A. The Growing Economic Importance of East Asia

B. Canada-Asia Pacific Merchandise Trade Links

C. Canada-Asia Pacific Services Trade Links

D. Canada-Asia Pacific Investment Links

E. Canada-Asia Pacific Immigration Links


THE RELEVANCE OF THE ASIA PACIFIC REGION FOR CANADA

"We are moving toward the Asian century."

(Dr. William Saywell, President and CEO, Asia Pacific Foundation of Canada)

A. The Growing Economic Importance of East Asia

        Why should Canada be interested in participating in the APEC process? One answer lies in the promise of improved access to East Asian markets, which are experiencing astounding economic success. Dr. William Saywell (President and CEO, Asia Pacific Foundation of Canada) told the Committee that in 1960 North America represented 37% of global economic output, while East Asia represented 4%. Today, both regions account for about the same share of world production, approximately 25%. It is estimated that over the next decade the East Asian region will be responsible for between one-half and two-thirds of global economic growth.

East Asia’s economic rise has been remarkable, starting with the Japanese economic miracle. Shattered by the Second World War, Japan began rebuilding its economy soon after 1946 with U.S. assistance. Japan’s real economy grew by an average of 9.2% per year between 1950 and 1970, moderating to slightly less than 5% per year between 1970 and 1990. As a result, Japan’s share of the OECD countries’ GDP rose from under 2.5% in the early 1950s to almost 23% in 1995; its share of world exports increased from US$9.8 billion in 1966 (or 5.1% of world exports) to US$443.1 billion in 1995 (or 8.8% of world exports). Japan is now the world’s second largest economy, after the United States.

Japan has also played a key role in East Asia’s economic development, first as a market for the region’s raw material exports, and later as a source of foreign direct investment and a market for labour-intensive products. As Mr. Yozo Yamagata (Member, Canadian Advisory Board, Marsh & McLennan Limited) explained, the Yen’s strong appreciation during the 1980s accelerated Japanese manufacturers’ shift of operations offshore, especially to Asian countries. These investments have hastened the region’s economic development and increased intra-regional trade. Mr. Yamagata noted that, since 1991, Southeast Asia has been Japan’s largest export market, surpassing the United States in that regard.

Table 1

Growth Trend of APEC Economies

(Real GDP Growth, Percentage Per Annum)

 

1980-1990

1991-94

1995

World

*3.1

1.5

2.8

High-Income Economies

3.2

1.7

2.5

APEC Economies:      
Australia

3.5

2.5

3.5

Canada

3.4

1.3

2.3

Japan

4.1

1.4

0.9

New Zealand

1.9

2.5

3.4

United States

3.0

1.9

2.0

Developing Economies

*3.0

1.0

3.9

APEC Economies:      
Brunei

na

1.3

2.0

Chile

4.1

7.2

8.5

China

10.2

12.4

10.2

Hong Kong

6.9

5.7

4.7

Indonesia

6.1

7.7

8.1

South Korea

9.4

7.2

9.0

Malaysia

5.2

8.8

9.5

Mexico

1.0

2.9

-6.2

Philippines

1.0

1.6

4.8

Papua New Guinea

1.9

11.9

-4.3

Singapore

6.4

8.5

8.8

Chinese Taipei

na

6.8

6.0

Thailand

7.6

8.4

8.6

Source: PECC, PIDS, The Asia Foundation, Perspectives on the Manila Action Plan, 1996.

Following Japan’s example of export-led growth, the newly-industrialized economies (NIEs) of Hong Kong, Taiwan, South Korea, and Singapore began developing in earnest in the 1960s. As Japanese wages rose, the NIEs initially became the source of labour-intensive manufactured products, such as footwear, clothing, and textiles. Later, the NIEs were able to compete with Japan in other areas, first in heavy industries such as chemicals, steel making, and shipbuilding, and then in consumer electronics and transportation vehicles. Taken together, the four NIEs averaged real GDP growth of more than 8.5% per year between 1960 and 1988. Exports from the four NIEs have increased from US$3.2 billion in 1966 (or 1.7% of world exports) to US$528.7 billion in 1995 (or 10.5% of world exports). The NIEs’ share of world imports rose from 2.2% in 1966 to 10.9% in 1995. Hong Kong and Singapore now have living standards comparable to those of the world’s industrialized nations.

The four economies of the Association of Southeast Asian Nations (ASEAN): Malaysia, Thailand, Indonesia, and the Philippines represent another wave of Asian industrializing economies.(4) These economies first began producing agricultural products and raw materials, such as oil, rubber, and tin. The ASEAN economies were able to capitalize on their large populations to manufacture labour-intensive products, such as clothing and textiles; later, electronics and electrical products became important manufactures. Like Japan and the NIEs, the ASEAN economies are relying on an export-led strategy to achieve high economic growth rates. These four ASEAN economies exported US$3.4 billion in merchandise in 1966 (or 1.8% of world exports). In 1995, these economies exported US$193.4 billion (or 3.9% of world exports). Their share of world imports increased from 1.7% in 1966 to 4.3% in 1995.

The next wave of developing East Asian economies are those of Vietnam, Laos, and Cambodia, which recently have been opening up to foreign investment. As wage rates rise in Malaysia and Thailand, labour-intensive manufacturing has begun shifting, to Vietnam in particular. Vietnam’s economy grew by about 9% in 1996 and foreign companies invested US$2.3 billion in the country last year. Vietnam’s accession to ASEAN and its probable admission to APEC will also hasten that country’s development.

The fastest-growing, and potentially the largest, economy in East Asia is that of China. Between 1978 and 1987, the Chinese economy grew by an average of 9.5% per year. Most years since 1987 the Chinese economy has grown by double digit amounts. Since the Chinese economy began to be reformed in 1979, it has increased in size by 475%. By some estimates, if recent growth rates continue, China could have purchasing power equivalent to that of the United States by the year 2020. (5) China has a population of 1.2 billion persons, but many still live in poverty. Nevertheless, the sheer number of people, combined with extraordinary rates of economic growth, means that a sizeable Chinese middle class is forming. China’s exports have grown from US$2.7 billion in 1966 (or 1.4% of world exports) to US$148.8 billion (or 3.0% of world exports) in 1995. China’s imports accounted for 2.5% of world imports in 1995.

Analysis by the World Bank suggests that the high economic growth rates in the region can be explained by a number of factors:

Recently, there has been a pause in the extraordinary growth rates achieved by the region. Even Japan, the post-war world’s greatest economic success story, in 1992 entered an economic slowdown which lasted four years. The torrid economic growth of three Asian tigers (Hong Kong, Taiwan, and South Korea) slowed in 1996 to 5% or 6%; Singapore’s economy grew by less than 4%. Although the major industrial countries would regard these growth rates as highly desirable, Asian tigers are accustomed to economic growth rates in the 7%-10% range.

In South Korea, for example, 6% economic growth is viewed as a critical minimum below which widespread bankruptcies are expected to occur. South Korea’s slower economic growth has been blamed on declining competitiveness as wage rates and production costs have climbed steeply. Recently, labour unrest resulted in South Korea when the government attempted to increase competitiveness by introducing flexibility in company hiring and firing policies.

Is the East Asian economic miracle over? Consider the following facts.

  • First, the economic "slowdown" does not encompass the entire region. The Chinese economy -- the region’s second largest -- continues to expand at close to 10% per year. Furthermore, three new Asian tigers, Malaysia, Thailand, and Indonesia, experienced at least 8% economic growth last year, which is robust by any standards.(6)
  • Second, part of the economic slowdown, particularly in Singapore, can be explained by external factors, such as a cyclical world-wide decline in the demand for semi-conductors.
  • Third, the U.S. dollar appreciated considerably against the Japanese Yen during 1995-96. This appreciation hurt the export competitiveness of Asian economies which peg their currencies either officially or loosely to the U.S. dollar.
  • Fourth, in the past the East Asian economies have shown a remarkable ability to adjust to internal cost pressures by moving up the so-called value-added chain into the production of more sophisticated products.

Projections by the World Bank are that the developing economies in East Asia and the Pacific will experience average GDP per capita growth of 6.8% annually until at least the year 2005 (Chart 1).(7) Exports by the developing East Asian economies are expected to increase by 10.2% annually over the same period. More important to Canadian exporters is the fact that imports by these economies are forecast to increase by an average of 10.7% per year. By comparison, exports and imports of OECD economies are expected to grow by about 5.8% and 5.5% annually over the same period.

 

* See footnote 7.

Source: The World Bank staff estimates.

 

An implication of East Asia’s high growth rates is that the world’s economic centre of gravity is shifting to the East very rapidly. Members of APEC, including Canada and the United States, represented 60% of world economic output in 1995 and almost one-half of global merchandise trade; by the year 2000 these economies are expected to account for over 70% of all merchandise trade. For Canada and the United States, the East Asian economies offer among the world’s most profitable trade and investment opportunities. For the East Asian economies, trade and investment cooperation with each other and with economies on the other side of the Pacific will enhance their access to investment, technology, and export markets.

 

"In the first quarter or first half of the next century [Asia] is where the action will be, and we must participate in it. We have a huge opportunity."

(Dr. John MacDonald, Chairman, MacDonald-Dettwiler and Associates Ltd.)

The East Asian economies are on the verge of a spending boom on consumer products and capital goods. Rapid economic growth combined with the sheer number of people in East Asia will produce a large and growing middle class. However, as Mr. Yamagata explained to the Committee, East Asia’s inherent structural problems should not be minimized. Such problems include: infrastructure bottlenecks, inadequate worker training, low levels of technology, underdeveloped capital markets, rising wage costs, overcapacity in some manufacturing facilities, regional gaps in economic development, and corruption.

Yet some of these problems also present opportunities for Canadian business. Perhaps the best opportunities for Canadian companies will occur in the area of infrastructure construction and design. It is estimated that over the next decade the Asian members of APEC will need to spend almost $1.5 trillion on infrastructure, such as transportation systems, electricity generation, water distribution, and telecommunications systems.

 

"Current and past data show that the Canadian economy does have links with Asia, but these are not as strong as one is often led to believe. On the other hand, there are very good reasons to believe that the links between the Asia Pacific region and Canada will become stronger over time."

(Dr. Richard G. Harris, Professor of Economics, Simon Fraser University)


B. Canada-Asia Pacific Merchandise Trade Links

1. Canada’s Merchandise Exports

 

Table 2

Canadian Merchandise Exports by Country Grouping

(in billions of Canadian dollars) (1988-1996)

   

1988

1989

1990

1991

1992

1993

1994

1995

1996

United States

98.1

98.7

105.5

103.3

118.7

142.5

173.1

196.5

210.1

Japan

8.8

8.8

8.2

7.1

7.5

8.4

9.6

11.9

10.4

Other Pacific Rim*

8.1

7.4

7.3

8.0

7.6

7.3

9.2

13.4

12.1

European Union

10.9

11.5

11.7

11.1

11.2

10.6

11.3

16.0

14.9

All countries

134.9

134.8

141.7

138.5

154.5

177.6

213.3

248.4

258.4

The Pacific Rim encompasses all the economies of East Asia and Oceania. North and South America are excluded.

Source: Statistics Canada.

 

Canada is often referred to as a Pacific nation; yet the trading patterns shown in Table 2 seem to demonstrate that this country is still overwhelmingly a North American nation. Notice that Canadian merchandise exports to the United States have doubled in the last five years, registering $210.1 billion in 1996. As a result, the proportion of Canadian merchandise exports destined for the United States has risen from 73% of total trade in 1988 to 81% in 1996. Although the absolute value of exports to the Pacific Rim (East Asia and Oceania) has risen in the last couple of years, the share of Canadian exports destined for the region has declined from 13% of all merchandise exports in 1988 to 9% in 1996(8) (Charts 2 and 3).

 

     * Pacific Rim includes East Asia and Oceania.

      Source: Statistics Canada.

 

However, one important element which these data do not capture is the level of Canadian raw material and component exports to the United States that are incorporated in U.S. products and ultimately exported to third countries, including those in the Pacific Rim. As Canadian and U.S. industry becomes more integrated, due in part to the Canada-U.S. Free Trade Agreement and NAFTA, determining the final destination of Canadian intermediate goods exports to the United States increasingly will become an important consideration in assessing the global distribution of Canada’s exports.

"My guess... is that within ten years British Columbia’s trade will be 80% based on the Asia Pacific region."

(The Honourable Michael Harcourt, former Premier of British Columbia)

In addition, these data do not show the significant role that Asia Pacific trade plays in the economy of Western Canada, especially that of British Columbia. As former Premier Michael Harcourt explained to the Committee, slightly over 50% of British Columbia’s exports are destined for the United States (with about half of that to the U.S. Pacific coast) and 35% of the province’s exports are shipped to Asia. On that basis, it could be argued that 60% of British Columbia’s trade is with Asia Pacific. With much of British Columbia’s trade with Asia Pacific representing transhipments for the rest of Canada, Mr. Harcourt believes that British Columbia’s port and airport facilities will play an increasingly strategic role for the whole country.

Table 3 shows the levels of Canadian merchandise exports to selected APEC markets. For almost 25 years, Japan has been Canada’s second largest trading partner. Mr. Klaus Pringsheim (President, Canada-Japan Trade Council) told the Committee: "I feel that in our enthusiasm for Asia as a whole we sometimes forget how big a part of our Asian trade is actually our trade with Japan" (10:15). In fact, the value of Canada’s exports to Japan are greater than the combined value of Canada’s exports to its next seven largest trading partners in the region. Mr. Pringsheim noted that Canada’s exports to Japan exceed this country’s combined exports to the United Kingdom, Germany, France, and Italy.

 

Table 3

Canadian Merchandise Exports to Selected APEC Economies

(in millions of Canadian dollars)

 

1994

1995

1996

Japan

9,636

11,900

10,377

China

2,126

3,293

2,707

South Korea

2,208

2,698

2,676

Taiwan

1,203

1,704

1,362

Hong Kong

907

1,381

1,109

Australia

858

1,153

969

Indonesia

451

619

826

Thailand

398

557

503

Malaysia

272

536

500

Singapore

367

484

529

Philippines

194

325

258

New Zealand

139

183

213

Source: Statistics Canada, Canadian International Merchandise Trade.

 

2. Canada’s Merchandise Imports

Table 4

Canadian Merchandise Imports by Country Grouping

(in billions of Canadian dollars) (1988-1996)

 

1988

1989

1990

1991

1992

1993

1994

1995

1996

United States

86.0

88.1

87.9

86.4

96.5

114.0

136.6

150.8

157.3

Japan

9.3

9.6

9.5

10.3

10.8

10.7

11.3

12.1

10.4

Other Pacific Rim*

9.1

9.7

9.6

10.0

11.5

13.9

16.2

19.2

19.1

European Union

16.1

14.9

15.6

14.7

14.4

14.8

17.7

22.6

22.7

All countries

131.2

135.2

136.2

135.5

148.0

170.1

202.7

225.6

232.9

* Pacific Rim includes East Asia and Oceania.

Source: Statistics Canada.

 

 

On the import side, Canadian trade with the Pacific Rim (East Asia and Oceania), especially with countries other than Japan, has risen sharply (Table 4). Yet imports from the United States have increased even more rapidly so that slightly over two-thirds of Canada’s total imports originate in the United States. As a result of rapid increases in Canada-U.S. trade, the proportion of total imports originating in the Pacific Rim in 1996 was slightly lower than the level registered in 1988 (Charts 4 and 5).

 

* Pacific Rim includes East Asia and Oceania.

Source: Statistics Canada.

 

 

Table 5

Canadian Merchandise Imports from Selected APEC Economies

(in millions of Canadian dollars)

 

 

1994

1995

1996

Japan

11,367

12,103

10,440

China

3,856

4,639

4,926

South Korea

2,504

3,204

2,728

Taiwan

2,780

2,792

2,863

Malaysia

1,214

1,550

1,580

Hong Kong

1,190

1,305

1,143

Singapore

1,152

1,311

1,191

Australia

1,121

1,283

1,291

Thailand

896

1,014

1,043

Indonesia

522

597

626

Philippines

469

497

553

New Zealand

321

298

322

Source: Statistics Canada, Canadian International Merchandise Trade.

"In an absolute sense, Canadian trade with the region is growing, but as a market share it is not."

(Mr. David Hecnar, Senior Policy Analyst, Canadian Chamber of Commerce)

 

3. Canada’s Export Performance

How have Canadian exports fared in the growing East Asian markets? A number of witnesses told the Committee that Canada’s share of the East Asian import markets has been declining. Dr. William Saywell (President and CEO, Asia Pacific Foundation of Canada) pointed out that Canada’s import market share in the region declined from about 2% a few years ago to about 1.4% in 1995. Mr. David Hecnar (Senior Policy Analyst, Canadian Chamber of Commerce) explained that, "If you look at Canada’s own trade figures within that group there is actually some worry because our trade share is diminishing" (18:25). Table 6 confirms that, with the exceptions of Hong Kong and possibly Australia, Canada’s shares of the import markets of most major East Asian and Oceania countries are small and have been declining over the past few years.

Why has the Canadian export share of these markets fallen off? A possible explanation may be the rising share of trade occurring within the East Asian region. Increased intra-regional trade implies proportionally less trade with outside sources. The rising share of intra-Asian trade may merely reflect the increased size of the East Asian economies and the proportionally greater weight of their trade within the world trading system. On the other hand, it may reflect an increasing bias toward intra-Asian trade and against trade with outside economies.

 

Table 6

Canadian Merchandise Exports

Percentage Share of Import Markets

of Selected APEC Trading Partners

 

1981

1983

1985

1987

1989

1991

1993

1995

Japan

3.1%

3.5%

3.7%

4.0%

4.1%

3.3%

3.3%

3.2%

China

5.4%

7.4%

2.7%

3.2%

1.8%

2.6%

1.3%

1.7%

South Korea

2.0%

1.7%

2.0%

2.3%

2.7%

2.3%

2.1%

1.9%

Taiwan

n/a

1.5%

1.7%

1.7%

1.6%

1.5%

1.1%

1.2%

Hong Kong

0.6%

0.7%

0.7%

0.5%

0.5%

0.4%

0.5%

0.6%

Australia

2.6%

1.9%

2.0%

2.0%

2.4%

1.7%

1.7%

1.9%

Indonesia

0.8%

1.1%

2.0%

2.4%

1.9%

1.4%

1.4%

1.2%

Thailand

1.3%

1.4%

1.2%

1.2%

1.4%

0.9%

0.9%

0.6%

Malaysia

1.2%

0.9%

1.2%

1.0%

1.0%

0.8%

0.5%

0.5%

Singapore

0.5%

0.4%

0.3%

0.5%

0.5%

0.6%

0.4%

0.4%

Philippines

0.9%

0.8%

0.7%

1.4%

1.6%

1.3%

0.9%

1.0%

New Zealand

2.3%

2.2%

2.6%

1.9%

2.0%

1.6%

1.6%

1.7%

Source: Calculations based on IMF, Direction of Trade Statistics.

Another reason for Canada’s loss of import market share in these economies may be that Canada’s exports to East Asia have traditionally consisted mainly of resource-based and semi-processed materials, such as lumber, wood pulp and paper, cereals, fertilizers, and minerals (Table 7 and Chart 6). The share in world trade of natural resources and resource-based products has declined in recent years. This decline is due to falling commodity prices and energy consumption relative to GDP and more substitution of synthetic materials for natural products. (9) Furthermore, Canadian natural resource exporters are facing significant competition from traditional competitors in Australia, the United States, and New Zealand as well as from new competitors in China and ASEAN countries.(10)

 

Table 7

Canadian Exports to Selected Areas, 1996

(Millions of Canadian dollars)

Commodity Group

APEC*

United States

Animal, vegetable, mineral, energy products, wood and pulp

14,150

66,652

Chemicals, plastics, textiles and clothing

2,396

20,035

Vehicles

594

62,076

Other machinery and equipment

2,859

37,526

All other

2,030

23,781

Total

22,030

210,071

* Selected APEC economies (See Table 6)

  Source: Statistics Canada, TIERS and the Research Branch, Library of Parliament.

A study received as evidence by the Committee found that Canada has inexplicably high levels of natural resource exports to East Asia, even after controlling for Canada’s sources of comparative advantage, including this country’s large resource endowments.(11) This result suggests to the authors that Canada may have an implicit industrial strategy buried in its tax structures and elsewhere that "may have directed Canada to inappropriate specialization in natural-resource-based industries. What may be called for is a new pattern of industrial incentives that would encourage Canadian entrepreneurs to migrate out of natural resources and into growth-oriented, high-wage technology industries."(12)

However, another study received by the Committee paints an optimistic future scenario for resource-based exports. (13) Examining patterns of resource consumption in various countries, the study found that per capita natural resource consumption increases with higher levels of economic development. Since the East Asian economies are forecast to grow rapidly into the next century, they should consume significantly more natural resources.

For example, the study estimated that if China maintains an 8% growth rate, in ten years time the country could be consuming four times as much coal as did the United States in 1990, three or four times the 1990 U.S. level for most minerals, ten times as much iron ore as the U.S. in 1990, five times as much steel, three times the amount of cereals and forestry products as the U.S. consumed, and seven times the amount of fish as the U.S. consumed in 1990.(14) If Canadian exporters can maintain or increase their share of the natural resource and agricultural product import markets of the East Asian economies, there should be a substantial increase in Canadian resource exports to China and other East Asian countries.

In addition, the increased demand for resources may open the way for Canadian suppliers of resource production technology and services to Asian countries. "For example, Canadian firms should be able to provide knowledge and capital to construct pulp mills, oil and natural gas pipelines, oil refineries, and electric power plants using hydro or natural gas cogeneration technology. They should be able to assist in the exploration for and production of oil, natural gas, and minerals. Some of the Asian countries, especially China, have under-explored their resource potential in energy and minerals."(15)

Gradually, Canada’s exports to East Asia of manufactured goods, such as machinery, plastics, aircraft and precision parts, are increasing. Mr. Dan Gaw (M.K. Wong & Associates Ltd.) told the Committee that in order "to redress our trade imbalance with the region, Canadians need to more aggressively market value-added goods to the Asia-Pacific region"(19:95). According to Mr. Gaw, this is true of traditional sectors, such as agricultural and fisheries products, as well as goods, such as aircraft exports, more commonly thought of as containing high value-added.

 

"...Canadian engineers are the best in the world....they are the best in terms of their ability to develop science and technology. However, our ability to exploit it is absolutely abysmal."

(Dr. John MacDonald, Chairman, MacDonald-Dettwiler and Associates Ltd.)


C. Canada-Asia Pacific Services Trade Links

Global trade in services has grown faster than international trade in goods; between 1982 and 1992 world services trade grew by an average annual rate of 15%, while trade in goods increased at 9.8% per year over the same period.(16) In 1994, world services trade amounted to more than US$1 trillion, or almost one-quarter of international goods trade. Because of the growing importance of services trade in global commerce, it was vital that services be brought under the multilateral trading system. The General Agreement on Trade in Services (GATS), reached in December 1993 as part of the Uruguay Round, established, for the first time, international rules governing trade in services as well as commitments to liberalize trade in specific sectors. World Trade Organization (WTO) negotiations continue in certain areas of services trade.

Examination of Canadian balance of payments data reveals that, over the past 20 years, Canada’s services exports increased at about the same rate as merchandise exports. On the other hand, trade in one group of services, known as commercial services, has been rising faster than merchandise trade.(17) Not captured by Statistics Canada services trade data are foreign sales of services by Canadian subsidiaries located abroad. For example, if a Canadian insurance company establishes a subsidiary in Hong Kong, the sale of insurance services to local clients would not be recorded by Statistics Canada in the services trade account. (18) Yet, delivery of services by movement of the service supplier to the country of the consumer, involving the establishment of a commercial presence, is one of the modes of delivery of services covered by the GATS.

In 1994, APEC economies accounted for 42% of global commercial service imports; Asian APEC members purchased almost one-quarter of world commercial service imports.(19) Table 8 reflects the extent of Statistics Canada’s published data on commercial services trade with APEC economies. As with merchandise trade, Canada’s services trade is heavily weighted toward the United States, with Japan representing Canada’s next largest services trading partner. South Korea, Hong Kong, Australia, Taiwan, and the ASEAN economies also figure in Canadian services trade.(20)

 

Table 8

Canada’s Commercial Services Trade with Selected APEC Economies

(in billions of Canadian dollars)

    1993  

1994

   
 

Exports

Imports

Balance

Exports

Imports

Balance

United States

6,422

10,344

-3,922

7,336

11,812

-4,476

Japan

245

251

-6

363

414

-51

Hong Kong

55

86

-31

63

98

-35

South Korea

107

83

24

146

156

-10

Taiwan

15

11

4

20

17

3

ASEAN (5)*

146

76

70

162

69

93

Australia

78

58

20

62

45

17

* ASEAN (5) comprises Malaysia, Singapore, Philippines, Indonesia, and Thailand.

Source: Statistics Canada, Canada’s International Transactions in Services, 1994 and 1995.

 

Although historically Canada has experienced an overall deficit on trade in commercial services, this country runs a payments surplus in the component of services trade identified as architectural, engineering and other technical services. In 1994 this surplus amounted to $644 million. This surplus tends to confirm the commonly-held belief that Canada has a comparative advantage in the area of architectural and engineering services. Most of the surplus on trade in this component is accounted for by trade with economies other than those of the United States and the European Union (EU). Other categories of services where Canada had sizeable surpluses in 1994 with economies other than those of the U.S. and the EU were research and development ($229 million) and commissions ($231 million).

As noted earlier, the East Asian economies will need to spend an estimated $1.5 trillion on infrastructure over the next decade. Further, it has been demonstrated that demand for services tends to increase with higher levels of GDP. This positive income elasticity of services consumption, combined with infrastructure bottlenecks, is likely to raise East Asia’s share of world service imports. These developments bode well for Canadian providers of engineering and architectural services, as well as certain other types of services.

The sale of financial services to East Asian residents represents promising opportunities for Canadian financial institutions for a number of reasons. First, high rates of economic growth and high savings rates have increased the demand for financial services in the region. Second, a number of East Asian countries have taken steps toward regulatory reform of their financial sectors, thereby opening up opportunities for foreign-based financial institutions. Third, WTO negotiations have begun to liberalize trade in financial services, with more progress expected to come in the future. Fourth, Canadian financial institutions already compete internationally in a number of East Asian markets. For example, Canadian banks are present in Japan, Hong Kong, South Korea, Malaysia, Singapore, and Taiwan. Canadian insurance companies are prominent also in East Asia.

Another category of services in which Canada may have a comparative advantage is education services. According to Dr. William Saywell, "[n]o country in the world has a better educational and training structure than [Canada]; it is competitive in terms of price and is delivered in a safe, friendly and hospitable manner" (10:11). Another reason is that Canadian universities and colleges, along with those in the United States, the United Kingdom, Australia, and New Zealand, provide education in English, the premier language in the region. Dr. Saywell explained that human resource development in East Asia has not kept up with economic growth. He noted that some of these countries need 10,000 or 20,000 new engineers per year, but are producing only 2,000 or 3,000 graduates annually.

Environmental services are another area where East Asia will need to spend significant amounts over the next decade in order to keep pace with population growth and economic development. It is also an area where Canadian firms have shown a competitive ability. As Mr. Dan Gaw explained to the Committee, China is an example of a country which could use Canadian assistance in this area. "For those of you who have not been to China, the air quality is very polluted. Coal is mainly used to heat homes in the wintertime. The rivers are very polluted. If the Canadian government can finance some of the operations, China could use a lot of help in this area. Canada is very well known in environmental engineering and clean-up" (19:104).


D. Canada-Asia Pacific Investment Links

1. Overview

International trade follows investment. As noted earlier, this relationship is evident in East Asia where Japanese investment outflows resulting from the high-valued Yen have been a catalyst for increasing intra-regional trade. However, cross-border investment flows have figured prominently also in North American and European regional integration.

Both inward and outward foreign direct investment (FDI) can influence trade flows. For instance, Japanese direct investment in new Canadian automobile production facilities may increase Canadian auto exports to the U.S. market, or Japanese FDI in Canadian coal production may increase the supply to the Japanese home market. Outward direct investment can also raise exports as foreign affiliates typically rely on their parent company for components, supplies, and technical knowledge. For example, some Canadian-owned plants in the United States tend to import more from their Canadian parents than they send back to Canada in finished product.(21)

 

             

* Pacific Rim includes East Asia and Oceania.

Source: Statistics Canada.

Foreign direct investment in Canada (FDIC) from East Asia is still relatively modest.(22) At the end of 1995, there was $11.8 billion worth of FDIC from the Pacific Rim countries, representing just 7% of total FDIC (Charts 7 and 9). More than one-half of FDIC from the Pacific Rim (57% or $6.7 billion) was accounted for by Japanese investors. Another 27% of Pacific Rim FDIC was accounted for by Hong Kong investors. It is believed that a considerable portion of new investment from Hong Kong can be attributed to investor-class immigrants who must invest at least $250,000 in Canada in order to qualify for entry. Investment from Australia, Singapore, South Korea, and Malaysia comprised most of the remaining FDIC. Between 1985 and 1995, the share of FDIC accounted for by Pacific Rim countries doubled, from 3.5% to 7%.

The stock of Canadian direct investment abroad (CDIA) in the Pacific Rim amounted to $14.7 billion at the end of 1995, or about 11% of total CDIA (Charts 8 and 10). CDIA in Japan accounted for 21% of all CDIA in the region, followed by Australia (21%), Hong Kong (17%), Singapore (14%), and Indonesia (8%). CDIA in the Pacific Rim has increased from $4.0 billion in 1985 to $14.7 billion in 1995, with the result that the share of total CDIA located in the Pacific Rim has risen from 7% to 11% over the period. Clearly, Canadian companies are beginning to invest actively in the region. Officials from NOVA Corporation told the Committee that the company is using its technology licensing and consulting activities in the region to seek to build equity positions in chemical projects, pipeline and related gas processing, and power projects.

*Pacific Rim includes East Asia and Oceania.

Source: Statistics Canada.

 

Data are not available on flows of portfolio investment between Canada and East Asian countries, with the exception of Japan. At year end 1995, Japanese investors held $32.5 billion in Canadian bonds and $542 million in Canadian portfolio stocks. These amounts represented 9.8% and 1.7%, respectively, of the total amounts owned by foreign investors. At year end 1995, Canadian investment in Japanese portfolio bonds was $1.1 billion. Canadian portfolio investment in Japanese stocks amounted to $4.0 billion at the end of 1995. These investments accounted for 5.7% and 6.3%, respectively, of total foreign portfolio bonds and portfolio stocks owned by Canadians.

 

* Pacific Rim includes East Asia and Oceania.

Source: Statistics Canada.

 

"Japanese direct investments in Canada are not in real estate, but in wealth and job-creating industrial and manufacturing operations. They are export-oriented rather than focusing on the domestic market, with an ever-increasing amount being exported to countries other than Japan."

(Mr. Arthur Hara, Chairman, Mitsubishi Canada Limited)

 

2. Competing for Foreign Direct Investment

Attitudes toward FDI have changed markedly since the 1960s and 1970s when some governments, concerned about the degree of foreign ownership in their economies, established elaborate foreign investment screening procedures and performance requirements. In the 1990s, governments actively compete to attract foreign investment, especially where this involves greenfield investment in manufacturing. The perceived economic benefits from FDI include job creation, increased economic output, enhanced productivity, high wages, and stimulation of economic activity in supporting industries.(23)

As noted earlier, Japanese direct investment has played a large role in the economic development and integration of East Asia. In the late 1980s, Japan was the world’s largest source of foreign direct investment. In the early 1990s, financial instability in Japan, connected to a downward correction in the Japanese stock market and the collapse of international real estate values, caused a reduction in Japanese FDI outflows. Nevertheless, Japan remains one of the world’s largest sources of FDI. Over the years, Japanese direct investment in manufacturing, particularly greenfield investment, has been actively courted by Canadian and U.S. governments. The fact that Canadian provinces and U.S. states have often offered competitive subsidies to lure Japanese (and other offshore) manufacturers to locate in their jurisdictions shows that governments believe that foreign manufacturing investment does provide significant economic benefits.(24)

Mr. Yozo Yamagata (Member, Canadian Advisory Board, Marsh & McLennan Limited) told the Committee that Canada has not been particularly successful in attracting Japanese FDI. The stock of Japanese foreign direct investment in Canada was C$6.7 billion (US$4.9 billion) at the end of 1995 compared with US$108.6 in the United States. Based on the relative sizes of the United States and Canadian economies (about 10 to 1), Japanese FDIC should be approximately twice as large as the amount registered in 1995. Furthermore, as Mr. Yamagata explained, Canada’s share of Japanese direct investment outflows has been declining in recent years.

Why has Canada failed to attract a proportionate share of Japanese FDI? Mr. Yamagata provided the Committee with a number of possible reasons. First, although Canada has a population of 30 million, the market is spread out geographically. Second, labour costs are not low by international standards. Third, Canada is thought to be more interested in protecting the environment than in encouraging industrial and commercial development. Fourth, when governments change at the provincial level, sudden changes can occur in industrial policy and legislation, particularly in labour and environmental legislation. Fifth, there is an impression that Canadian tax rates are higher than those in the United States.

Mr. Arthur Hara (Chairman, Mitsubishi Canada Limited) explained that effective marketing by U.S. states is another reason why the United States has been more successful than Canada in attracting Japanese FDI. He told the Committee that 36 U.S. states have Tokyo offices which are used to attract Japanese investment. Moreover, Mr. Hara said the U.S. states "will take the Japanese investors to their state and they will hand-hold them through the regulatory mazes and ensure that the state government opens the door all the way down. More often than not in Canada, and in the provinces, when Japanese investors are invited to Canada or the provinces, they are left alone to find their own way through the maze.... Anecdotally, I can recall one Japanese investor who came to Vancouver and threw up his hands and walked away because he was told he had to go through 26 different federal, provincial and municipal offices to get clearance" (19:76).

The Committee received a study of the competitiveness of U.S. states and Canadian provinces for attracting new Japanese investment in manufacturing. (25) The study assessed the relative competitiveness of states and provinces in attracting Japanese FDI on the basis of a number of criteria: access to domestic and export markets; government policies that influence investment; and proximity to other manufacturers, to specialized labour and to suppliers. California, the top ranked location, is estimated to be more than 5½ times as likely as Ontario to obtain Japanese investment in the overall category of manufacturing. The study shows that only Ontario, ranked thirteenth, placed among the top twenty locations for manufacturing in the two countries.

With respect to investment in motor vehicle parts manufacturing, Ontario ranks seventh as a location for attracting Japanese investment. However, Indiana, Michigan, and Ohio are estimated to be, respectively, 7.3 times, 5.7 times, and 5.5 times as likely as Ontario to obtain Japanese investment. Even in pulp and paper manufacturing, an industry where Canada should have a comparative advantage, Quebec is ranked only tenth among all locations in the two countries. (British Columbia ranks twelfth and Ontario ranks fourteenth.) These results explain the evidence presented earlier on the size of Japanese FDI flows to the United States relative to those received by Canada.

Other East Asian countries, in addition to importing large amounts of FDI, are becoming important sources of FDI outflows. Indeed, Japan’s position as East Asia’s largest source of FDI outflows was overtaken by Hong Kong in 1993, 1994 and, possibly, in 1995. Other large regional sources of FDI outflows include Taiwan, China, Singapore, South Korea, and Malaysia. Despite East Asian countries’ high savings rates, most remain net importers of capital because of their high demand for investment funds. However, as these economies develop, they are likely to change from net importers to net exporters of capital.

In summary, although investment flows between Canada and East Asia have been rising over the past decade, the absolute size of CDIA in the region remains fairly modest. FDIC from East Asia has been increasing also, but still totalled less than $12 billion in 1995. Furthermore, there is evidence that Canada has not been getting its "fair share" of investment from Japan, one of the world’s largest capital exporters. In the future, this issue may become a consideration also in relation to other East Asian countries.

 

"One of Canada’s key strategic advantages in strengthening our economic ties to the economies of Asia may, in fact, lie in our growing human links with the region."

(Asian Canadians: Canada’s Hidden Advantage, Asia Pacific Foundation of Canada)


E. Canada-Asia Pacific Immigration Links

1. Overview

The earlier examination of trade and investment data suggested that Canada-East Asia commercial links, although growing, do not predominate. The same conclusion does not apply to Canada-East Asia immigration links, which have been extremely robust for a number of years. In 1996, four of the top ten sources of immigration were East Asian countries(26) (Chart 11).

By far the largest single source of immigration has been Hong Kong, accounting for an average of 16% of all Canadian immigration over the last five years. Much of the immigration from Hong Kong can be explained by uncertainty related to the Chinese takeover of the British colony in July 1997. Future levels of immigration from Hong Kong will depend largely on how smoothly the transition to Chinese rule proceeds.

Other significant East Asian sources of immigration have been Philippines, China, and Taiwan. People from East Asian countries accounted for more than one-third of all immigration to Canada in 1996. Canada’s links with the greater China (Hong Kong, Taiwan, and China) are growing especially quickly; immigrants from the greater China accounted for more than one-quarter of all immigration into Canada in 1996. Chinese is now the third most common mother tongue in Canada.

 

Source: Citizenship and Immigration Canada.

 

"The secret weapon Canada has is our multicultural society. We have ambassadors of goodwill from probably every country in the world. If you want to market in Hungary, Poland or any country in Asia our secret weapon is those people in our country who can help us to bridge those cultural gaps."

(Mr. Bing Thom, Principal, Bing Thom Architects Inc.)

 

2. Canada’s Hidden Advantage

Apart from contributing in a very real way to Canada’s cultural mosaic, immigration from East Asia can help strengthen this country’s trade and investment links with the region. Immigration can enhance trade links in several ways. One mechanism by which immigration can expand exports is through reducing the transaction costs associated with doing business in foreign markets. East Asian immigrants have knowledge of their original countries’ markets; they have business connections in the region; and they have the language and cultural skills necessary to make business deals. If East Asian immigrants have preferences for goods produced in their country of origin, this may increase imports also from the region. Research provided to the Committee found a significant positive correlation between the stock of East Asian immigrants in Canada and trade levels with the region.(27)

Canada-East Asian investment flows also can be affected by immigration. Foreign investment in Canada may be increased when East Asian immigrants arrive in this country with capital to invest in Canadian business ventures. Canada’s Immigrant Investor Program (IIP), introduced in 1986, allowed immigrants to satisfy certain immigration requirements by investing a minimum of $250,000 or $350,000 (depending on the province) in eligible business ventures.(28) The Canadian government estimates that, since inception, the IIP has attracted $3.75 billion in investment funds and has created over 33,000 jobs.(29) Much of this investment was accounted for by immigrants from East Asian countries, particularly those from Hong Kong (Table 9).

 

Table 9

TOP TEN SOURCES OF INVESTOR PROGRAM IMMIGRANTS IN 1996

(Principal Applicants Only)

Rank

  Source Country

No. of Investors

Percentage

1

  Hong Kong

609

37.0%

2

  Taiwan

465

20.1%

3

  South Korea

69

6.8%

4

  China

55

3.4%

5

  Germany

16

3.0%

6

  Iran

15

2.5%

7

  Switzerland

7

2.4%

8

  Pakistan

9

2.3%

9

  Netherlands

2

2.1%

10

  Kuwait

2

1.4%
    Others

124

19.0%
    Total

1,373

100%

Source: Citizenship and Immigration Canada.

 

Also, immigration from East Asian countries might facilitate foreign investment by improving information flows between Canada and the region. Immigrants have local contacts and first-hand knowledge of investment opportunities in their countries of origin. At the same time, immigrants can provide information about Canadian investment opportunities to potential investors from East Asia. However, research provided to the Committee failed to find any correlation between investment from different areas of East Asia and the stock of immigrants from the region. (30) This result is interesting given the evident popularity of the IIP with East Asian immigrants.

Mr. Dan Gaw (M.K. Wong & Associates Ltd.) emphasized to the Committee the importance of East Asian immigration for British Columbia, in particular. He believes that, although the IIP has been successful in stimulating British Columbia’s economy, it also is true that family class immigrants from the region become successful entrepreneurs, leading to job creation and capital investment. According to Mr. Gaw, the sectors that benefit most from immigrant entrepreneurs are services, wholesale and retail trade, and manufacturing. Immigration data show that Ontario, Quebec, and Alberta also have received large numbers of immigrants from East Asia over the years. In fact, the 1991 census revealed that Toronto had more residents of Asian ethnicity than did Vancouver.

Canada could make better use of the professional skills, knowledge, and experience of Asian Canadians. This was the consensus reached at a number of roundtable discussions held across Canada by the Asia Pacific Foundation of Canada. These discussions dealt with the trade and investment opportunities for Canada presented by East Asian markets, and with how to capitalize on Canada’s East Asian human resources in order to make the most of these opportunities, particularly by encouraging greater collaboration between Asian Canadian and non-Asian Canadian business people. The report based on these roundtable discussions issued 22 recommendations under three general themes:

Several witnesses emphasized to the Committee the importance of developing cross-cultural communication between Asian and non-Asian cultures. Mrs. Tamako Yagai Copithorne (Member, Canada-Japan Forum 2000) told the Committee: "Canadians must learn more about the people they are trading with -- their language, their values and cultures -- to understand and appreciate their differences" (19:70). Mrs. Copithorne explained, for example, that understanding Japanese culture can be key to designing export products that satisfy the Japanese aesthetic sense. Dr. Jan Walls (Director, Asia-Canada Program, Simon Fraser University) outlined the work of the Asia-Canada program at Simon Fraser University and of the David Lam Centre for International Communication in helping non-Asian Canadian students, professionals, and business and government people acquire competence in Asian languages and cultures.

Mr. Bing Thom (Principal, Bing Thom Architects Inc.) told the Committee that much of the credit for obtaining the huge contract to design the new city of Dalian in China can be given to a recent immigrant to Canada, Dr. Li. With the assistance of Dr. Li, who immigrated to Canada from the Dalian area of China, Mr. Thom was able to tap into the local culture and the local subtleties of doing business.

The Committee agrees that Asian Canadians do represent one of Canada’s greatest hidden advantages in furthering both cultural and commercial linkages with the East Asian region. Our final report on Canada’s relations with Asia Pacific will explore in more detail the question of how Canada can best capitalize on this underutilized resource.


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