distribution Sales Service
Sales
Corporate Services
Finance
HR/ Payroll
Marketing
Logistics
IT
Headquarters
6
Distribution After Sales Service
AssemblyR&D
R&D
Intermediate Input
Services
Intermediate Input
Inputs Assembly Distribution Sales Service
Sales
Corporate Services
Finance
HR/ Payroll
Marketing
Logistics
IT
Headquarters
…individual functions become separable
R&D
R&D
Intermediate Input
Services
Intermediate Input
Inputs
Assembly
Assembly
Distribution
Distribution
Sales
Sales
After Sales Service
Service
7
CompanyHQ
Lawyers
Manufacturing
Call-Centre & IT
R&D
Which can then be located anywhere in the world
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
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
Measuring Global Value Chains is difficult
11
Evidence of growth in global value chains
* 1982 to 2005 for exports and FDI, 1982 to 2004 for FA and Royalties. Data: UNCTAD WIR and WTO
Growth in Nominal GDP
0 1 2 3 4 5 6
Royalties &License Fees
Exports ofForeign Affiliates
Gross Product ofForeign Affiliates
Sales of ForeignAffiliates
FDI OutwardStock
Exports of Com.Services
Exports
Growth in Global Value Chains - World
Growth Relative to GDP*
12
•Years are as close to 1982-2005 period as possible given data limitations and world growth is often for different years. Data: Statistics Canada
0 1 2 3 4 5 6
Outward FDI
Inward FDI
FA Employment
FA Sales
Goods Exports
Services Exports
Goods Imports
Services Imports
R&D
Growth Relative to GDP*
Growth in Nominal GDP
World GrowthRelative to World GDP
Canada is not keeping pace
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
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
Canada’s trade and investment relationship with RICs
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…
0
1
2
3
4
5
6
7
8
9
10
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
$ Billions
Canada’s Merchandise Exports to RIC Countries
(by value)
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• Canadian merchandise exports to China are more than three times as large as exports to Russia and India combined.
China
Russia
India
17
…as well as the fastest growing
0
50
100
150
200
250
300
China India Russia
PercentGrowth in Canada’s Merchandise
Exports to RIC Countries(1997-2007)
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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.
18
But Canada’s share of Chinese imports has declined by almost half…
0
0.5
1
1.5
2
2.5
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Percent
Canada’s Share of Chinese Merchandise Imports
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• Canada’s share of Chinese imports has declined from 2.0% in 1995 to 1.1% in 2007.
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.
Value of Exports (2007, US$
Billion)
Share of Chinese Imports
(2007)
Export Growth (1997-2007)
Japan $133.9 14.0% 361.9%
South Korea
$104.0 10.9% 599.1%
Taiwan $101.0 10.6% 514.5%
U.S. $69.9 7.3% 328.9%
Germany $45.4 4.7% 634.5%
Malaysia $28.7 3.0% 1056.4%
Australia $25.8 2.7% 693.8%
Philippines $23.1 2.4% 6972.4%
Thailand $22.7 2.4% 1029.9%
Russia $19.6 2.1% 380.6%
Canada $11.0 1.1% 448.3%
20
Canada’s growth is not bad when compared to other OCED countries …
0
100
200
300
400
500
600
700
800
U.K.
Franc
eU.S
.
Canad
a
Ger
man
y
Austra
lia
Percent
Growth in Chinese Imports, Select Countries
(1997-2007)
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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.
21
…as well as level of exports
0
0.5
1
1.5
2
2.5
3
U.K.
U.S.
Franc
e
Canad
a
Ger
man
y
Austra
lia
Percent
Value of Chinese Imports as a Share of Exporting Country’s GDP
Source: Office of the Chief Economist, DFAITData: World Trade Atlas and OECD
• 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.
22
Canada’s share of Indian imports has declined slightly…
0
0.2
0.4
0.6
0.8
1
1.2
'99 '00 '01 '02 '03 '04 '05 '06
Percent
Canada’s Share of Indian Merchandise Imports
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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.
23
…but growth has been comparable to that of like countries…
0
100
200
300
400
500
600
U.K.
U.S.
Franc
e
Canad
a
Ger
man
y
Austra
lia
Percent
Growth in Indian Imports, Select Countries
(1999-2006)
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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
24
…although Canada is under-performing in terms of value of exports
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
U.S.
Franc
e
Canad
aU.K
.
Germ
any
Austra
lia
Percent
Value of Indian Imports as a Share of Exporting Country’s GDP
Source: Office of the Chief Economist, DFAITData: World Trade Atlas and OECD
• 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.
25
Canada’s small share of Russian imports has not fallen…
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Percent
Canada’s Share of Russian Merchandise Imports
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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.
26
…although our growth has been poor…
0
100
200
300
400
500
600
U.S.
Canad
aU.K
.
Ger
man
y
Franc
e
Austra
lia
Percent
Growth in Russian Imports, Select Countries
(1997-2007)
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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.
27
…and the GDP-scaled measure of exports is mediocre
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
U.S.
Austra
lia
Canad
aU.K
.
Franc
e
Germ
any
Percent
Value of Russia’s Imports as a Share of Exporting Country’s GDP
Source: Office of the Chief Economist, DFAITData: World Trade Atlas and OECD
• 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.
28
• 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
Summary of Relative Export Performance
29
China is by far the most important supplier for Canada among the RIC countries…
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
$ Billions
Merchandise Imports from RIC Countries
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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
China
Russia
India
30
… Imports from China have also grown the fastest
0
100
200
300
400
500
600
China India Russia
Percent
Growth in Canada’s Merchandise Exports to RIC Countries
(1997-2007)
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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.
31
Services trade with the RICs remains small for both exports…
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
'97 '98 '99 '00 '01 '02 '03 '04 '05
$ Billions
Commercial Services Exports to the RIC Countries
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• Canadian exports of commercial services to the RICs combined was around $450 million in 2005
China
RussiaIndia
32
…and imports of services
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
'97 '98 '99 '00 '01 '02 '03 '04 '05
$ Billions
Canadian Imports of Commercial Services from the RICs
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• Canadian imports of commercial services from the RICs were around $300 million in 2005 combined.
China
Russia
India
33
China has moved into second place overall among suppliers of imports into Canada
Canada's merchandise exports and imports by area
Export by area ($ billion and per cent) Import by area ($ billion and per cent)
Country
2007 Share in 2007 Country
2007 Share in 2007
World 449.7 100 World 406.7 100
U.S. 354.6 78.9 U.S. 220.4 54.2
U.K. 13 2.9
China 38.3 9.4
China 9.3 2.1
Mexico 17.2 4.2
Japan 9.2 2
Japan 15.5 3.8
Mexico 4.9 1.1
Germany 11.5 2.8
Netherlands 4 0.9
U.K. 11.5 2.8
Germany 3.9 0.9
Korea, South 5.4 1.3
Norway 3.7 0.8
Norway 5.3 1.3
France 3.1 0.7
France 5.1 1.3
Korea, South 3 0.7
Italy 5.1 1.3
EU-27 35.6 7.9
EU-27 49.4 12.2
Source: Statistics Canada
34
Canadian direct investment in the RICs is low, but growing in China…
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
'99 '00 '01 '02 '03 '04 '05 '06 '07
$ Billions
Canadian Direct Investment in RIC Countries
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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.
China
Russia
India
35
… While FDI from the RICs into Canada remains small…
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
'00 '01 '02 '03 '04 '05 '06 '07
$ Billions
Direct investment in Canada
Source: Office of the Chief Economist, DFAITData: World Trade Atlas
• 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
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-10 Merchandise Exports to China, 2007
2.81.5
1.10.9
0.60.5
0.40.4
0.30.30.3
0 1 2 3 4
OtherWoodpulp
Organic chemicalsNickel
MachineryMineral ores
FertilizersElectrical machy &
OilseedsPlastic
Motor vehicles
$ billions
Top exports to China
39
Growth in Top-10 Merchandise Exports to China
Sector % Growth 07/06
Motor vehicles -22.4
Plastic -1.6
Oilseeds 92.3
Electrical machinery -5.9
Fertilizers 69.9
Mineral Ores -3.4
Machinery 15.4
Nickel 42.8
Organic chemicals 23.0
Woodpulp 32.0
Other 21.8
Growth rates for top exports to China
40
Top-10 Merchandise Exports to India, 2007
340.1
342.2
178.0
147.3
138.2
135.8
131.5
110.7
94.5
79.4
64.6
0 100 200 300 400
Other
Vegetables
Fertilizers
Machinery
Woodpulp
Paper & paperboard
Electrical machinery
Ores, slag and ash
Cereals
Iron and steel
Aerospace
$ millions
41
Growth in Top-10 Merchandise Exports to India
Sector % Growth 07/06
Vegetables 130.0
Fertilizers 48.5
Machinery 39.4
Woodpulp 14.5
Paper & Paperboard -34.8
Electrical machinery 11.4
Ores,slag, and ash -27.3
Cereals -60.9
Iron and steel 102.3
Aerospace -57.4
Other 27.3
Growth rates for top exports to India
42
Top-10 Merchandise Exports to Russia, 2007
179.8
416.7
150.3
137.6
55.8
44.4
43.1
39.0
38.3
23.8
18.9
0 100 200 300 400 500
Other
Machinery
Meat
Motor vehicles and parts
Fish and seafood
Optical equipment
Electrical machinery
Plastic
Aerospace
Live animals
Tools & cutlery of base metals
$ millions
43
Growth in Top-10 Merchandise Exports to Russia
Sector % Growth 07/06
Machinery 60.7
Meat 0.7
Motor vehicles and parts 14.3
Fish And Seafood 51.3
Optical Equipment 8.2
Electrical Machinery 18.2
Plastic 42.1
Aerospace 21.1
Live Animals 1110.7
Tools & cutlery of base metals 273.6
Other 8.1
Growth rates for top exports to Russia
44
Top-10 Merchandise Imports from China, 2007
9.2
7.9
7.1
3.0
2.6
2.0
1.8
1.4
1.2
1.1
0.8
0 1 2 3 4 5 6 7 8 9 10
Other
Electrical machy & equip.
Machinery
Toys & sporting equip.
Furniture and bedding
Woven apparel
Knit apparel
Iron & steel products
Footwear
Plastic
Leather products
$ billions
45
Growth rates for top imports from China
Growth in Top-10 Merchandise Imports from China
Sector % Growth 07/06
Leather products 10.3
Plastic 12.7
Footwear 7.7
Iron & steel products 8.1
Knit apparel 16.5
Woven apparel 11.3
Furniture & bedding 15.1
Toys & sports equip. 25.0
Machinery -1.4
Electrical Machinery 16.9
Others 11.5
46
Top-10 Merchandise Imports from India, 2007
641.3
317.8
194.3
188.4
160.7
112.4
89.4
85.0
78.7
59.7
52.2
0 100 200 300 400 500 600 700
Other
Organic chemicals
Precious stones & metals
Knit apparel
Woven apparel
Machinery & equip.
Textile Articles
Iron & steel products
Electrical mach. & equip.
Fish And seafood
Textile floor coverings
$ millions
47
Growth in Top-10 Merchandise Imports from India
Sector % Growth 07/06
Textile floor coverings 1.5
Fish & seafood 19.4
Electrical machinery 18.1
Iron & steel products 6.7
Textile articles 4.9
Machinery 8.9
Woven apparel -13.2
Knit apparel -5.7
Precious stones & metals 2.0
Organic chemicals 81.6
Other -12.4
Growth rates for top imports from India
48
Top-10 Merchandise Imports from Russia, 2007
94.1
1000.9
65.6
52.6
52.4
47.9
36.9
26.3
21.2
21.2
17.9
0 200 400 600 800 1,000 1,200
Other
Mineral fuel & Oil
Precious stones & metals
Fertilizers
Beverages
Iron & steel
Fish & seafood
Aluminum
Inorg chemicals
Wood
Rubber
$ millions
49
Growth in Top-10 Merchandise Imports from Russia
Sector % Growth 07/06
Rubber -28.8
Wood 28.3
Inorganic chemicals -22.4
Aluminum 10.4
Fish & seafood 17.3
Iron & steel -79.0
Beverages -27.3
Fertilizers 66.0
Precious stone & metals -7.5
Mineral Fuel & Oil 41.3
Other -35.8
Growth rates for top imports from Russia