Contribution Agreement – General Terms and Conditions
Effective: May 15, 2016
Unless otherwise specified in the Agreement, the expressions listed below shall have the following meanings:
“Advance Payment” (Paiement anticipé) - means a payment made, under the terms of the Agreement, before the performance of that part of the Agreement for which the payment is being made.
“Agreement” (Accord) - means the Articles of Agreement and Annexes, as well as their amendments, the General Terms and Conditions applicable on the Effective Date of the Agreement and the forms.
“Applicable National Law” (Loi nationale applicable) - Notwithstanding the law applicable to this Agreement, the law applicable to the Work for which is done, in that country, any act reserved to the owner by this law, such as, in Canada, the Copyright Act.
“Arms Length Relationship” (Relation sans lien de dépendance) - means a relationship whereby in the implementation of the Project, the Organization has entered into a contract or agreement with a Subcontractor and where the Organization and the Subcontractor are independent of each other and are not controlled by the same person or group of persons.
“Beneficiary of the Project” (Bénéficiaire du Projet) - Population(s) and organization(s) in the Recipient Country (ies) which are within the immediate or indirect reach of the Project.
“Canadian Personnel” (Personnel canadien) - means all individuals involved in the Project either as Employees of the Organization or Subcontractors that are Canadian citizens, landed immigrants or permanent residents of Canada.
“Canadian Volunteers” (Volontaires canadiens) - means a Canadian citizen, a landed immigrant or a permanent resident of Canada who meets the eligibility criteria for volunteers established in Appendix II of the Overhead Compensation Policy for Contribution Agreements with Canadian Organizations under the International Development Assistance Program.
“Contribution” (Contribution) - means the funding provided by Global Affairs Canada under this Agreement.
“Direct Eligible Costs” (Coûts directs admissibles) – means eligible costs as defined herein with the exclusion of the allowance for Indirect/Overhead costs described in Appendix C.
“Eligible Costs” (Coûts admissibles) - means those costs reasonably and properly incurred and paid by the Organization, the Ultimate Recipients and the Local Partners which are cash disbursements or in-kind contributions made with respect to the activities set out in Appendix A, as itemized in the Project Budget - Appendix B, and in accordance with the principles of Article 1 of Appendix C.
“Employees” (Employés) - means individuals who perform services or works for an employer in return for wages or salary under an employer/employee relationship.
“Flow-Through Funds” (Fonds de transfert) - means funds included in the Agreement exclusively for providing an administrative mechanism to transfer funds to an Ultimate Recipient for the delivery of a Sub- Project, and for which the Organization has administrative and financial management responsibility, but is not responsible for the ultimate results/outcomes of the Sub-Project.
“In-Kind Contribution” (Contribution en nature) - means a contribution of materials, goods, services or time to which a dollar value can be attributed, that would otherwise be purchased and paid for by the Organization to achieve the Project results. Those costs must be eligible under the Agreement and must be recorded at a fair value as agreed to by Global Affairs Canada.
“Intellectual Property Rights” (Droit de propriété intellectuelle) – means any intellectual property right recognized by the law, inter alia any intellectual property right protected by the Applicable national law (such as copyright, patents, industrial designs, etc.) or arising from the protection of information as a trade secret or as confidential information.
“Interest Earned on Advances” (Intérêts accumulés sur les avances) - means the interest earned or calculated by the Organization on the Advance Payments made by Global Affairs Canada.
“Interest Rate” (Taux d’intérêt) - means the Bank of Canada Rate, as defined in the Treasury Board's Guideline on Interest And Administrative Charges in effect on the due date. The Interest Rate for a given month can be found at Public Works and Government Services Canada Web site.
“Local Employees” (Employés locaux) - means all individuals (professional and non-professional) that are hired in the Recipient Country by the Organization or through Local Partners, are citizens or permanent residents of the Recipient Country, or any individual of another country having a work permit for employment in the Recipient Country, and are subject to all applicable local laws and policies.
“Local Partner” (Partenaire local) - means an organization established in a Recipient Country participating in the implementation of the Project pursuant to a Sub-Agreement.
“Monthly Payment” (Paiement mensuel) - means a payment made on a monthly basis by Global Affairs Canada under the terms of the Agreement, for Eligible Costs incurred during the preceding month.
“Payment Request” (Demande de paiement) - means a form prescribed by Global Affairs Canada that is to be completed by the Organization to request an Advance Payment, a Progress Payment or Monthly Payment of funds from Global Affairs Canada under the terms of the Agreement.
“Personnel” (Personnel) - means all individuals involved in the Project including, but not limited to Employees and Subcontractors.
“Progress Payment” (Paiement progressif) - means a payment made, under the terms of the Agreement, after the performance of that part of the Project for which the payment is being made but before completion of the entire Project.
“Project” (Projet) - means the project, the program or the set of activities including Sub- Projects, as fully described in Appendix A.
“Recipient Country” (Pays bénéficiaire) - means the country or countries in which the Project is being implemented.
“Recipient Country Government Employees” (Employés du gouvernement du Pays bénéficiaire) - Government employees of the Recipient Country identified to work with the Organization or Personnel in the implementation of the Project.
“Subcontractor” (Sous-traitant) - means an individual (other than an Employee), a firm, a for-profit or not-for-profit organization or institution, acting alone or in a consortium, a joint venture, a partnership (limited or otherwise), having entered into a contract or agreement with the Organization to provide goods or services in relation to the implementation of the Project. The term Subcontractor includes Canadian and local consultants.
“Sub-Agreement” (Sous-Accord) - means the agreement signed between the Organization and an Ultimate Recipient or a Local Partner.
“Subcontract” (Sous-Contrat) - means the agreement signed between the Organization and a Subcontractor.
“Sub- Project” (Sous-Projet) - means the activities that will be carried out by an Ultimate Recipient.
“Supporting Documentation” (Documents à l’appui) - means but is not limited to: original vouchers, invoices, statements of account, receipts, contracts, lease agreements, and timesheets or other data supporting the Organization's actual costs incurred. The term also includes cancelled cheques, bank drafts and other forms of data supporting disbursements.
“Ultimate Recipient” (Bénéficiaire ultime) - means the individual or organization that has entered into a Sub-agreement with the Organization and will receive payments distributed by the Organization from the Contribution to carry out a Sub-Project under the Agreement.
“Volunteers” (Volontaires) - Individuals who are not remunerated by the Organization whose services are essential to the Project's success and are eligible under the program’s terms and conditions, and would otherwise be hired/contracted and paid for to achieve Project results.
“’Work” (Oeuvre) - means the original expression of any literary, artistic, or scientific production, or the original expression of any literary, artistic, dramatic or musical production, but not the idea itself expressed by the Work, the original expression resulting from the selection or arrangement of works or of parts thereof, or of data, in the case of a compilation, the original expression produced by the collaboration of two or more creators whose respective contributions cannot be distinguished in the case of a Work of joint authorship, or the original expression written in distinct parts by different authors, or which incorporates works or parts thereof by different authors, in the case of a collective Work, whether or not protected under an Applicable national law. This definition includes software and any documentation related to the software.
Unless otherwise specified in the Agreement, words importing the singular include the plural and vice-versa and words importing gender include all genders.
Unless otherwise stipulated in the Agreement, no amendment made to the Agreement is valid unless it is incorporated into the Agreement in writing and the amendment is signed by Global Affairs Canada and the Organization.
The Organization shall not assign the Agreement, in whole or in part, without the prior written consent of Global Affairs Canada. Any assignment carried out without such consent is null and void.
5. Communication with Canadian Embassies and High Commissions
Canadian Personnel working on the Project in a Recipient Country will register with the Canadian Embassy or High Commission of this country. The Organization will keep the respective Canadian Embassy or High Commission informed regarding the Project, including the participation of Local Partners. If assistance is needed, the Organization will advise the Canadian Embassy or High Commission in advance of planned stays in the Recipient Country with regard to the Project.
6. Publication of information
All information provided by the Organization will be treated in accordance with the Access to information Act and the Privacy Act. Global Affairs Canada may compile and publish statistics based on information contained in the documents comprising the Agreement and arising from its performance. Global Affairs Canada may publish the Organization's name and address, the amount of the Contribution, the type of activities funded, the title of the Project and the name of the Recipient Country.
7. Confidential Information - Non-Disclosure
- 7.1 The Organization shall not disclose any confidential information or document, nor make use of any intellectual property rights subject-matter that it becomes aware of or takes possession of during the implementation of the Project, without having obtained written approval from the appropriate authority that can release it from the obligation to confidentiality. Upon Global Affairs Canada's request, the Organization shall provide Global Affairs Canada with a copy of the approval obtained.
- 7.2 The Organization shall ensure that the Personnel and the Ultimate Recipients are obliged to comply with sub-Article 7.1 by including or attaching these General Terms and Conditions, and any part of the Agreement relating to these General Terms and Conditions to the contracts or agreements with them. The Organization shall further ensure that the Personnel and the Ultimate Recipients do likewise in any Sub-Agreements they sign in the implementation of the Project and so on.
8. Business Conduct
The Organization shall refrain from practices or activities which might be prejudicial to the relations between Canada and the Recipient Country, and shall require that all the Personnel, Local Partners and Ultimate Recipients act accordingly.
9. Contractual Commitments with Third Parties
Global Affairs Canada shall not be held liable for any loans, leases, capital leases or any other contractual commitments entered into by the Organization with any third party for the implementation of the Project.
10 .Subcontracts and Sub-Agreements
Agreements signed between the Organization and its Subcontractors or Ultimate Recipients shall be in written form and shall be consistent with the provisions of the Agreement. The Organization shall retain these agreements and supporting documents relating to their performance. These agreements are subject to audit by Global Affairs Canada and its representatives as per Article 15 below.
- 11.1 The Organization shall be responsible and accountable for the procurement of goods, services or Assets related to the Project.
- 11.2 The Organization shall favour a competitive process for the procurement of goods, Assets and services for the Project that enhances access, transparency, competition and fairness and results in best value. The Organization agrees to ensure that a reasonable number of suppliers are given an opportunity to bid and should avoid situations where there may be a bias toward awarding a contract for goods, services or Assets for the Project to a specific person or entity.
- 11.3 The Organization shall maintain procurement files containing all relevant procurement documentation including, without being limited to, purchase requisitions, tender documents or records of telephone bids, tender evaluations, contracts or purchase orders, invoices, and shipping and receiving documentation. Any procurement deviating from the provisions stipulated in sub-Article 11.2 above shall be fully justified and documented in the Organization's procurement file(s).
- 11.4 For the purposes of Article 11, “best value” means the optimal combination of quality, service, time and cost considerations, over the useful life of the good, service or Asset acquired for the purposes of the Project.
- 11.5 The Organization shall maintain an active inventory of all Project Assets.
12. Disposal of Assets
- 12.1 As per the Article “Disposal of Assets Plan” of Appendix D of the Agreement, the Organization shall dispose of all Intellectual property rights in accordance with Article 27 of the General Terms and Conditions, and of all assets acquired for the purpose of the Project, which have an estimated lifespan greater than one year at the time of acquisition or disposal. at the end of the Agreement at the latest, in one of the following methods of disposal:
- transfer of Intellectual property rights and ownership of assets to the beneficiaries designated in the inventory list mentioned below;
- transfer of Intellectual property rights and assets to another Global Affairs Canada Project;
- sale through public tender or auction (or other agreed method); or
- if warranted, an alternate disposition as approved by Global Affairs Canada.
- 12.2 Where the Intellectual property rights and assets identified above are to be transferred, the following procedures shall be followed:
- an inventory list shall be prepared by the Organization, of all Intellectual property rights and assets, listing the individual items (make and model number, if applicable and the quantity) being transferred as well as the designated beneficiaries;
- a covering letter shall be prepared with the inventory list attached, in which the Organization confirms the transfer of assets and Intellectual property rights to the designated beneficiary;
- both the Organization and the designated beneficiary shall sign the covering letter as well as any other legal document acknowledging the transfer of Intellectual property rights and ownership of the assets;
- a copy of the executed covering letter, the inventory list and any other legal document acknowledging the transfer of Intellectual property rights and ownership of the assets shall be sent to Global Affairs Canada.
13. Monitoring and Evaluation
The Organization shall permit, or cause to be permitted, reasonable access to any authorized Global Affairs Canada representative to the Organization's premises, including third parties under contract with the Organization for the implementation of this Project, and any premises where the Project takes place to review and assess the progress of the Project or any element thereof and supply promptly upon request such data as Global Affairs Canada may reasonably require for statistical or Project evaluation purposes. Global Affairs Canada reserves the right to proceed with an evaluation, whenever it deems it necessary, during the implementation of the Project and for three (3) years following the termination or expiry of the Agreement. Global Affairs Canada will inform the Organization of the results of such evaluations.
14. Accounts and Financial Records
The Organization must maintain separate accounting and financial records for the purpose of producing financial reports required by Global Affairs Canada pursuant to the Agreement. These shall be established to account for the total funds budgeted for the implementation of the Project, regardless of the source of funding, and for the expenses related to the implementation. The Organization must retain the original supporting documentation for each expense for three (3) years following the termination or expiry of the Agreement.
15. Global Affairs Canada's Right to Audit
- 15.1 During the implementation of the Project and for a period of three (3) years following the expiry of the Agreement, the Organization shall, at its own expense, preserve and make available for audit and examination by Global Affairs Canada or Global Affairs Canada's representatives the books, accounts and financial records of the Project and of the information necessary to ensure compliance with the terms and conditions of this Agreement and all supporting documentation relating to expenses incurred to implement the Project, including those of its Subcontractors, Ultimate Recipients or Local Partners. Global Affairs Canada shall have the right to conduct such additional audits at Global Affairs Canada's expense as may be considered necessary using audit staff selected by Global Affairs Canada. For this purpose, the Organization must afford Global Affairs Canada or its authorized representatives proper facilities for the duration of the audit. The Organization shall insert similar provisions in its Subcontracts and Sub-Agreements, providing Global Affairs Canada and its authorized representatives access to third parties’ books, accounts and financial records, in order to allow Global Affairs Canada to exercise its audit rights.
- 15.2 The Organization's expenses associated with an audit conducted pursuant to sub-Article 15.1 above shall not be recoverable from Global Affairs Canada.
16. Auditor General's Right to Audit
- 16. 1 The Organization acknowledges that the Auditor General of Canada may, at the Auditor General's cost, after consultation with the Organization, conduct an inquiry under the authority of sub-Article 7.1 (1) of the Auditor General Act with respect to the use of funds received for the purposes of this Agreement.
- 16.2 For the purposes of any such inquiry undertaken by the Auditor General, the Organization shall provide, upon request and in a timely manner, to the Auditor General or anyone acting on behalf of the Auditor General:
- all books, accounts and financial records held by the Organization, or by third parties under a Subcontract or Sub-Agreement with the Organization, relating to this Agreement and the use of the funds provided under this Agreement; and
- such further information and explanations as the Auditor General, or anyone acting on behalf of the Auditor General, may request relating to this Agreement or the use of the funds provided under this Agreement.
- 16.3 The Organization shall, at all times, ensure that third parties are obligated to provide to the Auditor General or his or her authorized representative the books, accounts, records and other information that are in those third parties’ possession and that relate to this Agreement or to the use of the funds.
17. Status of the Organization
- 17.1 This Agreement is neither a contract for services nor a contract of service or employment. No provision in the Agreement creates or may create a joint venture, an association, or a partnership, employment or agency relationship, mandate, representation or delegation between Global Affairs Canada and the Organization.
- 17.2 The Organization shall not represent itself to third parties as the joint venturer, associate, partner, agent, representative or delegate of Global Affairs Canada or the Government of Canada, and shall require that the Personnel, the Ultimate Recipients, or the Local Partners act accordingly.
Any payment to be made to the Organization is subject to there being an appropriation by the Parliament of Canada for the fiscal year in which the payment is to be made. If Global Affairs Canada's appropriation is changed by Parliament or if funds are not available for any other reason, this Contribution may be reduced or this Agreement terminated, by notice sent to the Organization.
19. Termination or Suspension for Convenience
- 19.1 Global Affairs Canada may, by written notice, terminate for convenience all or part of the Agreement or suspend its performance, in whole or in part. The termination or suspension for convenience takes effect on the date stipulated in the notice.
- 19.2 As a result of the termination or suspension for convenience, the Organization shall have no claim against Global Affairs Canada other than the reimbursement of reasonable and proper Eligible Costs, as defined in Appendix C - Financial Terms, actually incurred by the Organization up to the termination or suspension, less the sums already paid in this regard.
- 19.3 In cases where Global Affairs Canada terminates this Contribution Agreement for convenience, Global Affairs Canada may reimburse proper and reasonable relocation costs as provided under this Agreement.
20. Default and Remedies
- 20.1 Global Affairs Canada may declare the following situations to be defaults under this Agreement:
- the Organization becomes bankrupt or insolvent or is placed in receivership or takes the benefit of any stature relating to bankrupt and insolvent debtors;
- an order is made or a resolution is passed for the winding-up of the Organization or the Organization is dissolved;
- there is a change in risk that would jeopardize the success of the Project or the programming;
- the Organization, either directly or through its representatives, makes or has made a false or misleading statement or representation to Global Affairs Canada in respect of any matter related to this Agreement other than in good faith;
- in Global Affairs Canada’s opinion, a term, condition, commitment or obligation provided for in the Agreement has not been respected or complied with; and
- the Organization is no longer eligible under the program’s eligibility criteria.
- 20.2 In the event of a default, Global Affairs Canada reserves the right to:
- reduce the contribution level, suspend any payments or make any alternate arrangements;
- rescind the Agreement and immediately terminate any financial obligation arising out of it;
- require the repayment of amounts already paid.
- 20.3 The fact that Global Affairs Canada refrains from exercising a remedy or any right herein shall not be considered to be a waiver of such remedy or right and, furthermore, partial or limited exercise of a remedy or right shall not prevent Global Affairs Canada in any way from later exercising any other remedy or right under this Agreement or other applicable law.
The Organization shall, both during and following the termination or expiry of the Agreement, save harmless and indemnify Her Majesty, her employees and her agents from and against all claims, losses, damages, costs and expenses or actions or other proceedings made against them in any manner, attributable to any injury, death, damage or loss of property arising or alleged to arise from the execution of the Project, except to the extent that the injury, death, damage or loss has been caused by the negligence of Her Majesty, her employees or agents.
22. Dispute Resolution
In the event that a dispute arises from or is related to the Agreement, the parties agree to attempt to resolve the dispute through negotiation or through another appropriate alternate dispute resolution process.
23. Health Protection for Canadians Assigned Abroad
- 23.1 The Organization shall ensure that, prior to their departure from Canada, Canadian Personnel assigned abroad for the purpose of the Agreement, as well as any accompanying dependants, are provided with full information on health maintenance in the Recipient Country and are physically capable of performing their assigned duties in that country.
- 23.2 The Organization shall ensure that Canadian Personnel assigned abroad for the purposes of the Agreement, as well as any accompanying dependants, have adequate health insurance coverage. All costs associated with the repatriation of Canadian Personnel as well as any accompanying dependants for medical reasons are to be assumed by the Organization.
24. Briefings and Language Training
- 24.1 Pre-departure
- In order to facilitate individual and family adjustment in the Recipient Country and to promote professional effectiveness, Global Affairs Canada may require that Personnel assigned abroad for the purpose of the Agreement, as well as accompanying dependants, attend a pre-departure program provided by the Centre for Intercultural Learning. In such a case, the Organization shall ensure that these individuals attend such program.
- 24.2 Language Training
- If, in Global Affairs Canada's opinion, knowledge of a language other than one of the two official languages of Canada is essential to the proper performance of the Agreement, Global Affairs Canada may require that Personnel assigned abroad for the purpose of the Agreement take language-training classes. Should such knowledge be required by Global Affairs Canada, the Organization shall ensure that these individuals attend such training.
- 24.3 Debriefings
- In order to obtain a better understanding of the lessons learned during the assignment, to draw conclusions on the experience abroad and to provide the Organization with valuable feedback that will enable it to improve its methods, Global Affairs Canada may organize a debriefing session at the Centre for Intercultural Learning at the end of the assignment. In such a case, the Organization shall ensure that Personnel assigned abroad for the purposes of the Agreement attend such a debriefing session.
- 24.4 Payment of Training Costs
- If such costs are not already assumed by the Centre for Intercultural Learning as part of its overall agreement with Global Affairs Canada, Global Affairs Canada may reimburse the following training costs associated with the sessions mentioned in sub-Articles 24.1 to 24.3:
- the actual cost of the training;
- the cost of travel (except international travel), accommodation and meal expenses in accordance with the Treasury Board Travel Directive.
25. Training for Foreign Professionals, Students and Trainees
- 25.1 On-arrival Orientation
- In order to facilitate their initial contact with Canada as well as their integration into Canadian culture, Global Affairs Canada may require that, upon their arrival in Canada, foreign professionals, students and trainees attend an orientation course provided by the Centre for Intercultural Learning. In such a case, the Organization shall ensure that those foreign professionals, students and trainees attend such a course.
- 25.2 Mid-term Review
- Global Affairs Canada may invite foreign professionals, students and trainees to attend a mid-term review offered by the Centre for Intercultural Learning once a third or one half of their stay in Canada has elapsed in order to assist them and their Canadian counterparts to review all aspects of their shared experience and to take steps toward making their interactions more satisfactory and effective and optimize their learning for the remainder of their stay in Canada. If such an invitation is made by Global Affairs Canada, the Organization shall ensure that these individuals attend.
- 25.3 Pre-return
- Global Affairs Canada may, upon completion of their training or work, invite foreign professionals, students and trainees to attend a pre-return session provided by the Centre for Intercultural Learning. If such an invitation is made by Global Affairs Canada, the Organization shall ensure that these individuals attend.
- 25.4 Payment of training costs
- If such costs are not already assumed by the Centre for Intercultural Learning as part of its overall agreement with Global Affairs Canada, Global Affairs Canada may reimburse the following costs associated with the sessions mentioned in sub-Articles 25.1 to 25.3:
- the actual cost of the sessions;
- the cost of travel (except international travel), accommodation and meal expenses in accordance with the Treasury Board Travel Directive.
- 25.5 Health Care
- The Organization shall ensure that health care coverage for foreign professionals, students and trainees is in accordance with the Management of Students and Trainees in Canada - Manual for Executing Agencies.
26. Conflict of Interest
It is a term of this Agreement that no current or former public office holder, member of the House of Commons, member of the Senate or public servant of the Government of Canada who is not in compliance with the Canadian Conflict of Interest Act, 2006, c. 9, s. 2, the Conflict of Interest Code for Members of the House of Commons, the Ethics and Conflict of Interest Code for Senators, the Values and Ethics Code for the Public Service and the Values and Ethics Code for the Public Sector will derive a direct benefit from the Agreement that is not otherwise available to the general public.
27. Intellectual Property
- 27.1 All Intellectual property rights are vested to the Organization.
- 27.2 The Organization hereby grants Canada a worldwide, perpetual, irrevocable, non-exclusive, non-commercial, free of charge and royalty-free license authorizing to reproduce, disseminate and translate said Work to achieve the objectives of the programs targeted by Global Affairs Canada.
- 27.3 The Organization shall forward at its expense a worldwide, perpetual, irrevocable, non-exclusive, non-commercial, free of charge and royalty-free license to the persons designated in the inventory list referred to in Article 12 of the General Terms and Conditions, allowing them to exercise all of the Intellectual property rights in the Work and inter alia, but without limiting the generality of the above, authorizing them to:
- do the acts reserved to the owner by the Applicable national law or, if there is no law in a country where the license is exploited, the acts reserved to the owner in the applicable law in Canada;
- grant a free of charge and royalty-free sublicense to any person, authorizing the sub-licensee to do any or all of the acts mentioned in paragraph (a).
- 27.4 Moreover, in terms of any Work licensed under this Article, the Organization:
- represents and warrants that the Work, and the exercise of the Intellectual property rights granted under this Agreement, in no way infringe upon the Intellectual property rights of others or upon the legislation in force;
- indemnifies Global Affairs Canada from all costs, expenses and damages arising from any breach of all warranties given under this Agreement;
- will incorporate, in all Works created using the Contribution provided by Global Affairs Canada, under this Agreement, in a format deemed acceptable by Global Affairs Canada, a statement recognizing that the Work was produced using the Contribution provided by Global Affairs Canada and specifying that the Organization is solely responsible for the content of this Work.
- 27.5 If the Organization is involved in a claim, either in or out of court, brought by a third party relating to the infringement of its Intellectual property rights, the Organization must immediately notify Global Affairs Canada in writing.
- 27.6 The obligations contained in this Agreement must be reproduced in all Sub-Agreements and Subcontracts.
- 27.7 Unless otherwise specified in the Agreement, the Organization shall deliver to Global Affairs Canada, prior to the final or last payment of the Contribution to the Organization, an inventory and one (1) electronic and two (2) hard copies of any Work referred to in paragraph 27.3 of this Article.
- 27.8 Article 27 shall remain in force after the expiration of this Agreement.
The Organization shall plan and implement the Project in a manner that promotes sustainable development and ensures the protection of the environment to the greatest extent possible.
Where for any reason Global Affairs Canada determines that the amount of the Contribution disbursed exceeds the amount to which the Organization is entitled or that the Organization is not entitled to the Contribution, the Organization shall repay Global Affairs Canada in accordance with Articles 30 and 31 below.
30. Repayment and Recovery of the Contribution
The Organization shall repay Global Affairs Canada, within the time specified in the notice requesting such repayments, the amount of the Contribution disbursed or the amount of the overpayment, as the case may be, together with interest at the Interest Rate, from the date of the notice to the day of the payment to Global Affairs Canada in full. Any such amount is a debt due to Her Majesty and is recoverable as such.
31. Right of Set-Off
Global Affairs Canada reserves the right to set off against any amount payable to the Organization and any amount which the Organization owes to Her Majesty. This Article does not restrict any right of set-off given by law or by any provision of the Agreement or of any other agreements between Her Majesty and the Organization.
This Agreement is binding on the Parties and their successors and permitted assigns.
Any provision of this Agreement prohibited by law or otherwise ineffective will be ineffective only to the extent of such prohibition or ineffectiveness and will be severable without invalidating or otherwise affecting the remaining provisions of the Agreement.
- 34.1 Selection and Approval
- For payment of Flow-Through Funds, the Organization shall enter into Sub-Agreements with Ultimate Recipients whose proposals have been approved for funding by the Organization.
- 34.2 Sub-Agreement's Provisions
- The Sub-Agreement shall, at a minimum, contain the following provisions:
- a description of the Sub- Project, including activities, goal and purpose, expected impacts, outcomes and outputs, and if applicable, Environmental Analysis and Gender Equality;
- a clear description of roles and responsibilities, including financial roles and responsibilities;
- monitoring and reporting provisions ensuring the fulfilment of the Organization’s monitoring and reporting obligations under this Agreement;
- requirement that the Ultimate Recipient retain books, records, and any supporting documents relating to the Sub- Project, including Eligible Costs, for the duration of the term of the Sub- Project and for three (3) years following the termination or expiry of the Agreement, and for the Organization and Global Affairs Canada to have access to such documentation for Sub- Project monitoring, auditing and evaluation purposes;
- authorization for the Organization to provide Global Affairs Canada with copies of any such reviews, evaluations or audit reports;
- Global Affairs Canada’s right to access the Ultimate Recipient’s premises and any premises where the Project takes place, for monitoring and audit purposes;
- detailed terms and conditions addressing the respective liabilities of the parties;
- description of the Eligible Costs consistent with Article 1 – Eligible Costs Elements of Appendix C - Financial Terms;
- publicity and public acknowledgment of the funding by Global Affairs Canada, in accordance with this Agreement;
- a requirement for the Ultimate Recipient to report to the Organization immediately any government assistance to be received for the Sub- Project;
- default and remedies, including automatic termination in the event that this Agreement is terminated;
- insertion of a Sub- Project completion date consistent with the terms of the Agreement.
- a clause relating to the interdiction to fund terrorist activities and/or terrorist groups in accordance with sub-Article 10.6 of the Articles of Agreement.
35. Capacity Building of the Beneficiary of the Project on Financial Management
To improve Project implementation, Global Affairs Canada may conduct capacity building on financial management activities for the Beneficiary of the Project after the signature of the Agreement. The objective of the activities is to review the terms and conditions of the Agreement with the Organization, and to ensure that the Organization's financial management of the Project can be done efficiently and in accordance with the requirements of the Agreement. The Organization agrees to allow for the activities and to provide Global Affairs Canada’s authorized representatives with the facilities, personnel, and any information required for the purposes of the activities, at no costs.
- Date Modified:
Canada's State of Trade: Trade and Investment Update 2012
PDF version (474 KB)*
VII. SPECIAL FEATURE: International Trade and Its Benefits to Canada
Canada depends heavily on trade to sustain incomes and living standards of Canadians and the prosperity of the nation. Consider that, in 2011, Canada’s exports and imports of goods and services were approximately $1.1 trillion in total— which is, on average, about $31,600 for every person in Canada, or $3 billion each and every day—and that the overall size of Canada’s economy, as measured by its gross domestic product (GDP), was $1.7 trillion last year. Thus, the share of trade in the economy was about 63.3 percent in 2011. Indeed, the share of trade in the economy has risen over the decades, in particular during the 1990s when it climbed nearly 34 percentage points following the elimination of most of the trade-dampening tariff barriers between Canada and two of its most important trading partners—the United States and Mexico.
But statistics only partially highlight the importance of international trade to Canada and Canadians. Economic models and theories can also be used to ask the question of what is the benefit of international trade to Canada. The answer to the question is, however, multi-dimensional and not entirely computable. From one vantage, the trade data suggest, as a first order of approximation, that one in five jobs in Canada depend on exports, either directly or indirectly.1 Yet this is simply an accounting of how much spending in the economy is accounted for by exports. Taken from another perspective, this vastly understates how dependent Canada is, and Canadians are, on trade. The structure and the organization of the entire economy are crucially dependent on trade and integration with regional and global trading networks.
The purpose of this special feature is to delve deeper into the benefits that trade brings to an economy and/or its citizenry. The focus is on Canada and, where possible, we bring forward evidence that pertains to, or can be applied to, Canada. The theoretical aspects of the analysis have been confined to a few broad sections. We have tried to keep these portions as short and non-technical as possible, perhaps too general for the more technical reader. However, the key message about the benefits of trade is intended for the average Canadian—who may never have realized how much trade improves the quality of the Canadian way of life.
The Importance of Trade
Many of the benefits of exports to Canadians are straightforward. Exports allow Canadians to sell their goods and services in exchange for foreign goods and services. They also help to support jobs in Canada, directly to those producing the goods and services, and indirectly to those providing supporting activities to the producers of Canadian exports. Other benefits are less tangible. For example, exports mean added production beyond that produced for the domestic market, which allows for economies of scale in production and lower average costs for producers, in turn lowering prices for consumers. Competing in export markets also means seeking out efficiencies and being innovative in all aspects of business. Rather than trying to produce many products, firms tend to focus on and specialize in products or services where they have an advantage. This drives up their productivity, allows firms to pay higher wages, and helps to increase the prosperity of the nation. Firms that rise to the challenges of the export marketplace increase their production volumes and become larger. They develop wider and deeper client bases and are better able to withstand downturns and softer market conditions in a region, thus becoming more secure and stable employers. For governments, larger and more-efficient firms are more profitable and thus pay more in taxes, providing additional revenues to the public coffer. These benefits, while indisputably real, are difficult to capture empirically.
The level of income in a nation is a reflection of the efficiency with which the resources of that nation are combined to produce goods and services and the relative value of the price of the nation’s goods and services that are exported compared to those imported (i.e. the terms of trade). As a small economy, Canada produces only a fraction of the goods and services it consumes and imports the rest. In a world devoid of international trade, it would be unrealistic to think that a country like Canada could make the necessary investments to produce the range of products and services it presently enjoys. In other words, Canadians’ access to a broad variety of foreign-made machinery, computers, and communications technologies, and to travel and entertainment services, for example, reflects Canada’s ability to sell Canadian-made goods and services in international markets.
Indeed, it would be very difficult to imagine a world without international trade for the average Canadian. The typical Canadian starts the day by awakening to the sounds of a clock radio. Inside that radio, the alarm mechanism is controlled by a microchip. That microchip, and indeed the entire clock radio, was most likely imported. Even the bed linen, whether cotton or polyester, is made of fibres that are likely imported. When the typical Canadian sits down to scan the day’s headlines while eating breakfast, the glass of orange juice or cup of coffee or tea on table are imported goods: the oranges, tea, and coffee originate from other parts of the world. And the headline news, about fiscal austerity in Europe or a natural disaster somewhere in the world, is a service imported into Canada from an international newswire.
Many of the cars the typical Canadian encounters on the daily commute have direct or indirect foreign connections. Roughly one third of new cars in Canada are built overseas, another third are transplants built in North America by foreign-owned manufacturers such as Toyota or Honda, and the remaining third are North American “big 3” cars2 containing subcomponents sourced from countries around the world.
The typical Canadian’s cell phone and computer were likely manufactured in another country as well, with the subcomponents, such as microprocessors and RAM, produced and/or assembled in still other countries. The operating software and many of the software programs on these devices are also likely of non-Canadian origin. Likewise, many commonly used food products, ranging from spices and out-of-season fruits and vegetables to nuts and chocolate, and even many appliances in Canadian kitchens, are also imported. International trade enriches the lives of everyday Canadians in so many ways and through so many direct and indirect channels that it would be virtually impossible to disentangle its effects or to precisely measure the innumerable benefits and conveniences it brings.
But imports also have other effects on the economy beyond providing variety and choice for consumers. Imports provide inputs to producers and competition for Canadian producers. They provide jobs directly to people in the transportation, wholesale, and retail sectors and indirectly to many others whose activities support those involved in importing; the bankers, for example, who arrange for the exchange of currencies and transfer of payments.
Specialization, Comparative Advantage, and Gains from Trade
Economic theory has one central explanation for the process of wealth creation resulting from trade: let people do what they do best or, in one word, specialization. Throughout economic history, mankind has gradually increased its economic well-being through specialization. The division of labour, specialization, and the international exchange of goods and services have been key to improving economic conditions. As specialization increased, so has productivity and total output, leading to a larger economic pie to be divided among the population.
There are many instinctive reasons that make specialization more efficient. First, the specialist acquires more expertise and performs better over time. Second, specializing avoids the costs of switching between different activities. Third, specialization avoids the need to provide everyone with a different set of tools for all activities. Finally, economic agents can choose occupations that they enjoy more and thus be better at it.
Trade among nations further accentuates the importance of specialization by allowing the gains from specialization to be extended to a wider area.
In the context of international trade, economists have developed the concept of comparative advantage, in which one party is better than the other at producing all goods and services, but by a different margin. The concept of comparative advantage was first articulated by David Ricardo in 1817, using an example involving England and Portugal and two goods (cloth and wine). Ricardo showed that even when one of the two countries has an absolute advantage in producing both goods (i.e. it can produce more output with one unit of labour in both sectors) there is scope for mutually beneficial trade if both countries specialize according to their pattern of comparative advantage.3 More precisely, it is said that a country has a comparative advantage in the production of good X if it is relatively more productive in the production of that good.
It is differences between the relative prices between countries (as reflected in costs of labour to produce the goods) that underpin the incentive to engage in trade.4 The divergence between self-sufficiency and free trade prices only partially explains the gains from trade. A more complete explanation of those gains should also take into account the underlying factors that give rise to different prices, thereby creating the conditions for mutually beneficial trade. These factors are the ones that lie behind the sources of comparative advantage. They include such things as differences in technology and differences in natural endowments. In addition, there are other gains from trade that are not linked to differences between countries. In particular, countries trade to achieve economies of scale in production or to have access to a broader variety of goods. Moreover, if the opening-up of trade reduces or eliminates monopoly power or enhances productivity, there will be gains from trade beyond the usual ones. Finally, trade may have positive growth effects.
Differences in technology
As already mentioned, differences between countries are one of the main reasons why they engage in trade. The Ricardian model and its extensions point to technological differences as the source of comparative advantage. This was illustrated in Ricardo’s example of England and Portugal by using labour as the only factor of production,5 so that differences in technology show up as differences in the amount of output that can be obtained from one unit of labour. These differences allowed each country to exploit its comparative advantage and expand the size of the economic pie.
Differences in resources endowments
Given that the Ricardian model assumes labour as the only factor of production, differences in labour productivity thus provide the only possible source of comparative advantage between countries in that model. Clearly, however, differences in labour productivity are not the only source of comparative advantage. Differences in resource endowments also play a role. For example, countries that are relatively better endowed with fertile land than others are more likely to export agricultural products.
The idea that international trade is driven by differences in relative factor endowments between countries forms the core of the Heckscher-Ohlin trade model. Because this model focuses on another source of comparative advantage—factor endowments, it provides an additional explanation of trading patterns. The model rests on the theory that a country has a production bias toward, and hence tends to export, the good that intensively uses the factor with which it is relatively well endowed. However, the gains from trade in the Heckscher-Ohlin framework are fundamentally similar to those in the Ricardian model: that is, they are gains from specialization that arise because of differences between countries.
While the concepts of comparative advantage and gains from trade appear straightforward, the benefits of trade are difficult to capture empirically. This is because there is considerable difficulty in translating the theories of Ricardo and Heckscher-Ohlin into forms that are testable by empirical research. Thus, very little is known about the empirical magnitudes of gains from international trade, and the mechanisms that generate these gains. In particular, limited evidence is available on how much specialization contributes to an economy’s overall prosperity.
The example of trade liberalization in Japan in 1858 provides one of the few cases in which a country moved from economic isolation (or self-sufficiency) to open trade. Using this example, Bernhofen and Brown (2005) estimate the size of gains from trade resulting from comparative advantage on national income. They found evidence that Japan’s trading pattern after opening up was governed by the law of comparative advantage and estimated the gains in real income from trade resulting from comparative advantage at 8 to 9 per cent of GDP.
The Jeffersonian trade embargo that cut off the United States from shipping between December 1807 and March 1809 provides a second test case. Here, the welfare cost to the United States of the nearly complete embargo on its international trade was estimated to be 5 percent of GDP. This cost, however, does not represent the total gains from trade because trade had already been restricted prior to the embargo (Irwin 2002).
The literature on testing and estimating Heckscher-Ohlin models is both voluminous and complex. Moreover, according to a 2008 review by the World Trade Organization most of the empirical work that attempted to test or estimate Heckscher-Ohlin models used inappropriate methods and is therefore largely irrelevant. In recent years, however, empirical work has been more about accounting for global trade flows than about testing hypotheses related to trade theories. Nonetheless, studies using appropriate methods have shown that if technological differences and home bias are included in the model and if the assumption of an integrated world is relaxed, there appears to be a substantial effect of relative factor abundance on the commodity composition of trade.
The “New” Trade Theory
The trade flow literature has highlighted the fact that traditional approaches, which attribute trade to differences between countries, have difficulties in explaining the existence and degree of trade in similar products within the same industry (i.e., what economists call “intra-industry trade”) and of trade between similar countries (in terms of technology or resources). To explain these phenomena, a “new” trade theory was needed. The best known approach is Krugman’s monopolistic competition model which provides a framework to explain these phenomena (Krugman 1979). The Krugman model employs two basic assumptions, both of which can be readily observed in the real world: “increasing returns to scale” and consumers’ “love of variety”. With increasing returns to scale (also called economies of scale), firms that double their inputs more than double their output.6 Since goods can increasingly be produced more cheaply (i.e. more output for the same cost), producing at a larger scale becomes economically efficient. The reason why, at the extreme, economies do not rest on a single firm producing a single product is because consumers prefer to choose from different varieties for each product they buy rather than buy the same one each time. This is Krugman’s “love of variety”.7 Consumers’ love of variety favours the existence of many small firms, each producing a somewhat differentiated product, while the exploitation of economies of scale makes it worthwhile to organize production in larger firms.
Under this approach, each firm produces a product “variety” that is “differentiated” from the varieties produced by other firms. Thus, each firm has some leeway to set prices without fear that consumers will immediately switch to a competitor for the sake of a small difference in prices. However, while these varieties are not exactly the same, they are substitutes for one another, and each firm continues to face competition from other producers in the industry. So what happens if two countries, each with identical industry technologies and factor endowments, open up to trade? According to traditional models on country differences, no trade would occur. In contrast, with differentiated goods and increasing returns to scale, trade opening enables firms to serve a larger market (and reduce their average costs) and gives consumers access to an increased range of product varieties. However, as consumers can choose among more varieties, they also become more sensitive to price. Hence, each firm can produce a larger quantity than before the trade opening (selling to both domestic and foreign markets), but each must sell their product at lower prices.
The gains from trade in such a scenario are threefold. Firms produce larger quantities and better exploit their economies of scale (“scale effect”). Consumers in both countries can choose from a wider variety of products in a given industry (“love-of-variety” effect). At the same time, in an integrated market, consumers pay lower prices (also known as a “precompetitive effect”). Because of these gains, it makes sense that similar countries trade with each other and export and import different varieties of the same good. However, while the “new” trade theory provides a framework explanation of why similar countries may find it beneficial to trade with each other, the usefulness of the theory can only be determined by the actual evidence of the predicted gains from liberalization. We thus turn to the economic literature for evidence on the various effects (e.g. scale, variety, and price), including the evidence for Canada.
Economies of scale results
According to “new” trade theory, firms are able to expand production within the domestic economy and enjoy lower costs through economies of scale by specializing in a variety for which they have a competitive advantage, thereby creating the conditions for intra-industry trade between countries. By engaging in international trade, firms can further expand production by offering their differentiated products to consumers in other countries, thereby lowering average costs and prices. This “economies of scale” hypothesis has been tested in the economics literature, and the evidence is mixed.
Following the conclusion of the Canada- U.S. Free Trade Agreement (CUSFTA), almost all Canadian manufacturing industries exhibited substantial rationalization between 1988 and 1994. Head and Ries (1999) analyzed the impact of the CUSFTA on the size and scale of operations for 230 Canadian industries at the 4-digit SITC level. Trade liberalization was expected to have two opposing effects on the size of Canadian industries. On the one hand, a positive effect on the size of Canadian firms was expected as a result of the lowering of U.S. tariffs, due to enhanced opportunities to expand production by initiating or increasing exports to the U.S. market. In this respect, the study found that the average U.S. tariff reduction of 2.8 percent caused a 4.6-percent scale increase among Canadian industries. On the other hand, an opposing negative effect due to increased U.S. penetration of the Canadian market was also expected. The study found that the average 5.4-percent reduction in Canadian tariffs caused a 6.1-percent scale decline in Canadian industries. Thus, the evidence on balance did not support an increase in the size and scale of Canadian industries as a result of Canada-U.S. trade liberalization, nor did it constitute a factor to explain the observed gains from economies of scale and specialization in many Canadian industries during the period following the introduction of the CUSFTA.
Baldwin and Gu (2006) analysed the impact of trade liberalization (the Canada- US FTA and NAFTA) on exporters and non-exporters in Canadian manufacturing industries. The analysis incorporated plant scale and production-run length both essential to achieving benefits from economies of scale—as well as product diversification. The principal conclusions suggested that trade liberalization in the form of tariff cuts reduced product diversification and reduced plant scale of non-exporters, but had little effect on their production-run length. In contrast, exporting firms reduced their product diversification and increased production-run length and plant scale when compared to non-exporters, taking advantage of the tariff cuts for further expansion.
The economies of scale benefits may thus be overstated. The likely explanation is that economies of scale at the plant level for most manufacturing firms tend to be small relative to the size of the market because most plants have already attained their minimum efficient scale. Average costs therefore seem to be relatively unaffected by changes in output; in other words, a large increase in a firm’s output does not lead to lower costs, and a large reduction in output does not lead to higher costs. When faced with competition from imports, many firms are forced to reduce output but production costs rarely rise significantly.
The explanation for trade based on product differentiation suggests that many varieties of a product exist because producers attempt to distinguish their varieties from those of their competitors in order to win brand loyalty from consumers, or because consumers demand a wide spectrum of varieties. Although countries without substantial cost differences are not specialized at the industry level in international trade, they are, nonetheless, specialized at the product level within the same industry, which results in intra-industry trade.
With the opening of trade, each country increases its exports of varieties to other countries; at the same time, each faces increased competition from foreign varieties produced from abroad. As a result, a country undergoing free trade is expected to produce fewer domestic varieties due to foreign competition, but will receive a broader range of available varieties via imports. Moreover, there is a price effect associated with trade liberalization and increased competition, which lowers the price for each variety. Consequently, the sum of the varieties under freer trade would exceed the number of varieties available before the opening of trade (Feenstra, 2003).
Hillberry and McDaniel (2002) used detailed U.S. trade data to examine the extent to which the increase in NAFTA trade was associated with trade in new varieties. Their study decomposed the growth in U.S. trade with its NAFTA partners over the period 1992-2002 into price, volume, and variety effects. The variety effects are measured by the change in trade values due to trade in more or fewer goods using the Harmonized Tariff (HS) Schedule. During the 1993-2001 period, they found a 35-percent increase in U.S. exports to Canada and a 69-percent increase in Canadian exports to the United States. Of the measured 35 percentage point increase in U.S. exports to Canada, only 3.4 points represented trade in new goods. In other words, Canadian imports from the United States would have risen by 3.4 percentage points holding the prices and quantities of other pre-existing trade constant, due to new varieties. This represents a gain to consumers in Canada.
Chen (2006) used data on trademarks to quantitatively estimate the impact of the CUSFTA on the variety of goods available. He found that not only did the annual variety of products available to Canadians increase by 60 percent, but because of the size difference and positive relation between the size of the market and the number of varieties available in that market, Canada benefited more than the United States in terms of the number of new products available as a result of trade. The smaller Canadian economy gained access to some three times as many new U.S. varieties than U.S. consumers received from Canada.
A number of studies have examined the effect of foreign competition on pricing decisions by firms and concluded that trade liberalization has indeed reduced mark-ups of price over costs, although disentangling the price effect from other relevant factors has proven difficult. Badinger (2007) examined the effects on price-over-cost mark-ups using data across 18 sectors in 10 EU member states in relation to the creation of the European Union (EU) single market. After taking cyclical and technological factors into account, the study found that mark-ups in manufacturing declined by 31 per cent following integration while services mark-ups increased slightly. Badinger argued that the comparatively weak state of the single market for services and the persistence of anticompetitive strategies in certain services sectors might explain why services mark-ups did not behave as expected.
The WTO (2008) reported on several case studies that found significant price impacts arising from trade liberalization for several developing countries. For example, India posted important decreases in pricecost margins for most industries in response to a range of liberalization measures undertaken in 1991 (Krishna and Mitra 1998). Similar results were obtained for Côte d’Ivoire following the implementation of a comprehensive trade reform in 1985 (Harrison 1990). The relationship between the exposure to trade and price-cost margins at both the industry and plant levels was also examined across several developing countries—in particular, Chile, Colombia, Mexico, Morocco, and Turkey—and findings suggested that the price effects of increased import penetration were particularly strong in highly concentrated industries where firms had a degree of market power prior to trade opening (Roberts and Tybout 1991).
The trade literature therefore provides overwhelming evidence that trade liberalization fosters increased intra-industry competition. Exporting firms expand their production to serve a larger market, but given that most firms operate at an efficient plant size where output can be shifted considerably with minimal impact on costs, evidence of pronounced economies of scale is weak. Consumers, however, gain access to an increased range of product varieties following trade liberalization. Moreover, as competition in differentiated but substitutable products becomes more heated, prices fall.
The “New” New Trade Theory
The new trade theory, however, has one major drawback: it is based on the assumption of a representative firm. This contradicts the evidence generated by micro-level datasets covering firms and plants, which shows that differences among firms are crucial to understanding world trade.
Equally important, the predictions arising out of the new trade theory did not coincide with some features of trade in the real world. In particular, exporting industries do not export to all countries as implied by their theoretical cost advantage and importcompeting industries sometimes experienced productivity gains following trade liberalization, despite smaller scales of production. The analysis thus shifted from the industry level to the firm level in order to better understand trade flows (e.g., Melitz 2003).
Melitz showed that differences between firms were an additional source of comparative advantage: although, on average, no firm within a specific sector might be productive enough to export, given the dispersion of firm productivities, there might still be some firms left which would be productive enough to do so. This insight was important as it explained why countries might export (or import) in sectors where they may have a comparative disadvantage (advantage). Another major insight was that trade liberalization not only led to resource reallocations between sectors but also to allocative efficiency gains within sectors as resources are reallocated from lower-efficiency firms to higher-efficiency firms (Melitz 2003). These insights laid the foundation for the “new” new trade theory.
Under “new” new trade theory, comparative advantage can be determined at a very low level of aggregation—even within the firm at the component or task level. Such an approach can thus help us understand the increasingly granular nature of international trade and the emergence of global value chains.
Gains from Trade to Canada
The discussion thus far has addressed the broad benefits that trade brings to an economy, covering the key economic concepts, models, and theories. Clearly, many aspects of trade are intertwined. For example, liberalized trade brings about increased competition in domestic and foreign markets, increases product variety and puts downward pressure on prices. It also induces firms to specialize and produce more, but in fewer product lines, and use their particular talents, resources, and factor endowments most efficiently to their benefit. These effects, in turn, lead to supplementary benefits such as greater productivity, higher wages, and increasing prosperity. The following sections address some of these supplemental benefits of trade in the Canadian context.
Trade and specialization in Canada
Trade in international markets is driven by the search for goods and services produced elsewhere at a relatively lower price than the opportunity cost to produce them at home. In exchange for the comparatively low priced international goods, Canada supplies goods in which it specializes. The outcome is an international division of labour that produces economic welfare gains from increased specialization. Canada stands to increase growth, firms to increase output, workers to receive higher wages, and consumers to access higher quality products at reduced prices.
Canadians have the opportunity to gain from specialization in two forms: a one-time shift in resources from less to more efficient sectors or firms, and in an ongoing form as workers, firms, and the nation as a whole focus their efforts on what they do best— and become increasingly better at doing it. One-time shifts can be understood as welfare- enhancing structural changes. Here gains derive from the movement of resources from a less to a more efficient sector. However, moving forward, while a country may specialize by moving its factors of production into more efficient sectors, it is natural that, with practice, their ability to produce the goods in which they specialize would improve with time. This type of adaptation, or learning by doing, is suggestive of the second form of specialization—ongoing or dynamic specialization. Gains in this case come from increased productivity (output per hour) through a “learning by doing” process in the same sector.
While most easily understood at the industry level (for example, the auto industry), specialization can occur at finer levels as well, such as at the firm level or plant level. Nonetheless its impact can be felt throughout the economy. Research has identified the link between specialization and trade liberalization at the plant level in Canada. Baldwin et al. (2001) found a strong relation between the export intensity of plants in manufacturing industries and their specialization following a period of increased trade liberalization in the late 1980s and implementation of the CUSFTA. The average nominal tariff (customs duties paid divided by imports) decreased from 6.5 percent in 1973 (as part of the Kennedy Round) to 1.1 percent in 1996, over which time the export intensity increased, for example, from 31 percent in 1990 to 47 percent in 1997. Likewise, commodity specialization at the plant level increased sharply with the implementation of the CUSFTA. About 30 percent of Canadian manufacturing firms that operated continuously from the early 1980s to the early 1990s reduced the diversity of their output. Within this group of firms, between 1983 and 1993 some 38 percent more firms switched from multiple-plant to singleplant firms than switched from single-plant to multiple-plant firms, further suggesting a move toward increased specialization.
Furthermore, given that Canada comprises many diverse regions, it was not surprising that the impact of increased trade liberalization and specialization yielded different impacts across the country. Brown (2008) has shown that the impact of trade liberalization on specialization was found to be greater in regions outside of urban areas and outside of Canada’s industrial centres of Ontario and Quebec. As in the case for Canada as a whole, plants with higher export intensities in these regions were found to have increased levels of specialization in the industries under investigation.
The key benefit from specialization lies in the fact that as plants specialize they become increasingly productive, either through a one-time shift in resources or through an ongoing process of learning or exploitation of scale economies. As specialization has been shown to increase at the plant-level in tandem with trade liberalization, so too has plant-level labour productivity. Trefler (2004) found that 14 percent of export-oriented industries increased productivity following the implementation of the CUSFTA; and furthermore, productivity improvements across industries were shown to grow at a compound annual rate of 1.9 percent. As a whole, labour productivity in Canadian manufacturing rose about6 percent with the implementation of the CUSFTA—strong support for the welfareimproving nature of specialization.
Along with labour productivity, output and wage growth were also shown to increase with the implementation of the CUSFTA (Trefler 2004). On the other hand, while export-market participation in Canada is linked to higher plant specialization and productivity growth, employment growth was found to be lower in exporting firms, likely a reflection of exporters employing a more skilled, more productive workforce and operating less labour-intensive plants.
The impact of specialization on Canada’s trade has also been analyzed using computable general equilibrium (CGE) models, which have the capacity to assess the gains from trade on a per-agreement basis. Typically, CGE models estimate the economic welfare gains from FTAs under the assumption of perfect competition.8 As such, these models are best understood as estimates of the potential economic impacts of the FTA under investigation. Nonetheless, while a number of assumptions are made in the model, the results most likely understate the gains in output and economic welfare for a given amount of trade expansion. More specifically, under the assumptions made, the removal of tariffs has less of an effect on domestic prices, as the industries are already perfectly competitive, which is not the case in reality. Therefore, although the analysis does not separate out specialization in particular from gains overall, general economic gains are estimated— of which specialization is deemed to be one component. All of the four most recent joint studies released by DFAIT9 have shown that Canada stands to gain by eliminating tariffs and increasing trade liberalization.
A discussion of the positive impacts of specialization must also take into account the effects of technology on specialization. Indeed, countries specializing in the export of goods with higher technological contents experience elevated growth rates. By exporting products with higher technological intensity, countries have typically experienced higher growth rates (Lee 2011). Industries defined as having high technological content include aircraft, pharmaceuticals, and electronics. In this regard, Canada, with its highly educated workforce, is well positioned for higher growth, provided it focuses on producing innovative, technologyintensive exports.
Trade and domestic competition in Canada
An often overlooked aspect of open trade is the added competition imports create in the domestic market. If not for imports, domestic producers would have a higher degree of market power. This lack of competition could allow them to set higher prices, give them less incentive to innovate, and result in lower quality goods and services being supplied to the market place. Imports thus become an important source of added competition, requiring domestic firms to compete with companies from around the world. Foreign exporting companies are usually world-class producers, offering leading-edge, high-quality, or innovative goods and services, while others offer lower-cost goods from countries with more abundant labour. The very presence of foreign competitors compels domestic firms to seek out efficiencies and cost savings and to offer higher-quality goods at the same or lower prices. This, in turn, makes domestic firms leaner, more efficient, and more competitive, thus benefiting consumers. Although additional competition may force some domestic firms to exit the marketplace, this is more than offset from the productivity growth as more efficient producers take over, and the resulting gains are passed on to consumers.
In reality, Canadian firms do face increasing competition from imports. As a percentage of the total domestic manufacturing market, imports have risen from 45 percent in 1992 to 53 percent in 2009 (latest data available). In some manufacturing sectors, such as clothing, chemicals and electrical equipment, this trend has been even more pronounced, while in others, such as beverages and tobacco, import penetration is less striking. Research indicates that the increased influence of imports has raised the competitiveness of Canadian manufacturers.
|Total||Clothing||Chemicals||Electrical Equipment||Beverage & Tabaco||Primary Metals|
The impact of increased competition in Canada can be seen following the implementation of the CUSFTA and NAFTA. Increased competition from imports caused the number of firms in the domestic economy to decrease as smaller and less efficient firms closed, allowing more efficient firms to expand and become even more productive. In the six years following the CUSFTA, the number of manufacturing plants declined by 21 percent while output per plant in Canada increased by 34 percent. This reduction in number of firms was found to be largely induced by the reduction in tariffs (Head and Reis 1999).
The notion that increased imports from trade liberalization results in the closing of some domestic firms may at first appear to be a negative outcome. But it is important to realize that this is one of the main mechanisms by which increased competition makes the domestic market more efficient: firms that were compelled to shut down did so because they could not compete with the quality or price of foreign imports, while those domestic firms that remained were more efficient and better able to face the increased competition from abroad. In this way, imports cause a reallocation of domestic resources to more efficient uses. Plant turnover (closing of some companies and opening of others) contributed between 15 percent to 20 percent of manufacturing productivity growth during the 1988-1997 period (Baldwin and Gu 2002).
Not only does competition force out less productive plants, but the surviving firms are also compelled to become even more productive in domestic economy. Baldwin and Gu (2009) looked at 7,000 Canadian manufacturing plants for the period 1984 to 1990 and found that plants in industries with the largest tariff changes also experienced the largest increases in product-run length, and increased plant size. This was due both to increased competition from imports and from gains in exporting accruing from greater access to the U.S. market.
Studies from other countries support these findings. For example, Liu (2010) showed that greater import competition in the United States led multi-product firms to drop peripheral products and focus on core production. Gibson and Harris (1996) investigated the effect of trade liberalization on manufacturing in New Zealand and found that liberalization caused smaller-sized, higher-cost plants to close, while low-cost specialized plants were more likely to survive. In Chile, Pavcnik (2000) showed that the trade liberalization undertaken in that country in the late 1970s and early 1980s resulted in plant level productivity improvements that were mainly due to the reshuffling of resources and output from less to more efficient producers.
CGE models can also be used to show the impact of imports on competition. For example, Cox and Harris (1985) show that by incorporating scale economies, imperfect competition, and capital mobility into these models, the estimated gains from trade to Canada under the CUSFTA increase by a significant factor (in the order of 8 to 10 percent of GNP) through rationalization of industries, greater production runs, lower price-cost mark-ups, and increases in factor productivity.
Imports also encourage innovation in an economy, first, by obliging domestic producers to innovate to improve their products and production processes in order to compete with foreign goods and services; and second, the imports themselves produce spill-over effects by introducing foreign technology and ideas into the domestic marketplace to consumers and producers alike. Unfortunately there is little empirical evidence on the impact of imports in Canada in this regard, but there are some international studies that quantify the spill-over effect. One such study examined the impact of Chinese imports on a sample of 200,000 European firms and found that competition from Chinese imports led to technology upgrading within firms as well as resource reallocation to technologically intensive plants. Between 15 to 20 percent of technology upgrading in the EU between 2000 and 2007 was attributed to competition from Chinese imports (Bloom et al. 2009). A link between imports and innovation was also found in Mexican plants. Teshima (2008) documents that sectors affected by greater tariff reductions were induced to increase R&D expenditures. However, in that case, R&D expenditures were more likely to go toward upgrading processes as opposed to products, suggesting that competition from imports generated greater incentives to increase production cost efficiencies rather than to create new products or increase product quality.
Trade and productivity in Canada
Productivity performance is central to economic growth, competitiveness, and standards of living. This section examines two avenues by which opening trade has contributed to improvements in Canadian productivity: improvements in allocative efficiencies10 and improvements in productivity efficiencies.11
Open economies tend to grow faster than closed economies because reduced barriers to trade improve productivity performance and support capital accumulation. For example, a recent study based on results from 14 OECD countries and 15 manufacturing sectors found that an increase in openness by one percentage point increased productivity in manufacturing by an average 0.6 percent (Badinger and Breuss 2008).
One of the best-known examples of open trade leading to improved productivity performance is the North American Auto Pact of 1965. Prior to the signing of the Auto Pact, the Canadian automotive industry produced most car models for Canadian consumers and the U.S. automotive industry did likewise for U.S. consumers. Since the Canadian auto market was much smaller than the U.S. market, the Canadian auto sector was at a substantial disadvantage in terms of scale of production in the Canadian market, and productivity in the sector was about 30 percent below that of the U.S. auto sector. The establishment of a free trade area for automotive products under the Auto Pact allowed manufacturers to consolidate the production of car models in one partner country, and export those models to consumers in the other partner country. This rationalization of production resulted in the reduction of the number of car models assembled in Canada. However, by concentrating resources into fewer models, total Canadian auto production actually increased while average costs for auto production decreased. Canadian auto products became much more competitive compared to the pre-Auto Pact era and exports of Canadian auto products to the United States surged. Moreover, a few years after the inception of the Auto Pact, Canada’s productivity gap with U.S. auto industry had virtually disappeared (Wonnacott and Wonnacott 1982).
Other examples of gains in efficiency arising from increased intra-industry trade include empirical research into the effects arising from the implementation of the CUSFTA conducted by Baldwin, Beckstead and Caves (2001), Baldwin, Caves, and Gu (2005), and Baldwin and Gu (2006), who documented a dramatic reduction in the number of manufacturing products produced in Canada following the implementation of the CUSFTA in 1989. In particular, Baldwin, Caves, and Gu (2005) report that the decrease in the number of products produced in Canada was accompanied by substantial increases in production runs for individual products.
Moreover, because of productivity differences between firms, when trade barriers are removed (or reduced), more productive firms tend to thrive and expand, while less productive firms contract or possibly exit. This generates another type of allocative efficiency gain known as the “reallocation” effect. In essence, market share is reallocated from less efficient firms to more efficient firms—with the result that overall efficiency in the industry improves.
Using firm-level data, Lileeva and Trefler (2010) examined the significance of this “reallocation” effect in raising Canada’s overall manufacturing productivity in the wake of the Canada- U.S. FTA. Analysing plantlevel exports between 1984 and 1996, they found that as the United States lowered its tariffs against imports from Canada under the CUSFTA, Canadian exporters grew by exporting to the U.S., thereby raising overall productivity. A market share-shift analysis showed that this raised average manufacturing productivity by 4.1 percent.
At the same time, corresponding Canadian tariff cuts pressured some Canadian firms to contract and even exit in the face of foreign competition. This selection effect also generated overall productivity gains in the Canadian manufacturing sector since the contracting and exiting plants were substantially less efficient than the average Canadian firms. Trefler (2004) estimated that this selection effect increased overall Canadian manufacturing productivity by an estimated 4.3 percent.
Thus, the allocative efficiency gains via reallocation and the selection effects induced by the CUSFTA combined to generate a productivity gain of 8.4 percent (i.e. 4.3 percent plus 4.1 percent) for Canadian manufacturing.
Beyond those gains associated with differences in efficiency between firms, gains also arise from within individual firms themselves. As exporting firms become larger because of open trade, it becomes attractive for some firms to invest in innovation and technology, skills and knowledge, thereby raising their profits and productivity. The development of new products and processes, and adapting these to foreign markets, also involves substantial fixed costs, so only the larger, integrated markets can support the sales volumes needed to justify incurring the high fixed costs of innovation and investment. While adapting to local conditions in foreign markets is often a dynamic and timeconsuming learning process, it is by learning through exporting that many exporting firms improve their productivity.
For evidence on within-firm productivity gains, Lileeva and Trefler (2010) divided 5,000 firms that had not exported prior to the CUSFTA into two groups: those that started exporting in the CUSFTA implementation period and those that did not. The study found that the CUSFTA raised the productivity of new exporters by 15.3 percent, and furthermore that these new exporters accounted for 23 percent of Canadian manufacturing output, and were therefore responsible for raising Canada’s overall manufacturing productivity by 3.5 percent (i.e. 15.3 percent multiplied by 0.23). In addition to these new exporters, existing exporters, or firms that had already been exporting to the United States prior to the CUSFTA, also responded to improved market access by increasing their exports: this contributed to an overall 1.4-percent productivity growth for Canadian manufacturing. Finally, productivity gains came from increased imports of intermediate inputs imported from the United States under the CUSFTA, which contributed an additional 0.5-percent increase in total productivity to Canada’s manufacturing industry.
The gain from the CUSFTA on overall Canadian manufacturing productivity is therefore 13.8 percent—the sum of the allocative gains (between firms) and the productive gains (within firms)—a remarkable trade-related achievement (See Table 1).
|Allocative efficiency gains (between firms)||%|
|Growth of most productive exporters||4.1|
|Contraction and exit of least productive exporters||4.3|
|Productive efficiency gains (within firms)||%|
|New exporters invest in raising productivity||3.5|
|Existing exporters invest in raising productivity||1.4|
|Improved access to U.S. intermediate inputs||0.5|
Trade and prosperity in Canada
Trade and prosperity go hand-in-hand. Trade allows consumers to buy products and services to which they would not otherwise have access. It is as a result of international trade that Canadians are able to eat fresh fruit and vegetables in the winter, have access to coffee and chocolate, and to the choice of more than 300 models of cars12 and 197 models of cell phone13. Because of trade, almost everything that Canadians consume daily is cheaper than it otherwise would be, stretching Canadian incomes even further.
Through higher wages, trade puts more money in the pockets of Canadians to spend on necessities like food, shelter, and government services like education and healthcare or on discretionary items like flat-screen TVs and the occasional vacation. Because trade encourages companies and workers to specialize in what they do best, to innovate, and to grow large by serving global markets, the productivity of firms improves, which in turn drives up wages for workers and increases Canada’s prosperity. The end result is increased standards of living.
It is hardly coincidental that the Canadian standard of living and Canada’s openness to international trade (both exports and imports) are closely linked. Each incremental opening to international trade has been linked to further improvements in the Canadian standards of living (see Figure 2). This relationship between trade and improved standards of living has been formally tested in a large project on understanding economic growth undertaken by the OECD. Using the data from 21 advanced countries over nearly 30 years, the OECD reported that, controlling for other factors, every 10-percentage point increase in trade exposure (as measured by trade share of GDP) contributes a 4-percent increase in GDP per capita. Employing a different methodology than that used in the OECD, Frankel and Romer (1999) found further evidence supporting the link between international trade and economic growth for developing countries in particular. Here, a 1-percent rise in trade share produced a rise in per capita incomes of between 0.8 and 2.0-percent. This finding suggests that openness to trade is a key factor in economic development.
|Trade share GDP||41.07||42.24||44.72||48.69||46.44||44.82||46.34||49.49||52.95||54.02|
|GDP Per Cap||19,930||20,773||21,950||22,444||22,522||23,384||23,911||24,610||25,295||25,511|
|Trade share GDP||52.79||47.12||47.30||53.40||53.90||54.39||52.15||52.41||51.06||51.24|
|GDP Per Cap||26,081||25,036||25,463||26,690||27,712||28,102||28,914||29,961||30,199||29,804|
|Trade share GDP||50.54||54.28||60.15||66.57||71.19||72.48||76.74||80.58||82.44||85.17|
|GDP Per Cap||28,820||28,731||29,081||30,146||30,674||30,846||31,832||32,862||34,399||35,864|
|Trade share GDP||81.11||78.40||72.102||72.38||71.71||69.58||67.80||68.78||58.96||60.7|
|GDP Per Cap||36,112||36,771||37,124||37,922||38,697||39,386||39,820||39,626||38,059||38,826|
Trade and wages
Trade has a significant impact on workers through its effect on wages. While some firms may shrink or exit when faced with the additional competition that trade brings, others will meet the challenge. Research shows that the latter will be the most productive firms. In addition, as these firms grow and expand abroad they will become even more productive and innovative, allowing them to pay higher wages while also increasing their employment. This was the case in Canada following the implementation of both the Canada-U.S. Free Trade Agreement and NAFTA. Gu and Rennison (2006), for example, find a significant and growing wage premium in traded sectors (both exports and imports) compared to the economy overall once the public sector is removed from consideration.
Because exporting firms are more productive, they are thought to pay their employees higher wages. Indeed, Bernard and Jensen (1999) estimated that U.S. exporters pay, on average, wages that were 9.3 percent higher than those paid by non-exporters. Similarly, a 25-percent export wage premium was found by Arnold and Hussinger (2005) for German manufacturers. However, other factors, such as manufacturing plant size, capital intensity, degree of foreign-control, and multi-unit firm status, as well as certain individual worker characteristics, are also factors positively associated with higher wages. A recent paper by Breau and Brown (2011) performed plant-level regressions controlling for such factors. Canadian exporters paid wages that were, on average, about 14 percent higher than those paid by nonexporters; however, this wage premium fell to slightly over 6 percent, once plant characteristics were taken into account and was further reduced to slightly under 6 percent once controls for indivual worker characteristics were included.
|1992 dollars per hour||18.36||18.14||17.18|
International trade is driven by the search for goods and services produced at relatively lower prices than the opportunity cost to produce them domestically. As trade is liberalized, competition for markets heats up. Except for those firms (and their employees) that are the least productive, the increased competition is beneficial. Competition from imports prevents firms that hold power in domestic markets from over-charging, or under-producing, for the market. More importantly, competition from imports causes domestic firms to realign their resources, to drop less-profitable lines of production, and to specialize in one variety (or on a “differentiated” product) for which the firm has a comparative advantage. The outcome is an international division of labour and increased economic welfare.
This was the case following the CUSFTA and NAFTA. Economic evidence suggests that increased competition from imports induced a number of smaller and less-efficient firms to close and allowed more efficient firms to expand. At the plant level, Canadian plant sizes increased and production runs lengthened due to gains accruing from greater exports to the United States.
Moreover, following both agreements, Canadian consumers were introduced to a greater variety of products than before. One estimate found that the agreements increased the annual variety of products available to Canadians by 60 percent, which was about three times as great as the new varieties introduced into the United States from Canada. A separate study found that roughly 10 percent of the increase in U.S. exports to Canada represented trade in new goods.
As firms narrow production lines, concentrate on differentiated products, extend production-run lengths and face new entrants in their markets, they are induced to compete in prices as well. Evidence suggests that trade liberalization also brought about reduced mark-ups over costs—to the benefit of consumers.
Liberalized trade is also expected to have an impact on productivity levels. Between 1984 and 1996, following the CUSFTA, Canadian manufacturing productivity rose by an estimated 13.8 percent. The expansion of exports and realignment from lessefficient to more-efficient producers following that agreement accounted for about 60 percent of the overall increase in productivity, or 8.4 percentage points. Better access to intermediate products combined with increased productivity from new and existing exporters contributed the remaining 5.4 percentage points in improvement of productivity.
Empirical evidence strongly supports the observation that firms that export pay higher wages. Higher wages (wage premiums) are induced by increased productivity, and Canadian exporters are indeed productive, paying wage premiums compared to non-exporters.
Overall, an open trade policy leads to higher wages for employees, lower prices and greater variety for consumers, and greater productivity in business operations through less costly inputs and more efficient and longer production runs. The increased level of competition also creates an environment in which firms are facing incentives to innovate and control costs—to the benefit of all Canadians.
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