Pierre Lortie, Chairman and Chief Executive Officer, Provigo Inc.
FREE TRADE: CORNERSTONE OF A NEW NATIONAL POLICY
October 10, 1985
The President, Harry T. Seymour, Chairman
Distinguished guests, members and friends of The Empire Club of Canada: It is my pleasure to welcome as our guest speaker today Pierre Lortie, Chairman and Chief Executive Officer, Provigo Inc.
When Pierre Lortie, 34, became the seventh and youngestever president of the 107-year-old Montreal Stock Exchangelater renamed the Montreal Exchange-in May 1981, he inherited an institution whose very existence was in doubt.
Undaunted by the exodus of banks and firms following the election of the Parti Quebecois government in November 1976, Lortie embarked upon his announced goal of making the Montreal Exchange "the dominant Exchange in Canada."
He introduced a series of new financial products from gold options to lumber futures. He linked the Exchange by computer with other world markets to speed up industrial trading.
The result? In 1984, the Montreal Exchange accounted for nearly 22 per cent of the combined value of shares traded on the Toronto and Montreal Exchanges, up from about 14 per cent in 1983. A major success story indeed, when you consider that the Exchange's very existence was in doubt
when Lortie assumed the helm in May 1981.
Why, then, did we read in the April 19, 1985, issue of The Financial Times of Canada: "Does Lortie have the right stuff to run Provigo?" "Appointment ruffles feathers"?
Did he need a new challenge? Was the offer of Chairman and Chief Executive Officer of Provigo, Canada's secondlargest grocery chain, too attractive to ignore? Speculation is rife that it was a combination of both!
Not content to rest on his laurels, Pierre Lortie spent a hectic summer ensuring Provigo was successful in its bid to acquire a substantial voting interest-46.4 per cent-in Consumers Distributing Co. Ltd., North America's thirdlargest catalogue-showroom retailer.
Who is "Le Grand Dieu Gris" (The Great Grey God), as his Montreal Exchange employees called him? Pierre Lortie was born in Giffard, Que., in 1947. He graduated with a Bachelor of Applied Science degree in engineering physics from Laval University in 1970; and a Licence en Sciences Economiques Appliquees, Institut d'Administration et de Gestion, University de Louvain (Belgium); and a Master of Business Administration degree from the University of Chicago in 1974.
He held the rank of major, commanding officer, 10th Field Squadron, Royal Canadian Engineers, 1968-70.
His early business career included two years as executive assistant to Raymond Garneau, then Quebec Minister of Finance; two years at the Montreal Exchange, in increasing positions of responsibility in the area of development; and four years as a senior partner with Secor Inc., a Montreal economics research group that specializes in developing corporate, financial, and marketing strategies.
A past president of the 5,500-member Chambre de Commerce du District de Montreal, Pierre Lortie represents the new corportate elite in Quebec who have replaced the departed anglophone businessmen in Montreal since 1976. Nowhere is this trend more evident than at the Montreal Exchange, where Lortie was preceded by Michel Belanger and
Robert Demers at what had been historically a predominantly anglophone institution.
Ladies and gentlemen, it is my great pleasure to introduce Pierre Lortie, who will address us on the subject. . ."Free Trade: Cornerstone of a New National Policy."
I thank you very much for this invitation to address the Empire Club. It is a singular honour. Accepting your invitation was the easy part; more difficult was determining the subject of my remarks. Last week was "La semaine francophone" in Toronto. Therefore, it might have been proper to review the tremendous progress made throughout Canada since the Laurendeau-Dunton Royal Commission Report and the hopes and aspirations of my fellow French-speaking Canadians. However, in the end, I concluded it was preferable to address a subject of the utmost importance to all Canadians. The route we will choose on this issue will shape the future of Canada much in the same manner that (Sir John A.) Macdonald's National Policy of 1879 structured the Canadian economy. This issue is the establishment of a free trade area with the United States.
Canada is at a critical juncture. Four times in the past 150 years, this nation has grappled with the issue of free trade with the United States. Each time, the resolution was the same. Canada decided to protect its domestic industry by erecting or maintaining trade barriers between the U.S. and Canada. Whether these decisions were good or bad is best left to economic historians. Suffice it to say that, from our 1985 perspective, the country our forefathers left us is not in such a bad shape.
But times have changed. Even today, according to many observers, Canada's economy is resource-driven. Economists have developed theoretical arguments to justify the protection of infant industries. Such arguments have been made in the past with respect to our own manufacturing sector, which, on the whole, has traditionally been protected and more domestically oriented than export oriented.
However, nobody can argue seriously that the Canada of tomorrow can remain resource-driven and insure the maintenance of a superior quality of life for Canadians. If our economic base is to move away from commodities, it must rely on a larger domestic market to establish the competitiveness of its manufacturing sector. Canada is at this juncture. Establishing a free trade area with the United States is a unique window of opportunity.
It is important to fully understand our international trade predicament. Roughly, two thirds of our total exports is commodities or mildly differentiated semi-finished goods, with low technological content (although technology may have been extensively used in their capital-intensive production process). These exports are quite different from our imports, which, by and large, are made up of finished manufactured goods.
The well-being of Canadians is significantly affected by our terms of trade. Terms of trade represent the average price of our exports relative to that of our imports. In a nutshell, the better the terms of trade, the more value a country will get for a given basket of exports. Given that our exports are dominated by commodity-type goods, we must squarely face the question of what is most likely to happen to Canada's terms of trade in the coming years.
International commodity markets are tough markets. Firstly, sellers are mainly price takers, despite the short-term illusions of some exporters who mistakenly think that calling price changes is calling the shots. Secondly, commodity markets are subject to significant fluctuations because supply and demand are only loosely related. Thirdly, most of them are not high-growth markets. Indeed, in volume terms, we are witnessing a decreasing relative importance of trade in primary products, a trend that began early in the present century and should continue in the future because it mainly reflects the fact that food and primary materials have low income elasticities.
But what should be most disturbing to us about these markets is that they point to a major deterioration in our terms of trade in-the coming years. In real terms, world prices for major commodities and semi-finished goods are most likely to continue to decline relative to manufactured goods and services.
Several cogent reasons suggest that commodity prices will soften in the future, as developing countries continue to assault world commodity markets in the same manner they have assaulted the labour-intensive assembly-line markets in the last twenty years. Diffusion of agricultural technology, geological technology, forest-management techniques and mining technologies, as well as major investments in infrastructures and megaprojects, will lead to an increase in the potential of the developing world to supply the industrial countries with basic materials. Thus, the markets for our copper, our iron ore, our pulp and paper, our aluminum, our lumber, and our wheat will increasingly be undermined.
Developing countries can rely on a young generation of specialists who have learned our technology in Canada as foreign students and have gone back home to apply their findings. Moreover, the diffusion of such technologies will be accelerated by the integration of our economies and the deployment of large firms on a world basis. Thus, we should not underestimate the likelihood that, in the coming years, supply will outstrip demand at constant prices and that we shall be faced with an acceleration in the deterioration of our terms of trade. In this regard, it is useful to note that the Canadian share of world markets in some of these commodities and semi-finished products began to decline during the 1970s.
How Canada should respond to this deterioration in our terms of trade is a fundamental question, and, in my opinion, one of the most crucial we have to face in this decade.
I do not believe that the so-called "obvious" solutions will work. For instance, I seriously doubt that, in the present
context, attempting to transform more of our resources in Canada will produce significant results. Most of these commodities are transformed by industries that are marketdriven. It is wishful thinking to hope that we will be able to do much to restructure the processes by which commodities are gradually transformed into finished goods as they get closer to their ultimate consumers. The market system provides sufficient incentive to make it happen if it made sense. That it has not done so is a strong indication that it does not make economic sense. In this regard, there is no question that the small size of the Canadian economy places us at a serious disadvantage.
Import-substitution policies are ineffectual, at least on a large-scale basis. Here again, our domestic markets are small in most, although not all, cases. Therefore, the potential gains from import-substitution policies are minimal.
When everything is considered, we are bound to conclude that, to maintain our balance of trade in reasonable shape, new exports will have to be generated. As our terms of trade in commodity markets (broadly defined) deteriorate, we shall have to compensate by increased exports of finished goods and services. If we do not do so, the result of this shift in our terms of trade will be an absolute loss of advantage and a decline in our earnings from exports. The net result will be a net decline in the standard of living of Canadians.
Larger exports of finished goods will result from the increased competitiveness of our manufacturing and services sectors. But a significant improvement in competitiveness can only be achieved by a structural change in the Canadian competitive environment, which will pressure Canadian firms to adapt, to become more efficient, and more competitive on a global scale.
Those of you familiar with the so-called Japanese miracle know that Japan's tremendous successes in export markets are due mostly to the highly competitive nature of Japanese firms, a characteristic nurtured and maintained in their own domestic market-probably the most competitive in the world.
How can we bring about these major changes in the way in which, and the environment in which, Canadian firms operate? The Macdonald Commission, joining the majority of Canadian economists and a growing number of business leaders, has concluded that more open markets with the U.S. is the best way to achieve the objective of increasing our share of world markets in manufactured goods and services. A broader domestic market, a North American one, would create conditions that would improve the competitiveness of our productive sector and greatly enhance our capacity to export manufactured goods and services on a worldwide basis.
Needless to say, such a historic abandonment of one of the pillars of the "National Policy" creates a certain degree of uneasiness for many Canadians. By any standard, the U.S. economy is very large. Establishing a free trade area with the U.S. raises the question of our vulnerability in such an arrangement. It would also represent a fundamental redirection of our economic policies; therefore, one should expect structural changes to result. Will those changes be for the better or for the worse? These questions are legitimate and deserve well-thought-out answers. Let's hope that, soon in the process, several myths that cloud the present debate will be debunked.
• Directforeigninvestments should increase, notdecreaseMost Canadians have come to realize that, generally, direct foreign investments constitute a plus to our economy and society.
It is also generally assumed that a substantial portion of U.S. direct investments in the manufacturing sector has been made in Canada to circumvent the tariff and non-tariff barriers. Consequently, it is argued, creation of a free trade area would remove the incentive to establish manufacturing operations in Canada and, therefore, lead to less direct foreign investment with a concomitant effect on growth and job creation. This line of reasoning is intuitively appealing;
yet, it is incorrect because it does not recognize the characteristics of modern-day trade in manufactured goods. Closer examination of world trade in manufactured goods reveals that the majority is intracorporate trade-that is, sales by a subsidiary in a country to another subsidiary in another country and vice versa. This is also a major characteristic of Canada-U.S. trade in manufactured goods. According to a recent report of the Economic Council, the average share of intracorporate trade in total Canada-U.S. trade is 81 per cent for exports and 79 per cent for imports.
Thus, it is fair to expect that, as a result of the establishment of a free trade area with the United States, corporations in both countries will modify their strategic outlook and plan the deployment of their facilities and operations to take advantage of both markets. In the process, Canada will gain both from greater investments and from the fact that our production facilities will gradually evolve to the optimal size and achieve significant economies of scale. Moreover, we cannot discard the fact that Canada becomes a better place to invest in the eyes of foreigners, once a free trade area is established.
Some may doubt the validity of my comments. To them, I would simply say: Look at what happened in the European Common Market countries, look at what happened in the countries that formed the European FreeTrade Area (EFTA). The evidence is overwhelming. Moreover, the persistence of many foreign firms in industries in which the tariff with the U.S. is now zero shows that the mass-exodus-of-directinvestments argument does not rest on a solid basis.
• The threat from contingent protection actions on the part of the U.S.-In recent years, many have found that the U.S. was "trigger-happy" when it came to the use of contingent protection measures. This phenomenon is taken by many as evidence of the illusion of attempting to negotiate an FTA with the United States. They argue that the problem is intractable, and that it will be impossible to agree on a mechanism to deal with legitimate problems.
This objection is important because it goes to the very heart of one of the major arguments in favour of an FTA: the risk of U.S. import restrictions or duties significantly increases the risk to investment in new production facilities in Canada and, therefore, establishment of a free trade area would remove this uncertainty and improve investment opportunities in Canada.
In this regard, there exists substantial evidence that much of the dumping that now occurs between Canada and the United States is a result of companies in one country attempting to hurdle tariff barriers in the other to sell in the other country. Thus, one should expect that the incidence of dumping would decline if tariff barriers were removed, in contrast to the present trend of increasingly resorting to contingent protection.
Here again the lessons of the EFTA experience are worthy of note: during the 14 years it existed, dumping duties were never applied by any of the member countries to intra-EFTA trade, even though such recourse was expressly provided for in the Stockholm Convention.
• The removal of barriers to trade across Canada-We often hear the following argument: How can we argue for free trade with the U.S. when we do not even have it among the provinces? The observation is well taken. However, it is also self-serving and shortsighted when used as an argument to postpone negotiations with the U.S. until we have eradicated these barriers within our domestic market.
Such an approach is doomed to failure. It is doomed to fail for the same reason sectoral trade agreements cannot be concluded with the U.S., leaving us to pursue a comprehensive trade agreement. No province, no country, can win in each and every sector as a result of the elimination of trade barriers. To reach an agreement, there must exist trade-offs. The interprovincial barriers to trade are limited to too few sectors to give rise to enough trade-off opportunities. Access to a larger market is required to allow for the necessary restructuring. This is why the fairest chance we have of removing interprovincial barriers lies in the conclusion of an FTA with the United States and not the reverse.
There is no such thing as a free lunch. To reap benefits, one has to invest. The long-term benefits of free trade with our southern neighbour rest on immediate investments. In a market system, those who will bear the costs are not necessarily those who will reap the benefits. Thus, there will be losers and winners. Some industries will not adapt, some corporations will be too weak to compete.
But let's put everything in perspective. The matter of the cost to the Canadian economy has been thoroughly analysed over the years, and, in particular, by the Macdonald Commission. True to a dark streak in our national character, we spend more time worrying about the short-term burden of the investment than about how we will enjoy the riches of the outcome.
The Macdonald Commission has found that these shortrun costs are outweighed by the benefits by a ratio that can vary between 25 to 1 to 80 to 1, depending on whether you are a pessimist or an optimist. This means $25 to $80 of benefits for each dollar of cost. Even if we allow for unforeseen events, all cost-benefit analyses of free trade with the United States indicate overwhelmingly that "long-term gains... heavily outweigh short-term adjustment costs."
Who are the business executives, who are the elected officials, who will publicly affirm that, to keep an extra dollar in their pocket, they are ready to impose a burden ranging from $25 to $80 each on the rest of us?
Naturally, because the short-run costs are borne by few, whereas the long-term benefits are spread among many, the howls of protest are louder than the expressions of contentment. But the over-all benefits are so important that any reasonable citizen is bound to go beyond headlines and selfserving arguments. Moreover, it is probably not out of order to indicate that recent studies have shown that the short-term effect of free trade with the United States would be a 5.5-per-cent increase in employment (due mainly to trade-diverting effects).
One of the major consequences of the last recession on the Canadian psyche was a certain recognition of the virtues of economic growth. The attitude of the majority of the Canadian people is clearly pro-growth. Even if we do not know much with confidence about how to obtain more economic growth, we have learned a few lessons. For instance, we have learned that great results should not be expected from small measures.
Probably the most important of all lessons about growth is that the difference between three-per-cent growth and four-per-cent growth is not one per cent but 33'/s per cent. Structural changes are required to maintain such an improved performance on a consistent basis over several years. And this is exactly what one should expect from a free-trade agreement with the U.S., the impact of which the Macdonald Commission has evaluated to be a one-time three-per-cent to eight-per-cent increase in gross national product (GNP).
Finally, let me say a few words about the cultural and sovereignty arguments. The arguments about loss of sovereignty are endless and can never be resolved. Sure, in any agreement, both parties lose some freedom to do their own thing. As a matter of fact, it is precisely for this reason that Canada must sign a trade treaty with the United States to reduce the risk that our imports be curtailed by actions of Congress or the states in the future.
We should not let the loss-of-sovereignty argument be carried too far. Two counter-examples will illustrate its weakness. The European Common Market agreement is much more comprehensive than anything that is contemplated in the bilateral agreement with the U.S. Yet, it is difficult to argue that France, England, Germany, Italy, Belgium or Holland has lost significant autonomy in the area of growth and employment policies.
The second example is closer to home. Quebec shares a common market with the other nine provinces. Despite an intimate political and economic integration, it has had no major difficulty in adopting a cultural policy of its own. It has not lost its identity. Indeed, even the proponents of an independent Quebec in the '70s strongly argued for the maintenance of a common market with the rest of Canada.
So let us not be moved to tears by those who argue that free trade with the U.S. would bring a loss of Canadian sovereignty. If (French president Charles) de Gaulle could live with the Common Market, I see no reason why our Prime Minister and premiers could not live with free trade with our southern neighbour.
In 1948, men of vision built the European Common Market over the objections of the apologists of the status quo. Today, nobody would dare suggest that Europe would be better off if the clock were turned back and if new barriers were mounted between countries. Despite its bureaucratic rigidities, the compromises that it forces on each individual country, and the poor handling of the agricultural sector, the European Common Market agreement is still the better solution for each of its member countries. And the European business community would simply be appalled by the suggestion that it should be dismantled.
The Canadian business community has to rise to the challenge. Its leadership will be the critical factor in the success or the demise of the present trade initiative. A first step in establishing this leadership would be to disseminate the facts and to ensure that the debate does not fall prey to demagogic claims.
A second step would be to design ways and means to smooth the transition. Not all corporations will be able to adapt to this new challenging environment. Nor are they expected to. Moreover, trade patterns will be changed. Some regions will benefit more than others, although the regional costs seem to be greatly exaggerated.
With benefits outstripping short-term costs by 25 to 1 and more, there surely are sufficient resources to smooth out the transition. This is not to suggest that the adaptation should be delayed by subsidies. Such policies would be self-defeat-
ing. But workers could be retrained, entrepreneurship could be stimulated, investment could be encouraged. A positive stance by the business community, a dedicated effort to find efficient ways of cushioning the impact without delaying the change would be a well-spent exercise in leadership.
It has been said that Ontario is, of all Canadian regions, the least enthusiastic about free trade with the United States. The Montreal business community has been fighting for more than fifteen years for Canadian unity. The casualties in the trenches have been high, but we fought for Canada and for the long-run benefits of Montreal. At decision time, a majority of our fellow citizens shared our vision of what was best for the future.
The Toronto business community faces a similar challenge today. You can make a significant contribution by putting your efforts and your influence behind a greater Canada and a much bigger Canadian market in the years to come. A new National Policy is in the making. Let us all participate in its establishment.
I sincerely hope that the Toronto business community will ally itself with the rest of the country for a better Canadian future. Canadians need your help.
The appreciation of the audience was expressed by Sydney Hermant, a Past President of the Club.