May 2011

Supply Side

Tax-based incentives could stimulate Canadian exports

By Jon Baird

Continuing with the theme of my last column where I discussed our country’s future being heavily dependent on exports (CIM Magazine, March/April issue, p. 52), at 30 per cent of the GDP, exports are critical to Canadians’ standard of living. Because mining is Canada’s most dominant industrial sector globally, Canadian firms offering goods and services used by the industry have much to gain from opportunities around the world.

According to Export Development Canada (EDC), Canadian exports grew at an average annual rate of just two per cent from 2000 to 2008. Then, once the 2008 recession started, Canadian trade crashed by 30 per cent in six months in real (price adjusted) terms, to the same level as a decade ago. Now, our trade is slowly returning to previous levels.

Further, Canada’s exporter population shrunk from 42,000 companies in 2004 to 39,000 in 2008. The drop in the annual number of new exporters has been dramatic, falling from a peak of 5,400 in 2002 to 2,300 in 2008.

While other countries are organizing national export drives to seize the increased shares of expanding markets, Canada is doing little in the field of international trade promotion. In the past, Canadian governments have chosen to support exporters through subsidies offered by the Program for Export Market Development (PEMD), which ran for about 30 years starting in the 1970s. Most such subsidies have been stopped by now as governments have realized that they are not effective stimulants. They are ineffective because of the “free rider” effect, where the money is taken by firms that would have done the project anyway.

For many years, I have thought that Canadian firms might be motivated to increase their export marketing efforts if there were tax incentives encouraging such activities. A model might be the federal government’s Scientific Research and Experimental Development (SR&ED) tax credit program. While currently needing some repair and maintenance, SR&ED is regarded as an excellent stimulus for small- and medium-sized firms to innovate.

Following are reasons as to why tax-based incentives like SR&ED, rather than subsidies, would work to stimulate Canadian firms to export more.

  • Instead of following a government lead or applying for a specific program, companies make their own decisions, resulting in timely actions to capture rapidly changing market opportunities.
  • Companies use their own knowledge to identify market opportunities and mobilize their capabilities to capitalize on them.
  • Such a program could be applied to all business sectors so that governments are not put in the position of picking winners.
  • Tax-based incentives provide good leverage of the government’s investment by requiring the commitment and up-front use of the firm’s capital and a focus on the return on investment, not just a grab for available government money.
  • Because the firm’s business acumen and capital are put on the line when well-designed tax-based mechanisms are used, overhead costs and disruptions associated with obtaining government support are minimal.

I believe that if Canadian firms were to receive tax credits on expenses made to develop export markets, there would be a significant increase in exporting activity. Such credits could be used in a strategic way, such as applying them to activities in certain countries or regions.

Jon Baird
Jon Baird, managing director of CAMESE and the immediate past president of PDAC, is interested in collective approaches to enhancing the Canadian brand in the world of mining.

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