OCTOBER 1992 Economic Digest - Importing and Exporting

OCTOBER 1992 Edition

NAFTA

            President Bush has now formally notified Congress of NAFTA, before the legal drafting was completed. The ratification process in Congress will start on December 17. It now appears that Prime Minister Mulroney will shortly meet his U.S. and Mexican counterparts in San Antonio, Texas, to initial the deal. It is suggested that the ceremony has been designed to give a sagging campaign a boost in an area where Bush must gain strong support among Hispanic voters.

            Bill Clinton is now fence-sitting on NAFTA lest out-right support costs him votes in the industrial north-east of the U.S. However, Richard Gephardt, leader of the Democratic majority in the House of Representatives has called upon the Bush administration to cease further efforts to win congressional approval of NAFTA and to re-negotiate it or leave it for the next administration to be written right. This is an interesting contrast to the Canadian political process which requires that the party line be followed. Meanwhile, Mexico's foreign minister says that his country won't renegotiate the free trade agreement.

            U.S. Trade Representative Carla Hills told A & A Customs Brokers at a recent meeting in Bellingham, "international trade agreements are above the political process."       

THE ECONOMY

            A number of Canadian industries have sloughed off the recession and embarked on a round of solid growth that sets them apart from their more sluggish counterparts. Economists at Burns Fry Ltd have singled out 10 industries--together accounting for more than 14 per cent of Canadian output-- that have expanded by an average of 28 per cent since 1987 and six per cent in the past year alone. Each has consistently outperformed the economy in the decade since the previous recession.

            Among them: Telecommunications (almost three per cent of output), up four per cent in the past year and 54 per cent in the past five. Office machinery, which has doubled its output in the past five years and Gold-mining production which has risen by almost two-thirds in the past five years.

            At the same time, the economists isolated another group of industries--more numerous--but accounting for less than seven per cent of output--that they describe as collapsing. Included are: Major appliances (down 55 per cent in the last five years), Footwear (off 37 per cent), Batteries (down 35 per cent) and Printing and Publishing which accounts for about two per cent of total output and is the biggest shrinking industry. It has contracted by 17 per cent in the past five years.

TOURISM

            Eaton's has a yen for Japanese shoppers. The downtown department store in Victoria says its decision to do business in Japanese currency is already a clear winner. Eaton's said more yen has been collected than U.S. bucks since starting the practice in August. Several smaller tourist-oriented shops have followed or will follow Eaton's lead to accept yen.

            Meanwhile, it is reported that German tourists are starting to drop Banff from their Canadian itineraries as they feel it is becoming too large and sophisticated.

            The accommodation and food industry in B.C. has seen a growth of 40% in employment between 1981 and 1991 with 32,300 new jobs created.

            It was recently announced that Canada presently has a $8.5-billion tourism deficit which is expected to climb to over $9-billion by 1994. During discussions at the Open Skies negotiations where the government is trying to "protect" Vancouver, Montreal and Toronto from transborder competitiveness with temporary safeguards, industry experts said that lost economic opportunities that would be generated by open skies are costing B.C.--and mostly Vancouver-- over $40-million a year.

LABOUR LAW

            Ontario's proposed labour law reform has generated a lot of controversy and the suggestion that it could make the province an uncertain place for the Big Three auto makers to do business, costing jobs and industrial investment, according to the car makers. The government is proposing to ban the use of replacement workers during strikes and lockouts which could disrupt its parts delivery system. The ban on replacement workers could also cause auto parts makers to sign collective agreements that drive up the cost of doing business because a strike would shut them down completely. The changes could cause suppliers to quietly leave, with the resulting     loss of jobs. Other changes proposed would transfer workers' union rights from one employer to another when businesses are sold.

            The government is also preparing legislation that could unionize farm workers for the first time which has terrified many farmers who say they will be forced out of business by regulations that were developed for urban factories but cannot be applied to farms. The Ontario Federation of Farmers is not philosophically opposed to collective bargaining but say "there is nothing good in this legislation for farmers."

CLOTHING

            The consumer is benefiting from the competitiveness in the Canadian clothing trade. Murray Goldman of Vancouver says his prices have dropped ten per cent in the last year and the Fairweather chain say their prices are now twenty per cent below last year. Clothiers attribute the drop in prices to better deals from manufacturers, better fabrics, rock-bottom wool prices, cheaper production costs and few increasing costs. No one admits the prices were too high in the first place but it would seem that this area has benefitted from the competition of cross-border shopping.

            There are even success stories in this ravaged area of the economy. Danier Leather, with its glamorous full page newspaper ads, appears to be one. Profitable and debt-free, Danier is a privately  held company whose sales have tripled in the last five years to about $55-million, and it now has 33 outlets in seven provinces. At its June year end, sales were up 11%, while women's fashion sales as a whole were down almost 2%. 

            Meanwhile, giant clothing company Dylex Ltd which operates 1300 stores in Canada and the U.S., is negotiating to buy a stake in U.S.-based Pacific Linen Inc. which operates 45 stores, most of them south of the border, that sell large volumes of everything from cut-rate sheets and bath towels to tablecloths and duvet covers. Because "category killers" buy in bulk and enjoy greater clout with suppliers, they are able to undercut traditional suppliers. Pacific Linen opened three stores in Vancouver and a fourth in Edmonton and it recently acquired Folkstone Fine Linen which owns three stores in Calgary. Additional stores will quickly follow as the company takes aim at a market that Dylex says is poorly served by the competition.

FARMING

            Farmers in B.C.'s Lower Mainland are growing lush fields of cash---by moving indoors. The region's 80-odd hothouse vegetable growers have escaped recession by selling fresh vegetables to, of all places, California, where discerning consumers are willing to pay big premiums for near-perfect produce.

            Because of new technology, vegetables are not only unblemished but they grow like weeds. Tomato plants 30 feet tall are not uncommon; English cucumbers grow 14 inches in 10 days. Harvesting is year round, with enough artificial light and cheap natural gas it's always summer under the glass. B.C. and Alberta are the largest markets but last year one B.C. Co-op flew five million pounds of tomatoes, peppers, cucumbers and lettuce--almost one quarter of its total production-- to California.

            Annual sales for these farmers jumped from $14.7-million seven years ago to more than $35-million last year, all from just 168 acres of glass. The boom is due to Dutch farmers, experts in the field, who have been moving to the Fraser Valley bringing new hydroponic technology with them.

SUNDAY SHOPPING

            Since Ontario and New Brunswick joined Vermont and New York in opening for Sunday shopping, a powerful coalition of Quebec retailers has warned that $2-billion in sales and thousands of jobs are at risk if the provincial government does not immediately allow wide-open Sunday shopping. A group representing retailers such as Price Club, Sears Canada Ltd, The Bay, Wise Stores and Dylex plus major shopping centre owners released a survey showing that nearly 70 per cent of Quebecers favour Sunday shopping. The large stores are less worried about cross-border shopping than they are about laws which allow small shops, with fewer than five employees, to open on Sunday and the creation of 26 exempt tourist zones, where factory outlets do a booming Sunday business. Large retailers want to see the law applied fairly and to let them compete on an equal footing.                                          

TRANSPORTATION

            Taking advantage of falling beer barriers between provinces, CN Rail has begun pulling containers of beer around the country. Since the historic beer walls came down, business has been so brisk that CN has announced an investment of more than $9-million for new cars to carry beer.

            The investment is for 200 domestic containers, steel boxes the same length as a long truck trailer. The containers are insulated and heated so they can continue to carry the beer during the winter months. CN says it's a natural fit for railroads because what they do best is long haul, high density service.

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.     

JULY 1992 Economic Digest - Importing and Exporting

 JULY 1992 Edition

NAFTA

     The pace of the North American Free-Trade Agreement (NAFTA) discussions continues. The U.S. views seem to have  prevailed on the contentious issue of rules of origin for vehicles. Canada and Mexico favoured 50% but it now appears that it will be 60%. This might prompt Japanese and South Korean automakers already located in Canada to get more of their auto parts from Canadian manufacturers. It could also induce the off-shore automakers to locate future North American assembly plants in the U.S.

     Under the FTA, Canada has to phase out, by the mid-'90's, its duty remission and duty drawback scheme for the auto transplants. Under the auto pact, only the Big Three can import duty-free across the border. The Asian automakers face a Canadian tariff of 9.2%, but under the duty remission they have been rebated the duty on every vehicle or part imported into Canada when it is re-exported, The phase-out removes a sizeable incentive for Hondas and Toyotas to be built and exported from Canada.

     It is suggested that, in conjunction with NAFTA, Ottawa could restore some of that benefit by dropping its duty to the U.S. level of 2.5%. Such a move, creating an automotive customs union, would help attract more Japanese and South Korean auto investment to our shores. 

    

     A copy of the energy chapter of the NAFTA has now surfaced. Ottawa appears to be ready to tie Canadian energy resources closer to the U.S. while Mexico balks at U.S. demands for concessions. Presently, in times of shortage, the U.S. would be entitled to Canadian oil, electricity and natural gas, at market prices in volumes equal to the proportion of total Canadian production bought in the previous 36 months. Canada and the U.S. are now proposing to eliminate the 36 month provision.

     Mexico insists on maintaining its constitutional protection of the monopoly position of PEMEX, the state owned oil company giving it exclusive rights in energy exploration,  and investment in extraction, refining and the basic petrochemical and pipeline industries. Similar protection is being sought for most of Mexico's electricity system. Even minority foreign ownership interests would not be allowed. Instead, U.S. and Canadian companies would have limited rights under the Mexican proposal to receive contracts for energy operation. 

CROSS-BORDER SHOPPING

     According to a report recently released by the Royal Bank, retailers are at last beginning to win the cross-border shopping battle. The report says that while shopping trips and  spending more than doubled since 1987, the tide of southbound shoppers is slowing. The report estimates that in 1991, the "leakage" of retail sales to the U.S. totalled $4.8-billion, or about 3.3% of all Canadian non-automotive retail spending.

     While cross-border shopping continues to drain billions from the economy, April same-day auto trips fell by 1.8%, for the fourth consecutive month. The Royal Bank suggests that Canadian retailers are fighting back by restructuring their distribution systems, becoming more price competitive, stressing superior product and warranty standards and trying to deliver better customer service and product selection.

     The report credits the sharp rise in the Canadian dollar over the last five years as having had the greatest impact on cross-border shopping. As growth in same-day auto trips fell in the first three months of 1992, the dollar's value fell from 86.54 cents U.S. on January 2nd to 83.96 cents on March 31st. However, with 55% of all Canadians living within 60 minutes of the border with the U.S., cross-border shopping will always be a problem.  

                                                                                GATT

     In Geneva, Canada continues to seek the best of both worlds. While continuing to support negotiating an end to the ruinous agricultural subsidies that have driven down the price of commodities produced in Canada, such as wheat and oilseed, which depend on overseas sales, we continue to support the protection of supply-management and marketing boards. 45% of Canadian farm income is subsidized at a cost to taxpayers of over $8-billion a year. Recent concessions by the EC, where there are literally mountains of surplus dairy products, make it likely that marketing boards will soon be a thing of the past.

RETAIL

     Department store sales rebounded 6% in April, after plunging in March, a tentative sign that consumers may be loosening their purse strings. Statscan reported that store sales, including concessions, totalled $1.02-billion. Through the first four months of this year, store sales are up about 1.6%. An expert warned that the sector, which has been in a steady decline since 1989, probably will not return to pre-recession levels this year, or even in 1993. It is suggested that it will likely get worse with the new formats such as Price Clubs, Aikenhead's and Toys R Us and that it will take some pretty dynamic marketing plans to reverse the erosion of market share.

     From coast to coast, Chambers of Commerce and Business associations are assisting their members to offer better service and become more sophisticated at pricing and marketing. Stores and malls, and even groups of malls, are getting together to do joint advertising promotions and many stores are getting back customers by hard-sell comparative advertising. In many communities, imaginative schemes have been hatched to offer discounts to shoppers. Eatons is advertising their "Buy Canadian" promotion and the Bay is opening their first cut-rate outlet as an experiment.

          

SUNDAY SHOPPING

     After bending to enormous pressure from major stores and reversing an election pledge, the Government of Ontario has announced that shops in Ontario may now remain open on Sundays. Union leaders are against it and describe it as a betrayal of faith. New Brunswick is opening the door to limited Sunday shopping. Legislation has been introduced to allow Sunday shopping  from September until Christmas and for special local events. Manitoba is now reviewing its Sunday-shopping legislation after the release of a poll estimating that Manitobans spent $300-million in the U.S. last year.

TOBACCO

     In February, the Federal government introduced a $1 a pack tax on all cigarettes exported from Canada in an attempt to reduce smuggling. Seven weeks later, after intense lobbying by the industry including threats to move tobacco manufacturing jobs from Canada to the U.S., Ottawa rescinded the tax. In April, the export of Canadian cigarettes reached an all time high as smugglers replenished their stocks and it is estimated that 20% of cigarettes smoked in Canada in April were smuggled. In June, the Province of B.C. announced that, starting in the fall, PST on tobacco and alcohol would be collected by Customs officials at the border earning $3-million in revenue for the province.

COMPETITION FOR CANADA POST

     For some time, the government of Manitoba has been using the services of Interpost, a company owned by the Dutch post Office and the Netherlands-based airline KLM for overseas mail at a considerable savings, ($20,000 on a single $90,000 contract). Now we learn that the Federal government is also using Interpost at a cost of $750,000 over the last two years. The biggest user is the Ministry of Energy, Mines and Resources which has spent a total of $301,237.

     

POLITICS

     B.C. Trade Minister David Zirnhelt announced recently that B.C. stands to benefit from liberalized trade, including trade with Mexico. Then, Government Services Minister Lois Boone stated that while supporting free-trade among the provinces, Victoria would retaliate against provinces that discriminate against B.C. companies when ordering goods and services. Finally, the Premier has now written to Ottawa stating, in effect, that Ottawa should abandon the NAFTA talks with the U.S. and Mexico because the U.S. was not living by the spirit of the commitments under FTA. He said that B.C. is now a "non-supporting participant in the NAFTA talks with Ottawa," and that should an agreement be likely, B.C. will recommend rejection. The business community is understandably confused by these  conflicting messages.

INTERPROVINCIAL TRADE BARRIERS

     National Revenue Minister Otto Jelinek has complained that no country in the world has imposed more barriers to growth on itself than Canada. He stated that five hundred interprovincial trade barriers alone are costing Canada some $6-billion worth of costs. Trade Minister Wilson still hopes to get something on interprovincial free-trade into the constitutional debate despite opposition from the provinces.

EMPLOYMENT

     While un-employment remains high, the number of Government employees nation-wide has increased by 72,000 between 1 January 1991 and February 1992.