Words by Suman S. Sinha
Innovation is the key to success. This mantra was propagated by the Mississauga Board of Trade at the Mississauga Convention Centre at their recent seminar called ‘Innovation 2 Growing Globally’.
The economy of Canada has been on a roller coaster since the inflated housing bubble burst in the U.S., which had a domino effect on the rest of the world. Here in Canada we saw some grim numbers, our global exports would shrink by 35% to 298.5 billion during 2009.
In the global scenario, Canada became an international trade loser in 2009, with money flowing out of the country for imports outpacing income for exports by $6.7 billion. This trade deficit represents a loss of over $50 billion from Canada’s trade surplus of 43.9 billion dollars in 2008.
As per the latest US Census Bureau statistics, the value of Canadian exports to the US fell 33.8% to 224.9 billion for 2009. Canada imported $204.7 billion worth of US trade items in 2009, a 21.6% decline from 2008. As a result, Canada’s trade surplus with the US declined almost 75% from 78.3 billion to $20.1 billion for 2009.
Overall the strong loonie has become a major factor increasing the trade deficit. Economists are forecasting that over the next 12 month period, the Canadian dollar may reach $1.15 against the US greenback or even higher. The Canadian dollar is also going to strengthen against the Yen, Euro and Pound.
Recently, the Bank of Japan slashed interest rates to zero and the US, Bank of England, and the European Central Bank are already trying to hold their rates. Whereas, the Bank of Canada is the only G7 central bank that has increased the interest rate to 1 per cent. This sharp contrast in monetary policy with the rest of world is also one of the factors in making Canadian dollars so strong.
Economist Carl Weinberg of High Frequency Economics in Valhalla, N.Y, published in Globe and Mail on Oct.4th, 2010 – “The main culprit for the loonie’s recent strength is the growing gap between Canadian and US bond yields. The spread on 90-day T-Bills, for example, is now 80 basis points up from zero in February. Spreads are also wide on 10-year bonds”. Therefore investors looking for yield in an uncertain world are pumping up the Canadian dollar.
Now the question is, if the Canadian dollar continues to rise and goes beyond parity, then what is going to be the fate of Canadian manufacturers and exporters? Will they be able to survive in the face of global competition with higher cost of export? Speaking at Innovation 2 Growing Globally, Mr. Perrin Beatty, President and CEO of Canadian Chamber of Commerce and Mr. David Pascoe, Vice President of Magna E-Car Systems, rightly emphasized the need to become innovative while simultaneously controlling quality and becoming aggressive in the world market.
Besides being innovative in their products and services, the Canadian exporter needs massive help and support from the local, provincial and federal governments. Export Development Canada (EDC), the Department of Foreign Affairs and International Trade, the Chamber of Commerce may provide help in finding prospective buyers or connect them to departments of the government providing funds for international visits and securing export receivables. But to compete in terms of the price of their product or services with the rest of the world, Canadian exporters need to have the required incentives from their local and or federal governments to offset the impact of a higher Canadian dollar.
Here’s a creative example of a multi-facetted offset against the impact of the higher Canadian dollar – The EPZ.
On a local level, the City of Mississauga may create an Export Processing Zone (EPZ), where the cost of land and building or rent may be subsidized by the city, to attract the prospective manufacturers for export. All inputs to the manufacturing process like electricity, water, gas etc could be subsidized and they should be free of all direct and indirect taxes like HST and property tax. Raw materials for manufacturing should be free of all taxes if they are being imported or bought exclusively for export. To minimize the cost of transportation of goods from the EPZ to the ports of loading, dedicated rail lines or transportation services may be organized in collaboration with the provincial and the federal governments.
In order to increase international trade, exporters will have to move from dependency on the U.S. to look for greener pastures in India and around the world. In my opinion, this can be made possible if the City of Mississauga could provide innovative assistance for their growth with the protections provided in an EPZ so that small to medium businesses can survive and even flourish with this new competitive advantage.
EPZs are working now in Mexico and Brazil – why not here in Mississauga?
Suman Sinha is a certified management consultant with experience in international trade, banking and finance. Sources: Statistics Canada, Globe & Mail, US Census Bureau – Foreign Trade Statistics and CIA World Factbook. www.sssinha.wordpress.com