To be sure, there are plenty of risks in doing business in Mexico, and Canadian companies are justified in being cautious. Although conditions have improved significantly, Mexico remains rife with corruption and its democratic institutions are still a work in progress. Yet, it is not the tenuous rule of law or language barriers that seem to most flummox Canadians. As Ambassador Winfield recalls a businessman telling him: “Why should I go to Mexico if I can’t even drink the water?” One Canadian government bureaucrat explained the dilemma this way: “How do we get Canadian companies more engaged in Mexico and not get diarrhea?”
ARMCHAIR TR AVELLERS
At first blush, the delicate constitution of Canadian companies seems incongruous with the country’s claim to be one of the world’s great trading nations. Despite representing 2.5 per cent of the world’s economy and just 0.5 per cent of its population, Canada is the world’s eighth-largest trader, a feat that has secured its place in the elite group of eight most-industrialized countries, the G8. Over the past two decades Canadian trade has expanded exponentially, from 44 per cent of gdp to 72 per cent, making it the most trade-reliant country of the G8.
But while some $1 million in merchandise trade criss-crosses the Canada–U.S. border every minute, cementing the world’s largest single trading relationship,* Canadian “trade” rarely ventures beyond the cozy confines of the northern United States. When it comes to the rest of the world, Canadians are armchair travellers, rarely roused from the familiar contours of the “intramestic” American market to seek their fortune in foreign lands.
Canadians may be trading with, and investing in, the rest of the world more than ever before, but the record to date reveals, if anything, that they are the antithesis of true traders. In every major market from Brazil to China, Canada is facing ever-widening trade deficits as its market share continues to erode under the strain of increased global competition. In 2005, Canada racked up a record $44 billion trade deficit with the rest of the world, and with the odd exception of countries like Lebanon and Sri Lanka, its only trade surplus was generated from just a single country: the United States. As Pierre Alarie, a Canadian veteran of international markets, observed: “If Canada were beside Bosnia instead of the United States, we’d all be bankrupt.”
When it comes to foreign direct investment (FDI), Canada musters the lowest level of outward-bound fdi in the G8 and remains largely absent from the current global push into developing markets. While it’s true that Canada is now a net exporter of fdi for the first time in its history, it’s also true that the third-largest recipient of Canadian foreign investment is Barbados, an offshore tax haven and post office box for dozens of Canadian banks and insurance companies.* According to Statistics Canada, an estimated $88 billion, close to a quarter of Canada’s overseas investment, is parked in similar tax havens in Ireland, Bahrain and the Caribbean.8
“Canada’s trade and investment market share has been falling, falling, falling, year after year, with few exceptions, since the end of the 1970s,” says Glen Hodgson, chief economist at the Conference Board of Canada. The dismal showing comes as little surprise to the rest of the world, which by now has become resigned to Canada’s cursory attempts at international business and seeming unwillingness to wade in and take the time and energy to actually cultivate trade. “You are nice people,” says Boris Rousseff, a European businessman who has worked closely with Canadian companies, “but you are not a trading nation.”
A quick tour of world markets reveals Canada’s declining and increasingly peripheral position. In Europe, long considered a second home for Canadian goods and investment, “Canada’s turn seems to have passed,” says one European diplomat who has worked to enhance two-way trade. Canada’s share of European Union (EU) imports declined by a third between 1990 and 2002. While Europe has been a beachhead for some of corporate Canada’s most aggressive international forays, including Alcan’s $4 billion acquisition of French aluminum giant Pechiney in 2003, Canadians on the whole have taken a laissez-faire attitude to Europe. As the Americans and Japanese scramble for position and the eu becomes increasingly preoccupied with its growing membership and the rise of China, Canadian companies have hung back like awkward teenagers waiting to be asked to the prom. Europeans, as a result, are often left scratching their heads, wondering why the Canadians bother showing up at all.
“Canadians are perceived as very friendly, but we don’t know what they are up to. What are they here for? What do they want to achieve? They don’t make any effort. They wait, like in the old days when women expected to be approached by men,” said one European businessman. “Things have changed. Even women don’t go for that anymore.” Apparently, neither do the Europeans. “We can tolerate that attitude from the U.S., but not from an average-sized country like Canada. You are bound to lose.”
Nowhere is Canada’s losing record more evident than in Latin America. In a rare burst of foresight, the Canadian government led a series of Team Canada trade missions to the up-and-coming region in the early 1990s in a bid to pre-empt American hegemony by parlaying Canadian goodwill into a first-mover advantage. As a result, Canada signed a free-trade agreement with Chile in 1996, six years before the United States did. Nevertheless, Canadian exports to Chile have stagnated to 1994 levels, as they have in almost every country in the region.
At the same time, Canada’s trade deficit has grown. All told, it exports less than 1 per cent of its merchandise trade to South America and the Caribbean. The lacklustre trade has been mirrored by a mass exodus of some of Canada’s biggest companies, including Bell Canada’s (now defunct) international wing, bci; Quebec cellular group Telesystem International Wireless; Alberta pipeline companies Nova Gas and TransCanada PipeLines; and even Scotiabank in Argentina. Many left the region with their tail between their legs.
Canada’s biggest retreat has been in Brazil. Exports to the sprawling country have been declining since 1997 as a $300 million trade surplus was converted into a $2 billion deficit in 2005. Sales to the world’s fifth-most-populous country represent just a quarter of 1 per cent of Canadian exports.
James Mohr-Bell, executive director of the Brazil–Canada Chamber of Commerce, says two-way trade, while edging up in favour of Brazil, remains “ridiculously low.” The Brazilian businessman has watched in frustration as Canadian companies remain “on the sidelines” while other foreigners, shrugging off currency devaluations and political volatility, have snapped up privatized state assets and invested in infrastructure projects. Although Canadian direct investment has cautiously expanded from $6.7 billion in 2000 to $8 billion five years later, overall foreign direct investment in Brazil has ballooned from us$40 billion in 1992 to over us$236 billion9 a decade later. “Canada has lost a lot of position. It used to be the sixth- or seventh-largest investor in Brazil, now it’s twelfth or fifteenth,” says Mohr-Bell. “As far as Canada is concerned, Brazil has just been forgotten, left aside. It was never exploited by Canadians to its potential.”
But perhaps the most worrying omission in the Canadian trade calculation is Asia. By mid-century, the region is expected to be home to three of the world’s six largest economies, yet Canada is barely a footnote in what is being touted as a historic changing of the economic guard. Canada’s share of Asian imports has almost slipped off the charts, from 2.88 per cent in 1988 to 1.06 per cent in 2004 in the wake of near-negligible exports and ballooning trade deficits. In 2004, Canada trailed Chile as the eighteenth-largest foreign investor in Southeast Asia.
While shrinking exports to Japan, a long-time trading partner, and Korea are cause for worry, it’s the seeming indifference to China that’s most alarming. As the world scrambles to feed China’s ravenous economic appetite, Canada directs less than 2 per cent of its exports to what has been the globe’s fastest-growing economy for the past decade. Not surprisingly, Canada lags behind every other major country in export growth to China.10 In fact, in the first half of 2006, exports actually contracted by 8 per cent compared with t
he same period in 2005.
Canada’s meagre and diminishing share of Chinese imports is matched by minuscule direct investment. By 2005, Canadian investment in the world’s most populous country barely topped $1 billion, representing 0.2 per cent of all Canadian investment abroad and nowhere near the $11 billion of Canadian money socked away in the Cayman Islands. At the same time, foreign investment in the Middle Kingdom has shot up by a phenomenal us$356 billion11 between 2001 and 2006.
The anemic performance even caught the attention of James Wolfensohn, the former president of the World Bank. During a speech at the Montreal Board of Trade Conference in 2004, he carefully admonished the country for not taking “as significant advantage of that extraordinary market as you might.” Howard Balloch, Canada’s former ambassador to China, is decidedly less diplomatic in his assessment of the country’s limp efforts. A trace of impatience ruffles his otherwise cool, bow-tied demeanour when asked why Canada still lingers at the water’s edge while the rest of the world takes the plunge.
“The Japanese recognize their presence in China is vital to their own economic existence. They are huge investors. The Germans are all over China. General Motors is investing billions. Where are the auto parts companies? This is supposed to be our flagship industry. There is a housing boom and heavy demand for wooden flooring — where are Canadian forestry products? The Scandinavians are bringing in their wood and wood from Siberia and making furniture and shipping it to North America. Where are our furniture companies?” says Balloch. “Look where we are supposed to be strong in Canada. Why are we not there?”
A MATTER OF PERSPECTIVE
That question is at the very heart of this book. The next few chapters deal with the reasons why Canadians so often fail to make the leap from hometown success to global conquest. The answer is a complex one, the product of a unique confluence of history, geography and culture that has made a powerful impression on our collective imagination. At its most elemental level, it’s about perspective.
Canadians seem to view the world through a fish-eye lens. Their immediate surroundings are dramatically overemphasized, to the point of distortion, while the backdrop — the outside world— appears dwarfed and distant. But just like the view from a fish-eye lens, the extreme wide angle is an optical illusion, fashioned through the careful engineering of optics and lenses to trick the mind’s eye. And we’ve been fooling ourselves in this way for a long time.
The effect can perhaps best be observed in Vancouver. Nowhere in Canada does the country’s natural bounty loom so large. The city’s downtown boardrooms offer panoramic views of majestic mountains, lush forests and shimmering bays. The gaze of Vancouver, a coastal city with a natural harbour, is cast away from Canada, towards the Pacific Ocean and the Orient beyond. Yet the “Gateway to Asia” appears truncated, its wide, luxuriant pathway suddenly subsumed into a blurred, distant horizon.
Despite the phalanx of glass and steel high-rises crowding the downtown skyline and a bustling port, Vancouver is essentially a “bedroom community,” says John Wiebe, head of the globe Foundation, an international consulting group, and the former president of the Asia Pacific Foundation of Canada. British Columbia, while leading the country in exports to Asia, remains among the least export-oriented provinces in Canada.* Why? Because the West Coast, like much of Canada, has never had to adjust its depth of field. As long as the foreground was in focus, the backdrop wasn’t all that important.
Michael Novak, an executive vice-president with Quebec construction giant SNC –Lavalin, calls this phenomenon “the Canada syndrome.” Its origins and continued propagation can be traced to two key factors: an abundance of natural wealth that provided Canada’s tiny population with one of the highest ratios of natural resources per capita in the world; and the United States. Taken together, these two factors form the basis of a quick and easy trading recipe that some argue would spoil any cook from tackling more ambitious confections.
Some 85 per cent of Canadian-made goods need travel no farther than a few hundred kilometres, into a market that is often no more difficult to trade with than some Canadian provinces. Without the natural barriers of language, culture or distance, an estimated 90 per cent of Canadian exports to the United States are shipped to buyers on an open account, without a contract. “We’ve had it easy. We’ve got lots of resources that we could sell easily to a market that spoke English and was close by,” says Carin Holroyd, senior research analyst at the Asia Pacific Foundation of Canada in Vancouver. “We haven’t had to work very hard.”
What makes it even easier is that Americans and other foreigners are doing most of the heavy lifting for us. Historically Canada has one of the highest levels of foreign ownership in the developed world,12 with more than half of its manufacturing base and 42 per cent of its oil, gas and coal mining industry currently in foreign hands.13 According to a Statistics Canada study, foreign affiliates represent just 2 per cent of all Canadian-based exporters yet account for an incredible 44 per cent of all exports. Of that, some 70 per cent is intra-industry trade — goods of a similar nature that are being imported and exported.14
What does that mean? That Canada’s three leading “exporters” are the Big Three American car manufacturers — General Motors, Chrysler and Ford — which manufacture cars in southern Ontario and ferry them across the border. In Ontario, Canada’s most export-oriented province, 53 per cent of exports are generated by foreign affiliates.15 The automotive industry represents nearly a quarter of the country’s total merchandise exports. “If you take out automotive,” says Bob Armstrong, the former president of the Canadian Association of Importers and Exporters, “what are we really selling?”
In a word — commodities. While more sophisticated Canadian exports of things like software and airplane parts have grown over the past two decades, more than half of the nation’s foreign sales still come from oil and gas, lumber, chemicals, fertilizer, grains and potash. Unlike value-added manufactured goods, which must be actively peddled and pushed into new markets, commodity prices are largely set by world markets, and the buyers, more often than not, come to you. Take Canadian exports to Japan, for example: an estimated 75 per cent of this trade is controlled by Japanese trading houses with offices in Vancouver and Toronto. Those same trading companies are also behind much of Canada’s trade with China — and even China’s state grain trader has an office in Vancouver. “There aren’t many Canadians actively seeking a market,” says John Wiebe. “Commodities are so hot, you don’t have to sell. If you’ve got pulp, there’s a buyer at your door. Our companies don’t have to go out and spend a lot of time in China. You don’t see the commodity guys out there very much peddling product, and we don’t sell a lot of other stuff.”
As a result, between cars, commodities and the U.S. market, Canada not only never has to go the extra mile to sell its goods, but is caught in a strange paradox, wherein, as Carleton University trade guru Michael Hart points out, “Canada has become a trade-dependent economy without a deep-seated trading culture.”16 With the rest of the world knocking on their door, says one government trade promoter, Canadians could afford to remain “nice and kinda dozy,” eschewing the hardscrabble edge of hungrier, less-endowed countries while never being forced to develop a homegrown global trading base.
“We are major traders, but not really. We are really sellers into the global marketplace,” says Jayson Myers, senior vice-president and chief economist of Canadian Manufacturers & Exporters. “What’s the difference? Sellers are just told how much to produce and the market is made for you. A major trader is out there developing his own market. We don’t have a lot of companies doing that in Canada.”
Myers estimates that with 60 per cent of Canada’s trade being intracorporate and 30 per cent taken up by energy, raw materials and commodities, only 10 per cent of the economy is made up of companies with the impetus to actively develop markets. The problem is, they are overwhelming small and medium-sized enterprises (SMES), which lack the financi
al stamina to withstand expensive international forays and the motivation or mindset to manoeuvre in more complicated foreign markets.
In fact, most smes do not even think about exporting. According to a poll taken by the Canadian Federation of Independent Business in 2004, an astounding 51 per cent of respondents didn’t sell abroad because their products or services were “not exportable.” A report by the Toronto-Dominion Bank quickly jumped on the finding, asking: “In this day and age, what isn’t a global product?”
All told, less than a fifth of small businesses, which account for 99 per cent of all Canadian companies, actually export. Even fewer do so regularly. Myers calculates just 3 per cent of smes are “active exporters,” engaged in producing and servicing goods in and for foreign markets. According to Statistics Canada, a meagre 1.5 per cent of small business exporters account for 75 per cent of all exports by smes.17 In other words, the vast majority of sme “exports” are one-off, opportunistic and usually unsolicited sales, worth a few thousand dollars at most. For many companies, concedes one business owner, exports are just “extra gravy.”
In the absence of a sustained and focused export strategy, companies tend to take a haphazard, scattershot approach to international business that rarely hits the bull’s eye. Two key challenges seem to particularly plague Canadian firms: a failure to follow up on new business leads, and an almost debilitating aversion to risk. Both are anathema to operating in globally competitive markets. Canadian companies, says Michel Charland, director of Industry Canada’s International Trade Centre in Montreal, “lack the preparation, the vision and the commitment” to venture into the choppy seas of international business.18
When they do venture forth, the results tend to be disappointing, both for Canadian companies and for many foreigners who, given the choice, would prefer to do business with Canadians. Instead, the tepid and at times amateurish approach has left many perplexed and even irked by Canadians’ stubborn insistence on being the wallflowers of international business. “At home they are as efficient as Americans, but when they go abroad and are doing international business, they are shy, withdrawn and inward looking,” says Boris Rousseff, who as executive director of the Canada Europe Round Table for Business has worked for two decades trying to better familiarize Canadian companies with Europe.
Why Mexicans Don't Drink Molson Page 3