Putting China’s Kitty in Perspective

(Stephen Poloz, Export Development Canada)

There is continuing angst around China’s vast accumulation of foreign exchange reserves. What will they do with all that money, buy the crown jewels? Switch into euros? No one really knows.

Back in 2006, the level of angst skyrocketed as China’s reserves approached the $1 trillion mark. But by the end of 2007 China’s reserves were up to $1.5 trillion, more than 40% higher than a year earlier. Back in 2000, China only had $166 billion, so this number has been rising fast.

The key driver of this accumulation of Chinese wealth is America’s trade deficit, which has begun to recede but was still $713 billion in 2007. China, as one of the biggest trade surplus countries, and accounting for about one-third of America’s trade deficit, accumulates a lot of U.S. dollars through foreign exchange, and invests a lot of those dollars in U.S. treasury securities. Hence the popular shorthand, which is that China is financing America’s overspending.

It is worth remembering that a similar issue emerged in the 1980s, when Japan was the world’s biggest trade surplus country and was accumulating a large kitty of reserves. Japanese investors made a lot of investments around the world during that era, raising concerns that they would someday own the world. Of course, it did not happen, because Japan’s rapid development included rising domestic wages – once their wages caught up to those of other major economies, they became a bigger importer. This will happen in China, too, eventually.

In the meantime, how do we put China’s growing kitty into perspective? $1.5 trillion sounds like a lot of money, and over $400 billion of that is held in the form of U.S. Treasury securities. But these figures are dwarfed by America’s private sector presence abroad. U.S. foreign assets were nearly $14 trillion in 2006 (the latest figures), over $12 trillion held in private assets. Sales by U.S.-owned foreign affiliates run at around $4 trillion per year, from some 23,000 establishments.

These figures underscore that the main underlying driver of reserve accumulation is not the U.S. private sector, which is highly globalized, but the U.S. government. Even so, the U.S. fiscal deficit is quite small relative to global savings. Global savings amount to around 20% of global GDP in most years, and usually at least one-quarter of that would find its way into U.S. dollar assets; even when the U.S. fiscal deficit was up at around 4% of U.S. GDP, it amounted to less than 1% of global GDP, or at most one-fifth of the total global demand for new dollar assets.

Furthermore, the recent descent of the U.S. dollar back to 1996 levels, is beginning to have its effect. That, combined with the U.S. slowdown now underway, will produce a significant narrowing of the U.S. trade deficit, even with China. U.S. imports from China grew 30% in 2004 and 2005, 20% in 2006, 13% in 2007 and the trend was around 7% towards the end of the year.

The bottom line? In today’s globalized world it is very hard to know who owns what and it doesn’t really matter much, anyway. Global imbalances can be a problem, so a degree of angst is appropriate, but natural adjustment processes are always running in the background.

Key Sectors Grow as Wholesalers Record Higher Revenues and Profits in 2006

A new report says wholesalers recorded higher revenues and profits in 2006 thanks to growth in business investment and consumer spending coupled with a healthy construction sector.

The Statistics Canada report says the economic environment provided a “very favourable context” for Canada's wholesale trade industry in 2006.

The agency says increased investment by businesses continued to drive revenues while consumer spending was robust, imports of consumer goods grew, construction hit record levels and some prices dropped due to a stronger Canadian dollar.

Total operating revenues for the wholesale industry hit $660 billion in 2006, up 5.8% from 2005. The growth rate was slightly slower than the increases of 7.1% in 2005 and 9.1% in 2004.

Half the 2006 growth came from three groups: petroleum products, building supplies and the “other products” category, which consists mainly of agricultural products, chemicals and recycled metals products.

Summary data and a link to the report are on the Statistics Canada website.

Frontline USA: Privatizing Border Security

Immigration and border security has become a frontline in US politics and a key battleground in the race for the White House. So, big stakes on the political front, but also big money, and big questions, with the same private contractors from Iraq now involved in building a high-tech fortress America.

The news program “Frontline USA” travels to the US-Mexico border to examine how big business is positioning itself to tap into the lucrative border security market. One of the first to get there was Boeing – America’s second largest defence contractor - with Project 28, a so-called “virtual fence” to police 28 miles of border near Tuscon, Arizona, a high traffic area for migrants.

Although the program focuses on the southern border, many of the initiatives in question are also being looked at for securing the US border with Canada. Earlier this month, DHS Secretary Michael Chertoff told senators on the Homeland Security Appropriations Subcommittee, “We are going to have technology on the northern border, but it’s going to be a different array than what we have at the southern border. We currently have a combination of infrared seismic sensors which are in the ground, remote and local video surveillance systems, and then of course at the ports of entry we have radiation monitoring devices.” Chertoff said there are also plans to have an unmanned aerial surveillance system at the northern border. Canadian Trade Minister David Emerson has sounded increasingly frustrated in recent weeks with what he has called a “bottom-up thickening” of the border.

CBSA Electronic Commerce Unit – Easter Period Batch 2008

(CBSA)

The Electronic Commerce Unit will be closed for the Easter holiday from Thursday March 20, 2008 at 5:00 pm (ET) until Monday March 24, 2008 at 8:00 am. On Monday, March 24, between 8:00 am and 4:00 pm, three officers will be available at 1-888-957-7224 to deal with urgent matters in production. At all other times during the long weekend, clients with EDI emergencies are asked to call the EDI hotline to obtain the number of the EDI pager for assistance with CADEX, ACROSS, ACI and other EDI systems.

CADEX reports will run on the evenings of Thursday, March 20 and Tuesday, March 25. Entries processed on Thursday March 20 will appear on the K84 notice (ready for pickup on Friday morning). Entries processed from Friday, March 21 to Tuesday, March 25 (inclusive) will appear on the daily K84 notice dated Wednesday, March 26. The rates of exchange appearing on the report generated on the morning of Friday March 21 will remain in effect from Friday, March 21, until Tuesday March 25 inclusive.

Since Friday March 21 and Monday March 24 are government holidays, they will not be counted in the calculation of overdue entries.

Please note that the cut off date for March’s monthly K84 will be March 20th, 2008.

Era of China as a Low-Cost, Manufacturing-for-Export Market at an End: Study

For some manufacturers, it’s getting too expensive to simply offshore production to China

A new study conducted by Booz Allen Hamilton and the American Chamber of Commerce, indicates that companies that pursue China as both a growth market and a market for lower-cost labor and sources, and integrate these operationally, enjoy significantly higher profits than companies pursuing just one of those objectives. Companies that employ dual sourcing and sales strategies report an average profitability rate two-thirds higher than those focused on just one of those objectives (29.6 percent compared with 17.8 percent). Despite the returns that this approach can generate, only one out of four companies is able to combine a strong in-country market growth effort with their manufacturing and sourcing operations.

The first annual study, “China Manufacturing Competitiveness 2007-2008,” found that while a stronger Chinese currency and rising wages were putting pressures on manufacturing margins, failures to deploy operational best practices and to fully leverage China as both a growth market and source of labor and products are also limiting profits.

“The manufacturing philosophy employed by many foreign multinationals in China in recent decades is in need of an overhaul,” said Ronald Haddock, Vice President, Booz Allen. “China’s changing cost and currency structure have shifted, forcing companies to rethink how they structure their Chinese operations and how they perceive China in their overall global strategy. At the same time, China is increasingly a major source of product and business model innovation. We’re seeing globalization at work and China’s role has changed.”

More than half of the surveyed foreign-owned or foreign-invested companies manufacturing products in China believe that the country is losing its competitive edge in manufacturing to other low-cost nations. As a result, nearly one in five manufacturers surveyed has concrete plans to relocate or expand China operations to other countries, with Vietnam and India seen as the top alternatives to China. To find out more, download China’s Shifting Competitive Equation – How Multinational Manufacturers Must Respond or Integrating China into Your Global Supply Chain – Lessons Learned from Global Supply Chain Integrators (both are in PDF format).

MoneyWatch: March 18

JP Morgan Chase buys its one-time competitor Bear Stearns for just $236 million causing investors to worry that the credit crisis could spread.



Jim Rogers, the veteran investor who predicted the 1999 commodities rally, declared that the US economy was "in recession" as he said he would take flight from the dollar and switch his investments into currencies including the Chinese yuan. More here.

There Must Be No Turning Back on NAFTA – McGuinty

(The Financial Times – Ontario Premier Dalton McGuinty)

For the past few months, we Canadians have had our ears pressed to the border, listening with great interest as our American friends discuss the North American Free Trade Agreement.

As a partner in the agreement, we have a tremendous stake in how this conversation plays out, of course. But we also have a unique perspective on the agreement. For us, NAFTA works. That is because NAFTA allows trade to flow more naturally and fluidly across our shared border and has helped turn the Great Lakes region into one of the largest concentrations of economic might in the industrialised world.

The numbers are significant. The eight Great Lakes states plus Ontario account for 30% of North America’s employment and output and a healthy 36% of its manufacturing employment. Every day, about $900m worth of goods travels between Ontario and our Great Lakes partners. At the Detroit-Windsor gateway alone – the busiest in the world – $122.8bn worth of goods, 6.5m trucks and 6m cars cross each year. This has helped create an integrated Great Lakes economy where products are made – not on the Canadian side, or the American side, but together as a region.

For example, a part produced in Ohio could find its way into a car assembled in Ontario, which in turn could be shipped to Europe. Resources produced in Ontario can be sold in the U.S., turned into products and sold again in the Canadian market.

Canada is the largest trading partner for 36 of 50 U.S. states. Pennsylvania exports more to Canada than its next seven markets combined. Cross-border trade supports 221,500 jobs in Michigan alone. The regional trade relationship is complex, dynamic and, ultimately, good for our shared economy.

A 2004 study in the American Economic Review concluded that, while there was short-term job loss in manufacturing in the early days of NAFTA, the lost employment was offset by employment gains in other parts of manufacturing. Overall, wages increased, as did productivity. In fact, labour productivity in manufacturing increased by a remarkable 0.93% annually. Overall, Canada and the U.S. increased their trade with each other, forming a more cohesive North American market.

Since NAFTA was introduced, merchandise trade between Canada and the NAFTA partners has increased 122%, to $597bn in 2006. In a world where greater economic integration is the order of the day, NAFTA has helped preserve competitiveness by pooling our shared strengths and resources.

However, manufacturing across the Great Lakes region continues to face challenges from low-cost competitors in China and India. The current oil price shock is accelerating the adjustment. In Ontario, we face the added pressure from a high Canadian dollar and a struggling U.S. economy, which has cost us jobs in the manufacturing sector.

Ontario remains strong because we have a modern, diversified economy. We have chosen to capitalise on the opportunities provided by NAFTA. For example, we have chosen to invest in infrastructure so that we can speed up the flow of goods and services across the Great Lakes region.

We have cut taxes, invested in innovation and partnered with key industries. But our biggest and most important investments have been in education. We have committed ourselves fully to strengthening our greatest competitive advantage – skills and education. Ontario now has the highest percentage of people with a post-secondary education in the western world.

Our choice has been to invest in our people – so the next BlackBerry, the next breakthrough in biotechnology or the next big thing in green technology happens in the Great Lakes region. When it happens the entire region will benefit. We will ship parts across the border, exchange information, ideas and labour and share the opportunities among workers and their families.

We are interdependent. What is good for one is good for all. To go backwards, when competitors in the European Union and South Asia are becoming increasingly integrated and productive, would be a mistake. Canada and the U.S. are joint stewards of a valuable economic partnership. But we are also stewards of something far more valuable – one of history’s great political friendships. For a century and a half, that friendship, in spite of the odd crack, has been a rock-solid example to the world. I believe our choice – the only choice – must be to deepen and strengthen our relationship so that we continue to grow, together. We owe nothing less to businesses and families on both sides of the border.

Someone Tell Commodities There’s a Slowdown Going on

(Peter G. Hall, Export Development Canada)

The marketplace is fast realizing that a global economic slowdown is in the works. Everyone seems to be convinced – except those irrepressibly bullish commodity markets. If slowdown is here, and key markets close to recession, why are commodity prices so high?

Not only are prices high, but many are close to peak levels. Oil prices closed at nearly US $108 per barrel two days ago. Gold is pushing US $1000 an ounce. Agricultural prices are soaring to unheard-of heights. Key base metals are hovering at peak levels, and even Dr. Copper, the metal with the PhD in economics, seems oblivious to the slowdown at over US $8500 per tonne.

These higher prices are no accident. The world economy reached the peak of its economic cycle a number of years ago, but a funny thing happened: instead of the typical slowing, world production continued to expand. Freer trade and increased technology opened up markets, like China and India, that formerly were much less involved in global commerce. This went a long way toward alleviating the shortages of labour and physical capital typical at the top of the cycle.

One key problem: production of commodities was not geared for this “extra” growth. A protracted period of low commodity prices actually suppressed investment in the exploration and development of a whole range of resources. Markets were lulled into thinking that supply was no problem. But shortages began to emerge in 2003, and the commodity boom was born.

If this “extra” growth is here to stay, then it is natural to conclude that commodity prices will be permanently higher. But at what level? Short-run price adjustments are almost always exaggerated, and this time is no exception. Perceived shortages lead to overbuying as producers lock in critical supplies. But sustained price increases also prompt producers to pre-buy, as what is bought can be stored and sold later at a higher price or mark-up.

These behaviours over-inflate prices, attracting a wider audience. Eager to ride the wave, speculators get involved, boosting prices even further. This activity has intensified in recent weeks as markets, spooked by troubles in the global financial sector, uncertain performance of equity markets and the eroding US dollar, have increasingly sought refuge in commodities.

At its core, the commotion is largely about perception. But the reality is that global slowdowns affect demand for commodities, and the present is no exception. How much? Consider copper. The US housing and auto sector corrections have chopped US copper usage back by over 10%, and world demand by 1.6%. Slower activity in other developed economies is having a similar effect. Copper demand could easily be off by up to 6% before taking slower emerging market growth into account. Similar logic applies to other base metals and the oil and gas sector. And the logic all suggests that prices are in for a sizable correction.

The bottom line? The recent bull run is delaying the typical effects of slower world growth on commodity prices. Commodities are unusually late in leaving the party this time around, but when they do, they will likely leave noisily, together, and quickly.

Industry Exposure to the Rising Exchange Rate – Study

(Statistics Canada)

Construction profits the most of any industry from the rising loonie, as it reaps the benefit of lower prices for imported inputs while selling its output almost entirely in Canada, according to a new study published today in the Canadian Economic Observer.

Services oriented to domestic demand also stand to benefit from lower import prices. Most resource-based industries have much larger exports than imported inputs, but have been insulated from the negative impact of the rising loonie by stronger commodity prices.

Comparing exports of outputs and imports of inputs by industry yields a measure of the net exposure each industry has to the exchange rate. Industries most vulnerable to a rising dollar are those with a large export dependency but little offset from imported inputs. The best-positioned industries are those that use large amounts of imported inputs and sell mostly in domestic, not export, markets.

This study showed that the net exposure of exported outputs and imported inputs is an important, but not dominant, determinant of industry fortunes. For nearly half the economy, exports are almost irrelevant to demand. Others that have suffered the most, notably forestry products and clothing, have been victims of events specific to those industries.

Overall, Canadian industry earned 20% of its income directly from exports in 2004. Industries vary greatly in their dependence on exports, with manufacturers and commodity producers being the leading exporters. Manufacturers of transportation equipment relied directly on exports for 73% of their output, the most of any industry in 2006.

Several other manufacturers rely on exports for nearly half their output, including machinery and equipment, chemicals, metals, wood and paper, and clothing. Mining and oil and gas directly export about half their output.

But large swathes of the service sector have little dependence on export markets. Together with construction, industries with almost no exposure to exports account for nearly half (48%) of gross domestic product.

Canadian industries imported 10.6% of all their inputs in 2006. Broadly speaking, what emerges for import use by industry is a sharp split between manufacturers and the rest of the economy — most manufacturers import inputs extensively, while other sectors essentially do not.

Comparing exports in output with imports in inputs reveals that among manufacturers, the wood and paper industries had the largest net exposure, with a gap of 36 points between the shares of exported outputs and imported inputs. This helps explain the woeful financial condition of these industries.

However, a large reliance on exports relative to imported inputs does not always imply hard times for an industry as the dollar rises. Oil and gas and mining have the largest net exposure to fluctuations in the dollar, at 46 and 43 points. These industries overall have done well recently, as the US dollar prices of their commodities have risen faster than the loonie has depressed export revenues.

Many manufacturers have a built-in hedge in their cost structure that helps compensate for the depressing effect on revenues of a rising exchange rate. While the soaring loonie has slowed export earnings, this has been partly offset by lower prices for inputs they import. This helps explain how manufacturers have adapted to the stronger exchange rate, maintaining steady output since 2003 while stepping up investment plans into 2008.

Construction stands out as the goods industry with the most to gain from a higher dollar, with a 10-point gap between the share of imported inputs and exported outputs.

Governments import a larger share of inputs than their exported outputs, notably health and education. Most commercial services have a slight excess of imports over exports. This includes business services, finance and recreation.

The study is included in the March 2008 internet edition of Canadian Economic Observer.

New Food and Drugs Act Liaison Office

(Health Canada)

The Government of Canada has announced the official opening of the Food and Drugs Act Liaison Office (FDALO) to deal with issues concerning the Food and Drugs Act.

"The new Food and Drugs Act Liaison Office is part of a series of initiatives designed to modernize and strengthen Canada's safety system for food, health and consumer products," said Minister Clement, Minister of Health. “Like the Food and Consumer Safety Action Plan announced on December 17, 2007, the new office will also serve to fulfil our Government’s commitment to continuously improve its accountability mechanisms when it comes to matters pertaining to the Food and Drugs Act."

The Food and Drugs Act Liaison Office will provide an independent and confidential resource for the public when they are experiencing problems with the regulatory process or with the application of policies or procedures under the Food and Drugs Act. It will also work with departmental and public stakeholders to facilitate early resolution of disputes and work to prevent future disputes of a similar nature from occurring.

The Food and Drugs Act Liaison Office will listen to complaints, offer options, facilitate resolution, make recommendations and examine issues independently and impartially. The Food and Drugs Act Liaison Office can be reached at 1-866-339-4998.

For more information, please visit the Food and Drug Act Liaison Office website. If you are experiencing problems with a specific drug or food product, please contact the Government of Canada’s general inquiry line: 1 800 O-Canada (1 800 622-6232).

Manitoba Expected to Lead All Provinces in Economic Growth in 2008

(Conference Board of Canada)

Manitoba’s economy is forecast to expand by 3.7% for the second consecutive year, making it the fastest-growing provincial economy in Canada in 2008, according to the Conference Board’s Provincial Outlook – Winter 2008.

“Boosted by ongoing construction projects, robust domestic spending and an optimistic outlook for manufacturing, the Manitoba economy is firing on all cylinders. Its neighbour, Saskatchewan, is also poised for another year of strong growth,” said Marie-Christine Bernard, Associate Director, Provincial Outlook. “In central Canada, the sombre U.S. outlook will present a challenge for both Ontario and Quebec, but neither province is expected to slide into a recession.”

In spite of the slowing U.S. economy and the high Canadian dollar, the well-diversified manufacturing sector in Manitoba is being fuelled by large, lucrative orders for buses and aircraft parts. As a result, manufacturing in Manitoba is expected to grow by an average of 5.5% over the next two years, two percentage points higher than the national average.

Saskatchewan’s economy is also booming, with growth of 3.6% expected in 2008 – slightly below the province’s 2007 pace. High commodity prices are driving mining activity and boosting construction projects. In addition, new migrants are bolstering Saskatchewan’s domestic economy.

Alberta’s economy is cooling down, due to a five-year low in drilling activity, combined with weaker gains in retail sales and lower population growth. But the service sector is still anticipated to grow strongly, boosting overall economic growth to 3.3% in 2008.

Weakness in the United States is cause for concern for British Columbia’s forestry and manufacturing sectors, but the province’s domestic economy remains strong enough to produce real GDP growth of 3.1% this year.

The weakening trade balance will continue to erode bottom-line growth in Ontario and Quebec, and more manufacturing layoffs are expected. Still, healthy capital spending and decent income growth will support Ontario’s economy, producing growth of 2.1% in 2008. The domestic economy in Quebec is even more of a pillar of growth, thanks to federal and provincial tax cuts that will boost consumption. As a result, Quebec’s real GDP is forecast to grow by 2.4%. Both provinces can expect better performances in 2009.

In Nova Scotia, new private investment in capital projects and stronger manufacturing prospects should add to a vigourous service sector, producing growth of 2.6% this year. New Brunswick will benefit from strong mining and construction activity – offsetting difficulties in the forestry sector – to produce growth of 2.2% in 2008. Following a hiring boom in 2007, Prince Edward Island’s economy will increase by a modest 1.9% this year, although tax reductions over the past 10 months will support income growth.

After growing by 7.3% last year, Newfoundland and Labrador will post growth of just 1.5% in 2008, due to a decline in oil production. Download the forecast here.

Profile of Canadian Exporters 1996-2006

(Statistics Canada)

The number of Canadian establishments that export merchandise fell for the second consecutive year in 2006, but the total value of their exports rose to a record high, according to the latest version of the Exporter Register.

In 2006, 45,641 establishments exported merchandise, down 5.0% from 2005. However, this amount was 19% higher than it was in 1996 and slightly higher than in 2000. These establishments exported a record $404.4 billion of merchandise in 2006, a marginal gain of 0.7% from 2005. This was the third consecutive annual increase, following three years of declining exports that began in 2001.

In the manufacturing sector, the number of exporters declined 2.9% to about 21,000. This sector accounted for about one-quarter of the overall decline in the number of exporters. Even so, the value of exports from the manufacturing sector remained steady at $248.4 billion, which represented 61% of total merchandise exports in 2006.

In the wholesale trade industry, the number of exporters fell 5.2% to 10,297. This industry accounted for just under one-quarter (23%) of the overall decline in number of exporters. However, wholesalers represented 58% of the total increase in the value of exports between 2005 and 2006.

The number of exporters fell in every province. Ontario represented 40% of the national decline, followed by British Columbia, which accounted for 27% and Quebec, 16%.

Establishments that export more than $25 million annually continued to account for the majority of merchandise exports.

The largest 4% of exporting establishments accounted for 84% of the total value of merchandise exports in 2006. Those exporting less than $1 million a year represented 72% of all establishments, but only 1.5% of the total value.Establishments with fewer than 50 employees accounted for 73% of all exporting establishments, but only 31% of the total value.

Conversely, only 6% of all exporters employed more than 200 people. However, they represented 43% of the total value. Summary data is on the Statistics Canada website.

Trade Surplus Expands in January

Canada's merchandise trade surplus with the world expanded by about $1 billion in January as exports increased at their fastest pace in more than a year.

Canadian companies exported $38 billion worth of merchandise, a 3.6% increase from December after a downward trend that persisted through most of 2007. Export prices rose 4.2% in constant dollars, while volumes edged down 0.6% in January.

At the same time, the value of merchandise imports rose one per cent to $34.7 billion, the third straight increase. Prices climbed 1.7%, while volumes slipped 0.7%.

As a result, the trade surplus with the world rebounded from a revised $2.3 billion in December, the lowest since November 1998, to $3.3 billion. Summary data, and a link to the report, are on the Statistics Canada website.

Economists welcomed a January improvement in Canada's merchandise trade surplus with the rest of the world, but cautioned that the report's strong results were skewed by rising energy prices. Click here for the complete article.

Oil Is Canada’s Ace in Any Revisiting of NAFTA

(Globe & Mail via CSCB)

Both Hillary Clinton and Barack Obama are threatening to opt out of NAFTA if elected, which means re-negotiate, a position that is quite tenable particularly with a protectionist Congress. This really is about more than politics – this threat is genuine.

Negotiating treaties involves horse trading and results are uncertain. In preparation for negotiation of the predecessor 1989 Canada/U.S. Free Trade Agreement, the Hon. Donald MacDonald concluded after exhaustive study that Canada should make a "leap of faith" and plunge in.

Should Canada do so again? There may be no choice. And if that happens, we need to pay heed to at least three key areas.

NAFTA and US AD/CVD Law
A prime objective in negotiating the FTA was to obtain an exemption from U.S. laws against dumping and export subsidies.

U.S. anti-dumping and subsidy laws are regularly used by "injured" U.S. industry associations. The U.S. has a large trade law bar that, some say, encourages (if they needed it) U.S. industries to use these laws as a "sword." Canada hoped, based on our two integrated economies, that the U.S. would be sympathetic to granting the exemption.

What did Canada end up with in the FTA (carried over into NAFTA without the "improvements" to the "temporary" FTA solution)? A "binding" dispute settlement regime with panels of arbitrators reviewing decisions of the imposing country to assess whether its laws, not any objective, international standard, were properly applied. There were more than 20 panel reviews in the most recent case against Canadian softwood lumber (one of four) – and the issue is still unresolved.

But there is an alternative. The 1994 World Trade Organization agreements created the international standard and an enforcement regime. Thereafter, Canada could also go to the WTO for dispute settlement …

NAFTA and energy
… NAFTA's energy section broadly unfetters energy trade between the U.S. and Canada. But it adds a virtual guarantee of U.S. supply. (Mexico got a "pass" on energy.) Neither country may reduce the proportion of its energy exports to the other relative to the "total supply" of the exporting country during the prior 36-month period. The rub is that "total supply" includes shipments to its domestic and foreign users.

But if you look at the current energy landscape, China wants to buy Canadian energy. Canada imports more than 55 per cent of its oil needs. Canada continues to be the largest oil and gas supplier to the U.S. Let's assume Canada continues to consume the same quantities of its own energy production and importation. If so, could Canada sell energy to China, or any country other than the U.S.? No. The proportionality maintenance obligation prevents that.

When negotiating the FTA, Canada's concern was that the U.S., then desiring energy self-sufficiency, might impose restrictions on Canadian energy imports to stimulate U.S. production. Canada won the articles prohibiting restrictions on Canadian exports, and the U.S. won the proportionality maintenance commitment. The U.S. now looks to safe, stable and friendly suppliers, now a good idea considering politics in Venezuela, Iran and Iraq…

… the prospect of the U.S. walking from NAFTA and watching China and others scoop Canada's energy exports is slim to nil…

NAFTA and investment protection
… Foreign investment protection is alive and well world-wide. There are more than 2,000 bilateral investment treaties and they are based on the NAFTA model. Importantly, there is an "manager" for settlement of foreign investment disputes at the World Bank — the International Centre for the Settlement of Investment Disputes, under the ICSID Convention. All 144 signatory countries promise to enforce ICSID awards and not one has gone unsatisfied since the convention was established in 1966…

Jack Layton Discusses Trade on CNN

Last Thursday, NDP leader Jack Layton appeared on CNN with host Lou Dobbs to discuss NAFTA, globalization and the offshoring of manufacturing jobs to China.

CBS MoneyWatch: Highs and Lows

Home foreclosures and mortgage payments in arrears in the United States are at an all-time high, crude oil topped a $105 per barrel and the U.S. dollar fell to a new low against the Euro.

Canada’s Dollar Gains as Prices of Commodity Exports Advance

(Bloomberg)

The Canadian dollar rose the most in more than a week against its U.S. counterpart as prices of the nation's commodity exports rose, bolstering the currency's appeal.

Canada’s dollar strengthened against 15 of the 16 most- traded currencies as crude oil climbed to a record after the Organization of Petroleum Exporting Countries gave no indication it will increase production. Gold prices also reached a record, and wheat advanced. Commodities account for about half of Canada’s exports.

“The strengthening prices of oil and gold are helping the Canadian dollar,” said David Bradley, a director of foreign exchange trading at Scotia Capital Inc. in Toronto. Click here for the complete article.

Can Profits Weather the Slowdown?

(Stephen Poloz, Export Development Canada)

The profitability of Canadian companies remained strong overall at least until the end of 2007, despite concerns about the economic storm clouds gathering just south of the border. Is the situation unique, and therefore sustainable, or an accident waiting to happen?

Total Canadian corporate profits were up 9.2% in the four quarters ending in 2007Q4. This pace was far in excess of the economy’s growth rate, which means that profits continued to rise as a share of total income. The leading profit-growth sectors were arts and recreation (63%), construction (26%), retail trade (25%) and real estate (19%). In contrast, profits were falling in sectors like agriculture, forestry, fishing and hunting (-32% overall), mining (-6%), oil and gas (-1%) and repair, maintenance and personal services (-6%). Manufacturing profits were up 3.3%.

Some of these results seem surprising, such as the strength in retail trade and weakness in mining and oil and gas, not to mention positive profit growth in manufacturing. But these data can be volatile, even when measured on a year-ago basis. It is helpful to look at profit margins, which are much smoother. The profit margin for the economy as a whole was 8.9% in 2007Q4, a very solid number. This number was as low as 3.3% back in late 1992, in the aftermath of recession, but spent most of the 1990s in the 6-7% range. In 2000 it drifted above 7%, faltered to 5.3% in late 2001, but then recovered steadily. In 2005, the aggregate profit margin moved above 8%, and it has fluctuated in a narrow range between 8.5% and 9.0% since that time.

One might suspect the oil and gas sector was behind this trend, but not so. Profitability in that sector peaked in 2005, and has been declining since. Even so, its five-year average profit margin is about 19%, more than double the economy average. In fact, the uptrend in overall profitability is mainly due to mining, where the margin has more than doubled since 2001-02 to around 18%, and finance and insurance, where margins have risen from 15-16% to about 27% in the same period. Real estate has moved up a little, too, to almost 20% most recently.

As for manufacturing, its overall profit margin at the end of 2007 was 6.3%, still in a range that has been typical for much of the past decade, except during the 2001-02 slowdown. Sub-sectors of rising profitability include non-metallic mineral products (15.8% most recently), computers and electronics (10.7%), and alcoholic beverages and tobacco products (25.0%).

Many other manufacturing sub-sectors are being squeezed, including motor vehicles (-1.2%, although parts manufacturers are still doing better overall, at 7.3%), wood and paper (1.1%), clothing and textiles (1.2%), furniture (3.6%) and primary metals (5.7%). But there is also a group that is showing relatively stable profitability, so far: transportation equipment; fabricated metal and machinery; chemicals, plastics and rubber; petroleum and coal products; food and soft drinks.

The bottom line? So far, the profit damage from the U.S. slowdown has been limited to a few sectors. This puts extra weight behind the recent survey of investment intentions by Statistics Canada, which indicated that investment will be a positive for the Canadian economy in 2008.

Industry Week Poll on NAFTA

Industry Week is running an online poll on the home page of its website.

Which of the following actions should the U.S. take on NAFTA?

• Withdraw from NAFTA immediately.

• Try to renegotiate NAFTA in the next 6 months, and withdraw if more favorable terms are not met.

• Keep NAFTA as it is.

Current results indicate almost even three-way split between the various choices.

Update 03-07-08: Current results trending towards renegotiation (38%) with the other two options at approx. 31% each.

Canada Scores Victory in Softwood Fight

(Globe & Mail via CSCB)

Canada won a sizeable legal victory today over the United States Tuesday after a private court settled the first dispute to flare up over the 2006 softwood lumber deal between Ottawa and Washington.

The decision is expected to infuriate the hard-line U.S. softwood lumber lobby, which will likely push for a judicial review of the ruling…

… the point Canada won – whether Alberta and B.C. producers should have been paying higher export taxes in the months after the deal was inked – will save those provinces as much as $75-million in export levies…

International Trade Minister David Emerson, said: “We are pleased that the tribunal agreed with our interpretation that the adjustment factor is not applicable to British Columbia and Alberta. However, we are disappointed that the tribunal did not agree with our position that adjustments were to commence as of July 1, 2007.”

The compete statement from the minister regarding the decision can be found here.

China to Enact New Product Safety Rules in Bid to Restore Reputation

(The Canadian Press)

The Chinese premier said Wednesday that Beijing is taking steps to ensure its product safety regulations meet international standards, signalling another phase in China's wide-ranging campaign to repair its battered reputation as an exporter.

China's exports have come under heavy scrutiny in the last year after potentially deadly levels of chemicals were found in goods ranging from toothpaste to toys to a pet food ingredient.

“It is imperative that the people feel confident about the safety of food and other consumer goods and that our exports have a good reputation,” Premier Wen Jiabao said Wednesday during an address to the National People's Congress, China's legislature.

Measures to ensure the quality of products for both domestic and international consumption will include creating or updating 7,700 national safety standards, he said.

Requirements and testing methods related to food and product safety will meet international standards, Wen said.

Wen also said co-ordination between law enforcement and prosecutors needs to be improved to increase penalties for guilty producers.

China last year announced a series of measures to boost product supervision and declared as a success a four-month quality and safety campaign that ended in December.

With the Beijing Olympic Games less than 200 days away, authorities have pledged to take rigorous measures to ensure food safety.

CBC National: Obama Campaign, NAFTA & the Canadian Government

Further clarification on the nature of the disucssions between Obama's presential campaign and the Canadian Embassy.

CTV on Obama, Clinton and NAFTA

CTV News reports on communications between the Obama campaign and the Canadian government regarding NAFTA and campaign rhetoric.

Candidates’ NAFTA Stance Stirs Canada

(Financial Times)

Canada has warned that the U.S.’s privileged access to its oil and natural gas could be in jeopardy if a Democratic administration backtracks on the North American Free Trade Agreement.

Canada is the U.S.’s biggest foreign oil supplier, exporting close to 1.8m barrels a day - more than 10 per cent of U.S. consumption. NAFTA provisions make it difficult for Canada to restrict oil shipments to the U.S.

“If NAFTA is ripped up then the Chinese can buy more of our oil; there’s no further obligation on the part of Canada to sell its oil to the U.S.,” a Canadian diplomat told the Financial Times.

He was responding to statements this week by Barack Obama and Hillary Clinton, the two Democratic presidential hopefuls, that they would be prepared to pull out of NAFTA it was not renegotiated.

“We will opt out of NAFTA unless we renegotiate it and we renegotiate on terms that are favourable to all of America,” Mrs Clinton said in her debate with Mr Obama in Ohio.

George W. Bush, U.S. president, criticised the Democratic rivals for “trying to score political points” at NAFTA ‘s expense and said the U.S. had benefited from the deal.

“One statistic I think people need to know is there’s roughly like $380bn worth of goods that we ship to our NAFTA partners on an annual basis,” he said, in a White House press conference.

“There’s a lot of farmers and businesses, large and small, who are benefiting from having amarket in our neighbourhood.”

Although Mexico, the third signatory to the treaty, is the overwhelming focus of much of the U.S. disquiet about NAFTA, Canada would also be affected by a renegotiation and has signalled that it would have demands of its own.

“NAFTA has been kind of a foundation of integrating the North American energy market,” David Emerson, Canada’s trade minister, said in Ottawa. “If you reopen [NAFTA] for one or two issues, you cannot avoid reopening it across a range of issues.” Click here for the complete article.

Meet The Press: NAFTA & the U.S. Economy

Political advisers for both the Democrats and Republicans discuss the presidential candidates’ positions on NAFTA and the U.S. economy.

Clinton Obama Cleveland debate: Is NAFTA Good Or Bad?

Democratic presidential candidates Hillary Rodham Clinton and Barack Obama debate NAFTA -North American Free Trade Agreement.

NAFTA Ministers Direct Further Efforts on Border Security, Food Safety, IPR

U.S., Canadian and Mexican officials met last week to discuss efforts under the trilateral Security and Prosperity Partnership. A joint statement issued at the conclusion of the meeting indicated that the officials have directed their appropriate agencies to take the following actions, and to consider innovative ways to advance the priorities indicated, ahead of a NAFTA leaders’ summit in New Orleans April 21-22.

Competitiveness
• continue to implement the strategy to combat piracy and counterfeiting
• build on the Regulatory Cooperation Framework by pursuing collaboration through sectoral initiatives, with an emphasis on the automotive sector

Food and Product Safety
• strengthen cooperation to better identify, assess and manage unsafe food and products before they enter North America
• collaborate to promote the compatibility of the countries’ related regulatory and inspection regimes

Energy and Environment
• develop projects under the newly signed Agreement on Science and Technology
• cooperate on auto fuel efficiency, energy efficiency standards and moving new technologies to the marketplace

Border Security
• strengthen cooperation protocols and create new mechanisms to secure common borders while facilitating legitimate travel and trade in the North American region

Emergency Management and Preparedness
• strengthen capacity for emergency management cooperation in the region before, during and after disasters

In addition, the statement said, the three NAFTA partners will explore new avenues of cooperation and convergence to address issues such as arms trafficking, terrorism, money laundering, counterfeiting, trafficking of people and smuggling, and border violence.

Exporting: It’s Time to Swim

(Canadian Business – Megan Harman)

Canadian manufacturers treading water might have to start swimming across the Pacific Ocean to keep afloat. And their destination need not be just China. The United Arab Emirates and India are also big markets where Canadian products should have a greater presence, says Harinder Takhar, Ontario’s minister of small business and entrepreneurship. “There are tremendous opportunities in both these countries,” he said at a Toronto roundtable event in January, where small and medium-sized manufacturers pitched ways the government can help the industry.

Between the strong Canadian dollar, a skilled-labour shortage and a U.S. economic downturn hampering the one market that exporters depend on most, the manufacturing outlook for the foreseeable future is the dimmest in years. No wonder companies might feel they have enough to handle without tackling new markets. “We’re a manufacturer. We’re not in the business of finding global markets,” says Jason Galamaga, co-owner of Modern Age Plastics Inc., a Toronto producer of signs and displays. Modern Age Plastics has fewer than 100 workers and lacks the resources to expand abroad, a problem facing most Ontario manufacturers since 99.5% of them have fewer than 500 employees. Read the entire article.

Courier Low Value Shipment (LVS) Program Review

(IE Canada)

The Canada Border Services Agency (CBSA) is undertaking a Courier Low Value Shipment (LVS) Program Review. The Review team is taking a comprehensive approach, consulting not only internally within the CBSA but also widely within the industry and with other government departments and stakeholders.

Since the inception of the Courier Low Value Shipment (LVS) Program in the early 1990s, volumes in the courier stream have risen by approximately 433% from 6 million to over 26 million shipments annually. As well, there is an increasing emphasis on securing the trade supply chain through the use of advance information and modern contraband detection technology.

The purpose of the Courier LVS Program Review is to re-examine and re-evaluate the program in light of the current environment with the objectives of identifying present and future model flows; best industry practices both nationally and internationally; co-operative risk management measures; and opportunities for automation and the streamlining of processes. The review team will identify short, medium, and long-term goals for process improvement.

CBS MoneyWatch: Buffet Says U.S. in Recession

Billionaire investor Warren Buffett says that the United States is in a recession. And the auto industry continues to suffer from sluggish sales.

Government of Canada to Fund Expansion at Border Crossing Facility in Lacolle, Quebec

(Transport Canada)

The Government of Canada will commit $10 million to expand the Canada Border Services Agency (CBSA) facilities at the Lacolle-Champlain border crossing, one of the ten busiest Canada-United States border crossings. The Honourable Stockwell Day, Minister of Public Safety, made the announcement today on behalf of the Honourable Lawrence Cannon, Minister of Transport, Infrastructure and Communities.

Funded through the Gateways and Border Crossings Fund, the project consists primarily of the expansion of commercial and bus processing facilities. The project is designed to improve border infrastructure along the Canadian side of the corridor, enhance safety, and relieve traffic congestion. More information here.

Is the Slowdown Spreading? Ask Producers

(Peter G. Hall, Vice-President and Deputy Chief Economist, Export Development Canada)

Last year, decoupling was all the rage. Sure, the U.S. economy was going flat, but many asserted that the malaise was more or less confined within US borders. But what was loudly proclaimed mere weeks ago has now gone strangely silent. Is decoupling dead, or has it just gone dormant?

The debate centers around sequencing. Our increasingly synchronized, just-in-time world likely led many economy-watchers to expect a more simultaneous slowdown. And when the largest single economy began to falter in mid-2006 with no immediate external effects, hopes of a confined slowdown were kindled. The more optimistic pundits were even more hopeful, confining the slowdown to just one sector of the U.S. economy. But slowdown has spread to other parts of the U.S. economy, perhaps more gradually than expected, casting increasing doubt on decoupling.

Is the slowdown spreading internationally? Industrial production data give us a clue. In the U.S., industrial production has been roughly flat for 6 months. Not only is this further evidence of a generalized slowdown within the U.S., but it comes in spite of a weak-currency-inspired resurgence in exports. But as the U.S. malaise is already well-digested, this is not really a surprise.

What of other countries? First, the developed world. Eurozone production declined in three of the last four months, and between August and December 2007, year-over-year growth fell from 4.6% to just 1.3%. Deceleration is evident in Germany, where growth stalled late last year. Annual growth in France is a fraction of Germany’s, and recent monthly performance has been spotty. Output has been flat in the UK for seven months, while Spain and Italy have recently slid into deep decline. Industrial production in Japan is still growing, but the pace has diminished steadily, to about one-third of its late-2006 rate. This sounds like a lot more than a U.S.-only phenomenon.

The case is less clear in the rest of the world. Some economies appear to be immune to the slowdown. Production seems to be gaining momentum in Korea, Thailand and Taiwan, where annual increases rose through 2007 to a comfortable double-digit pace. But others are clearly sliding. Singapore, a bellwether economy for global trade, saw year-to-year industrial production plummet from the 15-20% growth pace to zero in the final half of last year. Things are worse in the Philippines, where declines persisted for most of 2007. India is down from double-digit growth a year ago, to the 7-8% range.

Other economies are somewhere in the middle. Brazil slowed in recent months, although growth is still decent. Malaysia’s production has improved consistently since early 2007, but sales aren’t keeping up: export growth has slowed rapidly, from 10% a year ago to just 3% last December. In China, the same trend may be developing. Production is growing steadily at over 17%. But exports to the U.S., up by a hefty pace in each of the last three years, are just 6% higher. China’s yearly exports to the EU look more respectable, but the trend in recent months has slowed.

The bottom line? The evidence is not complete, but what we do have makes a compelling case for a more staggered slowdown. Given the evidence, there is potentially a lot more slowing up ahead. These days, even the decouplers seem to agree.

Exporters Beware - The Outlook According to Housing is Gloomy

The following article, by Peter Hall of Export Development Canada, is excerpted from “Canadian Transportation & Logistics”

Housing markets have once again proven their economic prowess. U.S. housing starts fell sharply in mid-2006, fully 18 months ahead of the softening in the broader U.S. economy – a remarkable lead on an economic slowdown that most agree is now going global. So given its foresight, is this keen sage saying anything about impending recovery?

Initially, the plunge in U.S. housing starts was not so bad. From just over 2 million units in 2005, starts fell to the 1.5 million-unit level in late 2006.

That’s a big tumble, but it marked a return to long-term trend levels – an unusually stable outcome…. But the tumble resumed in mid-2007, and by the end of the year had sunk to 1 million units. No sign of a rebound here.

There is some solace in this quick plunge. It stands to reason that the sharper the correction, the quicker the recovery. True, but U.S. housing markets became steadily more bloated in the 2002-06 period. Starts exceeded the population’s basic requirement for new housing by roughly 1.4 million units in five short years. Working this off could easily take another 18 months, even at the current slow pace of building activity...

Other housing activity measures are even less comforting…. As such, the U.S. market now has over 10 months’ supply of houses on the market, a far cry from the stable level of 4.5 months’ supply, last seen in late 2005. Again, not a happy result.

Calculated another way, this is equivalent to over 7 million surplus units on the market – a year’s worth of sales, and in a good year, no less. Given this situation, it is no wonder that the U.S. market is facing the first nationwide decline in housing prices in recent memory.

What is more, there is no clear indication that the U.S. housing market has hit bottom. U.S. consumers were lured into sub-prime mortgages with temporary ‘teaser’ interest rates which upon expiry were reset to higher levels. For the market as a whole, the peak of these resets occurs in the first quarter of this year – suggesting strongly that further fallout is likely.

The implications are gloomy. U.S. consumers are accustomed to using home equity as a ready source of cash. With the housing market in a funk and prices swooning, this pool of liquidity is fast drying up. Other sources of savings – equity markets and bank accounts – have also been found wanting, so the consumer’s only option appears to be curtailed spending, not a pleasant prospect for the world economy. Closer to home, the message for Canadian exporters – particularly of wood products, who face an 11% decline in activity this year alone – is sobering.

The bottom line? The numbers suggest it will be at least mid-2009 before U.S. housing markets begin a meaningful rebound. If this indicator is right yet again, 2008 and 2009 will see slower global growth. Let’s just hope that in the recovery cycle, this sage is not quite so forward-looking.

Farmers Should Get $72M Break on Freight Costs: CTA

(CBC)

The Canadian Transportation Agency has ordered a big change to the regulation of freight costs – a change that could mean $72 million in savings for Prairie farmers.

The change announced Tuesday to “revenue caps” – the maximum amounts that CP Rail and CN Rail can earn from grain shipping – means farmers will now pay $2.59 less for every tonne of grain they send to the port of Vancouver.

Biggar, Sask.-area farmer Rene de Moissac calculated that he’ll save about $5,000 this year on freight rates, but he also said he wonders how many years he was paying too much. De Moissac thinks farmers should lobby to get some of that money back.

Other observers, like Saskatoon-based commodity analyst Larry Weber, think farmers and grain companies should now lobby for an improvement in rail service. “My main concern is by lowering the rates, are we going to get any better service than we’re getting today?” he asked. “The service today is already dismal.”

The change reflects the fact that railways’ maintenance costs for hopper cars have decreased, the transportation agency said.

The president of the Farmer Rail Car Coalition, Sinclair Harrison, said years of lobbying by his group has finally paid off. “We felt that farmers were paying an excess of $3,000 per car too much,” he said. “This announcement by the CTA backs up everything we said for 12 years.”

The railways have said they will appeal the ruling.

Canada, U.S. Chambers Call for Lower Cost, More Efficient Border

(The Canadian Press via CCLA)

The Canadian and U.S. chambers of commerce are sounding the alarm on the mounting costs and delays encountered by companies trying to do business in both countries, saying some of the barriers are unreasonable and hurting the economy.

The two countries’ largest business lobby groups, with over three million member firms, issued 17 recommendations Wednesday on how to improve efficiency while maintaining security at what was once called the world’s longest undefended border.

But the chambers agree that one of the key changes needed – an attitudinal shift back to the good old days – is not in the offing for now, at least not on the part of the U.S. government following the terrorist attacks experienced on Sept. 11, 2001.

“Obviously, the events of 9-11 changed a whole lot,” said Canadian chamber policy head Mike Murphy. “We used to have a different attitude about the border . . . I just think it is going to take some time.”

Since the attacks, the U.S. has created a new government Department of Homeland Security and has erected increasingly layered and complex barriers of regulations and inspections.

That has increased wait times for Canadian shippers moving cargo into the U.S., as well as costs.

The report cites several examples of how the regulations have added to costs, including a 2005 U.S. requirement that health certificate numbers be printed on each case of meat and poultry shipped into the U.S., which is estimated to cost one food exporter about $700,000 a year.

“The reality is every incremental cost does filter down to the individual consumer and it makes North American businesses less competitive globally,” said Adrean Scheid Rothkopf of the U.S. chamber.

One of the problems, say businesses, is that neither the U.S. nor Canadian governments have hired and trained sufficient staff to administer the new security and safety regulations they have imposed.

One businessman, Robert Kee of Canadian corn products maker Casco Inc., said his company’s shipments are “held on a regular basis” simply because the trucks sometime arrive at the border when food inspectors are not present, or not working during a weekend.

The two chambers recommended that the two governments establish “trusted shipper and credentialing programs” for frequent low-risk shippers, mutually recognized pre-clearance, increase staffing to ensure 24/7 service at all major crossings, establish a “trusted traveller program” for executives, technical and professionals who frequently cross the border on business, and establish enhanced drivers’ licenses that citizens of each country could use in place of passports.

Murphy said the recommendations do not require large outlays of government funds, and many have been under discussion between the two governments for years. What is needed, he said, is an infusion of trust on the part of both governments that the other side is equally vigilant.

But trust may be in short supply in Washington, says Peter Morici, a University of Maryland School of Business professor and former chief economist that the U.S. trade commission.

“The perception here is that Canada has more porous borders,” he said. “So it’s not going to be satisfactory to us unless we have an integrated system so we are very knowledgeable about what goes in and out of Canada, and that raises very understandable sovereignty issues for you.”

Jason Conley, who specializes on security issues for the American chamber, said the U.S. administration is aware of the impact a tight border has on the economies of both countries, and that while some progress has been made, security trumps trade on the issue.

“It is a challenge because at the end of the day, they (homeland security) will be judged on how well they secure the border,” he said.

The joint press release is on the website of the Canadian Chamber of Commerce is here and the more lengthy report is here. Both are in PDF format.

New on CBSA Website: FAST Commercial Driver Program

New FAST program information posted at the CBSA website.

As an approved participant of the FAST program, you will receive:

• the participant’s guide;

• a FAST Commercial Driver card with photo identification;

• for Canadian residents, a copy of the Canada Border Services Agency (CBSA) publication called, I Declare, and the United States Customs and Border Protection (CBP) publication called, Visiting the United States, and if applicable, Traveller Declaration Cards for declaring goods;

• for United States residents, a copy of the CBSA publication called, Information for Visitors to Canada and Seasonal Residents, and the CBP publication called, Know Before You Go; and

• information on Canadian and American immigration rules related to cabotage.