Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 6 - Evidence
OTTAWA, Wednesday, December 3, 1997
The Standing Senate Committee on Foreign Affairs met this day at 3:20 p.m. to examine and report on the growing importance of the Asia-Pacific region for Canada.
Senator John B. Stewart (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, I should tell our guests that this committee has been focusing on trade matters for almost ten years now. This committee dealt with the Free Trade Agreement with the United States, the NAFTA, the World Trade Organization bill, our Free Trade Agreement with Israel, and our Free Trade Agreement with Chile; as well, we made a study of developments in the European Union.
Lately, we have been focusing on developments in what we call the Asia-Pacific region. Those of us who come from the Atlantic coast of Canada find it difficult to realize, in anything other than a superficial way, that Canada is very much a Pacific nation.
Our guests this afternoon fit in very nicely with the committee's work. Our first witness is the Honourable Alexander Downer, Minister of Foreign Affairs for Australia. Let me tell you a little bit about him.
Before he entered politics, he was an economist with the Bank of New South Wales. He served in the Australian Department of Foreign Affairs at the mission to the EEC. He was the Australian representative to NATO. He then served as political advisor to the Honourable Malcolm Fraser, sometime Prime Minister, and to the leader of the opposition.
Mr. Downer became the leader of the Liberal Party, and when the coalition government was formed, he became Minister of Foreign Affairs. He is a member of the National Security Cabinet Committee.
With him today is the High Commissioner for Australia, His Excellency, Mr. Greg Wood. I should tell members of the committee that His Excellency and I had a very interesting conversation a few weeks ago. At least, it was interesting to me, and very enlightening.
Senator Whelan: Where did that conversation take place?
The Chairman: It took place in my office, Senator Whelan, early in the morning.
Senator Whelan: I thought maybe it was in London, England, that you were meeting him.
The Chairman: No, I could not be there. I was in Ottawa. I must inform our guests that since we planned this meeting, things have happened. As they know, we have a postal strike in progress and the government has decided to intervene with back-to-work legislation. That bill reached the Senate at 10:45 last night and has had its second reading. It is now in committee of the whole of the Senate and is progressing, we hope, even as we meet here. That is why some of our chairs are empty.
I was hoping, Mr. Minister, that you would begin by saying a few words -- as many words as you want to say -- and then I am sure some of the members of our committee will have questions for you on topics that have attracted our attention over the last few months.
If you would proceed, we would be greatly honoured, sir.
The Honourable Alexander Downer, Minister of Foreign Affairs, Australia: Mr. Chairman and honourable senators, it is a privilege and an honour to address a committee of the Canadian Senate. I have just sat through Question Period in the House of Commons. I must say that, having done so, I am reminded of the close cultural links between our two countries, where our parliamentary systems are almost identical. The style of your Question Period, which we call "Question Time," is very much the same as our own, with all the displays of maturity that you get from politicians when they are set against each other in that sort of way.
Our two countries have a very common history and they obviously work very closely together in international fora. We do have very similar, although not always identical, perspectives of issues. For example, we work together in the Commonwealth and we have recently had the Commonwealth Heads of Government Meeting in Edinburgh in Scotland.
To focus on our part of the world, the Asia-Pacific region, Australia and Canada work together in two fora which are of particular importance to Australia. One of them is APEC, of course. I will come back to that. The other is the ASEAN Regional Forum, of which Canada is a member.
The ASEAN Regional Forum is part of the architecture that holds together the security of the Asia-Pacific region. We should not allow the fact that the Cold War has ended to lead us to assume that the security of the Asia-Pacific is something that can be taken for granted. There are some dangerous pressure points in the region. The Korean Peninsula is the most obvious of them -- the tensions between North and South Korea; the tensions between Mainland China and Taiwan are apparent; the tensions in the South China Sea because of the competing claims in the South China Sea and the potential of hydrocarbon resources in that part of the world are also apparent.
I give those as three illustrations of difficulties in the security environment. We know that the Asia-Pacific region does not have a history of close cooperation. In fact, it has a history of fairly stark confrontation.
To address that, a complex architecture of security in the region, involving bilateral alliances and bilateral security dialogues, has been developed. It involves the ASEAN Regional Forum, which meets once a year at the ministerial level. Canadian and Australian foreign ministers participate, as do just about all of the foreign ministers of the Pacific.
There are 21 countries that are involved in the ASEAN Regional Forum. That forum provides an opportunity for ministers to discuss, in a open, frank, and a very blunt manner, their concerns about security issues. You may say that, compared to the security architecture of the Atlantic which you are involved in, or of Europe itself, the ASEAN Regional Forum is a very unsophisticated institution. I would only say that it is a very different type of institution, one that is creating a habit of consultation and of confidential-building in the Asia-Pacific region, and that its importance should not be underestimated.
Mind you, I think that ultimately it is the United States that keeps the security of the Asia-Pacific region together. We, as a country that has a long-standing alliance with the United States, are part of what keeps the United States engaged in the Western Pacific.
The other alliances of real importance to the United States are, above all, Japan, and South Korea.
As I have said, there is great cooperation between Australia and Canada, but just as important is our relationship with APEC. I thought the APEC meeting in Vancouver was very successful. The outcome was exactly what we had hoped for and is relevant in the context of the uncertainty that we now find in Asian financial markets.
The 18 economies involved in APEC made a firm commitment to trade liberalization; they did so not only through the individual action plans that were announced but also through the early identification of voluntary sectoral liberalization in 15 different sectors -- including the food sector, which is important to our two countries and is sensitive to Japan and Korea in particular.
Of those 15 sectors, APEC identified 9 for particularly fast liberalization. Included in those nine sectors are the energy sector and the fish and fish products sector, both of which are important for Canada and Australia. There were one or two others that held importance to us, as well. We felt that the trade liberalization agenda was marching forward with success.
The APEC leaders responded responsibly and constructively to the financial crisis in the Asian markets by effectively endorsing what the central banks had said in Manila recently; that is, that the IMF should be the body that designs any packages that are necessary and that if there is to be some sort of Asian facility, or Asia-Pacific facility, it should operate under the auspices of the IMF.
A strong vote of confidence in the medium- to long-term prospects of the Asian economies came out of the APEC leaders' meeting. And let me just round off by saying that that is the big story for the Asia-Pacific region. It is certainly a concern to us, given that over 60 per cent of our exports go into East Asia. Korea is our second-largest export market, Japan being our largest. It is of concern to us that these economies have encountered some difficulties. Those difficulties are partly borne out of overheating and partly borne out of the weakness of their financial systems. They do not have the sort of sophisticated financial systems that Canada and Australia share. They do need to improve the prudential supervision of their financial systems, the transparency of their financial systems.
One of the consequences of this financial shake-out will be an improvement in the way the financial systems of those countries work, as well as greater liberalization in the services sector and the financial sector. We see problems that are going to affect us somewhat; no doubt it will affect Canada, as well. However, we think that the medium- to long-term prospects for the Asian economies are extremely good from this shake-out and can lead to stronger structures and stronger economies, and not the reverse.
I will conclude by thanking you for having me here today. Apparently, the Prime Minister is going to see me for five minutes at some stage. Hence, at the appointed time, I will take my leave and then return.
In the meantime, I would be pleased to answer any questions you might have.
The Chairman: We are most appreciative of your attendance here today.
Perhaps, since you ended with the financial crisis, it might be appropriate to start our questioning with that, in a sense to get that out of the way. I have shaped up a question based on what you have said.
Senator Grafstein: Mr. Chairman, I notice that someone is nodding to the minister. I understand he may have to leave for a few minutes.
Mr. Downer: Yes. This may be a useful juncture to break for a few minutes.
The Chairman: Certainly. We will rely upon you to return.
The committee continued in camera.
Upon resuming.
The Chairman: Mr. Minister, the fact that you were away for a while enabled us to develop some questions. I am going to lead off where you left off. You sounded an optimistic note concerning the financial situation in Asia. You said that you thought that they would develop appropriate financial institutions.
What I wanted to ask was whether the key countries have the political institutions to sustain those financial institutions. And by that, I do not mean democracy, either U.S.-style or Canadian- or Australian-style. Do they have political institutions that will produce stability, which is necessary as a basis for those financial institutions? What is your reading on that?
Mr. Downer: They are all different. I suppose you are really talking here essentially about four countries -- Thailand, the Philippines, Korea and Malaysia.
Thailand is a democracy, but it is a weak democracy. They now have gone to a new government, but the new government has a fragile majority. One of the problems you could have with Thailand is that as the unpopular measures wear through to the street, people will become agitated. Of all the countries involved, Thailand is the one that has the weakest political institutions, yet it is at the most democratic end of the spectrum. It is certainly a very good democracy. It does, however, in its new government have a very strong government in terms of ability. They have got some very good people in it.
Elections are held in the Philippines. And whilst the they have a very good president, a strong democratic tradition, particularly post-Marcos, the Philippines nevertheless has elections and Ramos is bound to be defeated. It is not clear how good the alternatives will be, in terms of economic management, or to what extent they will be populists, but its political system is fairly well entrenched.
Malaysia's so-called democratic institutions are pretty well entrenched. Dr. Mahathir Mohamad is well entrenched domestically, whatever the perception of him outside of Malaysia may be.
Elections will be taking place in Korea this month and the three major candidates have all committed themselves to the IMF package. As I understand it, they have all been asked to sign off on the IMF package, which I believe they have all done.
In the case of Indonesia, there is, truth be told, some dissolution amongst the middle class as a result of the regime there. However, there is also fairly deep-rooted respect for the president himself. But because of the president's age, sooner or later Indonesia will go through a political transition. That might be a little bit bumpy, and it certainly will not be helped if the country's economy becomes substantially weaker. It is my belief that its economy is going to weaken as a result of these financial problems.
Indonesia is a next door neighbour to us, so it is very important to us that Indonesia remains stable. On balance, we think it will, but there is not any doubt that the financial crisis will cause some political discontent in Indonesia, and there is already some political discontent there.
Senator Bolduc: Do you think that the turmoil will produce substantive structural changes in financial institutions?
Mr. Downer: Yes, I do. Essentially, two things will come out of it in all of those countries. The first is a liberalization of their financial markets, which will be good for financial institutions in your country and ours. As a result of that, our banks, insurance companies, and so on, will get better access to those markets.
Second, in most cases the number of financial institutions will be reduced, as a result of consolidation, to make them stronger, and will be subject to better prudential prudent supervision. Frankly, the level of prudential supervision of financial institutions in some of the Asian countries is very low by comparison with our countries. There is an urgent need to tighten that up.
Their financial institutions have a large number of non-performing loans. In Korea, that number is something like 20 per cent of the loans. By comparison, in Australia it is something like 0.8 per cent; as well, in Canada, it is likely to be something in that vicinity. They have a long way to go to strengthen prudential supervision of their financial institutions, and they accept that. They accept that as part of the IMF package.
Senator Bolduc: Here in Canada, we have trust companies, insurance companies, banks, and other financial institutions. Do they have the same type of organizations as in Japan, or is the system different?
Mr. Downer: They are somewhat similar to the Japanese model, but the Japanese model is not necessarily as strong a model as the Canadian or Australian model. Frankly, it is not. I think there is a recognition in Japan that they are going to have to tighten up their financial system. Perhaps there is a view amongst financiers that it is a pity that that has not happened in years gone by, but the Hashimoto government seems committed to do that.
The Chairman: When I was making my introductions earlier, I failed to mention that the minister is accompanied by his Chief of Staff, William Tweedell.
Senator Di Nino: Minister, following up on my colleague's question, would you care to comment on the judiciary in those countries?
Mr. Downer: They vary. It is my view, in the case of Indonesia, that the judiciary is becoming increasingly independent, but you have to appreciate that in those countries the judiciary does not have the tradition of independence that it has in our countries. In Indonesia, where it is fairly constantly criticized by outsiders, it is showing a greater degree of independence than has been the case in the past.
They have also established in Indonesia a Human Rights Commission which is genuinely an independent Human Rights Commission. It is absolutely independent; as well, it is quite fearless in its criticism of the government and of human rights breaches in Indonesia. It is one of the things that people from the American hemisphere or from Europe do not take into account sufficiently, the fact that institutions like that are evolving and the increased scrutiny of the political process.
In a country like the Philippines and Thailand, the judiciary is fairly independent, but then I am a foreign minister. You have to read my autobiography to find out what I really think about the degree of independence in all of them. They are certainly not all equally independent.
Is that a problem? Yes. I think it historically has been a problem. Whether it is true or whether it is not, there is a perception that the judiciary sometimes can be persuaded to take a non-independent view of issues.
Let me put it this way: It may be that the judiciaries in Asia are more independent when it comes to criminal matters than civil matters; for example, in cases where there are financial breaches, breaches of financial regulations or laws, those sorts of things. This is a matter for argument, but perhaps they are not quite as independent as they are in criminal matters.
Senator Di Nino: You are likely aware that Canada, as well as other OECD members, is going through a period of analyzing the MAI agreement. This should lead, hopefully, to some sort of an agreement among all these countries early next year. We were wondering if you could share with us the experience in your own country, and include your opinion about where you feel this will be beneficial in investments that come to your country from foreigners, or investments by Australians outside of Australia. In particular, if you could answer the question about foreign investment restrictions in Australia.
Mr. Downer: We have been participating in the process of the MAI agreement, but we have not been taking a high profile. Why? First of all, we agree with a broad philosophy that we need to liberalize investment. We do not need to do that through the OECD but we are promoting that, as are you, through organizations like APEC. We believe fundamentally in liberal investment flows. After all, our country, like yours, is a country that has essentially been built on foreign investment.
Why have we not been as active as we might, therefore, in the MAI process? We have a system of monitoring foreign investment in Australia, that is, investments which are above a certain threshold. My commissioner can probably remember the threshold better than I.
Mr. Greg S.R. Wood, High Commissioner of Australia in Canada: I will advise you, senator.
Mr. Downer: We can let you know. It might be $5 million. It is not a very high figure. Foreign investments above that threshold amount have to pass through the Foreign Investment Review Board. Invariably, they are approved, but nevertheless there is a process which has to be passed through before the investment is approved.
There are some other restrictions on foreign investment in Australia. One of them is that you cannot invest in domestic property in Australia unless you are a resident, unless you get an exemption. You can get an exemption but, essentially, unless you are a resident, you cannot buy domestic property. That is entirely for political reasons. That is not for economic reasons.
There are restrictions on foreign investment in areas such as telecommunications, in the so-called sensitive sectors of the economy, the media. Conrad Black has owned a lot of our media, as has Izzy Asper. Izzy Asper exceeded the foreign investment requirements in Channel 10, one of our national television networks, and had to sell down. There has been some compromise reached over how it is done, but they are still in the process of selling down. This illustrates the point that there are some restrictions on foreign investment.
Essentially, though, we have a pretty liberal approach to foreign investment. The Foreign Investment Review Board, whilst occasionally it does not back investments, typically it rubber stamps them.
Senator Di Nino: Are you concerned about the effect that an agreement on investment would have on some of these sensitive industries, or are you going to be looking for exemptions within that agreement?
Mr. Downer: We have had some reservations because of the potential impact of the MAI on the restrictions we have on investment in sensitive sectors and maybe even on the activities of the Foreign Investment Review Board. I say some reservations. That is not to say that we are opposed to the agreement, because we actually do support the continual process of the liberalization of investment. In time, perhaps that is going to involve us making some changes domestically that we might not have otherwise made, in order to underwrite the better access we want for our investors.
If you take overseas investment as a proportion of your GDP, Australia is something like the ninth highest foreign investor in the world. We have in the area of $23 billion invested in the United States and $27 billion in the European Union. We see our corporate investments overseas as a very important component of the development of our economic relationships. To this end, we have investments in Canada at about the $2-billion or $3-billion mark. We are investing in diamond mines in the Canadian northwest, and so on.
We do not want to impose instructions on the rest of the OECD, or countries beyond, on investing in Australia, but they must give us free access to their markets. We understand all of that.
The Chairman: What about Australian investment in Southeast Asia?
Mr. Downer: It has been growing very fast; it is quite substantial. I cannot give you a figure off the top of my head -- although I must admit to you that we have invested more substantially in North America and in Europe than in Southeast Asia -- but the rate of growth in Southeast Asia is very rapid. In the last ten years, our investments in the ASEAN countries have grown three-fold, so they have grown quite fast.
Senator Bolduc: On the other side, are the FDI from China or from Hong Kong or Japan pretty high in Australia?
Mr. Downer: I think Australia and Canada rival each other as being the destination of the largest amount of Chinese investment, of PRC investment. I was told by someone at the APEC that Canada had overtaken Australia. That can only be for a temporary period, I believe. Until recently, we were able to claim that Australia was the recipient of the largest amount of Chinese investment.
The Chinese invest in a whole range of areas, but essentially in resources. They have, for example, a very large iron ore mine in Australia; an aluminum smelter in Australia; a meat works in Australia.
There is also investment from Hong Kong. A lot of the Hong Kong investment, though, is in property, which is probably true here as well.
Senator Whelan: Mr. Minister, last night I watched on television the terrible fires that you are having in your country, not far, if I gathered properly, from Sidney. I think the news report said that the fire was 100 miles wide. It was a terrible-looking thing. I offer our condolences and hope that somehow those fires are put out.
You said APEC was successful during the meeting in Vancouver. During your presentation, you mentioned how important the food sector was. If we heard you properly, Japan and South Korea are big purchasers of your food. Did you state that 60 per cent of your trade was with South Korea and Japan?
Mr. Downer: The whole of East Asia.
Senator Whelan: What part goes to Japan and South Korea?
Mr. Downer: Korea would be about 8 or 9 per cent. Probably, if you added the two together, it would be the high 20s, 28 per cent, something like that, a very big proportion.
Senator Whelan: What are the main food products? I heard you mention that China has a meat packing plant in Australia.
Mr. Downer: Yes. They own a company which has several abattoirs in Australia.
Senator Whelan: What are the main foods that you export to those countries?
Mr. Downer: Those foods would include seafood, beef, some grains. I am not sure if we export wheat to all of those countries in big quantities. We used to export an enormous amount of wheat to China, but that is not so anymore. China is not a big wheat importer now, but we export some grains. Sugar would be pretty substantial, as well. We are the world's largest sugar exporter.
The rest of our exports include natural resources, such as coal, iron ore, and the like; and in one or two cases, uranium. Important nowadays, elaborately transformed manufactures are becoming a rapidly growing part of our exports, technology of one kind or another.
Senator Grafstein: First of all, Mr. Minister, I am delighted that you are here. I should tell you that with respect to the Pacific coast, it really stretches to Toronto because the largest Asian community is not in British Columbia but in Metropolitan Toronto. At present, the second language used in Toronto households is Cantonese. It exceeds Italian, the language of my colleague, Senator Di Nino. It is growing quite rapidly.
Mr. Downer: I saw the results of the census on TV last night.
Senator Grafstein: We can arrest people in Toronto in 89 different languages and we can answer an emergency call in the police force in about 123 languages. The spirit of the Pacific reaches into the heartland of Canada. I come from that region.
There are two issues which interest me. First of all, your comments with respect to the financial difficulties in APEC, and so on. As I mentioned to my colleagues in your absence, there was a very troublesome report early this week from the IMF that their reserves are down to about $60 billion -- and I think that is $60 (U.S.) billion. In addition to that, they were looking for supplemental funding from member states. The lead on that was to be the United States for $3.5 billion, and Congress has turned that down, or at least the Senate has turned that down for now.
This says to me, without any inside information or whatever, that the IMF is going to be under increasing stress as a result of the Asian situation. I put that together with another story that has been repeated at least four or five times in the last couple weeks, which is that the Japanese tell us repeatedly that the top 20 banks will be preserved, no matter what. As soon as one says that more than twice, one has a sense that they are experiencing deep and difficult problems.
I pair that with a statement made to Japan by the Secretary of the Treasury, Mr. Rubin, in the United States about a month ago. I thought it was the most extraordinary statement I have ever heard from a Secretary of the Treasury in the United States since the depression. That statement was: You have a serious problem; you have to take a look at your financial institutions.
I thought that was an unbelievable statement. I assume he would not have said that, had not the problems been very deep and very pervasive.
I give you that by way of background. I assume from that statement that the impact of a serious meltdown in Japan and Indonesia of financial institutions and difficulty of the IMF to give appropriate support in a timely fashion would have serious consequences for Australia. It, obviously, would have serious consequences for us. I wonder if you can give us some sense of that. I respect you may have a limited ability to give us a full sense of what you know, but give us some sense of that because this could be a very major problem for all of us.
Mr. Downer: As I mentioned earlier, these problems have been caused by overheating in some of the East Asian economies and by structural weaknesses in their financial institutions. There is no doubt that some of their financial institutions were overexposed by the standards of our financial institutions, and that has caused a lot of strain.
As far as the Japanese financial institutions are concerned, I think there is a fairly wide-spread view, which is a view held in Japan as well, that they are going to have to go through a process of some reform. Of course, the Japanese government has started announcing that. As I understand the IMF's position, it is recently well cashed-up, or has been, leading up to this crisis, so it has been in a surprisingly good position to be able to respond but it obviously has had to get the support of others.
We have supported packages most recently in Korea, but also in Thailand and in Indonesia. Of course, the Koreans themselves supported the packages in Thailand and Indonesia as well, rather ironically. At this stage, they seem to be able to handle the task that is set for them, although in the case of Korea, you are talking about very big money. I reiterate: You are talking about very big money. Korea is the eleventh largest economy in the world, and so for it to call on the IMF, that is a major financial burden.
The IMF reserves may not be as much as $60 billion. I think they may be a little less than that. I would not like to speculate at this meeting about that, but I think you will find that they are a little less than $60 billion. There is going to be some strain on the IMF, but so far, so good. So far there has been the willingness of others to assist in these packages. Often, it does not involve actually spending money; it involves consolidating the mix of the reserves.
In our case, as part of the IMF package, we swapped $1 billion Australian for $1 billion worth of baht. Hence, we put Australians dollars into their reserves. That strengthens the profile of their reserves. They will, after 3 years, repay us that money at the original exchange rate of the transaction, and with interest. It is a loan, in essence.
It is not as though you have to spend the money in the way you might in a foreign aid program or the like. We must hope that these packages prove successful and prove successful quickly. I think that some of the early signs are good, but there is a long way to go yet.
Senator, I know the high commissioner is getting restless. I have to leave to go sign the land mines treaty, which I came all the way here to sign.
Senator Grafstein: Is there another short question we might ask?
Mr. Downer: Very briefly, and then I must go.
Senator Grafstein: We have had a debate about China's accession to the WTO. It is an ongoing issue for us. You are closer to the question than we are. Can you give us a brief synopsis of Australian's position with respect to that?
Mr. Downer: We are not going to give them a free ride into the WTO. If you do that, you will undermine the credibility of the WTO and its capacity to take the trade liberalization agenda further.
Senator Grafstein: Are you a fundamentalist when it comes to that, or are you a liberal?
Mr. Downer: Well, I am a liberal fundamentalist.
Senator Bolduc: There is an ongoing discussion about the monetary union. Many Americans are quite suspicion of that. As a European Union specialist, what do you think about it?
Mr. Downer: It is not a problem for us. As the foreign minister, since it is not a problem for Australia, let me say to you gratuitously that I do not think it is a problem for Canada or the United States either. I think that for all of us it is fine; go ahead with your monetary union. It will go ahead on January 1, 1999, and it will include Germany, France, the Benelux countries, and one or two others. I think nine are expected to join.
We have a type of free trade arrangement with New Zealand, but we do not have a single currency with New Zealand. You have NAFTA, but you do not have a single currency. It is just not the way we would go, but it is the way they are going.
The Chairman:I must take into account the uneasiness of His Excellency.
Mr. Wood: Thank you.
The Chairman: This is the committee that dealt with the land mines treaty. We did that just last week. We are most appreciative of your zeal to proceed to sign.
This has been an extraordinarily good discussion. I wish we had more time, but you understand our limitations and we understand yours. We must try to arrange an opportunity one way or another to resume and deepen our exchanges.
The committee adjourned.