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OTTAWA, Wednesday, November 2, 2016

The Standing Senate Committee on Foreign Affairs and International Trade met this day at 5:02 p.m. to study foreign relations and international trade generally.

Senator A. Raynell Andreychuk (Chair) in the chair.

[English]

The Chair: Honourable senators, the Standing Senate Committee on Foreign Affairs and International Trade is authorized to examine such issues as may arise from time to time relating to foreign relations and international trade generally. Under this mandate, the committee will continue to hear witnesses on the topic of bilateral, regional and multilateral trade agreements: prospects for Canada.

To date, the committee has held many meetings on this topic and heard from academics, experts and government officials. The committee is pleased to continue its study and receive presentations from two specialists.

On behalf of the committee, I welcome in person Ms. Monique Moreau, Director of National Affairs, Canadian Federation of Independent Business, a not-for-profit organization representing more than 109,000 small- and medium-sized business members across Canada, and by video conference, Mr. Daniel Schwanen, an award-winning economist, Vice-President of Research at C.D. Howe Institute.

I thank both of you for accepting our invitation. We look forward to your presentation, and as usual, we like to ask questions as a follow up. Your CVs are known to us, so I'm not going to repeat them at this time and simply welcome both of you. I will take you in the order that I introduced you. Ms. Moreau, would you like to start your presentation.

Monique Moreau, Director, National Affairs, Canadian Federation of Independent Business: Thank you very much, senator, and thank you for the opportunity to be here today.

Senators, you should have a slide presentation in front of you that I would like to walk you through in the next few minutes.

CFIB is a not-for-profit, non-partisan organization representing more than 109,000 small- and medium-sized businesses across Canada. Our members represent all sectors of the economy and are found in every region of the country.

It is important to remember that Canada's SMEs employ 70 per cent of Canadians working in the private sector, are responsible for the bulk of new job creation and represent about half of Canada's GDP, so addressing issues of importance to them can have a widespread impact on job creation and the economy.

CFIB takes its directions solely from our members through a variety of surveys throughout the year. In all previous member surveys on this topic, a strong majority of members have been supportive of free and fair trade. This is because most of them understand that trade is good for Canadian small businesses, for our economy and for jobs.

We also know that many of our members appear to be in a position to benefit from trade deals such as CETA and the TPP. A few others, including supply-managed producers and small auto-part manufacturers, may have strong concerns. We continue to carefully listen to our members as more details unfold and commit to communicating any of their concerns to government.

One concern we have expressed, for example, is the importance of ensuring that any economic harm to supply-managed producers as a result of trade deals be fully compensated.

First, let's check in on the economy. One of the surveys CFIB conducts is our monthly business barometer. Our latest barometer shows that small business confidence dropped in October, sitting at 57.7 points, which is over one point down from our previous barometer in September. Ideally, we want to see this indexed at between 65 per cent and 70 per cent, when the economy is growing at its full potential.

Measures that can help boost small business confidence are critical right now to help kick-start the economy.

Generally, small business owners are very supportive of international trade. As you can see on slide 4, over half our members are supportive of the government's efforts to negotiate and sign trade agreements. Interestingly, however, nearly 20 per cent, or approximately one in five small business owners, felt they didn't have enough information to answer the question, suggesting that perhaps more needs to be done to inform entrepreneurs about the opportunities trade agreements can bring to their business.

However, when talking about trade, firstly it's important to know how much small-and medium-sized businesses currently trade. As you can see on slide 5, about one in five or 21 per cent have sold goods or services to other countries, while about half had purchased from other countries, with another 6 per cent planning to get more involved in the future.

Of those business that are trading, we do have some information as to where. As you can see on slide 6, the U.S.A. remains by far the most likely place that Canadian small businesses trade, followed by the EU, then Mexico, Australia, New Zealand and China. We know the government is currently participating in TPP negotiations, and three of the top five in this list are TPP countries, so those businesses would benefit from the lessening of trade barriers and tariffs that may be making it difficult for them to expand their markets into those countries.

As you can see on slide 7, of those that are not currently involved in any kind of trade, a good proportion or over half of them do not believe their product or service is exportable. However, that still leaves about 38 per cent of those that are not involved in exporting who could be. Making sure that trade deals address the barriers small businesses face, and that a greater effort to highlight what the benefits of exporting can bring to businesses and the community, may result in more of them taking the plunge into new markets.

Through our surveys, we also have a sense, as you can see on slide 8, as to what small business owners would like the outcome of free trade agreements to be in terms of benefiting their business. Ultimately, what smaller businesses want to see in any free trade agreement is a clear understanding of regulations and standards they must comply with, simpler border processes, less paperwork and red tape, in addition to lower costs.

On slide 9, you'll see that approximately a third of business owners are happy with the government's performance on adopting international trade agreements, while approximately another third rate the government's performance as poor. But again, there's a good segment of the population, approximately one third, that felt they didn't have sufficient information to answer this question. I note that these two data points are several years apart. We have some ideas as to how government can improve this standing, including better access to Trade Commissioner Services for small business.

In summary, a strong majority of CFIB members have been supportive of free and fair trade. Many of our members appear to be in a position to benefit from trade deals, such as CETA and the TPP, but a few may have strong concerns. As I mentioned, we have communicated these concerns to government and already stressed the importance of finding ways to mitigate any economic harm to sectors that may be adversely affected as a result of the trade deal.

As I mentioned at the outset, CFIB's position on our issues are solely determined by our members, and we continue to carefully listen to them as more details unfold. We will communicate this feedback to government as it moves through its consultations.

Thank you for the opportunity to present. I'm happy to try and answer any questions you may have.

[Translation]

I am also willing to answer questions in French.

[English]

The Chair: Thank you for your presentation.

Mr. Schwanen, we'll now turn to you for your presentation. Welcome.

Daniel Schwanen, Vice President, Research, C.D. Howe Institute: Thank you, honourable senators, for the opportunity to comment on trade agreements and on how we can implement them in such a way that they can generate the maximum benefit for Canadians.

Canada's prosperity depends, fundamentally, on its people's drive, their knowledge, ingenuity and on the fruitful stewardship of our resources. Those are domestic factors. But without international trade, these strengths could simply not be translated into the high standards of living Canadians enjoy or aspire to.

Most of the best paying private-sector jobs in Canada today are in sectors that are deeply involved in trade or sectors that support trade, such as logistics, or that are exposed to international competition and are therefore highly competitive sectors of our economy.

Although we've heard from some quarters that some of the agreements that we've signed recently could stifle Canadian innovation, I couldn't disagree more, to the extent that they provide Canadian innovators with the scale to amortize their investments in research and development, and amortize the cost of the effort — sometimes considerable efforts — it takes to go international. To the extent they make Canada a more attractive platform for international investment, for talent and for participation in regional value chains, these agreements encourage more innovation and income growth in Canada.

I'll note something here, which is that Canada actually exports a lot of its homegrown R&D. That R&D ends up being owned abroad, and we pay royalties and other forms of payments on the intellectual property that we import from abroad. What I'm trying to say here is that there is, in fact, a strong homegrown community of researchers that could actually help support more innovative Canadian businesses.

Under North American free trade, Canada's exports of manufactured goods and high value-added services grew faster than our exports of raw resources. Free trade is actually supportive of a more diversified economy based, once again, on innovation. There's no reason to expect that this dynamic would be different under comprehensive agreements involving other nations. We would still trade without these agreements, but the gains would be considerably harder to obtain and more uncertain if we didn't remove barriers to foreign markets.

Another lesson, and a more sobering one from the experience of North American free trade, however, is that implementing trade agreements and putting them into effect does not by itself ensure that firms will build on the initial one-off gains from the agreements. We need to do something more than sign the agreements and implement them. After the Canada-U.S. Free Trade Agreement was implemented, there was a one-off boost to Canadian labour productivity over the 10 years or so following the agreement, but it did not put Canada on a new, permanently higher growth path.

The challenge here, as we expand into new markets and sign trade agreements that now will considerably expand the potential reach of Canadian business, whether CETA or the TPP, is to turn these agreements into a platform that will create a more dynamic business environment in Canada — not just the one-off gain, but a permanently more dynamic business environment. Our businesses are still too small and too insular, on average, and we need to use the trade agreements that we have, or that we are signing, to help them grow.

Learning by exporting is a major way in which businesses can become more dynamic. Once you've expanded beyond your own borders and you've made that investment of accessing different markets, understanding them and creating business relationships in them, you have an appetite and an ability to generate even more exports and you go on to the next market.

If I understood Monique correctly, the 38 percent of small businesses that are not exporting, but could be, should be explicitly encouraged to do so. There are perhaps different techniques of how we could do this, perhaps even through a tax system that tends to promote or encourage businesses or not discouraging them from remaining small, and does not explicitly encourage them growth. Trade could be made less complicated for small businesses. For example, rules of origin under which our goods can be exported duty free to other markets, and vice versa, remain extremely complex in many cases, and we should aim to simplify them.

Canada should aim to support efforts at trade facilitation in target markets, especially in developing countries where customs procedures are still very onerous and of themselves are a barrier to the growth of Canadian exports. Our current trade agreements still leave many barriers intact, and Canada should seek more sectoral agreements with our trade partners to address barriers such as local content requirements and discriminatory public procurement rules that our existing trade agreements have only really chipped away at, for example, vis-à-vis the U.S.

We are investing more in infrastructure. That's the theme of the current federal government and of just about every provincial government. We need to look at where we need to and can invest in order to generate the biggest bang for the buck to exports. We're talking about border infrastructure and ports, in particular.

We need to focus on policies that will help ease the movement of people, of ideas and of communication with our trade partners, because sharing of information is crucial to the future of trade. The future of trade is not necessarily that Canada will export more to the EU, although we will, and the EU will export more to Canada, although it will. The future of trade is really about helping Canadian and EU businesses to make products together and accessing third markets together through competitive partnerships.

Finally, it's not necessarily the purview of this committee but I would also urge the Canadian government, or Canadian governments, to continue to make efforts to remove obstacles to a more harmonized set of rules for businesses to grow within our own domestic market, because that's where business growth starts. It starts at home.

I think that's pretty much all the time I have. I'd be happy to talk in greater detail about some of the general measures or avenues that I've outlined.

[Translation]

Like my colleague, I am willing to answer questions in French as well.

[English]

The Chair: Thank you. Between the two presentations, you've touched a lot of the points that we've been studying.

Senator Downe: I have the same question, actually, to both of our witnesses. I'll ask Monique first because she's in the room.

We see with the United States, in their election campaign, a growing concern about trade, a disconnect between what's called the elites, prominent organizations — I don't want to call your organization elite, but it would be considered a prominent business or groups advocating for trade deals, and people who don't actually see the benefits of the trade agreements. People hear about the importance of trade, importance of jobs, how important it is to your economy, but then you look at the figures where a number of trade deals have been signed and the balance of trade increases for those countries after we sign the deals; Mexico in particular. The United States, obviously, has been a very good trade deal for Canada, but others, you look at the balance of trade alone, and then you have manufacturing in sections of the country completely wiped out because of the competition.

What would you advise this committee that the government can do to assist businesses in taking advantage of the opportunities of these trade deals? It seems to me there's a bit of disconnect. The government spends a lot of effort negotiating them and then we seem to walk away and say, "Okay, business community, you're on your own. Good luck.'' We have a program here, we have a program there, but there seems to be, in my opinion, a general lack of coordination and effort.

In any of your studies, I'm just wondering if you have seen countries appear more organized to take maximum advantage when they sign a deal with Canada. Is there any role for government, and if so, what would that role be?

Ms. Moreau: Thank you for your question. I think, as some of the data points have shown, a number of our members are unable to answer survey questions regarding their confidence in the government's trade deals or their knowledge. I think, to the benefit to their organization, up to a third in each instance. That should be quite telling. They either don't know or they don't see what the benefit could be to them.

We do think there is a role for organizations like ours, and of course we're doing what we can to disseminate that information, but we do think that government needs to do a better job in encouraging small entrepreneurs to take the plunge. One way they could do that is by improving the knowledge and access to the Trade Commissioner Service. It's not that small businesses are not now part of their clients; it's just that they don't know that, and they don't think that they're big enough to access. Some of the skills they need help with initially are very simple, translation or finding legal counsel, and sometimes they just don't think it applies to them and so they don't ask. That's, I think, a twofold problem.

Something the government has done is embedded trade commissioners in different industry associations. We have one embedded in our office, so we have a direct link to someone to go to when those questions arise.

These are interesting notions and ideas to test whether that is something that would help those smaller businesses, that 38 per cent that would be interested or could trade that have a service that is able to cross borders.

Those are a few ideas. In my submission, I have mentioned other reports. You're getting a glimpse of those reports today in this presentation, but we have other ideas, and I'd be happy to circulate those after.

Mr. Schwanen: From my point of view, Canadian businesses have become more competitive and more resilient as a result of trade. It's true that since, for example, we signed the Canada-U.S. Free Trade Agreement, we've had a lot of ups first, actually, and downs. For sure, a lot of Canadian businesses that were competitive only because of the tariff walls have fallen by the wayside. For sure, in the past 15 years, as the Canadian dollar rose in response to higher commodity prices, it made a lot of manufacturing firms in Canada, in central Canada for example, less able to compete, and a lot of them closed their doors.

Canada still has a very resilient, competitive manufacturing sector, and it's also been able to develop under trade agreements what very few Canadians know — which is a large and significant surplus in trade in high value-added services. A lot of the good jobs in the Canadian economy are in tradeable services that we've been able to expand under these trade agreements: architectural services, engineering services, financial services. Those are creating and sustaining jobs in Canada.

It's true, if you look at the manufacturing sector under free trade, it first expanded and then, with the rising Canadian dollar, it contracted, the same way it has in many of our other competitors. Canada is no worse off than others there.

I would want to point out that the competitiveness of the manufacturing sector is very much dependent nowadays on services inputs. What used to be done within the plant is now outsourced to services firms, and the more Canadian services firms can compete and be competitive, the more this helps the manufacturing sector.

With respect to trade agreements, I agree with Monique that with the new trade agreements we need to be far more hands-on in essentially going to firms and going to sectors and explaining to them how — and maybe encouraging them and holding their hands if necessary — they can take advantage of new trade agreements, whether reduced tariffs on forest products, on fish products, on manufacturing products or easier access for service providers under the CETA or TPP agreements.

I think we need to target and almost go potential exporter by potential exporter and help them meet and communicate with their potential clients or partners in these foreign markets. We do need to be more active and not just step back, let the agreement happen, and que sera, sera.

I certainly agree with the more activist approach on that score. I do think the opportunities are much higher with the trade agreement than it would be without.

Senator Eaton: Thank you both of you. Madame Moreau, to carry on with what Mr. Schwanen was saying, what are you going to do specifically to prepare the small business group to take advantage of CETA? Are you going to put out an information program? Have you thought about what you'd do specifically to encourage them?

Ms. Moreau: Thank you for the question. Throughout the negotiation process with CETA, we've been very communicative with our members, from the beginning of the agreement in principle. We were also consulted by government prior to that and kept informed. So we would use our field force. We have a field force of 200 district managers — we call them — who knock on about 4,000 small business doors a week. We're able to disseminate information to them that they then tell business owners — their members, essentially our members — who would be the relevant audience for that information about the different steps that we've been involved in.

Our president has also travelled to the EU to advertise and to also tell them Canada is open for business at the small business level, to seek out opportunities which we then communicated to our members.

As I mentioned, we have a trade commissioner now embedded in our office here in Ottawa, so through her and our business counselling service, which receives 28,000 calls a year from members, any of those calls related to trade, we now have a person actually in our office who can help us with that.

Those are some of the initiatives we've taken, and we're certainly responsive to any member that expresses interest and/or seeks counsel from us on how to improve their trade or get better trade and maybe, if they think they are too small for the Trade Commissioner Service, we can, of course, encourage them to use that, where possible.

Senator Eaton: You were saying that the most satisfactory for a small business is if you have a confidence level on your graph of between 65 and 70 per cent, and it's now 57.7 per cent. What kind of things would you look at to raise their confidence?

Ms. Moreau: That data point comes from asking business owners: In the next 12 months, do you think your business is going to do better, worse or stay the same? That index gives us a sense of what their confidence is like in the economy.

If you look at the more detailed handout that came with it, you'll see, for example, hiring intentions on the back is flipped right now. I think 21 per cent of our members are planning to layoff and only 10 per cent are planning to hire. They are facing cost constraints due to energy costs, taxes, government regulation and paper burden. Resolving some of these domestic issues will give business owners a bit of stability. The economy, if you look at the past barometers from about February, has been pretty stagnant. I think that's why you're seeing maybe some members kind of turtling right now and not really sure where the economy is going.

There are some efforts that we can do to resolve domestically other things, like increasing payroll taxes, additional taxes that may be coming through carbon tax pricing. These are things on the forefront of their mind, and they are maybe not necessarily looking ahead to, "Okay, I need to clean up my house at home and then I'll think about exporting in the future.'' I think that is a two-pronged approach that we could perhaps resolve for them.

Senator Eaton: Mr. Schwanen, you said in your remarks that we export a lot of R&D. Past witnesses have said that a lot of innovations developed in Canadian universities are commercialized in the U.S. Is this what you were talking about when you said we export our R&D? Is that what you meant, that we don't pick up the commercialization of our R&D that comes out of universities?

Mr. Schwanen: That's right. That's exactly right. We have workers here that do research and development and have that capacity, including in universities, but the outcome of the R&D, the patents, ends up being owned and exploited abroad. It's a good thing that we have this capacity in the country, but it's the next step that is missing.

To give you a number, we export $4 billion net. This is a net export in Canada of $4 billion a year in R&D services. These are Canadian R&D workers that do research on various products, software and so on. That ends up being owned by foreign companies, or they work here for foreign companies. They do the research here, and the foreign company owns the IP and develops the IP and the market.

We have the capacity. The missing link, if I can call it that, is this incentive to develop the product here in Canada.

We had, of course, very large firms — the names are well known — that did have this for a while, this incredible international growth that benefited Canada tremendously while they were having it, but then fell by the wayside, perhaps because of a loss of innovation drive and a lot of foreign competition that came on the market. We need more of these companies that do the development here and then export the final product that's been developed thanks to the research and development. That comes with, for lack of a better word, entrepreneurial drive.

All we can say about these trade agreements is that they make the world more accessible to Canadian businesses, if you like. There's a tremendous growth potential. We can access these markets more easily, but if we don't develop the products here, the knowledge that we have here is going to end up being developed elsewhere and the trade agreements will be less beneficial as a result.

I'm sorry for that long answer.

Senator Eaton: No, no. I could keep asking you about the park around Guelph where they have this innovation and they market it, but I won't take my colleagues' time to discuss that with you. Thank you.

Mr. Schwanen: Yes. We need more, yes.

Senator Poirier: Thank you both for being here. I have one question for each of you. My first question is for Ms. Moreau.

Earlier this year, the premiers came to an agreement to remove internal trade barriers in Canada. Would you have an estimate of how much the SMEs can gain from the removal of the barriers, and could you also expand on what barriers are being removed?

Ms. Moreau: Internally here in Canada, that figure is the $64,000 question. We have had all kind of economic study done. We can't put a figure on it, but one that we have used is we know that red tape in Canada costs around $19 billion a year. Let's say it's a third or a half of that. It's still a large figure for many Canadians.

We were delighted that the premiers came together this year to at least address some of the internal issues that we have in Canada. It's sometimes more complicated to trade between provinces than it is to trade between Canada and the U.S., and we've had our members tell us that anecdotally. That's an issue that needed solving, and we're pleased to see there was some motivation to do that.

We've seen a lot of interesting work in terms of some sectoral approaches, agreements on apprenticeships, for example. I know the premiers immediately came together in the Western provinces to reduce the list of items that you need to have in a first-aid kit. These things seem trivial, but truckers need to buy six or seven first-aid kits as they travel across the country, and it doesn't make any sense. My favourite example is the tiny creamers that we put in coffee are different sizes. If you want to produce creamers and send them to Quebec, they're a different size than the ones in Ontario. These are the interesting little nuggets, the low-hanging fruit, if you will, for these issues that have plagued Canadian businesses from trading interprovincially.

That said, we do have an interesting report that we published last June on what our members are doing to surmount these barriers where they are trading within Canada, and I would be happy to send that to the chair. I brought all my international trade reports. I didn't bring my domestic one, but I would be happy to include that.

Senator Poirier: The committee heard from witnesses a couple of weeks ago who stated that Canadian businesses were more tentative in engaging in trading. In your opinion, when the internal trade barriers are removed, would the SMEs be more willing to expand internationally?

Ms. Moreau: If we clean up at home, they will certainly try their neighbours first. It just makes logical sense. That's why most of our members trade with the U.S. As I mentioned earlier, creating a stable business environment from internal trade to dealing with some of the other factors that influence them in giving their business confidence will, of course, propel them to then start looking at trading abroad.

Senator Poirier: Mr. Schwanen, distrust or fear towards the free trade agreements seems to be rising in certain countries and regions, including Europe and the United States. In your opinion, how can Canada, as a trading nation, overcome this mistrust and fear of the free trade agreements?

Mr. Schwanen: Well, people don't care, of course, nor should they, about trade agreements in the abstract. What we're seeing is a lot of people reaffirming the primacy of a clean environment, of high safety and labour standards and of good jobs. If I believed that trade agreements did not contribute to this, or at least were not barriers to achieving these overarching social or environmental goals, I wouldn't support trade agreements.

If you look at the text of the CETA, for example, I would almost have a bit of an information kit that basically says, "Look for yourself. Here are the six paragraphs of the CETA that tell you that not only will it not threaten environmental standards, but it creates new mechanisms that Canadians are not aware of for Canada and the European Union to create or establish or enforce even higher standards on trade and labour, on trade and environment.''

It is a challenge. I don't think that Canadians realize how much the good jobs that we have in this country — and they are the majority of jobs — depend on trade, growing trade and meeting international competition.

If I were a communications expert, maybe I would come up with more original ideas, but the short answer is if we start with the concerns that Canadians have, as opposed to just saying these trade agreements are good, we can say, "I know you're concerned about jobs. I know you're concerned about the environment, about high standards. These trade agreements, in fact, do not threaten these values or things that Canadians aspire to. They actually help make them come true and give Canadians more opportunity to generate rising standards of living and good standards, generally speaking, across the economy.''

I'm at a loss in terms of communications strategy. I think it should start with the concerns of Canadians rather than just statements that trade agreements are good for business. They are, but they are much more than that. They do help raise standards of living.

Senator Housakos: My question is for both of our guests. Are trade agreements inherently disadvantageous for Canada when we engage in trade agreements with countries where their currency is grossly devaluated compared to the Canadian dollar? In your opinion, at the end of the day, when we're judging free trade agreements, are there any benefits to having trade agreements with countries where we have a net loss or a trade deficit with certain partners we engage?

Mr. Schwanen: I can take that on. First of all, the benefits from trade definitely come from two-way trade.

Canada has an interest in supporting growing economies, whether it's China or Vietnam, because they are the future large markets for our sophisticated goods and our services. We have a manufacturing trade deficit with China, but we have a strongly emerging surplus in trade in services that calls on all kinds of sophisticated Canadian services with that country and with other emerging countries.

Trade is definitely a two-way street. When we import, in a lot of cases we raise the standards of living of Canadians. They get more for their paycheque. Look at what happens when we try to keep high the price of anything from electricity to — Monique will pardon me if I mention — milk. It's not really helpful for Canadians when we impose those barriers against imports.

I should also say that the competitiveness of Canadian business comes in part from being able to import some of the things we don't have in Canada or that we don't have competitively here in Canada. It's very much a two-way street: When you're able to have access to, let's call it, a good but cheap input, it may and it does help the rest of the Canadian business, if you like, or the Canadian line of business, compete globally. It's like that for auto parts, for textile imports that help our clothing manufacturers and so on.

So it's a two-way street. Respectfully, it's simply not correct to say that imports are, for example, hurting Canadian jobs. In a lot of cases, they raise the standards of living of Canadians and make the businesses that import more competitive.

To the point regarding currency, that's definitely an issue with countries that maintain their currency artificially low. That was an accusation, if you like, levelled at China, for example. But in the past few years, China has been trying to internationalize the use of its currency. You can't do that by suppressing the value of your currency, and they have started letting their currency appreciate. All told, I don't think it's a major problem for Canadian exporters. It's something worth watching.

Ms. Moreau: Just briefly, I can't better Mr. Schwanen's answer, so I would support what he said. The only thing I would perhaps add is that we do have a small but active group of business owners who choose to invest in developing countries. They are nimble and interested in those opportunities as well. I wouldn't necessarily discount those opportunities as they seek out interesting investments in those economies that then may go on to be bigger and more stable economies.

Senator Housakos: Thank you both for that answer. I share that point of view, actually. I just wanted to make sure it was on the record.

In your opinion, are there any markets that would be a bad market for Canada to engage in, and what would those conditions and markets be, if there are any?

Mr. Schwanen: It depends so much on the product and on the culture of the business. There is some interesting research on how or why a business owner chooses to access market X versus market Y.

The only thing I can do is give you the very boring economist answer: If it's a big market, we should probably prioritize it. If it grows fast, we should probably prioritize it. If the people in these markets need things that Canadians are producing, we should be right there saying, "Canadian products can really help raise your standard of living,'' and promote or prioritize our exports that way.

Below that, it's an individual business decision. In the same way that you can't really say that, over the next 10 years, we're going to develop this or that sector, it's hard to say we're going to prioritize this market or that market. A few years ago, we thought Russia was a priority market. I'm not so sure we think that way anymore.

Conditions change, and I would leave it up to businesses, up to a point, beyond what I just said in terms of the overall growth potential in these markets.

Ms. Moreau: We survey our clients on all kinds of questions, but we haven't asked them that one, so I can't speak on their behalf on that point.

Senator Cordy: Ms. Moreau, when you were speaking, you said that many of the small- and medium-sized businesses are not using a trade commissioner. In fact, you have your own within your own office. You also mentioned that not all small businesses understand the implications of the trade agreements; they're signed to great hoopla and then no one knows how to make the best use of it. You said you have to explain it to them.

What should government be doing? It often takes years to have a trade agreement signed, and then it has to be ratified after that. Then it's sort of "we've signed the deal' it's over with,'' and then businesses are left to sort of find their way about it. Maybe I'm generalizing here. What steps should government be taking to ensure small- and medium-sized businesses that don't have the resources to do a lot of research on how best to use it are taking advantage of free trade agreements?

Ms. Moreau: It really needs to be a priority for government to reach those businesses after trade agreements have been ratified. For them, the Trade Commissioner Services is one example, and trade fairs are another. The vast majority of our members tend to find opportunities on their own. If we could smooth that process for them as a way to reach them more efficiently, that would go a long way.

Also, address any concerns a business may have. Often we have a sense that a trade deal is going to be a good deal for Canada, so what does that mean concretely for them? Are there points that government can make sure that small-business owners understand? They can use stakeholders and other organizations like us that would be useful in this process, and they have been willing, as we have been, to go through the steps and explain the process to business owners.

There are others that are ready and chomping at the bit. Those members and business owners are ready to go; in fact, they're already trading. This will just expand their trade flows.

It's not entirely a sob-story, so to speak; we have a good proportion of our membership that are actively trading and looking for more opportunities.

Senator Cordy: With every trade agreement, there are businesses that have the opportunity to flourish, and others, not so much. That's also a challenge, I would think, for businesses.

Ms. Moreau: Absolutely. And we may always have a segment of the business population that just isn't interested. We can do what we can domestically to support them here in Canada so they flourish here.

But for those businesses that maybe have an interest that are not quite sure — they are tentative — that's a really interesting opportunity that we should be promoting and engaging with them to see if they want to take that leap.

Senator Cordy: We heard from another witness on this issue of global value chains and that products could be sent to another country, for example, the United States, our closest neighbour. Then the United States revamps them or takes the raw products and turns them into finished products and exports them to a number of other countries.

Mr. Schwanen, when you were speaking about that, you mentioned that maybe we should be developing some of these raw products more in Canada. I've certainly heard this from Canadians that I've spoken to: Why are we sending a lot of raw products to other countries? Why aren't we developing them here, where they would have greater value?

I have two questions. How successful are small- and medium-sized businesses in terms of using the global value chains? Second, are we utilizing our raw materials as well as we should be within Canada to have both the raw product to export but also the finished products to export?

Mr. Schwanen: I think it's tempting to think of production as starting with the raw material, and then somehow if you could add a layer on top of that here in Canada, let's say a refinery or another manufacturing or another plant that would use raw materials, and then export that, you would create more value added in Canada. In fact, that's not necessarily or mechanically the case. It's possible that because of transportation costs, for example, or other factors, it simply wouldn't make sense for Canada to export a finished product or to finish it here. It could actually decrease the value of Canadian output because it would create losses in that sector that you would try to prop up in that way.

In other words, if it's less profitable, if that's the right word, or if it adds less value or even detracts from value in Canada to try to maintain, let's say, a refinery here versus in the United States, where there is more concentration of customers, for example, you might as well at least export the raw material. It's not that you wouldn't want the refinery; it's just that it might cost you too much to maintain it here.

However, senator, I think we think too much in these layered terms. There is a lot we can do with our raw materials that would extract more value from them, and we can generate value through trade without necessarily creating a new plant on top of the resource.

Let me give you a specific example. In the forest products industry, Canadians have learned to make textiles out of wood fibres. In terms of value added, you think: I have some wood and I'm going to create a furniture industry and export the furniture. Instead, what you do is you invest in new products that no one else has thought of, based on your resource. It's true that in this ingenious type of research and development-based industry, for example, the Finns or Swedes are very competitive with us on forest products. We should do more of that.

In terms of that kind of research and development, it helps us exploit the resource in a more intelligent way, but that doesn't necessarily start with the concept that we're going to take a resource and then build industries all the way up to the end of the value chain.

Another way of exploiting our resources is to create a more robust environmental service industry. With the resources that we have here, we could actually become the country that has the most intelligent environmental policies, which creates jobs in environmental services firms, based on the fact that we have resources here. We just learn to manage and exploit them better, and we sell that expertise to other countries. So it's a different type of value extraction.

Finally, in terms of global value chains, they can help small business. We have Canadian clothing designers here in Canada that sell their patterns to China and the Chinese make the clothes and sell them to the United States. That's like a Canadian export to the United States, very indirectly. We create value here through a small business person being involved in these sorts of value chains.

I could go on, because I get really excited by these examples. There are different ways that we can plug into value chains and generate value through our resources than, let's say, the more traditional way that we're thinking about that.

The Chair: I join you; I'm excited about those examples too, because it goes to small and medium. There are very ingenious people in Canada who know how to get there, and I think that's what we're looking at.

We're fast running out of time, but I have two more questioners.

Senator Raine: Thank you very much. I'm a guest to the committee today. I am interested in terms of my background in tourism. I'm wondering if you have any comments on tourism and the economic opportunities through international trade — and tourism is trading.

One of the things that struck me for many years is that I believe tourism is the only export product that we have in Canada where we actually export the holiday, which is taken up in Canada but purchased by someone in a foreign country, in foreign dollars. They come and spend their holiday here. But our holiday packages have embedded in them GST. I don't know of any other export product we have where GST is charged on that product. Do you know of any product that we sell overseas that contains GST or HST?

The Chair: Does anyone wish to tackle that? Or we can take that question and perhaps address it at a future time?

Mr. Schwanen: I'll just say one thing, and it's to admit my ignorance, so I'll just talk to the question in principle.

In principle, we're not charging GST or HST on our exports. That's why, in the early 1990s, we got rid of the manufacturer's sales tax, which did apply to exports, and we replaced it by a value-added tax that does not.

Now, my sense — and I could be wrong — is that foreign tourists can claim a credit or rebate on the GST and HST. I'm willing to be proven wrong on that. Maybe one of the things we can do is that, number one, if they can't, they should; and, number two, if it's very difficult to do or there is a lot of paperwork involved, which I suspect is the case, then we can make that a lot easier for them to do from the get-go.

Senator Raine: You are absolutely correct that they can claim back the GST. However, the process is onerous, and in many cases it breaks their laws in terms of privacy of the person and having to prove the person that purchased the product. So the tour operator embeds the GST into the product; and if he does get a rebate, it goes to his bottom line and our products sit in the travel agencies, overpriced.

I don't know whether any studies have ever been done in your organization on this case, but I think we are right now in the top three places where people want to travel to, and we're number 17 in terms of where they actually go, because we're overpriced.

That was just a question. If you could dig into that for me and get back to us, it would be interesting, because tourism is a product we do export.

Mr. Schwanen: Sure, I will keep it in mind. Thank you.

Senator Ataullahjan: My question is to you, Mr. Schwanen. I was just reading something that you wrote a little while ago, which is that the benefits of open trade depend on what we make of the opportunities it presents. Have we taken advantage of the opportunities that the FTAs and NAFTA presented?

Mr. Schwanen: Yes, we have. What happened, for example, in the 10 years after the free trade agreement with the U.S. and NAFTA is quite remarkable. First of all, there was record manufacturing employment in Canada — certainly in a lot of sectors like the auto sector and food processing — in the 10 or 15 years after the FTA. The free trade agreements resulted in some job losses, but they also generated the opportunity for job gains in a lot of sectors.

What happened after that is a different matter, and I would like to speak to that. In the initial years after the trade agreement, basically plant for plant, Canadian plants became as competitive as U.S. plants. It was an incentive to become more productive and more competitive, or in some cases to close your doors, but the ones that remained were very competitive.

What we didn't do, and what the U.S. did subsequently, or what happened in the U.S., is they created brand new industries. We don't have an electronic chip plant in Canada, but they do have them in the United States. So it's that innovation piece, the kind of building on the initial success, that I think has been missing, not across the board but from a sufficient number of Canadian industries and sectors. That's the mystery. That's the puzzle we have to solve in Canada, because the opportunities are certainly there.

The Chair: Mr. Schwanen, you said at the very start that R&D needed incentives to stay in Canada. Can you give me one example of something that we could do that would be crosscutting, not just in one particular sector?

Mr. Schwanen: Yes. There are many people working on that theme, many people in the research community and people advising the government. The basic story is if we have all this knowledge here, how do we turn it into a wider benefit for Canadians through jobs?

People are exploring things, the concept of the patent box, where you reward not so much the person who does the R&D through R&D tax credits, but you reward the person that takes the IP, the intellectual property, whether or not it originates in Canada — although there's a lot that originates in Canada — but take IP from anywhere in the world, including in Canada, and actually employ it here and develop a business here based on that IP, and get, say, tax holidays while you're doing that and creating and generating jobs based on the IP. So that's perhaps something.

In the same vein, another policy that people are talking about, including here at our institute, we absolutely need to support small businesses, but we shouldn't support them for staying small forever, so is there a way to incent businesses to grow? Right now, there's a tax rate for small business. Maybe that tax rate should continue only if the business starts growing after a certain period of time, say five or ten years.

I realize that my colleague at the table may not necessarily agree with that, but the whole idea is not to keep the IP in Canada nor to keep businesses small, but to help them grow and utilize the IP and reward them for utilizing the IP that they can get in Canada or elsewhere in creating jobs here in Canada.

Sorry again for the long answer.

The Chair: Ms. Moreau, is this anything you wish to add? If not, I have one question for you.

We did hear from some sources that said small businesses want to grow but they can't get the financing or the investment attention that they need, so they go offshore, often to the United States. Have you found that as an issue amongst your membership?

Ms. Moreau: Your question has excellent timing. We've just finished publishing our banking reports, which we do every three years and I'd be pleased to share with the committee, and it evaluates any difficulties that businesses may have in obtaining financing. That could be for anything. It won't be trade specific necessarily. And certainly some do. That is an issue. We've also just recently published a report on innovation, which shows that financing is an issue there but not as big as finding skilled labour, for example. So it's maybe not the perception that people may think that what's holding people back from innovating isn't necessarily just finding funds, it's also having time and having skilled employees who can run the business while you're inventing your product, for example, or improving your process.

Financing is definitely an issue. In terms of that going offshore, I'm assuming you're meaning seeking funding through the U.S. through venture capital or other investments. The system is very developed down there.

The Chair: Being bought out by other country.

Ms. Moreau: Certainly, and being bought out is part of it. There are some entrepreneurs and start-ups with that as their big goal — to grow quickly, get bought out and make a lot of money — and perhaps we can support those businesses. But I think we should spend some time in investing and encouraging start-ups to stay here. Of course, Shopify has been a big, shining star in that environment, but I know there are others out there and there are other policies that government can put in place to encourage that kind of behaviour.

The Chair: On behalf of the committee, I want to thank both of our guests for coming today.

When we started out, we had the premise that trade agreements are in place, there are more to come, and we wanted to find out whether we needed to do more than look at a trade agreement. What is the economic environment? What are the other levers? What are the other problems?

Your testimony has been extremely helpful, from both sources, to complete our study, as we will perhaps be studying CETA very quickly and we want to finish our report on trade in general. You've given us a lot of information for our report but also a great help as we look forward to the new trade agreements that will be coming before this committee.

Thank you, Mr. Schwanen and Ms. Moreau, for being here with us.

Senators, we are adjourned until tomorrow.

(The committee adjourned.)