global value chains and canada’s trade with russia, india and china

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)


• 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


• 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)


• 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


• 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)


• 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


• 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


• 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)


• 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


• 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


• 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)


• 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


• 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


• 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


• 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


• 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


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


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


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


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


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

global value chains and canada’s trade with russia, india and china

Documents

highvalue activities

vast global value chains

global economy

different stages of

global commerce strategy

supply chains

canadas trade

different companies