COMPETITION Why The FTA Will Reverse North America’s Course
April 1 1990 by Chief Executive
Look beyond the trade numbers and it’s obvious
But trade figures are laggers, not leaders. What we see behind the trade statistics is a pattern of long-term structural change that is revitalizing our economies. For instance, the Canada-U.S. FTA signed early this year is the most far-reaching trade agreement ever put into effect.
The signs are everywhere-except in official trade statistics. They show up in global scale “mega corporations” created by mergers and acquisitions, a resurgence of North American productivity, and recognition by such international scorekeepers as the IMEDE-World Economic Forum report on competitiveness that
This doesn’t mean we should ignore the bad news the trade numbers tell us. But we have to interpret them according to what’s really going on, not “hand me down” economics devised for a less interdependent world. In part, the trade deficits we see are caused by imports of capital equipment-new machinery for retooling rundown production facilities.
The influx of foreign investments that excites so many “nationalist” voices in both
THE CANADA-U.S. FTA
The FTA creates an ever-denser network of trade and investment linkages between
Fundamentally, by eliminating tariffs, seeking to ensure access to markets, and creating a new dispute resolution mechanism, the FTA aims to encourage Canadian and
The net outflow of Canadian direct investment reflects
REORGANIZING PATTERNS OF PRODUCTION
We are witnessing the transformation of the branch plant into a facility more closely integrated into parent company strategies. Productive capacity is now being managed on a North American basis, a win-win outcome on both sides of the line.
Isaiah A. Litvak, professor of International Business at
Procter & Gamble is another example. It has four Canadian plants as part of its 54 plant North American production system. If you shower with Zest or Ivory, there’s a good chance it was made in
Other companies have pursued a successful niche strategy within their firm’s multinational distribution network. Among the most successful of these is General Electric. It started preparing for free trade half a decade ago. Now GE Canada sells halogen lamps and large industrial motors for GE worldwide.
Services, too, have reorganized. Canadian banking rules, unlike
Now they and their competition in trust companies are implementing aggressive business strategies in the
Indeed, virtually every traditional business service in
JUDGMENT AT DAVOS
Another sign that shows
In recent years,
Perhaps most indicative of the North American turnaround is that both
The importance of that human dimension shows up in
Science and engineering employment has been growing steadily for more than a decade at more than twice the real rate of GNP growth. Today, the proportion of scientists and engineers in the U.S. work force is higher than Japan’s (2.8 percent vs. 2.5 percent)-an edge that gets substantial leverage from the huge North American lead in computerization.
So why worry about the trade figure “fright night”? Because there exists the very real danger that protectionists will use them to adopt wrong-headed protectionist policies that will quickly destroy the turnaround course we are on. Indeed, concern about
The FTA also liberalizes the other side of trade-investment. In both countries, foreign investment has become a national concern. Recent acquisitions, especially by
What’s happening now in the
I do not believe-as some are advocating on both sides of the U.S.-Canadian border-that the huge inflows of foreign investment should be restricted. On the contrary, North American firms are on a roll-and further liberalization of investment flows would be among the best guarantees that the roll will continue.
At stake in these investments is not ownership, but the efficiency of capital. Where these mergers add to the capabilities of the firms or the productive allocation of assets, it is clearly in everyone’s interests that they proceed. Letting the market work freely ensures that the correct judgments are being made.
The conclusion of one of Canada’s leading academic commentators on free trade, professor Alan Rugman, director of research, Ontario Centre for International Business, help put these developments in perspective: “The recent wave of mergers and acquisitions in Canada is part of an efficient process by which the Canadian economy can prepare itself to survive into the twenty-first century….In our integrated North American and global economic systems, Canada’s companies are merging to their efficient relative size. Recent mergers and acquisitions merely reflect the reality of doing business in this environment.”
The fact is, in this new world, size matters. Canadians, even niche players, have to be big enough to count. Size brings greater financial strength, economies of scale and the ability to serve international clients. Our recent agreement with Elders IXL to combine our respective North American brewing operations into a Canadian-based partnership under the name Molson Breweries-by providing the required scale-should ensure Canadian beer a position in the highly competitive North American and world marketplace. The alliance enables us to be cost competitive. This is necessary if we are to preserve a quality Canadian brewing industry in an essentially flat domestic and international market.
The new company becomes the number one brewer in
JAPANESE FINANCIAL PERFORMANCE
Although size can confer advantages, biggest is not always best. On the contrary, a look at the world’s biggest firms confirms this and provides strong evidence that North American companies are now more efficient than those in
Considered on a market capitalization basis, Japanese firms-especially utilities and financial services companies-are the world’s biggest. But Japanese firms come second to last when ranked by return on equity.
Japanese capital accounts for 47 percent of total asset value reported by the world’s top 1,000 firms. Large
Yet, ranked by sales, large Japanese firms have just 32.7 percent of total market share;
This confirms the turnaround in North American business. North American managers are squeezing out twice the return on assets and a far better sales to assets ratio than the Japanese.
THE FTA AND CULTURAL DISTINCTIVENESS
However, if we accept the view that the transformation of the North American private sector has turned around to become significantly more international and competitive, we have to recognize there may be political limits to what people will accept in the name of free trade.
To Canadians, “culture” is an intangible, reserved space where we talk to each other. And
I see the recognition of these limits to the liberalizing process as a virtue of the FTA, not a defect. Because of these differences, the negotiators added to the FTA some common beliefs for settling disputes: manage the agreement as a whole, and protect the interests of the partners. Here, the FTA serves as a model for the multilateral trade negotiations now under way in the GATT Uruguay Round by providing a way to manage our distinctiveness as well as our similarities.
Marshall Cohen is President and CEO of the 204-year-old Canada-based Molson Companies. A former Deputy Minister of Finance, Industry & Trade, and Energy in the Canadian Government, he was President of Olympia & York Enterprises and Chairman of Gulf Canada Corporation before taking his position at Molson.