Saturday, August 01, 1992

AUGUST 1992 Economic Digest - Importing and Exporting



AUGUST  1992 Edition



NAFTA
     Negotiators are optimistic that agreement on a NAFTA is near. Final issues to be agreed are: rules of origin for clothing and automobiles and foreign investment in Mexico's energy industries. But there are no guarantees that the free-trade agreement will go into effect.
     Experts suggest that even when an agreement is signed, the proposal will become hostage to the political process in Mexico, Canada and particularly in the United States where the proposal cannot take effect until the middle of 1993. Signatures on the document mean nothing until legislators in all three countries ratify the agreement.
     In Mexico few troubles are anticipated. In Canada, the government might find itself going into an election amid yet another free-trade debate.  In the United States, both Bush and Clinton support NAFTA but in the new Congress, which will have the largest number of newcomers in decades, no one can tell how they will view NAFTA, especially after the special interest groups begin their lobbying efforts.           


CROSS-BORDER SHOPPING
     Between 1970 and 1986, same day trips to the U.S. were remarkably stable in the range of 20 to 26 million a year. The floodgates opened in 1987, four years before the introduction of GST, and in 1991 there were 59 million trips, 15 million of them from B.C. A Fraser Institute study suggests that a major cause for the higher costs of goods in Canada is due to labour costs. (A product that costs $29 to produce will cost $61.50 in the U.S. and $154 in Canada). Other important factors are high distribution costs and government regulation. (Bilingual labelling; tougher safety standards; tariffs and quotas causing a lot of paperwork, and trucking regulations which require U.S. trucks delivering to Canada to return home empty, all contribute to higher Canadian costs). The study recommends passing laws to reduce the strength of unions and advocates freer trade, not only with the U.S., but with Mexico and Europe which would force the government to loosen up crippling regulations. 

     As a means to combat cross-border shopping, B.C. Agriculture Minister Bill Barlee is unofficially proposing the removal of the provincial sales tax and regional transit levy on the price of gasoline: this represents 13 cents a litre and would make Canadian gasoline far more competitive with that in the U.S. Instead, the province would collect its revenue through an annual road tax, likely through the cost of automobile insurance. The Liberal Finance critic seems to be sympathetic to the suggestion. Such a road tax would likely discriminate against the elderly who drive very little over the course of a year.   
                                                                            

RETAIL    
     Analysts tell us that what is happening is nothing short of a revolution in Canadian retailing. After decades of putting up with higher retail prices compared to the U.S., Canadians have said "no more". The surge in cross-border shopping proves the point. The lingering recession has transformed passive Canadian consumers into zealous bargain hunters. Also, the emergence of a single North American market under free trade is forcing manufacturers to meet a continental price or perish. " I think that within 18 months Canadian retail prices will be  very close, if not identical to prices in the U.S.," predicts Toronto retail analyst John Winter
     At Eatons, prices have fallen across the board under its "Everyday Low Prices." With just-in-time" delivery from its suppliers, it has closed its mattress warehouses passing on savings to consumers. At Sears. men's suits are $100 less than last year. At Loblaws, Campbell brand soups are cheaper because the chain is now using Canadian packaging. In the East, the latest Consumers Distributing catalogue lists 2,000 products which are priced lower than last year. And on it goes.
     Traditional department store chains have typically operated with a 40% gross margin on sales. Mass merchants like Zellers and K-mart are in the 33% to 36% range. Supermarkets are between 20% and 25%. But warehouse type stores have gross margins of 20% and Price Club has 12%. That's the competition!

EXPORTS TO THE U.S.
     One of the more contentious issues between Canada and the U.S. in the NAFTA negotiations has been in the area of textiles and apparel. At the heart of it has been the insistence by the Americans that clothing not only be sewed in North America from fabric made in North America but that the yarn the fabric is made from also be from North America--a triple rule of origin.
     The reason for his seems to be that under FTA, Canada has been particularly successful in exporting wool suits to the U.S, using fabric imported from Europe. The number of Canadian-made wool suits shipped to the U.S. has soared to 380,000 last year from 50,000 in 1988. The exports to the U.S. in 1991 were worth about $50-million and represent a 6-per cent share of the U.S. men's suit market. The powerful U.S. clothing lobby has been putting severe pressure on U.S. officials to beat back this competitive threat from Canada.

           
PATENT PROTECTION FOR DRUG FIRMS
     Legislation has been introduced to give new brand-name drugs greater protection from cheaper versions. The bill will provide full patent protection for 20 years, three more years than is presently the case. Ottawa claims that this is line with the latest GATT proposals, though it is suggested that it has more than likely been influenced by the NAFTA deliberations.
     Provincial health ministers have warned that such a move will add tens of millions of dollars every year to the cost of their health plans. Canada's brand -name drug companies promptly announced $400-million in capital and research spending over the next five years, Quebec being the major beneficiary. Brand-name drugs are a $4-billion a year business while generic sales are about $440-million annually.


FOREIGN INVESTMENT
     A study by Peat Marwick Thorne of 115 foreign owned firms operating in B.C., indicates that they employ more than 14,000 British Columbians and have invested nearly $2-billion in the province. The participating companies came from 19 countries: 37 from the U.S.; 19 from Japan; 13 from the U.K.; seven from France and seven from Finland. According to the study, the decision to locate in B.C. as opposed to other Canadian provinces was most often determined by proximity to key industry\markets, followed by acquisition\joint venture opportunity and potential for economic growth. The companies were concerned, nationally, with the Canadian economy, GST, PST, corporate taxation and exchange rates. Locally, their major concerns are labour productivity, provincial and municipal taxation, labour quality and provincial and local leadership.


AN ASIAN TRADING BLOC?
     Malaysia is pushing hard for an East Asian Economic Caucus in order to combat a global tendency by industrialized nations to create regional trading blocs, but Indonesia, Singapore, Thailand, Philippines and Brunei are not overly enthusiastic. They are concerned that a new trading bloc, which could eventually include Taiwan, South Korea and Japan, could worry the U.S. where protectionist sentiment is already common. Such an arrangement would split the Pacific Ocean economically with North America on one side and a Japan-led Asia on the other.


EMPLOYMENT
     Unemployment benefits reached nearly $2 billion in March, up 20 per cent over the same month last year. 31,000 jobs were added to the economy in May but the unemployment rate still rose to the highest level in over 7 years, 11.2 per cent, as the labour force grew by 56,000 people. In June there was a healthy growth of 78,000 full time jobs.
     In July however, the Canadian economy lost 129,000 full-time jobs, the largest monthly drop ever according to Statistics Canada. Part-time employment added 100,000 jobs but the overall loss of 29,000 jobs  shows that the recovery remains extremely fragile.
    
     According to Nuala Beck in the Globe and Mail, there have been some employment surprises during the recent recession. The biggest job losses have been: restaurants, 113,280; building construction, 96,450; food stores, 44,974; general contractors, 37,930, and employment agencies, 25,640. Job gains have been made in: Insurance carriers, 8,153; accounting, 7,346; advertising, 5,100; furniture and appliance stores, 4,821 and offices of paramedical personnel, 1,982.