Ottawa’s renewed push for trade diversification is a necessary defence against Donald Trump

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Eric Miller is president of Rideau Potomac Strategy Group and a fellow at the Canadian Global Affairs Institute.

Psychological research suggests that near-death experiences often profoundly change one’s life trajectory.

During the NAFTA renegotiation, Canada came as close to the edge of economic disaster as it had in decades. While U.S. President Donald Trump did not make good on his threatened “ruination” of the Canadian economy and his tearing up of the North American free-trade agreement, Canada did, for a time, look into the abyss of economic chaos with its largest trading partner.

In response, Ottawa’s policy makers began a renewed push for trade diversification. The government’s economic statement in the fall of 2018 announced Canada’s intention to increase its overseas (or non-U.S.) exports by 50 per cent by 2025.

Meeting this goal will be challenging and requires a long-term commitment to success. Today, the United States takes more than 75 per cent of Canada’s exports. Given the scale and proximity of the U.S. and its largely business-friendly climate, the preference of Canadian business for this market is understandable.

Yet, the norm-shattering presidency of Mr. Trump, with its NAFTA renegotiation, national security proclamations about Canadian steel, aluminum and uranium, and repeated verbal broadsides, has transformed the idea of trade diversification from an objective to an imperative.

Sizing up the challenge

The goal announced in the fall of 2018 was backed up with substantial new funding.

The leaders of the Trade Commissioner Service and Export Development Canada (EDC) are significantly improving the effectiveness of Canada’s trade promotion infrastructure. This work must continue.

But hitting the 2025 objective will require more than making the existing system better. It will require policy innovation and different modes of collaboration.

Canada can learn from the world’s great trading countries, including Japan, South Korea and Germany.

Of course, any successful diversification strategy must recognize the natural gravitational pull of the U.S. on Canadian trade. If firms can make the same return selling to Indiana as to India, they will typically opt to stay closer to home.

Greater trade diversification does not necessarily mean less trade with the United States. It just means more trade with everyone else.

De-risking: the core principle

While their models differ in specifics, Japan, South Korea and Germany have driven substantial trade growth over a long period of time, including among smaller firms, by de-risking the exporting process.

Canadian firms are regularly encouraged to “go global." While Canada offers important support to its companies, many Canadian officials have privately lamented that Canadian firms are frequently outgunned by competitors from these exporting countries, which enjoy the comprehensive backing of their governments.

A central feature in Japan’s trade development system is the creation by its government of export opportunities through the financing of infrastructure and technology projects abroad.

How does this work?

First, the Japanese government approaches a partner country and offers to provide “free” infrastructure of interest to them. In recent years, this has ranged from installing most of the traffic lights in Yangon, Myanmar, to expanding subway networks in India.

Some projects destined for international procurement, such as the new Ho Chi Minh City Airport, are never really bid out because non-Japanese firms cannot compete with Japan’s “free upfront” model.

Next, the government organizes financing for identified projects through the Japanese International Co-operation Agency – Tokyo’s key development assistance mechanism. As master project agreements are developed, the Japanese government and private sector organize consortiums of larger and smaller Japanese companies to deliver them.

Consortiums are often led by a large prime contractor with the capacity to manage a network of partners and suppliers. Because funding is provided by the Japanese government, companies are guaranteed to get paid – a key consideration for work performed abroad.

The funds for the projects are substantially recycled into the Japanese economy through purchases of Japanese goods and services. By working on these projects, smaller Japanese firms gain experience in markets they could never crack on their own.

Importantly, because the projects deploy Japanese systems and technologies, the receiving countries are virtually guaranteed to hire and pay Japanese companies to do follow-on and maintenance work. (Indeed, that’s the model: Japan puts up the money to build the infrastructure and the countries pay through service contracts and upgrades.)

Japan sees development assistance as a conveyor belt for driving its own exports abroad. Yet recipient countries have a generally positive view of Japan as a partner because it provides quality infrastructure that responds to their needs.

One can envision ways to “Canadianize” this methodology. The Canadian Commercial Corp. or EDC could serve as the financing delivery vehicle. The large prime contractors to lead consortiums could be identified, at least initially, through a partnership with an entity such as the Business Council of Canada.

While Canada does not have a plethora of large engineering firms, an area such as cybersecurity, where international demand is substantial and the ecosystem of Canadian firms is broad, may be a good place to start.

Better use of trade agreements

Free-trade agreements have been central to Canada’s export strategy in recent years. Unfortunately, too few Canadian firms seem to use them.

South Korea suffered from the same challenge. Yet, when its government signed agreements with the European Union and the United States, its leaders made a national priority of fully utilizing them.

South Korea built world-class information tools that are used for guiding importers, managing trade processes and identifying opportunities. They formed partnerships with customs brokers and other trade professionals to provide comprehensive education and troubleshooting around trade agreements and their opportunities.

The government also ramped up efforts to verify that its trading partners were respecting the rules of their agreements.

According to South Korea’s Institute for International Trade, these efforts drove a 15-per-cent jump in the number of exports using the European agreement over the first three years.

Anecdotal evidence suggests that South Korean officials, informed by their information tools, pro-actively reach out to companies to discuss specific export prospects and opportunities to substitute foreign suppliers with domestic ones.

Canada requires a similar national effort to take better advantage of existing trade agreements. It needs information tools that can serve as the backbone of trade development efforts. It would benefit from more effective partnerships with technical specialists such as the Canadian Society of Customs Brokers and the Canadian Association of Importers and Exporters.

The Canadian government also needs to use its authorities more robustly to ensure that counterpart countries are complying with the rules of their trade agreements – while also supporting a big export development push in these markets.

Using other people’s trade agreements

Canada seems unlikely to have trade agreements with China or India in the near future, but some countries already do and can serve as “connectors” into these markets.

Vietnam, for example, is a member with Canada of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and a member through the Association of Southeast Asian Nations (ASEAN) of the bloc’s agreements with China and India.

If intermediate inputs are sent from Canada to Vietnam under CPTPP rules and are “substantially transformed” to meet the rules of origin and other technical requirements under, say, the ASEAN-China Agreement, the finished product can enter the Chinese market duty-free.

There is plenty of evidence that Canadian companies are already engaging in this fully legal trade triangulation process. Better understanding these networks, where technical overlaps exist in various trade agreements, and how to support these indirect exports into key markets should be a priority for Ottawa.

Experiment in high-growth, large-population countries

As countries grow from lower income to middle income status, they massively increase their consumption of products and services that Canada can supply.

Vietnam is precisely at this stage of economic development, for instance. Success in such markets requires a long-term commitment.

Australia, for example, is investing heavily in brand-building and creative marketing around food, fashion and education. Why? Because when Vietnamese consumers become middle class, they may default to buying Australian.

Fast-growing countries also have enormous technology needs. Given the networked nature of the tech economy, the Canadian Technology Accelerator program was launched in 2009 to help Canadian firms in existing tech centres, such as Silicon Valley. Activities range from providing mentorship and networking for senior executives to facilitating access to investors.

Why not create a parallel mechanism for high-growth developing countries such as Vietnam? While it would be perhaps more hands-on than its Silicon Valley cousin, including partnerships with national laboratories and emerging companies, the goal is clear: to give Canada a privileged position as a partner in the commercialization of the many technologies that will emerge as Vietnamese research grows more robust.

Establish a commercial advocacy infrastructure

Germany knows that commercial diplomacy matters. This is why its business associations, with government support, maintain offices in key locations globally under the common banner Representative of German Industry and Trade (RGIT).

They advocate for German commercial interests, support German companies in procurements and drive trade development. While RGITs are not housed within German embassies, they work closely with embassy staff to foster a “Team Germany” model.

Its management and funding structure, which brings together industry groups that represent both large and smaller companies, ensures that RGITs are responsive to a variety of German firms, not only the behemoths.

Canada would benefit economically by having similar business representation in key markets.

A “Representative of Canadian Trade," which could be jointly managed by the Business Council of Canada, Canadian Chamber of Commerce, Canadian Manufacturers & Exporters and Canadian Federation of Independent Business, and co-funded with the federal government, is worth exploring.

Next steps

The path to trade diversification is not linear. Canada will continue to send a majority of its exports for the United States for the foreseeable future. Yet, by learning and adapting the strategies of great trading nations, Canada can start moving the diversification needle.

There are three factors that will ultimately determine whether Canada succeeds or fails.

First, Prime Minister Justin Trudeau and Mary Ng, Minister of International Trade, need to remind Canadians of the NAFTA abyss and make diversification a priority national project.

Second, trade officials, provinces and the private sector must be encouraged to innovate with these “great trading nation” models and others. Success must be rewarded and good-faith failure not punished.

Third, the Trade Minister must be held accountable against specific quantitative and qualitative metrics. If we don’t measure progress toward export diversification, it will not be owned politically and will not succeed.

Thomas Edison famously said, “The value of an idea lies in the using of it.” While the concept of trade diversification has been around for decades, the process of delivering on it is just beginning. Canada should stay focused on this great transformation.

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