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Trade News

Each day TFO Canada publishes a sample of trade news on the Canadian import market along with any new, updated or changed regulations and legislations regarding international trade; countries in which TFO Canada offers services and on the export sectors which it promotes.

 

Adapting to the New Trade Paradigm

Friday, April 27, 2007 > 11:00:05
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(Stephen Poloz, EDC via I.E. Canada E-Bulletin)

Change is a constant in our lives today, and adaptability is highly rewarded in business. But only rarely is a change so fundamental that it changes everything – a paradigm shift.

We are living such a paradigm shift now. Managers of large companies grew up believing in the power of vertical integration. To reduce the costs associated with finding suppliers, negotiating with them and managing deliveries, companies integrated them into their operations. In the process they have built cost structures that are unsustainable in today’s environment.

Why unsustainable? New technology has vastly reduced the costs of tapping and managing supply networks, regardless of geography, making it feasible to integrate new, low-cost countries into global supply chains. The advantages of vertical integration have evaporated, and companies that are not burdened with a vertically integrated legacy can outperform those that are.

Consequently, many large companies are going through a process of vertical and geographical disintegration, spreading their supply network worldwide. Whether the suppliers are independent, partners or wholly owned, the result is the same. This new production model opens up many new access points for small, nimble, specialised companies. They can compete for individual links in the global supply chains of large companies, and go global with them. Small is beautiful.

This new production model means that companies are no longer using trade just as a sales tool, they are now using trade as a tool of production, to connect the links in the chain. This is the new trade paradigm – integrative trade – and there are many signs that companies are adapting to it.

First, Canadian companies are investing heavily in new technology. For the past four years, inflation-adjusted investment in new machinery and equipment has seen average growth of over 9 per cent per year. This is even higher than during the pre-2000 boom associated with the fears of Y2K.

Second, Canadian companies are diversifying into fast-growing emerging markets. Exports to emerging markets were up 18 per cent in 2006, and 9 per cent growth is forecast for 2007. These same markets also represent some of the best places to build global supply networks. Canadian direct investment abroad totalled $48 billion in 2006.

Third, the use of trade as a tool of production is on the rise. Goods at an intermediate stage of production now constitute 46 per cent of Canada’s imports, and 43 per cent of exports.

Manufacturers now do $2.75 in trade for every dollar of new value they create in Canada – up 50 cents from 15 years ago. And, a recent study from the Conference Board of Canada shows that the increase in Canada’s intermediate goods trade over that period has been with the large emerging markets.

The bottom line? The new trade paradigm poses implementation challenges for established and new companies alike. But the wider scope of opportunities it presents, especially for smaller companies, is worth looking forward to.
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