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NAFTA has been a success for Canada. It is vital to safeguard and augment its benefits. Canada and the US trade over $1 million worth of goods and services with each other every minute of every day of the year. In the wake of NAFTA, Canada restructured parts of its economy to better integrate with the US. We must make every effort to capitalize on this investment of time, capital and effort, recognizing that this is far and away Canada's most important near-term economic opportunity.

The common observation that over 70 percent of our trade is with the US belies the fact that the Canadian economy is more closely integrated than ever with that of our southern neighbour. Stephen Blank notes, "Ottawa and Washington talk about the world's largest bilateral trading relationship. But we really don't trade with each other, not in the classic sense of one independent company sending finished goods to another. Instead we make stuff together."54

This is epitomized by how new business models work. For example, an automobile may contain components that have crossed the border 18 times before the finished product reaches the car lot on either side of it. Two-way truck traffic volumes facilitating this trade means approximately 13 million cross-border journeys a year.55 The majority of this trade is intra-firm; the remainder is within global value chains rather than traditional exports or imports.

Since September 11, 2001, the Canada–US border has "thickened," threatening the viability of the fully integrated NAFTA business model. The problem is that "for Americans the border is a security issue; for Canadians it is a vital business artery that has become clogged."56 The Conference Board of Canada observes that document processing and other procedural delays at border crossings mean that "just-in-time" manufacturing (of supply chain inputs) is in danger of being replaced by much more costly and inefficient warehouses on either side of the border "just-in-case."57 Because the US market is so much larger than the Canadian market, these concerns weigh against the establishment in Canada of business activity to serve the North American market.

Slow Standards Harmonization

"...The continued presence of a heavily regulated border and of similar but differentiated regulatory regimes still undermines the ability of firms and individuals alike to reap the full benefits of deepening integration."*

A single market for automobiles in North America has been in the making since 1965. As of 2008, however, this process is still not complete.

* Source: Michael Hart, "Steer or Drift? Taking Charge of Canada–US Regulatory Convergence," C. D. Howe Institute Commentary no. 229, March 2006.

The chief mechanism to deal with Canada–US border issues, the Security and Prosperity Partnership (SPP), has yielded too little progress in improving cross-border flows. Indeed, Canada risks being side-swiped by the preoccupation the US has with its southern border.58 The most recent SPP Summit confirms that little progress can be expected within a relevant time frame. In this context, the Panel believes that it is imperative to intensify our bilateral effort with the US, focusing on facilitating the flow of goods, services and people across the Canada–US border. If we are forced to choose between trilateral and bilateral efforts, the latter should be chosen. Enhanced public recognition of the benefits of the Canada–US trading relationship south of the border should also be part of this effort.

Recognizing the vital contribution of Canada–US trade to Canadian prosperity, a two-faceted approach is necessary. The first and most immediate priority is to deal with logistics and physical infrastructure logjams at the border, starting with Windsor–Detroit (the conduit for 30 percent of total Canada–US trade59), and then other crossings. The Canadian and US Chambers of Commerce have produced a joint study on reducing border costs that outlines a number of recommendations that would facilitate cross-border shipping and complement our broader recommendations.60 The federal government must also lead on enhancing our transport infrastructure, beginning at the border.


The Panel recommends that:

47. Addressing the thickening of the Canada–US border should be the number one trade priority for Canada, and requires heightened direct bilateral engagement at the highest political levels.

48. Canada should act to create a more seamless US border crossing process, focusing on priorities jointly identified by the Canadian Chamber of Commerce and US Chamber of Commerce in their February 2008 report, while responding to legitimate US security needs, and funding and expediting vital border infrastructure.


International Trade and Investment

Much of Canadian wealth and well-being is directly attributable to our success as a trading nation. Canada is the second most trade-intensive country in the G7, with total trade amounting to 70 percent of gross domestic product.61 Complementing the increase in importance of trade in the Canadian economy, Canadian investment flows have also increased throughout the postwar period. Although Canada has always been an important destination for foreign direct investment, Canadian direct investment abroad has also increased as the Canadian economy has matured.62

While the US is Canada's biggest trading partner, new trading patterns and potential partners have emerged — in the European Union, South America, Asia and the growing BRIC countries. These are too numerous to tackle simultaneously, so priorities among them must be established.

Figure 11 — Geographic Distribution of Canadian Direct Investment Abroad, 2007

Figure 11 — Geographic Distribution of Canadian Direct Investment Abroad, 2007

* Caribbean, Africa, Oceania, and Mexico.
Source: Statistics Canada, CANSIM Table 376-0051.

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Too Little Engagement with Global Markets

While Canadian investment flows are more diversified than trade flows, too few Canadian companies have excelled at exploiting new economic opportunities beyond the US or in regions outside those where we have long-standing relationships. To be competitive, Canadian business must engage internationally, invest shrewdly, and marshal the skills and resources to add value and seize global opportunities. The government also has a role to play. As the Canadian Manufacturers and Exporters note, Canadian firms "require a world-class business environment in order to be world-class competitors. In turn, they depend on governments to take a strategic approach to policy making. …"63

The Panel notes that Canada has recently launched a Global Commerce Strategy (GCS). The GCS is a three-part strategy to increase Canadian participation in global investment and innovation networks beginning in North America, renew the Canadian international trade negotiations agenda, and better connect Canadian companies to global opportunities through realigned services to business.64

However we have heard through our consultations that, unlike the initiatives of other countries competing for markets on behalf of their companies, the GCS is lacking in profile and poorly understood, including by Canadian businesses.

Clear Plans and Priorities

Canada must ramp up its participation in new trading relationships and more aggressively pursue opportunities in the world economy, or risk being left behind. With poor prospects for a successful Doha Round of multilateral trade negotiations at the World Trade Organization (WTO), the onus is now on governments to focus on bilateral and regional arrangements through free trade agreements (FTAs) and foreign investment protection agreements (FIPAs).

The purpose of FTAs is to improve market access for trade in goods and services, either regionally or bilaterally. FTAs deliver commercial benefits by reducing tariffs, as well as discriminatory non-tariff barriers in areas such as standards or restrictions on services trade. These agreements have proliferated throughout the world. Since 2001, the US concluded 15 FTAs, and the EU has been similarly active. However, Canada has a poor record of concluding such deals and, despite an active negotiating agenda, has signed only three recent FTAs (with European Free Trade Association countries, Peru and Colombia).

One reason for this weak performance has been the difficulty in dealing with specific sectors in the Canadian economy. For example, the Panel understands that interests associated with the shipbuilding, textile and apparel, and agricultural sectors have at times actively opposed the conclusion of trade agreements that more broadly serve the goals of Canadian productivity and competitiveness domestically. This has served to deprive Canada of the benefits that accrue to the economy through greater competition. Insofar as the government liberalizes its investment restrictions generally and in specific sectors, it is more able to negotiate trade and investment agreements in Canada's economic interests.

Canada also has a poor track record at completing FIPAs or bilateral investment treaties (BITs). These agreements provide protection against expropriation without compensation and other mistreatment of investors.65 Canada has been able to effectively conclude only one new agreement (with Peru) since 2001. The United Nations Conference on Trade and Development estimates that 600 BITs have been negotiated globally since 2001. Countries such as Switzerland, Germany and China have negotiated over 100 each.

Canada must negotiate and conclude more FTAs and FIPAs with our trading partners, beginning with those markets determined to have the greatest trade and investment flows or potential. More agreements mean enhanced market access and investment protection for Canadian firms as well as greater competitive intensity in Canada. Failure in this regard means that Canadian firms are put at competitive disadvantage relative to firms based in countries with more agreements. An example cited to the Panel concerned a manufacturer that located North American production facilities in Mexico in part because Mexico has a free trade agreement with the EU and Canada does not. Rigorous impact assessments concerning prospective trade agreements would help generate domestic support for these deals.

In the context of our foreign relations more broadly, Canada should articulate its international trade and investment objectives and then make foreign policy choices with these goals in mind. Negotiating partners must be chosen strategically — with a view to maximum commercial impact in a world of global value chains and changing trade patterns. Foreign policy goals should be formulated with the understanding that they are intimately related to commercial policy goals.

More Collaboration with Business on Trade and Investment Priorities

We have heard that government consultations on trade and investment negotiations and services to business, including inward and outward investment flows, are not sufficiently coordinated by different government departments and sometimes are undertaken after key decisions have been taken. The Canadian Chamber of Commerce summarizes, "What we would like to see is a more focussed international strategy behind these negotiations that is developed in concert with, and reflects the priorities of, Canadian business."66 In Canada's case, enhancing consultations processes across government to facilitate pro-competitive business input on trade-related matters would assist in mobilizing support for crucially important trade and investment liberalization. A good starting point would be the prioritization of our FTA and FIPA initiatives. A stronger role for the Minister of International Trade in advancing the trade and investment agenda on behalf of the government would contribute to this.


The Panel recommends that:

49. The federal government should set an ambitious timeline for concluding priority trade and investment agreements, led by the Minister of International Trade who should pursue a flexible, results-based approach, beginning by simplifying Canada's model foreign investment protection agreements and streamlining our free trade agreements negotiating processes.

50. Beginning in 2009, on behalf of the federal government, the Minister of International Trade should report at least annually on Canada's trade and investment liberalization initiatives generally and in specific sectors.

51. Beginning immediately, the Minister of International Trade should build on the Global Commerce Strategy by developing and publicizing annual plans and priorities for enhanced trade and investment, and by identifying priority trading partners, economic impacts of prospective agreements and services to businesses. Comprehensive input from business should guide and inform Canada's approach across government.


Regulation

In many of the submissions to the Panel and through our consultations, we heard that federal, provincial and municipal regulatory processes constrain Canadian competitiveness.

Regulation is one means governments use to achieve public policy objectives, such as health, safety, environmental protection, and a fair and efficient marketplace for industry and consumers. However, regulations often unnecessarily or inadvertently constrain Canadian competitiveness because public policy initiatives are rarely designed to minimize their impact on competition.

An unintended consequence of regulation can be the anti-competitive effect of preventing the entry of new products into the Canadian market. As the C. D. Howe Institute notes in its submission to the Panel, "regulatory policy can improve Canada's attractiveness as a destination or home for business establishments."67

In this regard, the Panel believes that, building on our NAFTA positioning, competitiveness in Canada would benefit if the default position in the regulation-making process was to harmonize our product and professional standards with those of the US so that Canada and the US would represent a single market for those products or services.

Concerns about the impact that regulations have on competitiveness are not new. In fact the 2004 External Advisory Committee on Smart Regulation, chaired by Gaetan Lussier, got it right. The Committee heard, "the current regulatory system often acts as a constraint to innovation, competitiveness, investment and trade." Lussier concluded, "…I observed an increasingly profound disconnect between the regulatory system and 21st century reality. …Without rapid and significant change, Canada's ability to innovate and provide citizens with high levels of protection would be impaired."68

The Panel has been advised of the following steps taken by the federal government to address regulatory issues:

  • In March 2005 under the Security and Prosperity Partnership of North America, Canada, the United States and Mexico agreed to work together to strengthen regulatory cooperation, streamline regulation and regulatory process, and encourage the compatibility of regulations.69
  • The government has set the goal of simplifying compliance with regulations by reducing the number of information and administrative requirements imposed on business by 20 percent by November 2008.70
  • A new Cabinet Directive requiring that all new regulations undergo greater scrutiny came into effect on April 1, 2007.71
  • In 2007, the government established a Major Projects Management Office to provide overarching management of the federal regulatory system for major natural resource projects and to identify areas where the federal regulatory process can be improved, working with regulatory departments and agencies.72

We understand that there are more than 20 000 regulators in the federal government working in more than 20 different departments and agencies.73 Regulatory departments and agencies are required to implement the Cabinet Directive while a central group, numbering about 30, is charged with providing policy leadership on federal regulatory policy as well as the review of new regulations. While a simple metric, these numbers make a powerful statement. Moreover, political responsibility seems to be dispersed among ministers and departments, and overall leadership appears problematic. Finally, none of these initiatives appears to be aimed squarely at confronting federal–provincial overlap or duplication, or a re-engineering of regulatory regimes, which is a principal source of complaint.

The 2004 Smart Regulation Report set out useful principles: effectiveness, cost efficiency, timeliness, transparency, accountability and performance. We accept these, placing competitiveness at the top of the list.

It is premature to judge the efficacy of the more recent initiatives to reduce the regulatory burden. The Panel believes that effective regulatory reform is vital and that the success of any reforms will require strong leadership, a comprehensive process focused on execution, meaningful milestones and deadlines, and rigorous evaluations.


The Panel recommends that:

52. A senior federal economic minister should be mandated to lead and oversee progress on regulatory reforms, implementing a new regulatory screen by June 2009 that would subject all new regulations to a rigorous assessment of their impact on competitiveness.

53. Each major federal regulatory department and agency should reform its processes to increase transparency, reduce overlap and duplication, and set clear standards to yield time certain decisions, reporting annually, commencing in 2010, on outcomes and performance.

54. The foregoing recommendations for regulatory reform are equally applicable to provinces and territories.

55. Canada should harmonize its product and professional standards with those of the US, except in cases where, and then only to the extent that, it can be demonstrated that the impairment of the regulatory objective outweighs the competitiveness benefit that would arise from harmonizing.


Innovation and Intellectual Property

Innovation

Innovation drives productivity and competitiveness in the 21st century. It underpins the fastest growing industries and high-wage jobs, provides the tools needed to compete in every business today, and drives growth in all major countries and in every sector. Innovation and technological leadership often mean the difference between success and failure in the global marketplace.

Innovation involves the successful interplay of four factors: public and private research and development (R&D), science and technology (S&T) policy, intellectual property rights, and the effective commercialization of technologically intensive goods and services.74

In addition, as we have seen, new business dynamics have combined to make the "innovation imperative" even more crucial for companies seeking to compete in the domestic and international economy. The Panel heard about all these factors in the course of its research and consultations.

Canada is near the top of the OECD in public research funding for R&D infrastructure.75 But with respect to private investment in R&D, Canada ranks only 15th out of 30 OECD countries in terms of business expenditure on research and development (BERD), although the heavy weighting of resource industries in Canada's economy affects our ranking76 (Figure 12). To increase competitiveness, Canadian business needs to increase its expenditure on R&D in order to enhance its knowledge, know-how and technology to the level necessary to be globally competitive.77

Figure 12 — Business Expenditure on Research & Development (BERD) as a Percentage of Gross Domestic Product, 2000 and 2005

Figure 12 — Business Expenditure on Research & Development (BERD) as a Percentage of Gross Domestic Product, 2000 and 2005

*Based on 1999 data.
**Based on 2004 data.
Source: OECD, Main Science and Technology Indicators 2007/1 (Paris: May 2007).

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In this regard, we acknowledge improvements to the scientific research and experimental development (SR&ED) tax credit in the most recent Budget. Notwithstanding the $4 billion in tax assistance in 2007 through SR&ED,78 we believe that it is important to closely monitor the SR&ED program in line with the important policy goals of enhancing business investment in R&D and innovation in Canada.

More broadly, we believe that ambitious policies to promote competitive intensity, greater reliance on market forces, more openness to international trade and investment, and greater business investment including investment in R&D will enhance Canadian competitiveness and spur greater innovation.

Intellectual Property

Intellectual property (IP) rights are accorded to inventors and creators of new and/or original work. They are protected through domestic and international laws governing copyright (which typically also governs computer software), patents, trademarks, trade secret rights and industrial design rights. Internationally, intellectual property frameworks are governed by a number of agreements under the umbrella of the World Intellectual Property Organization (WIPO), including the Berne Convention for the Protection of Literary and Artistic Works (copyright) and the Paris Convention for the Protection of Industrial Property (patents, industrial designs, etc.). In the trade domain, the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement at the WTO seeks to protect these rights through the multilateral trading system, as do intellectual property chapters in many of our bilateral and regional trade agreements including NAFTA.

Waterloo Magic

"Most North American universities retain ownership of intellectual property developed within their laboratories and classrooms. Not so at the University of Waterloo (UW). … Our professors and students own their creations and our creator-ownership policy encourages them to commercialize their research results. … Why? Because what goes around, comes around. The university has benefited immensely from the philanthropy of its graduates, who choose to support those who supported them. In the process, UW is becoming the best-supported university of its size per capita in the country. …"

David Johnston, President, University of Waterloo.

The Panel recognizes that intellectual property frameworks play a central role in rewarding and encouraging innovation by granting creators the rights that enable them to monetize the products of their innovation. This is particularly so for knowledge-based industries in the contemporary global economy. At the same time, the rights afforded by these frameworks should not be so all-encompassing as to impede further innovation by others and create barriers for new entrants. It is important for the federal government to get this balance right.

The ever-increasing importance of the Internet to all aspects of economic activity has brought new urgency to updating IP frameworks in Canada. We acknowledge the difficulties inherent in doing so, but believe that Canada has an opportunity to develop strong IP capacity and demonstrate to the world how competition and productivity can be furthered by a modern IP regime.

In this regard, any new copyright or patent legislation must take account of changes facilitated by the Internet as a platform for creating, selling or telecasting digital content, such as software, music, videos, and even literature. In this vein, the legislation should facilitate use of the Internet as a medium for research and education, cornerstones of Canada's ability to innovate and compete in a knowledge economy. There is no reason for Canada's patent and copyright frameworks not to be "state of the art" for the Internet age.

In addition, Canada must further strengthen its counterfeit laws. Commercial counterfeiting robs legitimate IP rights holders of their livelihoods and chills creative industries. OECD estimates for trade in counterfeit and pirated goods are up to $200 billion a year, and even this is likely an underestimate.79

Finally, complementing our views on enhanced business–university partnerships, we believe strongly in the benefits to Canada that can accrue from more effective commercialization of intellectual property. This has been acted upon effectively at the University of Waterloo, but this is not the only model for the effective transfer of technology from educational institutions to the marketplace.80


The Panel recommends that:

56. The federal government should monitor the scientific research and experimental development tax credit program annually in order to ensure that business investment in research and development and innovation in Canada is effectively encouraged.

57. As a matter of priority, the federal government should ensure that new copyright legislation will both sufficiently reward creators while stimulating competition and innovation in the Internet age. Any prospective changes to Canada's patent law regime should also reflect this balance. The federal government should assess and modernize the Canadian patent and copyright system to support the international efforts of Canadian participants in the global economy in a timely and effective manner.

58. Before December 2009, the federal government should strengthen counterfeit and piracy laws to ensure that intellectual property rights are effectively protected.

59. Canada's post-secondary education institutions should expedite the transfer of intellectual property rights and the commercialization of university-generated intellectual property. One possible method to achieve this would be to move to an "innovator ownership" model to speed commercialization.