APRIL 1993 Economic Digest - Importing and Exporting

APRIL 1993 Edition

NAFTA

            President Clinton wants side deals on labour, environment and trade-volumes before he will press Congress to adopt NAFTA. Canada has now introduced NAFTA legislation to parliament and the Mexican ambassador to Canada says that Mexico will pull out of the free-trade agreement if Canada and the U.S. try to impose deals which infringe on Mexican sovereignty.

            The U.S. is now talking about creating commissions and tribunals to deal with these issues. However, disputes mechanisms are a two (or three) way street and it is hard to imagine circumstances which would allow Mexico to file a complaint against Canada and the U.S. because of pollution on the Great Lakes, for instance.            It seems that the panels will likely undertake advisory roles, with the power to investigate and publicize rather than issue  binding decisions.

CUSTOMS TRADE SEMINAR

            Revenue Canada will host its next Customs Trade Seminar in Vancouver on 26 May 1993. The seminar will concentrate on individuals in the small and medium-sized business sector who are or will be importing goods to, or exporting from, Canada.

            It will address topics which will be of interest to the importing community in general, including exporting from Canada\importing from the United States; the basic Customs process; valuation; the adjustment process; the New Business Relationship Initiative; and duties relief.

            There will be an exhibit area staffed with officials from National Revenue, U.S. Customs and other federal departments. The registration fee is $100. For further information, please contact Roslyn MacVicar, Registrar, Customs Trade Seminar '93, at 604-666-2973. 

CROSS-BORDER SHOPPING

            February saw 246,000 fewer Canadians crossing into Whatcom County compared with a year earlier. A recent survey indicated only slight cost differences on many of 33 popular items checked in metropolitan Vancouver and Whatcom County. It showed that shoppers would pay US$1,337 for the goods in B.C. and US$1,210 in the U.S. Twenty of the items were cheaper in the U.S. and thirteen cheaper in B.C.

            Cross-border shopping by mail is plummeting also, perhaps by as much as 25 per cent, due to the declining dollar and the rules imposed last year by Revenue Canada which added a $5 duty-collection fee by Canada Post and reduced the entitlement for a single order from $40 to $20.

            Now, Revenue Canada is examining a proposal by the Frontier Duty Free Association which wants to sell untaxed gasoline to tourists and Canadians leaving the country for at least 48 hours, though no one has explained how the latter group would be monitored. The owner of West Coast Duty free at Pacific Highway has stated that he would be prepared to invest $2-$3-million in capital costs and hire 15 more people if the proposal is approved.

PRESCRIPTIONS BY MAIL

            Since opening last August, Toronto-based MediTrust Pharmacy Inc has become the "Price Club" of pharmacies with 50 staff and 50,000 square foot facility and has upset many competing retailers along the way. MediTrust makes its money doing high-volume business and undercutting the markups and dispensing fees of traditional pharmacies and should sell $33-million worth of drugs in its first year.

            The niche MediTrust is after is the employer-sponsored drug plan market, worth about $1.4-billion in Canada. MediTrust charges a flat dispensing fee of $5, against an Ontario average of $10.08, and a mark-up on unregulated drugs of 10 per cent. On average, employee drug costs have been rising at a rate of 12 per cent a year, which will be closer to 18 per cent in 1993. Many firms with expensive employee drug plans are faced with

reducing drug costs or reducing benefits.

            One company, with 150 employees, has saved 28 per cent on drug costs in the first six months. Employees can phone or fax their prescriptions from work during the day, and then have them delivered to the office or their home within 24  hours. MediTrust bills the insurer direct. MediTrust expects to be  ministering to the prescription needs of 250,000 in Ontario by the fall when they will begin expanding to other provinces.

ABSENTEEISM

            According to the Conference Board of Canada, absenteeism robs the economy of an estimated $15-billion a year, eroding productivity by up to two percentage points.

            The board states that working parents, an aging population, increased job stress, abuse of sick leave and overly generous workers' compensation are making absenteeism a growing and costly problem for employers and the economy. 20 per cent of employees account for 50 per cent of all sick days taken. The report suggests that fast-changing technology, increased workloads and job insecurity have added to worker stress which is responsible for one quarter of absenteeism. Older workers are more likely to suffer certain types of illness or injury, such as back problems and the increase in working parents, especially mothers, creates difficulties in balancing work and family responsibilities.

JAPAN

            Japan's trade surplus surged in February intensifying pressure for it to stimulate the faltering economy and boost imports.

            Canadian exporters looking to penetrate the Japanese market are being extended a helping hand by the Japanese External Trade Organization (JETRO) which has opened a Business Support Centre in Tokyo. The Centre will offer a range of free services on a temporary basis to businesses and trade organizations with a focused plan to approach the Japanese market for ongoing export business, but without an established base in Japan.

            The Centre offers private furnished offices, full-time advisors on how to approach the Japanese market, a business library, use of the JETRO database terminal, meeting rooms, support staff and a variety of other valuable services. More information on this Centre may be obtained from the JETRO office in Vancouver at 604-684-4174.

MARKETING

            Hoover, the well known UK appliance manufacturer and a division of Maytag, was recently in the news for contravening the European social charter by closing a factory in France and opening another one in Scotland where they are paying employees considerably less. They are in the news again with a scheme that has cost the jobs of the company's top three executives, including the managing director.

            Consumers were offered two free return flights to Europe or the U.S. (value up to $1000), if they purchased any appliance worth more than $150. The company relied on the fine print in the offer, such as when the flights can be taken and which hotels may be used, to deter purchasers from actually collecting their tickets.

            Purchasers were clearly better at maths than Hoover executives and there have been 200,000 applications for flights since the promotion was launched last summer with only 6,000 tickets issued so far. Even worse, recent purchasers seem to have been more interested in free flights than household appliances. The campaign  has not built up real demand but merely created a gigantic second-hand market in unused Hoover appliances. Maytag said that it will take a $30-million charge against after-tax profits to pay for the mess created by Hoover, which is equivalent to nearly half of Maytag's net income for last year.        

INTER-PROVINCIAL TRADE

            Almost everyone agrees that tearing down provincial trade barriers will contribute several billions of dollars to the economy. However, two provinces are going the other way.

            The New Brunswick government, frustrated by Quebec's refusal to ease its strict labour code, has decided to take reciprocal action against Quebec companies and labourers who want to work in the province. Quebec companies bidding for construction and government contracts will now have to follow the same strict guidelines that govern labour in Quebec. That means Quebec companies will have to hire local, unionized workers.

            Meanwhile, the Quebec government is close to signing an exclusive deal for three hundred transit buses if a company agrees to keep an assembly plant open in the province. The same buses obtained from Ontario could each be acquired for $35,000 less.

SUNDAY SHOPPING

            Last June, the Ontario government allowed Sunday shopping in an effort to stem the tide of cross-border-shopping. This has had a dramatic effect on corner stores, a $3.8-billion a year sector. It is now estimated that they will lose $300-million in sales this year because of Sunday shopping. An association representing corner stores warns that without government intervention, the sales decline will result in closings and layoffs among the 52,000 employees of the 6,000 corner stores. 200 stores have closed since last June and an unknown number of independent stores have filed for bankruptcy. To offset their hardship, store operators want the right to sell beer and wine and earn commission from the government for collecting sales tax and GST.

            In New Brunswick, a survey of small businesses indicates that 79 per cent of those responding are opposed to Sunday shopping  as a way to keep consumers from crossing the border saying that Sunday should remain a day of rest.

EMPLOYMENT

            48,000 jobs were added to the economy in March and employment has increased by 203,000 since April of 1992. The added jobs were primarily in services but there were also 9,000 jobs in the manufacturing sector bringing the total of additional manufacturing jobs to 42,000 in the past five months. Manufacturing has benefitted in the past year from soaring exports, but new jobs have been slow to appear as companies increased output with less labour.

            The economy has recovered 40 per cent of the 409,000 lost during the recession according to the Bank of Nova Scotia. Despite the buoyant job growth, the unemployment rate still edged up to 11 per cent as 85,000 job-seekers returned to the labour market.

GOVERNMENT

            The Newfoundland government has called an election to underline its determination to cut program spending by $29 million and civil service wages by $70 million. New Brunswick is eliminating 500 jobs and limiting spending to a 1.7 per cent increase. Nova Scotia, which has already frozen public service wages, announced plans to cut its spending by 10 per cent and to pass legislation requiring a balanced budget within three years. Manitoba has bought in a budget  with a 1.2 per cent cut in expenditures. The Saskatchewan budget cut spending by more than $100 million and the Ontario government is attempting to get union agreement to slash the civil service before taking more drastic action.  Quebec has frozen public service wages.

            Only in B.C. is it business as usual. Tax increases of $600 million to support a spending increase of 5.7 per cent and several thousand new employees added to the public service.      The Retail Merchants' Association of B.C estimates that the recent increase in the provincial sales tax will result in 4,200 jobs lost in the retail sector.

U.S. CUSTOMS AUDITS

            An apparent rise in U.S. Customs Service audits is causing many Canadian shippers to stop claiming tariff exemptions under the Canada-U.S. Free Trade Agreement according to American trade lawyers and customs brokers. Many Canadian shippers and U.S. importers have opted to pay the full tariff rather than take the time to determine if the product qualifies for a duty break. Many shippers are declining the opportunity for substantial duty reductions for fear they will be audited by U.S. Customs, seeking to deny their claim.

            U.S. Customs have denied that Canadian companies are targeted for audits but acknowledged that audits throughout the country are rising.

MARCH 1993 Economic Digest - Importing and Exporting

MARCH 1993 Edition

NAFTA

            The federal government has announced that it will spend $27-million over four years to help Canadian businesses seize opportunities opened up by NAFTA. Key elements of the program, called Access North America, are focused on enabling Canadian companies to gain a foothold in Mexico.

            Trade Minister Wilson stated that Mexico is a fast-growing economy that will need telecommunications products, infrastructure assistance, environmental services, new technology and other goods and services that Canada produces. Canadian business has already shown heightened interest in Mexico. 4,500 business people visited the Canadian embassy in Mexico City last year compared to only 2,100 such visits in 1991.

EXPORTS

             Medieval Glass Industries, maker of cut-glass windows and doors with more than 130 different designs, has grown each year since it opened in 1986 and employs 65 staff. Now, with the help of a B.C. export loan guarantee, Medieval has signed a new contract to supply a 45-store chain in the U.S. midwest which will add another dozen jobs at their Richmond plant.

            V-W Canada imports Audis, Porches and Volkswagens but has turned into a large Canadian exporter. In 1991 the company exported $195-million worth of components, parts and accessories from its plant in Barrie, Ontario. The figure rose to $224-million in 1992. Besides eleven different wheel styles  which are exported all over the world, the plant has won contracts for catalytic converters going to Germany and Mexico.

           

FACTORIES

            Canadian factories are making themselves more efficient and productive. The ability to deliver goods just when the customer needs them has become a new competitive fighting ground. Big inventories cost money and a big backlog of unfilled orders can mean lost customers. A decade ago, factories typically kept inventories equivalent to about two months of shipments; that figure is now down to about six weeks. Key factory trends are:-

*           Smaller inventories of finished goods and raw materials.       

*           "Partnering" with suppliers and customers, so companies get their supplies and ship their products only as needed.

*           Electronic data interchange systems that link partners who have established a close relationship.

ECONOMY

            Reports of an end to the recession have done little to reassure Canadians, who cite the economy as their No. 1 concern. 48% of 1,501 Canadians surveyed in February indicated the economy was the "most pressing issue currently facing the country," while unemployment was named by 45% followed by the federal deficit at 18 per cent. Central Canada was most concerned about the economy, Atlantic Canada and Quebec cited the unemployment rate and the West was concerned about the national debt.Other issues mentioned were the environment, free trade and political leadership--six per cent each; and taxes, social services and national unity at five per cent.

           

EDUCATION   

            Education employs one in ten Canadians and accounts for almost 6 per cent of gross domestic product. More British Columbians works as university professors than as logging or forestry workers. The education industry is larger than  mining, forestry, food, beverage, rubber, plastics and clothing industries combined. Increasingly, communities see the presence of high-quality educational facilities as a powerful advantage for economic development. Education creates high knowledge-intensive, entrepreneurial spinoffs, which produce quality jobs.

           

ENVIRONMENT

            Recent surveys have shown that consumers now put value ahead of anything else. People are so price sensitive that many suppliers are switching their emphasis to bulk buying, not what retailers expected two or three years ago when it was regarded as good marketing to demonstrate social consciousness by coming out with a line of green products.

            In 1988, green promises were made for only 1.1 per cent of new packaged goods that appeared on the Canadian market. By 1991, that figure had soared to 33.9 per cent, only to plummet to 9.4 per cent last year. The trend in the U.S. and Europe was similar but less dramatic.

            The Loblaw chain has almost halted the introduction of green products after having set the pace for several years. The company sells about $100-million a year of its more than 100 green products but brought out only three new ones last year. It is now concentrating on upgrading its original products. Of 31 per cent of shoppers surveyed who claimed to be most concerned about the environment, only 28 per cent said they would pay a premium for green goods.

RETAIL

            Industry experts claim that warehouse and discount retailers will vault ahead of traditional department stores in sales of general merchandise this year. Price slashing giants like Price Club and Zellers  will continue to widen their lead over Canada's three major department store chains.

            A Toronto retailing seminar was advised that the consumer has changed dramatically and will continue to change. Much of the trend to low-margin retailing is being driven not just by economics, but by shifts in demographics and social attitudes.

            The baby boom generation reached its peak family-forming years in the 1980s which caused an upturn in the demand for houses and the things to go in them. Now, the biggest spending segment of the population--those between 24 and 34--is shrinking while the average age of the population is rising. Older people tend to shop at fewer stores and spend less.

TRAVEL DEFICIT

            Canadians spent a record $8.3-billion  more outside the country in 1992 than foreign visitors spent here, 10 per cent more than in 1991. $11.2-billion was spent by Canadians in the U.S. and $5.1-billion in other countries.

U.S. visitors to Canada spent $4.6-billion in Canada and other foreign visitors spent $3.4-billion here. On trips to the U.S. longer than one night, Canadians stay on average 7.2 nights spending $57 a night, while U.S. visitors to Canada stay an average of only 3.7 nights but spend $74 a night.

            Two factors might help to level the playing field. The lower Canadian dollar will make overseas trips more expensive for Canadians but cheaper for U.S. visitors to Canada. (The B.C. government has just announced that it will close the tourism offices in Seattle and California!). "Snowbirds" who traditionally spend the winter months down south are finding it increasingly difficult to get health insurance and the dollar and U.S. inflation  have reduced their purchasing power by more than 37 per cent over the last 11 years.

 

BRITISH COLUMBIA

            The Investment Dealers Association forecasts that the B.C. economy, as well as that of Alberta, should outperform the rest of Canada for the sixth consecutive year but warns the that the growth might not be sustainable if the government maintains its current spending and tax policies.

            B.C.'s expansion will be spurred by the continuing flow of migrants to the province from Canada and abroad and by exports, now rising because of the lower Canadian dollar and economic recovery in the U.S. and Japan.

SERVICES

            We thought it would be worth reproducing extracts from a recent article on manufacturing and services in the highly respected Economist.

            " Only manufacturing industry can create real wealth and proper jobs," is the battle cry of many businessmen and politicians in America, Europe and Japan. They fear that the falling share of manufacturing in countries' GDPs heralds inexorable economic decline unless governments help with an `industrial policy.'

            Manufacturing matters no more than services, but no less than them, either, they are interdependent. Computers would be useless without software writers and nobody would buy a car if there were no gas stations. Indeed, the distinction between industry and services is now largely meaningless. In rich countries today, over half the workers in a typical manufacturing firm do service-type jobs--design, distribution, financial planning, only a minority make things on a factory floor.

            Another myth about service industries is that their productivity lags behind that of manufacturing. Official statistics show that productivity in services has been dismal. Partly, this is because it is difficult to define, let alone measure, a unit of output in services. Despite this shortcoming, there are many non-statistical signs that a productivity revolution is sweeping through services. Cocooned for years by restrictive practices, services are now being liberalized and exposed to competition. Privatization and deregulation are having a much bigger impact on services than manufacturing, forcing airlines, banks and telecommunications firms to become more efficient.

            Another misconception about services is that they offer less scope for international trade than goods. Haircuts and hotel rooms cannot be shipped abroad. So if manufacturing shrinks, how will a country earn the foreign exchange needed to import video recorders or cars? Today, more and more services are tradable. The share of services in U.S. total exports has risen from 20 per cent to 30 per cent in the past 10 years alone. The opportunities for expanding exports of finance, consultancy and telecommunications are vast, through cross-border sales or foreign direct investment. Deregulation is opening more markets to foreign suppliers of services.

            Rich countries would gain handsomely if poorer countries opened their service markets even wider to foreign firms as part of a deal under the Uruguay round of trade talks. Instead, rich countries have foolishly denied themselves such gains by refusing to cut subsidies and protection for their own much smaller farming sectors. Services now account for 60 per cent or more of the rich countries' Gross Domestic Product. Manufacturing's share will continue to dwindle as more low-tech factories move to countries where labour-intensive assembly or other operations can be performed more cheaply.  The comparative advantage of industrial economies lies increasingly in services.

            Writing computer programs creates more added value than churning out computer discs. Those activities with the highest value added are those with the highest wages. If Munich or Chicago really want to hold onto jobs that can be done in Monterrey and Shanghai, then their citizens will need to be happy on Mexican or Chinese wages.

            Manufacturing snobs who sniff that their firms are more valuable than pizza parlours have an out-of-date image of services. Thanks to new technology, fewer service-industry jobs are clerical or manual and more require cerebral skills. More than half the workers in rich countries are employed in the production, storage, retrieval or distribution of knowledge.

            The best `industrial policy' is one that provides a sound macro-economic climate, opens the country to competition, and equips people with the education and skills for tomorrow's knowledge-based business."   

TRIVIA

*           Employees of Britton Plastics Ltd. of the U.K are being paid in cocoa beans. The scheme allows them to pay a reduced rate of National Insurance contributions. They get a pay slip telling them how many beans they own and can receive bonuses if cocoa does well on the commodity market. Benefits and pensions are still received in cash.

*           Despite economic hard times, the United Way of the Lower Mainland and the Vancouver office of OXFAM say donations were up in 1992. Statscan reports that in 1991 donations to charities increased seven per cent to $3.1-billion over the $2.9-billion given in 1990. Giving per capita was highest in Newfoundland ($230), followed by P.E.I. ($220), and lowest in B.C. and Alberta ($130 each) and Quebec ($80).