canada, china and rising asia: a strategic proposal

8/3/2019 Canada, China and Rising Asia: A Strategic Proposal

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1 Canada , China, and Rising A

A Strateg ic Prop

ByWendy Dobson,

RSMUT

Can ad a , China ,

and Rising As ia :

A Strate g ic Propo s al


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A Strateg ic Prop

Joint Statem ent

CCBC and CCCE

John P. Man ley

PCEO

CCCE

Peter Harder

PCCBC

China a nd t he Asia Pacific region

as a wh ole a re critically import-

ant to th e future prosperi ty of

Canad ians. For that reason we

are pleased to have sponsored this

stu dy by Wend y Dobson, Co-Direc-

tor of the In stitute for Intern ational

Business at th e University of To-

rontos Rotma n School of Man age -

ment . The purp ose of this study

wh ich is present ed in English,

French and Chinese is to inspire

new th inking and new ideas tha t

can help shape a long-term Can-

adian strateg y in Asia.

Dr. Dobson p resen ts a comp el-

l ing case for much deeper eng age-

ment in the region on the pa rt of

Canad ian businesses, govern-

ments and other stakeholders. She

lays out a comprehen sive roadm ap,

supp orted by an a nalyt ical frame-

w ork that includes h igh-level eco-

nomic analysis as well as regional

and country-specific findings . The

view s expressed in this study are

those of the aut hor.

Canadians have awakened to

Asias e conomic trans formation, but

the process is accelerating and w e

nee d to move quickly. The nu mer-

ous challenges that w e face are

outweighed b y tremendous oppor-

tu nities. All of us mu st w ork togethe r

to ensure th at Canada achieves its

poten tial as a Pacific nation.


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A Strateg ic Prop

Dr. Wen dy Dob so n

Dr. Wendy Dobson is Professor and

Co-director of the Institute for Inter-

national Business in t he University

of Torontos Rotm an School of Man -

ageme nt. She is a former Ass ociate

Deputy Minister of Finance in the

Canadian g overnment a nd a former

President of the C.D. Howe Insti-

tute, Canadas leading independ-

ent economic think tank an d a

non-executive director of Cana dian

companies in fina nce and energy.

Dobson ch airs the Pacific Trade a nd

Development (PAFTAD) network.

She is also a director of the Can -

adian Ditchley Found ation, Senior

Fellow at the Asia Pacific Founda-

tion an d mem ber of the Advisory

Committee of the Peterson Ins titute

of International Economics. Recent

w ritings include Differentiating

Canada: The Futu re of the Canad a-

US Relations hip, Will the Renm inb i

Become a World Cu rrency? a nd

The Contradiction in Chinas

Banking Reforms. Her most recen t

book Gravity Shift: How Asias New

Economic Powerhou ses Will Shap e

the 21st Centur y was a fin alist for

the Best Business Book of the Year

awa rd in 2010 wh ile the Mandarin

version Ya Zhou Xin Shi Li received

the an nual award for the best b ook

in Finance an d Economics from

Hexun.com.

Canad a China Busines s Counc il:

The Canad a China Business Council

(CCBC) is the cou ntrys Can ada -

China bilateral trade and investmen t

facilitator, catalyst an d a dvocate.

Founde d in 1978 as a p rivate, not-for-

profit business association, CCBC

provides unparalleled insight into

Sino-Canad ian trade and investment

issues a nd de velops connections

that ens ure its memb ers business

succes s. In addition to its focused

an d pract ical services, the Cou ncil is

also the voice of the Canad ian bu si-

ness community on issues a ffecting

Sino-Canadian trade and invest-

ment.

The Canad ian Council of Chief Execut ives

The Ca nad ian Council of Chief

Executives brings CEOs toget her

to sha pe p ub lic policy in the inter-

ests of a st ronger Canada a nd a

bette r world. Member CEOs and

entrepreneu rs represent all sectors

of the Ca nad ian economy. The

compa nies t hey lead collectively

adm inister C$4.5 trillion in a ssets ,

have an nua l revenues in excess of

C$850 billion, an d are res pon sible

for the va st m ajority of Canad a's

exports, investm ent, research and

development , and t raining.


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A Strateg ic Prop

Contents Execut ive Sum mary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Overview and Introduc tion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Cana das Econom ic Relations :

The State o f Play . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

A Clos er Look at Cana das Econ om ic

Relat ions hips w i th Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Asia in 2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

China a nd India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Risks and Uncertaint ies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Business Opportunit ies for Canadian Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

The Imp lication s of Asias Rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Enhancing Cana das As ian Econo m ic Ties . . . . . . . . . . . . . . . . . . . . . . 25

Joining t he Trans -Pacific Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Deepen ing Canadas Econom ic Engag em ent w ith China . . . . . . . . . . . . . . . 26

A Propos al for a Canadian As ia Strateg y . . . . . . . . . . . . . . . . . . . . . . . . 28

Eleme nts of the Strateg y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Restore Canadas presence in the region . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Develop the Canada brand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Liberal ize trade and inve stm ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Create a China Roadmap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Enhance the Canadian bus iness presence . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Antic ipate the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Append ix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Append ix B : Thum bna il Sketc hes

of Major Econo m ies and Ins titutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

The United Stat es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Indones ia, Malaysia , and Thai land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Asias Reg ional Inst i tut ions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40


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A Strateg ic Prop

Executive

Summary

Canad a has a reputation in Asia

of show ing up there but n ot being

serious a bout es tablishing long-

term relationships. This wa s not

always the case. In the pa st, we b uilt

strong bilateral relationships with

Japan a nd China and contributed to

international aid programs in India,

Malaysia, and Th ailand . Canad a wa s

also a strong supp orter of the Ass o-

ciation of Southe as t Asian Nations in

the early years follow ing its founding

in 1967. Today, Canad a h as no major

comprehen sive trade deals or invest-

ment ag reements in the reg ionin-

stead, such initiatives have stalled

in the face of demands of spe cial

interest s or for concessions iden ti-

cal to those made to Ame ricans.

Our a bse nce from political-secu rity

forums matters deeply to traditional

trading partners such as Japa n and

South Korea. The pictu re is one of

an a d hoc approach, one that lacks a

strateg y toward de veloping both ties

w ith Asia and a Canada b rand.

Already, China h as replaced

Japa n as Ca nadas largest Asian

trading partner, and China an d

other Asians are very interested

in Canadas energy an d nat-

ural resources. Over the next

two d ecades, Asia wil l unde rgo

massive urbanization, and rapidly

expan ding m iddle classes w ill be

demanding wea lth managementand other fina ncial services, edu-

cation, clean er tech nology, an d en -

vironmenta l improvemen ts, all of

wh ich Canad ians do w ell. As such

dema nds grow, the regions g lobal

sup ply chain s w ill be come more

complex, and services, investment,

an d sa les by foreign a ffiliates w ill

be at the hea rt of t rading arrange -

ments. Canad a can not afford to be

left out.

Canadian b usinesses a re diversi-

fying trad e beyond t heir traditional

dependen ce on the US market,

respond ing to market forces rather

tha n to any st rateg ic policy shift.

As p olicy does shift, the diversifica-

tion should be viewed th rough a

Cana da-US lens . Can adas long-term

interests are served by the United

States developing its ow n broad

Asia strategy and by Chinese-US

cooperation, even as the y become

rivals. Asia also faces t he u nique

challenge of reconciling the asp ira-

tions and a mbitions of its three

giant e conomies, China , India, and

Japa n. It is in no one s interes t to

see Asia turn inwa rd and become

preoccupied w ith competition

among these three giants.

Canadians are beginn ing to

realize the s ignifica nce of Asias

rising econ omic and p olitical influ-

ence and the ne ed to re-engage

w ith the reg ion. Bold leaders hip is

now req uired to shape Cana das

respons e in a spirit commens urate

w ith the reg ions g rowing import-

ance. Canada needs a genera-

tional, multi-dimen sional economic

strategy to support and advanceits interest s. Two pillars of any

Canadian Asia strategy should be

a serious com mitmen t to political-

security issue s in the region and

engagement through state -to-state

relationships, wh ich provide the


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A Strateg ic Prop

foun dat ion for comm ercial, polit-

ical, an d othe r relationsh ips. To

that end , Canad a should restore

its government s reg ional pres -

ence t hroug h high -level relation-

ship bu ilding. We shou ld d evelop a

Canada brand based on ambit ious

targets for trade and investm ent.

These ta rgets and relationsh ips

should be pursued on a n ongoing,

non-part isan ba sis supported by

a coordinated strategy a mong the

fede ral and provincial levels of

government , the private sector, and

other key s takeholders. We s hould

also be thinking of Canada as a n

Asian locationfor educa tion, non-

conventional energy, and even as

a headq uarte rs in the Americas for

Asian multinationals.

A pa rticular strateg y, or roadma p,

w ith respect to our relationship w ithChina should also be an integral part

of an e ffective Asia strateg yas

indeed, an effective Asia s trategy

and the linkages it would create

would be helpful in our dealing w ith

China. A China roadma p should ad-

dress mu tual interests: ours in trade

libera lization, investor an d inte llec-

tual property protections, sectoral

priorities, and Chinas in flows of

peop le, food se curity, ma rket access

to energy and n atural resources, and

the d evelopment of services such aseducation.

Central to a Canad ian Asia strat-

egy sh ould be t he active pu rsuit of

our interests through reg ional and

bilateral trade a nd investme nt lib-

eralization. In the long term , Can ada

should diversify its trade with China

by increasing its exports of know-

ledge -base d goods an d services

that China can not produce at this

time. At t he regiona l level, joining

the negotiations on a Tran s-Pacific

Partnership (TPP) would be the most

efficient w ay for Canada to deep en

its integration w ith other Asian

economies, but only so long as we

were w illing to p ut all issues on the

table, including s upply manage ment

and the protection of intellectual

proper ty. If not th rough TPP, the n

an aggressive strategy of bilateral or

other reg iona l economic frame w ork

agreemen ts w ill be necess ary.

Comm ercial priorities w ill also

reflect Canad as streng ths a nd

challenges. Canad ian natural

resource companies and firms such

as Manulife, BMO, Bombardier,

and SNC Lavalin already havedeveloped successful businesses

in Asia over man y years; we now

need to bu ild on these successes

and overcome th e major challenges

that confront sma ll and medium-

sized Canad ian enterprises as th ey

attempt to m ove be yond their small

domes tic ma rket and pa rticipate in

the regions supply chains. Finally,

Cana dian s should realize that, over

the next tw o decades, Asian p ro-

ducers w ill move into more d irect

competition w ith us as t hey developtheir capa bilities. To stay ahea d,

Canada w ill have to add ress its

lagging produ ctivity and other se lf-

inflicted wea knesses to ensure we

produce what Asians wa nt to buy.

Acknowledgement s: Special t hanks t o Walid Hejaziand Juan M a for assist ance wit h the empir ical

analysis and to Bar r y Norr is for his usual exper t

edit orial assist ance.


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A Strateg ic Prop

Overview and

Introduction

The rise of Asia, whe re ha lf of

hum an ity lives, is tran sforming

the w orlds economic and g eo-

political lan ds cape. Six of the te n

largest cit ies a re there a nd, w ithin

twe nty years, so wil l be th ree of

the four largest economies: China

India, and Japa n. Even before the

recent g lobal fin an cial crisis, Asia

accounte d for more tha n a fifth of

the w orlds real gross d omest ic

product (GDP), but th at sh are ha s

now increased to one-quarter

and i s even higher when measured

by pu rchas ing pow er parity. Asias

economic dynamismparticularly

Chinas role as a lead ing w orld

traderhelped p ull the res t of the

world out of the 200809 reces-

sion.

The sp eed of Asias tran sforma-

t ion is unprecedented, and h as

been made possible by a w orld

w ith open m arkets in which Asian

economies h ave thrived a nd by

the h igh savings rates of Asian ci t -

izens. As well , Asian governments

have en couraged internat ional-

ization as a route to economic

development by exploiting spe-

cialization an d scale e fficiencies

w ith p olicies s uch as industrial

upg rading an d by a l lowing losers

to fail. The ge ograp hic proximity

of dynam ic t rading partn ers w ith

differing comparative advantageshas de epene d economic integ ra-

t ion w ithin t he reg ion. Interest ing-

ly, East Asias rise is ba sed most ly

on good s product ion w hile Ind ias

relies h eavily on ser vices, but even

India has ach ieved 8 to 9 percent

real growth rates as i t gradually

open s its economy.

At the sa me t ime, Asian

countr ies are highly diverse.

Unres olved hist orical mistrus t

still colours relationsh ips w ith

outside powers a nd w ith each

other. Indeed, ma ny Asian govern-

ments depend on par tnerships

w ith pow ers outside the region,

pa rticularly the United States, to

insure ag ainst reg ional conflicts

the a l liance betw een th e United

States and Japan h as provided the

political sta bility that h as b een a

key element in Eas t Asias eco -

nomic rise. State -to-sta te relation-

ships matter for economic success,

an d fledgling regiona l cooperative

inst i tut ions are h elping to ma nage

and chan nel regional economic

and political rivalries.

Canad a, a marginal part icipan t

in this tra ns formation, is faced on

the one hand w ith s low growth

in the United States , its main

economic and strateg ic partn er,

and th e concomitant growth in

importa nce of Asias m ajor econ-

omies. While economic grow th in

Japanwith which Canada h as

a cen tur y-long bilateral relation-

shiphas sta l led, total t rade

w ith the other large Asian econ-

omies h as b een g rowing rapidly.

Trade w ith Ch ina, in part icular,is driven largely by that cou ntrys

fast-growing market dema nd for

Canad as n atural resources to feed

its goods-producing industrial

machine.

Yet Ca nad as rep utat ion in A sia


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A Strateg ic Prop

has decl ined in recent years w ith

our n eglect of bilatera l relation-

ships a nd regional inst i tut ions.

Canad ians act ive in the region

are often told th at some regard us

as u nrel iable. Canadian g overn-

ments and businesses , when they

turn up, make demands out of

proport ion to th eir importance and

then often fail to follow t hroug h.

Having investe d little in unde r-

stan ding Asian norms and conven-

t ions, Canadians often app ear to

be out of step w ith the reg ions

long-term th inking an d evolving

relat ionsh ips. Can ada has no free

trade agreement , now regarded

as a b arometer of the potent ial

of a relationsh ip, w ith any Asian

countryalthough bilateral ne-

gotiat ions w ith Singapore bega n

as long ag o as 2001. Canad ashistorically strong s upp ort for and

involvement w ith th e ten-membe r

Association of South eas t Asian

Nations (ASEAN) has declined

even as tha t body emerges as

the ma in inst itut ion prodding the

three giants to cooperate. Only in

the Asia Pacific Economic Cooper-

ation (APEC) forum h as Ca nad a

been act ive, but that forum ha s

been overtaken b y other inst i tu-

tions tha t are now driving Asias

strategic integ rat ion.Canad a need s a long-term Asia

strateg y. As a middle powe r and

latecomer to recog nizing As ias

poten tial, Can adas objectives

should be ambitious but realistic.

Our history and economic geog-

raphy are un iquely integrated

w ith and depende nt on the United

States, but that country, even as

it rema ins th e w orlds m ilitary

superp ower, wil l become a more

fruga l economic powe r, w ith

protect ionist pressures ema nat-

ing from high rates of st ructural

une mployment an d political ad-

minist rations preoccupied for at

least th e next decade w ith rebal-

ancing the economy. Canadians

cannot expe ct the United States to

continue to provide the econom ic

impetus w e have come to take

for grant ed . Economic integ ra-

tion in North A merica ha s largely

sta lled . Since its implementa tion

in 1994, the North A merican Free

Trade Agree ment (NAFTA) ha s

not kept up w ith major structu ral

change ssuch as th e rise of the

Internet, global supply chains,

and the s ervice economyor with

geop olitical shifts. Even as Asian

economies bu sily inte grate , in

North America security concerns

thicken borders, raising th e costs

of cross-border t ransact ions a nd

obstruct ing the movement of pro-

fess iona ls and te chn icians . Yet the

curren t US ad minist ration has lit-

t le interest in upg rading NAFTA;

instead, its strategic economicinterest lies in the Tran s-Pacific

Partn ersh ip (TPP), a comprehe n-

sive agreement covering trade in

goods and s ervices and invest-

ment , which many see as a clear

signal that China should not think

of Asia as its b ack yard.

Many Canad ians, however,

a re sangu ine about these t rends .

After all, Can ada e merge d from

the g loba l fina ncial crisis with a

sound fina ncial system , prudent

macroeconom ic policies a nd fis -cal posit ion, and strong dem and

for its na tura l resources des pite

a contract ion in investment a nd

net e xports in early 2009. Seen

another w ay, Canadas sou nd

economic base a ffords us flex-

ibility in ma king choices ab out

the futu re. Complacently continu-

ing our hea vy reliance on com-

modity exports and investments

w ill neither s usta in nor increase

future Canadian l iving stand ards.

Instead, we mus t modernize the

secondary sector and develop new

capa bilities in tertiary, know ledg e-

base d manu facturing and services

if we are to compete w ith eme r-

ging Asian p roducers. Canad a is


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A Strateg ic Prop

also an ag ing societyby 2020,

the med ian age of Canad ians

w ill be 42, compa red w ith 37 for

American s and 32 for Mexican s.

As the impetus for grow th from

an e xpand ing lab our force dimin-

ishes, Canadians w ill have to aug-

ment th eir relian ce on extracting

natura l resources w ith innovation

and know ledge th at add value to

those natu ral resources and to the

production of services.

At the sa me time, because of his-

tory, proximity, and re lative sizes,

the United States w ill remain cen-

tral to Can adas e conomic futu re,

and Canadas Asia strateg y should

view t he region through a Canad a-

US lens. Indeed, Canadas relation-

ships w ith the United States and

Asia are complementar yin some

sectors, for example, our US supplychain partners export advanced

intermediate goods t hat might have

come from Cana da . North Americas

long-term interests w ill be s erved

by deep er economic and p olitical

integration w ith th e Asian e con-

omies. An inwa rd-looking, more

self-sufficient Asian bloc dominated

by th e rivalries of its t hree economic

giants w ould be in no ones interest.

Canad as Asia strateg y should

also be intergen erational, in the

sense of having su fficient sup portfrom th e m ain federa l political

part ies th at i ts priorit ies and broad

agend a continue to be pursued

regardless of the pa rty in power

in Ottawa , and i t should also take

into account the provinces eco-

nomic aspirations in Asia with in

the Canadian brand.

In this stu dy, I propose t he out-

lines of an Asia strate gy for Can-

ada. I begin by sum marizing the

sta te of play of Can ad as relation-

ships w ith the United States and

w ith Asias en gine e conomies

China, India, Indonesia, Japa n,

South Korea, Thailand , and Ma-

laysiawhich th e Asian Develop-

men t Ban k calls the Asia-7. I also

provide some compa risons w ith

Australia, wh ich has h ad a focused

Asia strateg y for a generation. I

then a na lyze sectoral pattern s of

trade w ith and direct investme nt in

the five largest Asian economies,

and draw out some implications forpolicy. Next, I tu rn to th e ta rget s

and plans that China a nd India, in

par ticular, have set for them selves

for the coming decade , and asse ss

the commercial opportun ities of

this agen da for Canada over the

next tw o decades. In the pen ultim-

ate s ection, I take a closer look at

options for major enha ncements

of Can ada s econ omic relationsh ip

w ith Asia, such a s joining the TPP

and entering into a comprehensive

economic agreeme nt with China.Fina lly, I propos e a st rateg ic frame -

work that looks out tow ard 2030,

and offer some closing t houghts .


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A Strateg ic Prop

Canadas

Economic

Relat ion s : The

Stat e of Play

Despite the fund amenta l reshap -

ing of the interna tional economic

lands cape, the w orlds largest

t rading relat ionship remains that

be tween Can ada and the Uni ted

States (Figu re 1). Indicative of

the recent sea chan ge, however,

is that China is now Canad as

second-largest t rading pa rtner,

though Cana da-China t rade st i l l

amounts to just 10 percent of Can-

adas t rade w ith th e United States.

Canad as next tw o most important

Asian t rading partn ers are Japa n

and South Korea, with India and

Indonesia lagg ing far behind. That

said, in the past five years Can-

adas e xports to China, India, and

Indonesia have grow n at double-

digi t rates w hile those to the

United States and the Eu ropean

Union have g rown more slowly or

even sh run k (see Ta ble 1). Flow s of

immigrants and s tudents a re a lso

significant , with China topping

the l ist of num bers of immigrants,

followe d by India, Japa n, and

South Korea. More Cana dian s live

in Hong Kong tha n anyw here else

in Asia. Measu red b y stocks of for-

eign d irect investmen t (FDI), how-

ever, the As ian economies rema in

well dow n the l ist as b oth dest ina-

t ions and sou rces, w ith both Japan

and China trailing Brazils C $15

billion s tock of FDI in 20 09 (Ap-pen dix Table A-2), although t he

use of tax havens, w hich account

for a s ixth of Cana das $593 billion

tota l outw ard s tock in 2009, com-

plicate de stina tions of Can adas

outward investment .

For Cana da, howe ver, wh at

s tand s out in s ke tches of the dr iv-

ers of its reg ional an d bi lateral

relationships (see Appendix B) is

the a bsence of an overa l l s t ra tegy

tha t recogn izes As ias import-

ance to Cana das economic futu re.

Trade neg otiat ions are ad h oc.

Consu ltat ions with private sector

groups and other levels of govern-

ment a re ad h oc . And a robust

syste m of nat ional consu ltat ions

focused on th e nat ional interes t

no longer exists , leaving th ese a d

hoc a rrangements vulnerable to

captu re or delay by spe cial inter-

ests . Accordingly, Can adas repu-

ta t ion in Asia has b een da maged

by s tart -stop bi lateral init iat ives

and by wh at appears to others

to be an exa ggerate d view of i ts

own importance . Adding to the

lack of a s trateg y th at rea l ist ical ly

assess es the importance of these

major economies to Canad a is the

scarci ty of an alyt ic and neg otiat-

ing resources. Instea d, the feel ing

seems to be th a t i t is point less to

al locate resources th at are thin

on the ground to pursue a par t ia l

agree ment w ith, say, Ind ia, a

count ry tha t , to Canad ians , seemsto lag far beh ind China in eco-

nomic sign ificance.


11/42


A Strateg ic Prop

Figure 1. Total US Trade with

M ajor Trading Par tners

and Selected Asian Economies,

2000-2010

700

600

500

400

300

200

100

0

Canada

China

Japan

South Korea

India

Singapore

Hong Kong

Australia

Indonesia

Viet Nam

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

60

50

40

30

20

10

0

India

Singapore

Hong Kong

Australia

Indonesia

Viet Nam

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Instr uctive here is Austra lias strat -

egy t oward Asia. Indeed , Australia

ha s developed a n influen tial role in

the region far out of proportion to its

economic size, wh ich is a th ird sma ll-

er than Can adas. More than tw enty

years ago, the Australian govern-

ment initiated a m ajor economic an d

political study of northea st Asias

economic prospects, wh ich pa inted a

clear p icture of the reg ions p otentia l

an d mad e far-reaching policy recom-

mendat ions that were taken up at

the h ighes t level and h ave been su s-

tained by su ccessive governments

of both m ajor pa rties. An e xplicit

assumption in Australias strategy is

that its relationships w ith the United

States, with w hich it ha s a military

alliance, and the Asian economies


12/42


A Strateg ic Prop

are complementary. Australian gov-

ernments also have invested heavily

in maintaining personal relation-

ships at the h ighest level, as Prime

Minister Gillard d emonstrated whe n

she visited Japa ns prime m inister

following the recent de vastating

earthquake and tsunami. Australia

has also sought to improve its dip-

lomatic, edu cational, an d rese arch

capabilities w ith respect to the major

Asian economiesone target is

tha t, by 2020, 12 percent of Austral-

ian school leavers sh ould be a ble to

spea k an Asian languag e. Austra lia

has also completed or is negotiating

bilateral free trade a greements w ith

ASEAN as a w hole, w ith each of its

more advanced mem bers, and with

Jap an , South Korea, and Ch ina. It

wa s former Australian prime min-

ister Kevin Rudd wh o advanced the

Big Idea of an Asia-Pacific Com-

mun ity, wh ich led to Russia and the

United States joining the East Asian

Summit.

Table 1. Canadas Diversifying

Trade: Goods and Services

Trade by Major Par tner,

2008-2010

PARTNER

Exports ImportsTrade

Balance

Average

Value

(C$ billions)

Average

Share

(%)

Average

Annual Growth

from2006

(%)

Average

Value

(C$ billions)

Average

Share

(%)

Average

Annual Growth

from2006

(%)

Average

Amount

(C$ billions)

WORLD 469.5 100.0 1.5 496.9 100.0 0.7 27.44

UNITED

STATES 336.3 71.6 3.0 255.8 51.5 0.7 80.45

EUROPEAN

UNION 47.4 10.2 2.4 62.9 12.7 0.2 15.50

CHINA 11.6 2.1 10.3 44.2 8.4 7.9 32.56

JAPAN 10.4 2.2 1.0 15.2 3.0 2.6 4.74

INDIA 2.8 0.5 12.7 2.8 0.5 8.1 0.05

INDONESIA 1.6 0.3 23.7 1.2 0.2 4.5 0.45

SOUTH

KOREA 4.6 0.8 4.8 6.4 1.2 1.6 1.85

REST OF

WORLD 62.6 11.3 11.0 106.4 20.1 6.4 43.80

Source:Canada, Indust ry Canada, Trade Data Online;

available at http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home; accessed May 21, 2011.

Instru ctive h ere is Aus tralias s trat-

egy toward Asia. Indeed, Australia

has developed a n influent ial role in

the region far out of proportion t o

its economic size, wh ich is a th ird

sma ller tha n Can adas. More than

twent y years ago, the Australian

governme nt initiated a m ajor eco-

nomic and political stu dy of north-

eas t Asias economic prospects ,

wh ich pa inted a clear picture of the

regions p otential and mad e far-reaching p olicy recommend ations

that were taken up at the highest

level and have been s ustained b y

success ive governme nts of both

major pa rties. An explicit ass ump -

tion in Aus tralias s trateg y is that its

relationships w ith the United States,

w ith wh ich it has a military a lli-

ance, and th e Asian economies a re

complement ary. Aust ralian govern-

ments a lso have invested h eavily

in mainta ining pers onal relation-

sh ips at t he h ighest level, as Prime

Minister Gillard demonstrated when

she visited Japa ns prime minister

follow ing the recen t devas tating

earthq uake and tsu nam i. Australia

ha s also sought to improve its d ip-lomatic, educationa l, and resea rch

capabilities w ith resp ect to the ma-

jor Asian economies one ta rget is

tha t, by 2020, 12 percent of Austra l-

ian school leavers sh ould be a ble to

spea k an Asian lang uage. Australia


13/42


A Strateg ic Prop

has also completed or is neg otiating

bilateral free trade ag reemen ts w ith

ASEAN as a w hole, w ith each of its

more advanced mem bers, and w ith

Japa n, South Korea, an d China . It

wa s former Australian prime min-

ister Kevin Rudd w ho advan ced the

Big Idea of an As ia-Pacific Com-

mun ity, which led to Russia an d the

United States joining th e East Asian

Summit.

The Australian example thus

provides a mode l for Canada to

consider if it is serious a bout reviv-

ing its pa rticipat ion and visibility

in Asia. Before considering our

options, how ever, I first wa nt to

ta ke a closer look at our exist ing

relationsh ips w ith the major Asia

economies and to place them in the

context of wh at the reg ion might

look like in 20 30.


14/42


A Strateg ic Prop

A Clos er Look

at Can ad as

Economic

Relationships

w ith Asia

In the pas t decade, Canad as trade

has been diversifying be yond

its historical focus on t he United

States and Europe and toward

Asia, wh ich is timely cons idering

that, in 2006, China overtook

Canad a as t he largest sou rce of US

imports. As Table 2, show s, be-

twe en 2000 a nd 2010, Asias sh are

of goods exp orts to Canada rose by

nearly three a nd a ha lf percentage

points and imports by more tha n

six points. Similar grow th took

place in serv ices trade (Tab le 3).

In both cases, much of the g rowth

took place in trade w ith China

trade w ith Japa n largely stagn ated

wh ile tha t w ith India grew from

a very sma ll bas e. In contrast , the

United States share of both g oods

and services exports declined over

the de cade, a trend that accelerated

during th e recent global financial

crisis, when Can adas trade w ith

the United States dropped off more

sharply than d id i ts t rade w ith a ny

Asian p artners; t rade with the

United States recovered s mar tly in

2010, but at a slower pace th an t hat

w ith China (Figure 2).

Table 2. Canadas M erchandise

Trade with the United States


20 00 10

2000 2005 2010Annual Growth

of Share

Share of Exports (%)

CHINA 0.89 1.65 3.31 14.04

JAPAN 2.25 2.10 2.30 0.22

SOUTH KOREA 0.57 0.65 0.93 5.02

INDIA 0.14 0.25 0.52 14.02

HONGKONG 0.35 0.33 0.48 3.21

INDONESIA 0.17 0.16 0.27 4.73

SUBTOTAL 4.36 5.14 7.81 6.00

UNITED STATES 86.95 83.82 74.89 1.48

Share of Imports (%)

CHINA 3.16 7.75 11.02 13.31

JAPAN 4.65 3.89 3.33 3.28

SOUTH KOREA 1.48 1.41 1.52 0.27

INDIA 0.35 0.47 0.53 4.24

INDONESIA 0.25 0.25 0.31 2.17

HONGKONG 0.41 0.15 0.09 14.07

SUBTOTAL 10.30 13.91 16.81 5.02

UNITED STATES 64.33 56.49 50.37 2.42

Source:Canada, Indust ry Canada, Trade Data Online; available at

http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home; accessed May 21, 2011.


15/42


A Strateg ic Prop

2000 2005 2006 2007 2008 2009 2010 AnnualGrowth

(%)Exports (C$ millions)

WORLD 59,718 67,599 68,386 69,804 72,113 67,144 70,090 1.61

UNITED

STATES 36,601 38,260 36,781 38,102 38,693 35,386 37,208 0.16

JAPAN 1,869 1,535 1,565 1,296 1,266 1,049 1,244 3.99

CHINA 738 1,019 1,079 1,075 1,154 n.a. n.a. 5.75

HONG

KONG 756 996 1,189 1,000 1,039 n.a. n.a. 4.05

INDIA 249 306 335 308 355 n.a. n.a. 4.53

INDONESIA 202 172 148 169 149 n.a. n.a. 3.73SOUTH

KOREA 568 657 735 783 757 n.a. n.a. 3.66

SINGA-

PORE 292 376 411 387 379 n.a. n.a. 3.31

Imports (C$ millions) (%)WORLD 65,500 79,654 82,521 88,593 94,432 89,807 93,398 3.61

UNITED

STATES 41,686 46,392 46,694 50,278 52,702 49,943 52,544 2.34

JAPAN 2,068 2,461 2,145 1,846 1,637 1,404 1,726 1.79

CHINA 442 867 1,170 1,258 1,558 n.a. n.a. 17.06

HONG

KONG 967 1,706 2,010 2,183 2,779 n.a. n.a. 14.11

INDIA 168 302 352 369 589 n.a. n.a. 16.98

INDONESIA

84 81 79 87 87 n.a. n.a.

0.44

SOUTH

KOREA 303 334 379 403 431 n.a. n.a. 4.50

SINGA-

PORE 481 945 1,047 1,169 1,169 n.a. n.a. 11.14

n.a.: not available.

Source:Canada, Indust ry Canada, Trade Data Online; available at

http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home; accessed May 21, 2011.

Table 3. Canadas Services

Trade with the United States


20 00 10

Figure 2. Total Canadian Trade

with M ajor Trading Par tners


2000-2010

600

500

400

300

200

100

0

United States

Hong Kong

India

SingaporeChina

Indonesia

Japan

South Korea

VietnamAustralia

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


16/42


A Strateg ic Prop

Figure 2 , Cont inued 60

50

40

30

20

10

0

Hong Kong

India

Singapore

China

Indonesia

Japan

South Korea

Vietnam

Australia

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Since trad e a nd F DI are largelymarket driven how does th is

performance accord w ith Canad as

evolving comparative advantage

and competit iveness ? In broad

term s, a count rys competitiveness

in merchandise t rade is evaluated

by comparing i ts exports in an

industry to a part icular dest inat ion

w ith its total exports in that indus-

try to th e w orld at large . (Unfortu-

nate ly, a similar breakdow n is not

available for services trade .) When

exports to a part icular dest inat ionexceed the global sha re, the mea s-

ureknow n as revealed compara-

tive ad vant age (RCA)indicates

the exporting countrys competi-

t iveness in that m arket . Table 4

compare s the relative compe titive-

ness of Canadian indus tries in

foreign ma rketsinclud ing, by

inference, the Chinese marketin

two w ays: panel A ran ks those

prominent in world m arkets by

trade sh ares (colum n 3), wh ile

pan el B ranks t hem b y their prom-inence in Ca nad as tota l trade (col-

um n 4). Notab ly, those indus tries

prominent in world m arkets (panel

A) accou nt for relatively sma ll

sh ares of Can adas trade , reflect-

ing the continued dominance of

the United States as a dest inat ion

for Canadian e xports.

The ta ble also shows Ch inas

relative compet itivene ss in w orld

markets, meas ured b y its RCA by

indu str y (pane l A, colum n 6). For

Canadians, the key, and p erhapssurp rising, finding is that Ch inas

comparative advan tage is negative

in all industries in wh ich Canad a

is a world lead er. In pa nel B w e se e

that , with the exceptions of ma-

chinery and e lectrical eq uipment,

Chin a is relatively les s comp etitive

than Canada in the other indus-

tries. Can ada is a lso revealed to be

competitive in most of these indus-

tries in the Ch inese market (panel

A, colum ns 7 and 8, and p anel B).


17/42


A Strateg ic Prop

Table 4 . Canadas Comparat ive

Advantage by Industry

Industry (1)

Industrys Export

Share Industrys RCAin:

RCAof

Industry

(2)

as % of

World

Exports

(3)

as % of

Canadian

Exports

(4)

Trend of

Industrys

RCAver-

sus World

(5)

Chinas

RCAin

Industry

(6)

Trend of

Chinas

RCAin

Industry

(7)

China

(8)

South

Korea

(9)

India

(10)

A. Ranked by Share of World Exports

75 NICKEL 2.1 16 1 0.00 0.9 + + + +

47 PULP 3.1 15 1 0.04 2.4 0 + + +31 FERTILIZERS 2.6 10 1 0.00 1.1 + + +

79 ZINC 0.6 10


18/42


A Strateg ic Prop

such as construct ion and other

services sugges t Cana dians are

finding that competit ion is intens i-

fying an d that the Chinese govern-

ment is according preferences to

Chinese enterprises.

Several observations are su g-

gested by these find ings. Canad as

competitiveness in natu ral resou r-

ces (pa nel A, colum n 5) is relatively

static; though it is w orsening in

pulp and paper and w ood products,

these industries remain competitive

in Chin a (column 7). It is trou bling,

howe ver, that Cana das competitive-

ness in veh icles an d aircraft appears

to be d eclining (colum ns 5 and 7).

Trade is largely complement ary

but Canada buys tw ice as much

manu factures from China a s China

buys in nat ura l resources from us;

our trade de ficit grew by nea rly 50percent betwee n 2005 and 2010.

Cana da could close th is gap by sell-

ing more natural resources to China.

In the longer term, how ever, the

solution should be to diversify bilat-

eral trade, w ith Can ada exporting

more knowledge-based goods a nd

services that China can not produce,

and b y restoring Canad as declin-

ing advantages in industries s uch

as veh icles a nd a ircraft. Now m ight

be an opportune time for the two

countries to liberalize bilateral tradesince in the future both count ries

wou ld ben efit from a framew ork

that facilitates s pecialization and

intra-industry trade.

Table 4 also reveals that Can -

ada can compe te in South Korea in

most of the industries in w hich it

is a w orld leade r. But some of the

industries a ccounting for a large

sha re of Can adas tota l trade wh ich

are competitive in Ch ina are not

compet itive in South Korea. One

explanation for these p attern s is

sugg este d in Table 5 wh ich ranks

Canad as te n m ost competitive in-

dus tries by RCA in the five larges t

Asian e conomies plus Hong Kong.

None of the te n th at are competi-

tive in South Korea is a ma nu fac-

turer. This is not s urprising g iven

South Koreas su ccess in global

supp ly chains in goods ma nufac-

turing. Instead, natu ral resources,

foodstu ffs, and inputs t o early

stag es of South Korean produc-

tion p rocesses account for most of

Canad as top ten exports to th at

country. In the other economies,

too, Canad a tend s to be more

compe titive in activities furth er

down the value chain, rather than

in manu facturing (shown in bold

type).

Wha t are th e policy implications

of this picture for Canada? First,

our competitiveness in na turalresources implies th at we should

anticipate g rowing Asian interest

in investing in this country in order

to enh ance s upply. Second, the

picture is confined t o merchandise

trade . Since reg iona l produc tion

netw orks are a major featu re of

economic flows into and w ithin

the Asian reg ion, policy wou ld b e

much b etter informed if additional

meas ures w ere available as to how

Canadians a re doing w ithin these

regional networks; th ese me as-ures w ould include m ore detail

on outw ard FDI flows w hich are

integral to the services an d sales

abroad by foreign a ffiliates of Can-

adian compa nies. Third, although

Canadas trade diversification

beyond th e United States is driven

primarily by Asian m arket deman d,

the size of our US trade continue s

to sh ape our competitive profile in

key non-commodity indust ries. Are

we ade qu ately leveraging these

strengths in Asian ma rkets and

supp ly cha ins?


19/42


A Strateg ic Prop

Table 5. Top Ten Industries

in which Canada Has a Strong

Positive RCA in the United

Stat es and Major Asian

Economies, 2010

Rank

United

States China Hong Kong India Indonesia Japan

South

Korea

1

mineral

fuels pulp nickel vegetables fertilizer oil seeds pulp

2 vehicles

ores, slag

and ash meat fertilizer pulp meat fertilizer

3 paper

animal,

vegetable

oils fish pulp cereals wood aluminum

4 aluminum oil seeds fursiron and

steelmachinery/

nuclear pulp wood

5 plastics wood oil seeds

salt,

sulphur,

stone,

cement meat cereals cereals

6 wood nickel

pharma-

ceutical

products

optical

apparatus aircraft fertilizer

ores, slag

and ash

7 fertilizer

mineral

fuels paper

pearls,

precious

stones

salt, sul-

phur, stone,

cement aircraft nickel

8

commod-

ities (not

elsewhere

specified)

organic

chemicals

animal,

vegetable

oils

textiles/

apparel rubber prod

ores, slag

and ash meat

9 pulp copper plastics aircraft fish fish oils

10

iron and

steel

machinery/

nuclear wood nickel vegetables

milling

products furs

Note:Manufacturing industries are shown in bold type; data for Hong Kong and India are for 2009.

Source:Authors calculations, from Canada, Industry Canada, Trade Data Online; available at

htt p://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home; a ccessed May 21, 2011.

Fina lly, since a m ajor goal of the

Asian economies is to move up the

technology ladder, Canada h as a

strategic rationale for negotiating

bilateral and reg iona l trade ag ree-

ments w ith them sooner rather

tha n later. In the a bsen ce of such

arrang ements , Canad as relative

lack of compet itivenes s in s elling

man ufactured g oods to South Korea

could foresh adow the fate of our

value-adde d e xports t o, say, India,

as tha t count rys trade pattern s

increasingly resem ble those of

South Korea in Asias continu ing

economic tran sformation.


20/42


A Strateg ic Prop

Asia in 2030 Asia is on th e move: this, many inthe reg ion claim, is the Asian Cen-

tury. By 2030, estimate s th e Asian

Developme nt Ban k, Asias m iddle

class es w ill num ber more than 2

billion pe ople, and trillions of dol-

lars w ill have to be invested in t he

physical and s ocial infrast ructure

theyand th e aging populations

of countries such as Japa n and

Chinaw ill dema nd. At the sa me

time Asians are facing e ducation

and innovation dilemm as: w hile

large investm ents in e ducation

are being made in both China and

India, these are p roducing millions

of college gradu ates alongside

serious s hortages of techn ical and

scientific s kills.

Asia is also rapidly urba nizing:

by 2020, it w ill conta in 13 of the

w orlds 25 large st me tropolises,

each w ith more th an ten m illion

people. And Asia is integrating,

as major investmen ts are m ade in

trans portation routes to facilitate

intra-regional trade. Asian enter-

prises are also moving up th e rank-

ings of the w orlds largest firm s a nd

fina ncial ins titutions: in 2010, 23 of

the t op 100 of the Fortune Global

500 by total revenues w ere Asian,

11 from Japa n, 6 from China , and 3

from South Korea. Enterp rises s uch

as Samsu ng Electronics, Toyota,

Honda, Hyund ai, Tata Motors,CITIC, Cosco, an d th e na tional oil

companies of China a nd India are

among the worlds ma jor outwa rd

investors. Indee d, the single larges t

determ inant of rising w orld p rices

for oil and oth er nat ural resources

is incrementa l Asian dema nd.

As Asians increasingly think

Asian, two things are happ ening.

First, Asians a re creating th eir ow n

regiona l institut ions in se curity,

finan ce, and trade and inviting the

United States t o join. For years th e

Asia-7 followe d exp ort-led develop-

ment models that focused on fina l

markets in the advanced industrial

countries. India and its dynamic ser-

vice sectors as ide, most East Asians

pa rticipat e in regional production

netw orks organized around Ch inese

assem bly platforms. These regional

netw orks proved to be a doub le-

edged sw ord in the global financial

crisis when export dema nd in final

goods ma rkets evaporated, a shock

that cascaded th rough Asian sup ply

chains. The w akeup call prompted

East Asian governments to shift

their growth strategies toward

regional and d omestic dema ndto

a hea vier relian ce on other sou rces

of grow th, such as s ervices and

improved p roductivity, to rep lace

low-cost m anu facturing.

Second, Asian s are coming

to terms w ith slower economic

growth. Unthinkable before the

globa l crisis, slowe r grow th n ow

seem s inevitable as social and

political tensions rise over the side

effects of rapid industrialization, ris-

ing income inequ ality, and environ-mental de gradation. Sustaining

economic grow th th rough produc-

tivity increases a nd inn ovation,

which require institutional change,

is proving a challeng e. In th e de c-

ade ahead , we can expect grow ing


21/42


A Strateg ic Prop

pressures on Asian policymakers

to improve income distribut ion a nd

services, particularly those t hat

fulfill middle-class aspirations for

housing , hea lth, education, fina ncial

secu rity, and en vironme nta l qu ality.

China a nd India What w ill mas sively populated

China a nd Ind ia look like by 2030?

In the shor t t e rm, both a re s t rug-

gl ing w ith w idespread corrup-

t ion and persistent inflat ionary

pressures . Beyond tha t , grow th

in the five-year economic plans

of both countries (coincidently

the t we lfth for each) is heade d in

opposi te d irect ions. Ch inas p lan

for 201115 is to mod erat e th e

economys g rowth ra te and under-

take a m ajor rest ructu ring, while

Indias p lan for 201217 aims for

910 percent economic grow th to

generate jobs and promote social

inclusiveness . Both w ill undoub t-edly be preoccupied w ith th ese

goals far into the future.

China intends to rebalance its

economy to rely more on g rowt h in

household consumption a nd less

on heavy investment in industrial

export-oriente d production. It is

also shifting production and de -

velopment to the inland reg ions. It

intends to boost cons ump tion by, for

example, increasing the minimum

wage , spending more on the social

safety net and s ocial housing, andpus hing for even more urban iza-

tionCh inese cities are expecte d

to grow by 300 m illion pe ople over

the ne xt 30 years. China is also

encouraging g reater private sector

par ticipation in t he labour-intens ive

service industries through dereg u-

lation a nd m aking fina ncing more

accessible for small and med ium-

sized business. Innovation and

productivity grow th are a lso pa rt of

Chinas reba lancing strate gy, with

the ta rgeting of seven emerging

pillar indu stries, three of them

green: renew able energy sources,

energy conservation, new energy

(electric cars), biotech nology, new

materials, advanced manu facturing

(including high-speed trains and

aerospace), and new-generation

information te chnology. The plan

calls for energy prices to b e de ter-

mined m ore by market forces than

by governme nt fiat, and for carbon

emissions to b e ta xed. The large

industrial state-owned enterprises

w ill pay higher dividend s to the ir

central government owners, and a

planned value-added ta x w ill cede

more tax room to local governments ,

wh ich h ave had to rely heavily on

revenues from land sales.

In contras t, Inidias five yea r plan

is more indicative an d a spirational

becaus e of the d iffused nat ure ofpow er in Indias federal structu re.

The five year plan p laces g reater

emphasis than in the past on

greater market efficiency, innova-

tion, and en ergyin the latter tw o

areas, India is a lready a leader in

the developing w orld. India is a lso

focusing on e ducation, transp or-

tation, and urba nizationcities

are to retain a portion of the new

national value-added tax to h elp

with their finances. Indias political

diversity, how ever, makes it un cer-tain wheth er the country can reach

its economic potential without

determ ined efforts by the dyna mic

private se ctor. Some stat es, like Gu-

jarat, approach developed -countr y

levels, wh ile p opulous northea stern

states such as Uttar Pradesh and

Biha r lag far beh ind. Product ma r-

ket reforms have not been m atched

by labour m arket reforms. Over the

next tw enty years, India w ill have

to a bs orb 250 m illion 15-to-24-year-

olds int o the lab our forceyet 90

percent of Indian em ployment is

cas ua l, devoid of ben efits or skills

training. Opposition from pow erful

interest groups is slowing th e pace

of domestic reform and ham pering


22/42


A Strateg ic Prop

Slow er grow th: As midd le-class

consumption assumes greater

importance relative to investment

grow th in the more advanced East

Asian economies, slower g rowth

w ill mean more intense competi-tion among foreign exp orters of

natura l resources, l ike Canad a,

and more production opportu nit ies

in the developing economies such

as Bangladesh , Sri Lan ka, and

Vietna m to wh ich labou r-intens ive

manu facturing is sh ift ing.

Declining saving rates: On e

outcome of aging and rising

consumption among Asian popula-

t ionsw ith increasing deman ds

for residential, infrastru ctu re, and

productive investmentis declin-

ing rates of househ old saving . A

recent McKins ey forecas t of the

supply of and dema nd for invest-

ment in physical capital in As ia

out to 2030 predicts a g rowing

short fall of the su pply of capital

and higher capital costs.

The middle-income trap: Rising

expect ations by those asp iring to

midd le incomes cou ld lead to ris-

ing p olitical tensions as Chinese

and Indian governments struggle,

without the necessary institutionalstructures, to address regional

and income inequ alities. Some

worry that pus hb ack from pow er-

ful veste d interests w ill cause

growth rates to slow a nd p er capita

incomes to stagnate, known a s the

middle-income trap, that w ill be

difficult to es cape . Indias p olit-

ical leaders, even wh en h olding a

pa rliam ent ary m ajority, have failed

to carry out targete d job-creation

reforms, and the Ind ian pa rlia-

ment is p aralyzed b y corruption

scand als. China faces persistent

inflation, while strong political

pressu res oppose solutions such

as excha nge rate ap preciation. The

country also faces the ch allenge of

a major leadership transition over

the next few years.

Risks and Uncertainties

Business Opportunit ies

for Can adia n Firm s

Despite the cha l lenges China an d

India face in the years ahead , their

economic plans offer opport un ities

for Canadian b usinesses , part icu-larly in area s such a s ag ricultu re,

natura l resource commodit ies,

energy, and t he e nvironment (in-

clud ing so-called clean te chnology

and greener u rbanizat ion), and in

services such a s hea lth care, edu-

cat ion, entertainment , and t ourism

for which dema nd by midd le-class

Chinese an d Indians is rising.

The env ironment: Chinas

ques t for cleaner en ergy ha s

moved beyond am bit ious plans

for nuclear g enerat ion to a des ire

to pursue new sources such as

w ind, solar, biomass , coal-bed

metha ne, and sh ale gas. As we ll,

Chinas commitmen t to redu ce

carbon emissions h as t riggered a

w ave of activity in clean te chnolo-

gies, including smart grids, carbon

capture and storage, and bat tery

storage t ech nologies. These pr ior-ities w ill create m ajor opportu n-

i t ies for Canad ian firms in energy

and other consu lt ing services th at

ass ist, for example, in the d esign

and expan sion of conservat ion

activities.

Health care: By 2030, China

is expe cted to have 300 m illion

people of ret i rement ag e, and they

w ill be dema nding bet ter heal th

care services th an a re provided to-

dayCh inas rising midd le class es

are a lready creat ing dema nd for

high-end med ical and hea lth care

servicesopen ing opp ortunit ies

for foreign p art nersh ips in medical

research and med ical equ ipment

production.

libera lization of invest men t and

trade, both of wh ich are need ed to

mainta in Indias grow th momen-

tum in the years ahead.


23/42


A Strateg ic Prop

Urban services: By 2030, more

tha n a b illion Chinese and 600 mil-

lion Ind ians w ill live in cities, ma k-

ing the qu ality of urban life a major

issue in b oth countries. Both h ave

am bitious plans to increase energ y

efficiency, mas s t ransit infrastruc-

ture, and water t reatment and

sa nitat ion facilities , althou gh Ind ia

faces m ajor challenge s in th ese

areas, p articularly in its bu rgeoning

second a nd t hird-ran k cities.

Services for the m iddle classes :

Fast-growing m iddle classe s in

both countries are dema nding

bet ter services not only in health

care, as noted, but a lso in areas

such as h igher educat ion and

fina ncial services. Affluent Ch i-

nese a re demand ing access to

finan cial inst i tut ions to m ana ge

their crossborder t ransact ions,wh ile th e rising internat ional

presence of Chinese compan ies

is increasing dema nd for under-

w riters and investme nt banking

services. Chin as cap ital market is

much less developed tha n Indias,

except in th e issu ing of corpor-

ate bond s, wh ile privately own ed

corporations in both countries st ill

face heavy restrictions on bond

financing.

Tourism: The increasing a fflu-

ence of middle-class Chinese andIndians is expected to boost their

dem an d for foreign travel signifi-

cantly. China has a lready gra nted

Canad a approved destinat ion,

opening ne w opp ortun ities for Can-

adian travel services as m ore Chi-

nese nationals visit th is country.

New technologies: Chinas

targe ts for biotechnology and

na notech nology as area s for break-

throughs in b asic research signal

a larger s et of educational oppor-

tun ities. The state has planne d a

tota l inves tme nt of US $20 billion

in biotechnology by 2030, wh ile

nanotechnology received some

of the US$50 billion allocated t o

research and development fund-

ing in the 2008 stimulus package.

Many of these resources have b een

allocated t o the large un iversities

and research centres, but smaller

centres have also benefited a nd it is

there that u niversities a nd firms are

more open to foreign collaboration

and to edu cationa l opportu nities

encouraged by local governments.

Outflow s of Chinese capital: As

domestic growth slows, both state -

owne d and and non-state enter-

prises w ill seek to expand a broad.Profitable state-owne d enterprises

w ill wa nt access to natu ral resource

assets, new m arkets, brands, and

tech nologies. Desp ite the h igh

profile of Chines e FDI in the United

States, its total is still less tha n

th at of South Korea, Brazil, or Ind ia.

That, how ever, w ill chan ge. The

New York-based Rhodium Group

est imates th at, if Chinas outw ard

investmen ts w ere to follow a trajec-

tory similar to Japa ns in t he 1970s

and 1980s, Chinese investors wouldinves t US$12 trillion ab road in th e

next decade, w ith much of it headed

for the United States. Canad a cur-

rently receives 75 p ercent as much

Chin es e F DI ($9 billion in 2010) as

the United Stat es ($12 billion); w ere

tha t ratio to continue, hund reds of

billions of dollars of Chinese invest-

ments could be h eaded for Canada .

The Imp lication s

of As ias Rise

By 2030 Asia could be at th e cen-

tre of global econom ic gra vity. Ifthe reg ion is to achieve su stained

grow th , how ever, it will have to

dep end m ore heavily on productiv-

ity growth and on domes t ic and

regional dema nd. How far this re-

balancing proceeds in the coming

decade dep ends on the polit ical

w ill to address interests vested inthe entrenched e xport-led grow th

model.

In adapting t o this economic

gravity shift , Canada has many

distinctive compet itive ad vantag es.

It is th e w orlds larges t produce r


24/42


A Strateg ic Prop

and exporter of uranium a nd p ot-

ash; t he se cond-largest producer of

nickel, wheat, and hydroelectricity;

and the th ird-larges t producer of

natural gas, diamonds, and renew-

able fresh wa ter (of wh ich it has 7

percen t of the w orlds t ota l). Its cit-

ies a re attractive an d w ork we ll

the World Economist Liveab ility

Index ran ks Van couver, Toronto,

and Calgary among the top ten

most liveable cities in the w orld.

Canadian-based firms compete

globally in construction and infra-

structure development; Canadian

pub lic pens ion an d social security

arrangements a re sustainable;

and its financial inst itutions are

strong.

Canad ians can leverage these

streng ths in imaginat ive a nd for-

wa rd-looking ways to help Asians

meet th e chal lenges of educa-

tion that encourages creativity

and innovation; access to natural

resources; t he developmen t of al-

tern ative energ y sources, liveab le

cities, and reliab le infrastru cture;

and g rowing middle-class de -

man ds for modern se rvices.


25/42


A Strateg ic Prop

Enhancing

Can ad as Asia n

Eco nom ic Ties

The importance of state-to-state

relationships mea ns th at the reli-

able and trans parent framew orks

in which Canadian bu sinesses

respond to these opportun ities can-

not be bu ilt without comprehen sive

bi or multilateral economic ag ree-

ments . Two options a re of pa rticular

interest: joining the Tra ns -Pacific

Partnership and pursuing a deeper

economic relationsh ip with China

both p otential game changers for

Canada a nd by no means mutua lly

exclusive.

Joining t he

Trans-PacificPartnership

The TPP aims to be a compre-

hens ive, high-qua lity free tradeagreeme nt open to any economy

around th e Pacifica geograph ic

notion th at, in this case, even

includes Indiathat accepts th e

agreem ents a mbitious goals. The

TPP had mode st origins, begin ning

life in 2006 as an agreem ent am ong

Brune i, Chile, New Zealand , and

Sing apore. The s o-called P4 found

the a greeme nt relatively eas y to

negotiate b ecause of their comple-

menta ry economic structu res.

Sign ificantly, they e sta blished amecha nism for other countries to

joinAustra lia, Ma laysia, Peru,

and Vietna m have done so, Japan

has signa lled its interest, and

South Korea could follow wh en t he

US Cong ress ra tifies th e US-South

Korea free trade agreem ent. The

United Sta tes joined the T PP in

2009, considerably expa nding the

negotiations t o include fi nan cial

services and investment, wh ich had

been deferred in the initial agree -

ment. The Americans also com-

plicated t he ta lks by introducing

NAFTA Plus issue s such a s the

environme nt and labour, govern-

ment procurement , and intellectua l

property enforcementpa rticularly

on pha rmaceuticals and copyright

issuesand by argu ing for the useof sanctions ag ainst violators. The

TPP does not a ffect a ny count rys

commitments u nder th e World

Trade Org an ization (WTO), but

free trade a greeme nts a lready in

forcefor exam ple, those b etw een

the United States a nd, sep arately,

Chile (2003), Singapore (2004), and

Australia (2005)may be upg raded

as p art of TPP neg otiations.

For many Canadians, h owever,

the idea of hitching their economic

w agon t o rising Asia is still belowtheir radar. Most remain unaw are

of the TPP, and yet the pa rtners hip

could be a gam e chan ger, for several

reas ons . First , its inclusion of se r-

vices a nd investme nt offers a wa y

to address NAFTAs deficiencies in

services, reg ulatory harmon ization,

and investmen t. Second, the TPPs

broader reach an d mu ltiple neg otiat-

ing par tners could increas e oppor-

tun ities to make the trade offs that

are a vital part of any comprehe n-

sive ag reemen t. In Canad as case , it

would have to b e w illing to discuss

intellectu al property protection and

agricultural supp ly ma nagement,

areas w here it is viewe d as behind

global standa rds. In this, Canada


26/42


A Strateg ic Prop

wou ld not be aloneothe r partici-

pa nts, not leas t the United States

have ag ricultura l issues . Aust ralia

and New Zealand successfully

rationa lized their own s upply man-

agement programs by abolishing

su bsidies (in New Zealand ne arly 30

years ago) an d by buying out farm-

ers (in Austra lia). Agriculture ha s

bee n a se nsitive issue for Chile as

well, but it has agreed to ph ase out

its tariffs by 2017 using s afegu ards

during the transition period to

protect the da iry indu stry. How long

can Can adas archa ic syste m hold

the nat ional interes t hostage? The

TPP provides a g olden opp ortun ity

to phase out such program s in re-

turn for concessions in other area s,

from the United States a nd othe rs.

It is s till too soon to say if the

TPP talks w ill achieve the ir goals.At the se venth round of talks in

Ju ne 2010 in Vietnam , pa rticipa nts

agreed to su bmit negotiat ing

framew orks for major sectors

including goods a nd s ervices,

intellectu al property protection,

FDI screening, government pro-

curement , and sta nda rdsto their

leade rs in Novemb er 2011, around

the t ime of the APEC sum mit in

Honolulu. To the exte nt the y suc-

ceed, they w ill have esta bl ished

baselines for future participants

that w ill be difficult to change.

Part of the long-term payoff for the

United States w ill be to extend th e

TPP to its larger t rading p artners,

including Canad a, but Canad as

continued preference for supp ly

management programs remains a

sign ificant obst acle to our partici-

pat ion. If w e can not or w ill not

join TPP, th en t he fallba ck pos ition

could be the n eg otiation of a series

of economic frame w ork ag ree-ment s w ith priority countries in

Asia, or w ith s ome other regional

Asian a rrangement .

Deepe ning Canadas

Economic Engagement

w ith China

For Canad a, anothe r possible

game changer i s to pursue deeper

economic t ies w ith China. On the

face of it, a bilatera l ne got iation

should be s traightforward since

trade betw een the tw o countries is

complementary: China e xchanges

its consum er goods for Can adas

natura l resources. In the short

term, the potent ial benefits wou ld

come from enlarged ma rkets and

economies of scale as w ell as re -

duced tran sact ions costs. Through

time, furt her be nefits w ould follow

from sp ecializat ion a nd the grow th

of intra-industry t rade as the Chi-

nes e economy evolves.

China already has pursu ed

free t rade a greements act ively

both w ithin Asia and b eyond. It

has agreements w ith Chile , NewZealand , Peru , and Singap ore (all

pa rticipa nts in the TPP), as w ell

as Cos ta Rica, Hong Kong a nd

Macao, Taiwa n, Pakistan, a nd

Thailand . In Janu ary 2010, China

implemented a n agreemen t with

ASEAN, and further negotiations

are unde r way w ith Austral ia ,

Iceland , India, Mong olia, Norway,

South Africa, an d South Korea, as

we ll as w ith ASEAN+3, ASEAN+6,

the Shan gha i Cooperat ion Organ-

ization, and the Gulf Cooperation

Council.

Any Canada -China talks should

aim for an ag reement th at is

consistent with WTO rules an d

broad ly bas ed , including ta riffs

and non-tariff barriers an d other

obstacles to services t rade an d in-

vestment . China maintains tariffs

in a num ber of area s, part icularly

in industries such as rice, meat

products , process ed foods, textiles

and appa rel, and vehicles a nd

pa rts. On Can adas side, 68 per-

cent of tariff lines are a lready tar ifffree, bu t tar iff-rate q uotas still

exist in supply-man aged products,

beef, and w heat . Both countries

likely w ould ga in from tariff redu c-

tions on pr incipa l exports; for

Canad a, these w ould come from


27/42


A Strateg ic Prop

ag ricultu ral, minera l, an d serv i-

ces exports, wh ile China w ould

gain from expa nded a gricultural

exports.

Transp ortat ion and t ravel

services, rather th an commercial

services, dominate the tw o coun-

tries bilateral services trade , and

should be an important pa rt of ne-

gotiationsser vices account for 70

percent of Cana das GDP an d are

gaining significance in China as

we ll. Services trade in China faces

imped iments , how ever. In addition

to a tariff on the s ervices sect or

(est imated t o be around 9 percent

in 2004), state t rading e nterprises,

wh ich exercise ma rket power to

collect monopolistic rents, play a

sign ificant role. Other w ell-known

impediments include ow nership

and l icensing restrict ions, w eaken forcement of intellectu al prop-

erty rights , lack of admin istrative

transp arency, and discriminatory

procurement pract ices.

China would also demand th at

Canad a accord it ma rket economy

stat us (MES). In its WTO acces-

sion talks, wh ich concluded in

2001, China w as des ignated a

non-market e conomy, but it w ill

acqu ire MES automatically after

15 yea rsth at is, on Decem ber 31,

2015. Early recog nition of China a sa ma rket economy is also an issue

in its ongoing dialogue w ith the

United States. As the clock ticks

tow ard 2016, how ever, the va lue of

such e arly recogn ition is declining.

What are Can adas prospects of

succes s if it w ere to plunge d irect-

ly into free trad e ne gotiations w ith

China? China ha s had such neg oti-

at ions w ith three other developed

economies, and the record is in-

struct ive. Those w ith Austral ia a re

stal led: Ch ina remains reluctant

to address Australias interests

in liberalizing s ervices trade a nd

ag riculture, wh ile difference s exist

over Chinas interes ts in pe ople

flows, its protect ion of intellectua l

proper ty rights a nd Aus tralias

rules on FDI. Talks w ith Nor-

way are also at an impasse, and

despite i ts completed agreemen t

w ith China, New Zealand has en -countered d iscriminatory behav-

iour towa rd i ts da iry exports. This

record sug gests that , for Cana da,

moving direct ly towa rd a com-

prehensive bi lateral agreemen t

might not be th e most p roductive

choice. More promising might b e

to negotiate a s eries of confidence-

building agreements s tructured to

deliver libera lizing moment um a s

the y enter into force, and t o create

a framew ork for futu re talks as

Chinas comparative advantagechanges .


28/42


A Strateg ic Prop

A Propo s al for

a Cana dian

As ia Strateg y

To understand w hy Canada n eeds

an Asia strate gy, we need look no

further tha n Canad as surp rising

failure s o far to complete a free

trade agreement w ith a ny Asian

count ry. Talks w ith South Korea are

sta lled by auto and b eef interests

(Canada excepted supply manage-

ment even be fore the talks bega n).

Talks w ith Singap ore are sta lled

by un realistic demand s for con-

cessions equ al to those g iven to

the United States. And, as noted ,

Canad as p olicies on su pply man -

agemen t and intellectua l property

are blocking its par ticipat ion in the

TPP. In each cas e, short-term do-

mes tic political considerations a re

outweighing the e conomic calculus

of the national interest.

This ad hoc approach is risky

and short s ighted . It invites ever-

heavier relian ce on de veloping

and exp ort ing natural resources

and energy to sus ta in Canadians

l iving stand ards, and , as Asian

economies determined ly move up

the value chain, Cana dian non-

resource-base d indus tries w ill find

it increas ingly difficult to compete .

Canadians need to th ink aga in

about how to seize the opportunity

and strateg ical ly re-engage w ith

Asia, start ing with determ ining

what we w ant and how we should

achieve i t . Instead, Can ada si ts onthe sidelines a policy ta ker. To

have a voice, Canad a ha s to show

up, to b ecome involved in col-

lective app roaches to political and

economic development that serve

its deep interests in open markets.

Canad as strateg y toward China

should be a n integ ral part of its

strateg y towa rd Asia in gen-

eralthe tw o should be mutu ally

reinforcing. Can adas goa ls in for-

mulat ing an Asia strateg y should

be to promote cooperat ion w ith

the Chinese w here feasible and to

reassu re those who are concerned

about an exclusive focus on China.

China recognizes the value of

multilatera lism, not jus t becau se

i t used i ts accession to the WTO

to restructure i ts economy and

enter w orld ma rkets, but be cause

these inst i tut ions provide a w ay to

pu rsue its objective of restra ining

US heg emon ic beh aviour.

Within t his s t rategic frame-

w ork, there a re at least five criteria

to consider in choosing am ong

alternat ives a nd set t ing policies.

First , the Asia strategy s hould

be gene rat ional and serve Can-

adas long-term n ational interests;

framed in this way, the st rategy

should, like de ficit a nd debt reduc-

tion, be followe d th rough by su c-

cessive governments regardless of

political stripe. Second, the strat-

egy s hould focus on the largest of

the Asia-7 players, which w ill have

the greatest effect on ou r economic

future. Th ird, it sh ould aim t o solve

the d ifficult ies Ca nad ian bus i-

nesse s face in the reg ions d istantand un famil iar economies through

improved ma rket access and

grea ter pa rticipation its production

netw orks. Fourth , the strateg y,

recognizing that Asias dynamic

economies w ill move up the value


29/42


A Strateg ic Prop

Res tore Canad as

pres ence in the regionState and high-level personal

relationships are essential to the

confidence and trus t on which

long-term a greements are b uilt .

Canad a has b een act ive in APEC,

but th at body no longer drives

regional integrat ion a nd w e have

been s low to seek memb ership

in the n ext gen erat ion of inst i tu-

tions. At the ap ex of the se is the

East Asian Summit , but with the

recent add ition of Russia and t he

United States, some are pus hing to

close i ts mem bersh ip, wh ich w ould

leave Can ada out . Canadas m inis-

ter of defence ha s pa rticipat ed on ly

once in the nine meetings of the

Shang ri-La Dialogue , the regions

lead ing se curity forum , wh ile US

and Chinese officials at th e high-

est levels ensu re they ha ve a voice

in the new regional architecture.

Canad as inact ion in such matters

signa ls th at it is concerne d only

ab out bilatera l relationsh ipsa

serious misread ing of Asias evolv-

ing arch itecture. It is not yet too

late, however, and Can ada should

beg in by endow ing the ASEAN-

Canada Enhanced Par tnership

(201015) with su fficient resou rces

and p ersonnel commitments to

real ize i ts intended educat ional

exchanges , dialogues on inst i tu-

t ions, t rade and b usiness, the

environment , crime, and new tech-

nologies. With that engage ment

as a building block, Canada t henneed s to pursue other opt ions,

includ ing app lying to join th e Eas t

Asian Summit an d pa rt icipat ing

in securi ty dialogues an d in both

ASEAN-related act ivities an d th eir

regional and trans-Pacific counter-

pa rts. These initiatives are more

likely to be succes sful if Can adaidentifies and builds relat ionsh ips

w ith economiesIndonesia and

South Korea, for exam plewhos e

governments m ight be w ill ing

to serve as e ntry points to Asian

regional institutions.

Develop the Canada brand

Cana da s hould develop itself as a

brand, both a t home an d in Asia .

At home, the proclama tion of a

Year of Canad a an d Asia w ould

help build pu blic awa reness of

the importance of tha t par t of

the world for Can adas e conomic

future. In ad dit ion t o federal gov-

ernm ent pa rt icipat ion in Asian in-

s t i tut ions , governments and other

inte res t s w ithin Canad a should

a lso be encouraged to be come

involved in t he As ia strate gy. For

example , Ot tawa should engage

provincial premiers in developing

an integra ted approach to Asia ,

one tha t se es them coordina t ing

their Asian t ravels and a l ign -

ing th eir policies in their area s

of jur isdiction, including include

hea lth, educat ion, and e ven FDI.

Business groups and t rade as -

sociat ions could pu blicly sh ow-

case companies w ith successful

business s t ra tegies in the region

and w ork to encourage visi ts to

Canada by Asian tour i s t s . Can-

adian un iversi t ies s hould bu ild on

the count rys grow ing reputat ion

as a place in wh ich to becomeeducatedalready, internat ional

s tudents a re es t imated to spend

more tha n C$6 bi l lion a nnu ally

s tudying in Canad a , 40 percent of

i t by Chinese a nd South Korean

stud ents . Universit ies and othe r

Elements of the Strateg y

chain, should pu rsue te chnological

collaborat ion that helps ad dress

Canadas weak productivity

performance a nd bu ilds p otent ial

complementa rities. Fin ally, any

Canad ian Asia strategy should be

sen sitive to US interes tsth ough

Canad ians m ight not real ize i t ,

strong moves to diversify the

markets for our energy and n atural

resources w ill have g eopolitical

significance.


30/42


A Strateg ic Prop

educat iona l inst i tut ions shou ld

also cooperate in d eveloping

channels through w hich young

Canadians can c rea te bus inesses

in Asia or find em ployment in

enterprises located there.

In short , Canad ians should

beg in to think of Canad a as an

Asian location, linking w orld-class

expert ise in research and b usiness

development across b orders. Signs

of this sea change are already evi-

dent: Calgary is pursuing a global

hub strateg y for non-conventional

petroleum and al ternat ive energy

development , Montrea l is an aero-

space and pha rmaceuticals hub,

and Toronto aims to b ecome an

interna tional financial centre. As

McK

canada, china and rising asia: a strategic proposal

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