Remarks by Jean-François Perrault, Senior Vice President and Chief Economist, presented to the House of Commons Standing Committee on International Trade – Trans-Pacific Partnership (TPP) Public Consultations, Ottawa, Ontario.
June 7, 2016
Good morning. It is a pleasure to be here to discuss the Trans-Pacific Partnership.
As Canada’s international bank, we have operations in 9 of the 12 TPP countries, and operations in 46 other countries. In Scotiabank’s view, free and open trade is critical to Canada’s economic well-being. We are a trading nation. Our economic prospects depend critically on the economic health of our major trading partners, but also on our access to their markets. At the moment, roughly 75% of our exports go to the United States. This of course reflects the deep integration of the North American economy, but exports being so heavily concentrated in a single country necessarily entail some risks, and limits economic opportunity.
In our view, the TPP represents a meaningful expansion of trading opportunities for Canadian firms. It provides our companies with preferential access to markets representing 800 million people. If implemented, the TPP and the Comprehensive Economic and Trade Agreement (CETA) would make Canada the advanced economy with the largest preferential access to markets. While this is impressive by virtue of the trading opportunity it provides to our firms, it is also a powerful magnet for foreign investment. I was in Korea a couple of weeks ago talking to Korean investors, and they were all impressed when I explained these advantages to them. Setting up shop in Canada would provide them, and firms from any other country, with preferential access to North American, Asian and European markets if both the TPP and CETA were implemented. When combined with our highly qualified labour force and the ease of doing business in Canada relative to our main competitors, these trade deals help make Canada that much more appealing to foreign investors that want to start and grow businesses here.
Implementing free trade agreements also help diversify our export markets. As I indicated, our exports are heavily concentrated to the U.S. This is normal given our shared land border, cultural similarities, and the North American Free Trade Agreement. Excessive reliance on a single partner however, is a bit risky. We are, to some extent, hostage to developments in the U.S. economy. While this is true for most countries given the importance of the U.S. to the global economy, it is even more so for Canada. There is thus a compelling case to diversify our export markets, to reduce our reliance on any single country, but also to ensure that we have access to countries that are growing faster than the U.S., which is the case for virtually all the emerging market countries in the TPP.
Finally, and this is the element of freer trade that some take issue with, it increases the competitive pressure on our Canadian firms. This is fundamentally a good thing. Canadian firms have adapted to competitive pressure in the past and continue to do so. It is in our DNA as a trading nation. The World Economic Forum considers us to be one of the most competitive economies in the world. A recent study by KPMG finds that Canada has the lowest labour costs of all G7 economies. We have the highest quality of education in the G7 and the soundest financial system in the world, again according to the World Economic Forum. All of this suggests that Canadian firms are well suited to meet new competitive pressures, and more importantly, to gain market share in new markets.
Of course, with greater competitive pressure comes more innovation and higher productivity. These two elements are critical to the long-term health of our economy and to the rising standards of living.
From Scotiabank’s perspective, the agreement levels the financial services playing field in TPP countries. This means Canadian banks will have the same access as other foreign banks in TPP countries. This is important to us, as it would allow us to help our Canadian and international clients to take full advantage of the opportunities presented by the TPP.
Let me emphasize that what drives our support for the TPP is not narrow self-interest. The ability to meet our clients’ needs is of course important to us. But more important are the economic interests of our country. The TPP, and CETA, represent meaningful increases in market access for Canadian firms, and make us a more attractive investment destination. This will pay off over the long term, even though there are likely to be some segments of our economy that will struggle to adapt to increased competitive pressure.
There are estimates of the impact of the TPP on our economy. They tend to be small. We don’t have the models to calculate these effects at Scotiabank, but this seems to be a reasonable assessment. Importantly, there are costs to not participating in the deal. Again, these are small, but taken with the gains from participating, there is a solid case for signing on to the TPP. Moreover, there are expectations that the TPP will, in time, expand to include other countries. This would increase the beneficial aspects of the deal.
Importantly, estimates of the impact of the TPP do not account for the possibility that firms will want to use Canada as a production base given our geographic location and our preferential access to markets. We do not have an estimate of what this could be, but it stands to reason that the impact should not be negligible.
Model-based estimates of the impact of TPP also do not account for the potential impacts of increased competition on productivity growth in Canada. This too is something that has the potential to increase our standard of living over a longer period of time.
Thank you, and I would be happy to answer any questions the Committee has.