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The Shifting Competitive Landscape for BC's Natural Resource Industries

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Jock Finlayson's presentation to the BC Natural Resources Forum looks at the economic contribution of resources to BC's economy. Spoiler Alert: Resources represent 13% of BC's GDP, 77% of merchandise exports and lumber remains our largest export product. Jock notes, however, that Canada is losing ground on our competitiveness, particularly compared to the United States.

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The Shifting Competitive Landscape for BC's Natural Resource Industries

  1. 1. www.bcbc.com | @bizcouncilbc T H E S H I F T I N G C O M P E T I T I V E L A N D S C A P E F O R O U R N AT U R A L R E S O U R C E I N D U S T R I E S JANUARY 18, 2018 PRESENTED TO B C N AT U R A L R E S O U R C E S F O R U M P R I N C E G E O R G E , B C JOCK FINLAYSON, Executive VP and Chief Policy Officer (Jock.Finlayson@bcbc.com)
  2. 2. NAFTA : I NI TI AL E X P E CTATI O NS “We will modernize NAFTA so that it is a win- win for all our trading partners” (VP Mike Pence) “More than our entire deficit (with Canada) comes from hydrocarbons and electric energy… I don’t call that blameful exports” (Commerce Secretary Wilbur Ross) 2
  3. 3. BUT… “We can’t let Canada… take advantage and do what they did to our workers and farmers… I want to just mention included in there is lumber, timber and energy” “We lose with Canada – big-league. Tremendous, tremendous trade deficits with Canada.” 3
  4. 4. US TRAD E BAL AN CE S : THE NO N - FAK E NE WS ( U S $ B I L L I O N S ) 4 Sources: BCBC; USTR. Goods Trade – 12 months to June 2017 Exports to Imports from Balance Value of total trade Canada 272 291 -19 563 Mexico 235 304 -69 539 China 124 480 -356 604 U.S. Services Trade Balance (4-quarter monthly series) With Canada +23 With Mexico +4 Total U.S. Goods/Services Balance With Canada +4 With Mexico -65
  5. 5. United States 75.2% EU* 8.0% China 4.3% Japan 2.1% Mexico 1.7% Other markets 8.7% CAN A D A’ S M E RCHANDI S E E X P O RTS , 2 0 1 6 BY DE S TI N ATI O N M ARKE T 5 *EU 28, including the UK. Source: Global Affairs Canada, Canada’s State of Trade, 2017.
  6. 6. NAFTA E ND G AM E S CE N ARI O S … 6 • Scenario 1: A renewed agreement is stitched together in 2018 o this outcome looks increasingly unlikely • Scenario 2: US officially announces NAFTA withdrawal (with six months’ notice) o negotiating tactic or a real choice? o reaction in Congress…can the legislative branch prevent termination? o legal action in the courts? • Under Scenario 2, the Canada-US FTA may come back to life o FTA legislation remains ‘on the books’ in the US o would Trump support this…or try to kill the bilateral FTA as well? • Implications for Canada if NAFTA unravels… o a small hit to GDP and employment (~1% of real GDP) o negative impact on the currency and business sentiment o the #1 risk: capital investment and management attention shift further toward the US, reinforcing an already well established trend in the energy and manufacturing sectors
  7. 7. CAN A D A CO NTI NUE S TO LO S E M ARKE T S HAR E I N THE US 7 Source: Desjardins Economic Studies, Economic News, February 17, 2016. 0 5 10 15 20 25 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2015 2016 Country share of total US merchandise imports, per cent Canada Mexico China Canada down 6.0 percentage points since 2000
  8. 8. CAN A DI AN BUS I NE S S I NV E S TM E NT HAS P LUNG E D 8 Source: Statistics Canada, CANSIM 380-0064. Seasonally adjusted annual rates. 5 6 7 8 9 10 11 12 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Canadian capital investment as a share of GDP, % residential non-residential
  9. 9. … AT A TI M E O F RE CO RD HO US E HO LD DE BT ACC UM UL ATI O N 9 Source: Statistics Canada, CANSIM table 378-0123 Latest Q2 2017 80 90 100 110 120 130 140 150 160 170 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Canadian household debt to disposable income, %
  10. 10. R E V E AL E D C O M PAR AT I V E AD VA N TA G E ( R C A) 10 • A country is considered to have a revealed comparative advantage in a particular class of traded goods if those goods comprise a larger share of its exports than of total global trade in the same class of goods • Using this methodology, Canada has a positive RCA across many segments of the main natural resource industries operating in our economy…including: o oil and gas; o lumber; o pulp and paper; o metallurgical coal; o many base and precious metals; o aluminum; o fertilizers and some chemical products • Canada also has a positive RCA in 18 agricultural commodities, including wheat, oats, barely, rye, certain seafood products, soybeans, and pulses
  11. 11. Automotive Products 19.1% Advanced technology products 3.7% Other manufactured goods* 24.4% Others 1.2% Energy 16.4% Ores and metals 15.2% Agri-food 13.2% Forestry 6.8% Natural Resource Products 51.6% CAN A D A’ S M E RCHANDI S E E X P O RTS , 2 0 1 6 BY BRO AD P RO DUCT CAT E G O RY 11 *Includes industrial machinery and equipment, aerospace, chemicals, plastics, fertilizers, and consumer goods. Source: Export Development Canada, Global Export Forecast, Spring 2017.
  12. 12. E FFE CTI V E TAX RATE S O N NE W I NV E S TM E NT: CURRE NT FO R CAN A D A AN D US 12 *Oil and gas is not included in aggregate result. Source: School of Public Policy, University of Calgary. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Forestry Electric Power, Gas & Water Manufacturing Oil & Gas* Aggregate 2017 US Tax Rates US Tax Cut & Jobs Act Canada
  13. 13. CAR BO N P RI CE S I N NO RTH AM E RI C A, 2 0 1 7 ( I N E U R O S ) 13 Source: Institute for Climate Economics. (In 2018, the BC carbon tax rises to the equivalent of 23.1 euros)
  14. 14. R E S O U R C E I N D U S T R I E S I N B R I T I S H C O L U M B I A 14 • 12-13% of the province’s real GDP • 75-77% of merchandise exports (if LNG comes to fruition, the figure will rise) • The management, discovery, extraction, and processing of natural resources provide the economic foundation for most communities in the north and interior • Resource companies and their suppliers represent a significant part of BC’s “corporate economy” concentrated in Metro Vancouver • BC has room to leverage the province’s relatively low-carbon energy system to attract new investment and industrial development, and build a brand as an environmentally responsible supplier of resources and resource-based goods in a carbon-constrained world
  15. 15. R E S O U R C E S D O M I N AT E B C ’ S E X P O R T B AS E 15 Source: BC Stats. 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 BC international merchandise exports, millions $ resources & related products Total exports 77.7% 82.2% 76.7%
  16. 16. L U M B E R I S O U R L AR G E S T E X P O R T P R O D U C T Source: BC Stats. 0 1 2 3 4 5 6 7 8 lumber metallic mineral products machinery & equip coal pulp & paper other wood products agriculture natural gas fish products fabricated metal prod BC exports by major commodity 2016, billions $ 16
  17. 17. W H Y R E S O U R C E S I N B C C AR RY D I S P R O P O R T I O N AT E W E I G H T 17 • Strong export-orientation • High productivity industries • High wages (mining is #1, followed closely by pulp, oil & gas, forestry, also pay well above average) • Most business inputs used in resource extraction and processing are sourced domestically (raw materials, energy, labour, transportation, business services) o import content of BC resource products is quite low o machinery/equipment is the main imported input • Resource industries important to urban areas o several billion dollars annually spent on business inputs purchased from Metro Vancouver suppliers o head offices generate economic benefits - of BC’s top 100 companies, 23 are resource firms and most are headquartered in Metro Vancouver
  18. 18. P U B L I C P O L I C Y E L E M E N T S T H AT S H AP E T H E C O M P E T I T I V E E N V I R O N M E N T F O R C AN A D I A N R E S O U R C E I N D U S T R I E S 18 • Access to resources (mainly found on Crown land in Western provinces) • Royalties, fees and other non-tax levies • Taxes on income, property and inputs • Cost of energy • Quality/cost of transportation • Efficiency and predictability of government regulatory regimes affecting resource development and industry operations (project assessment, land use planning, operational and facility permitting, contaminated sites, carbon management obligations, etc.) • Ability to sell into international end-user markets on favourable terms…via trade agreements In some of these policy domains, Canada has been losing ground on competitiveness… especially vis-à-vis the United States

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