UPS Chief Operating Officer David Abney discussed emerging trends in global trade June 19, 2012 at the Economic Club of Canada in Toronto. "When it comes to global trade, Canada is leading the way. You’re getting it right."
Thank you for that kind introduction. I'm delighted to be speaking here today.
It's good to be north of the border again where the business environment is upbeat. Here in Canada, commodities are driving growth, and the hot real estate market for the past few years has been the talk of Toronto.
Today, I'd like to talk about emerging trends in global trade. I'll share with you new UPS research on trade in Canada. The findings are surprising yet unmistakable: business leaders in your country are optimistic and outwardly focused. Canadians are ready and eager to compete in a global economy with your eyes fixed far beyond your traditional trading partners in the states. When it comes to global trade, Canada is leading the way. You're getting it right.
What does this mean for your economy? It's growing, and you're creating jobs. Canada's unemployment rate is almost a full point lower than in the United States. There's a lesson for the United States. Unfortunately, in our country, trade is anything but popular, and we are falling behind. If we look north and follow your example, we can still turn it around and reinvigorate our role in global trade. That result would be good for not just the United States but also Canada and the rest of the world.
The New Consumers
Let me start with some background. There's a wealth of evidence that trade has done wonders for developed countries. And that goes for the U.S. and Canada. According to one study, the increase in trade since World War II has lifted U.S. annual incomes by approximately $10,000 per household. For Canada, exports account for roughly a third of the country's GDP.
We have seen trade bring some members of what used to be called the Third World into what we know now as developing economies. But what we're seeing now is that trade is translating into newfound wealth and spending power. I've been at UPS for 38 years now and I've never seen anything like it. What's happening is that we're seeing the emergence of "the new consumers." Who are these new consumers?
Most come from China, India, Brazil, Turkey, Kenya and Mexico and they are reshaping the global economy. They represent a new and emerging market that's about the size of the United States, Canada, and Mexico combined. Imagine that: Another NAFTA!
And they have two things any growing business wants to see in their customers: discretionary income and a thirst for spending. The growing ranks of the middle class in up-and-coming parts of the world mean that the old rules of the global economy no longer apply. If you want to grow your business in the future, you'll need to reach out and attract these new customers. In short, you'll have to think anew.
As UPS evaluates global commerce, we see the developed world and emerging markets moving on two different tracks.
The developed economies are on the slow track. Growth in emerging economies this year (2012) is expected to be 5.75%. Even with recent cooling in China, emerging economies are growing at nearly four times the rate of advanced economies (1.5%).
Canada's New Trade Priorities
How can developed nations get on the fast track? Simple. Do what Canada is doing and reach out to embrace the world's new consumers. Thanks in part to trade, the recovery from the financial crisis in Canada has been stronger and faster than in other G7 countries in terms of employment and output. Canada's economy has been an anchor of stability in an otherwise turbulent world. I know most Canadians don't like to showboat. But trust me: you have earned the praise and imitation of your global peers.
That's why UPS is aggressively investing here. In the last decade, we have invested close to $300 million in our Canada operations. And we've made a recent multi-million dollar push into Atlantic Canada.
In a recent business survey of small, medium and large-sized Canadian enterprises, we asked about plans for international expansion. The results are pretty telling. Nearly half of business leaders in Canada recognize that exporting is a necessity. You can see here that the only major impediment they cited was that it simply didn't apply to their industry.
While the U.S. remains a close and important trading partner, businesses that intend to expand in the next five years aim to do so in China, Mexico, India, Brazil as well as the United States. As you might expect, Asia drew the most interest. Canada's government is also driving export growth. In the last five years, the government has secured 6 free trade agreements, most of them in South and Central America and Europe.
Looking ahead, Canada is negotiating free trade agreements with India, Japan, the European Union, South Korea, Singapore, and others. The stakes are enormous. For instance, a trade agreement with Canada and India would boost Canada's economy by as much as $6 billion. How? By eliminating or reducing tariffs and liberalizing trade in services. That kind of economic growth is low hanging fruit. So why not grab it?
Canada's government and its business community are working together. A high-powered panel of blue-chip Canadian business executives recently formed to act as a sounding board as the government accelerates its efforts abroad. Canada's International Trade Minister says he will count on the panel's input.
U.S.-Canada Trade Relationship
The partnership between the United States and Canada is vital to both of our economies. Every day, about $1.4 billion in goods and 400,000 people move across the border. The foundation of this relationship is NAFTA, which is approaching its 20th anniversary. This agreement facilitates more than $500 billion in trade each year. Today, one in seven jobs in Canada relies on exports to the United States because of NAFTA. That's huge. But there's room for improvement. NAFTA used to be the model for efficient free trade. Now Asia and Europe have more integrated trade zones than North America. By conservative estimates, inefficiencies in border crossings cost the Canadian economy $16 billion each year. That's one percent of GDP.
What does it mean for businesses? Consider the case of PEI Preserves of Prince Edward Island. The company wanted to ship jellies into the United States. But that required loads of time-consuming paperwork and border regulations. The added shipping delays meant constantly checking on delivery status for customers, at great expense. The company was ready to give up on exporting to the U.S. market.
Then UPS stepped in. We helped them figure out how to streamline new customs documents using digital technology. Now, this Canadian business quickly and proactively notifies customers across the border of their shipment's status. As a result, the company has saved thousands of dollars a year, and customer inquiries are down by 75 percent. Not only is the company continuing to do business in the U.S., but it just acquired another catalogue-order business so it can expand.
As the world's largest brokerage company, UPS sees many best practices around the world and we are constantly looking for ways to assist government entities and customers to adopt some of these practices in order to speed shipments across borders.
Still, these solutions only affect one business at a time. After two decades, NAFTA still gets a bad rap. It gets blamed for all sorts of problems. Recent spats over the Keystone pipeline and Mexican trucks only highlight a disturbing isolationist bent south of the border.
But critics have a point. NAFTA is not a perfect agreement. Multiple inspections are required for components that are all part of the same supply chain, leading to redundant information gathering. And companies have to maintain and present cumbersome paperwork to achieve NAFTA status and receive clearance. The list goes on. But here's my suggestion. Let's not fight over out-dated NAFTA trade rules. Let's rethink the issues and do something bigger.
One promising sign is to use The Transpacific Partnership (TPP) negotiations as a way to modernize trade rules governing the flows across United States borders with both Mexico and Canada. I'm encouraged by recent news reports that the U.S. government is doing just that by moving to add Mexico and potentially Canada to those negotiations, which currently include nine countries.
NAFTA was based on old trade paradigms that no longer reflect the realities of trade today. Including Mexico and Canada in the TPP is the right way to ensure that we have a modern trade agreement in place governing the flow of goods and services across our borders.
Last December, Canadian Prime Minister Harper and U.S. President Obama announced Beyond the Borders. A big objective of this initiative is trade facilitation or making cross border trade more efficient and effective. We think it could be a very important step to reduce friction at the border and attract more trade between small and medium-sized businesses. We know from the survey I referenced earlier that many small and medium-sized businesses are still uncomfortable with taking their business global. One in five still don't think they can compete in emerging markets. As these businesses account for 90 percent of Canada's economy, we need to address these concerns.
Beyond the Borders has a sensible goal to harmonize the documentation requirements of all companies, regardless of the mode of transportation. As it stands, companies trading within North America by truck or rail face much more rigorous documentation demands than their overseas competitors moving cargo by ship.
Take the example of steel. Steel traded between the U.S. and Canada is shipped by truck or rail, and each shipment requires a customs transaction. A typical truck shipment carries about 20 tons of steel, whereas one shipload from overseas can carry as much as 30,000 tons. Yet both require a customs transaction. As a result, an equivalent amount of steel shipped within NAFTA countries requires 1,500 separate customs transactions. And that's just the impact on a single industry.
Call to Action
I want to call on you as leaders in Canada to continue to support free trade here in North America and around the world. Trade creates jobs and raises living standards, and we all have a stake in it.
Here's the cold hard truth: the rest of the world will move ahead with trade, whether or not our two countries are on board. By 2025, global trade is expected to increase 73 percent to $50 trillion. So let's seize this opportunity and lead it together.
The face of the new middle class is ready to buy, ready to spend. The winning businesses of the future will find a way to reach them, wherever they live.
I tip my hat to those of you in Canada who are leading the way.