Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 11 - Evidence
OTTAWA, Wednesday, March 18, 1998
The Standing Senate Committee on Foreign Affairs met this day at 3:35 p.m. to examine and report on the growing importance of the Asia-Pacific region for Canada (Canada-Japan economic relations).
Senator John B. Stewart (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, this afternoon we resume our work on the importance of the Asia-Pacific region for Canada. We are focusing specifically on the economic relations between Canada and Japan. To assist us we have three distinguished witnesses.
I do not have a CV for Professor Ursacki, but I have asked him to say a word or two just now to fill out our record on this point. Professor would you tell us a word or two about yourself?
Mr. Terry Ursacki, Associate Professor, Faculty of Management, University of Calgary: You are asking an academic to say a word or two. Since 1990 I have been at the University of Calgary teaching international business, focusing especially on doing business with Japan. My Ph.D. is from the University of British Columbia; where I specialized in international business. I taught At UBC for a year, before joining the University of Calgary. Prior to that I worked for the Bank of Nova Scotia in international trade finance; and prior to my work at BNS, I received an MBA from the University of British Columbia, where I specialized in international finance. As well, I went on a traineeship to Japan in 1982, which was the beginning of my keen interest in Japan.
The Chairman: Our interest in our trade relations with Japan is keen for obvious reasons, and consequently the meeting we are having with you this afternoon is of great importance to the committee. Ms Huber, please proceed.
Ms Margaret Huber, Director General, North Asia and Pacific Bureau, Department of Foreign Affairs and International Trade: I have just returned from a trip to Asia last week. I had the opportunity of visiting not only Japan but also China, Korea and Taiwan. As well, I stopped over in Vancouver on the way back to meet with our Asian heads of mission, who in addition to our Ambassador to Japan, Len Edwards, included 24 other heads of mission from Asia.
The message that the heads of mission, including Len Edwards, were giving, in Vancouver and across the country in a subsequent outreach program, was that despite the economic difficulties in Asia, which are very much differentiated from country to country, there remain substantial opportunities for Canadian business. This is particularly true of Japan.
As requested, my focus today will be on Canada-Japan trade and economic relations, but setting it in the context of the Asian financial crisis -- or perhaps I should say "crises," since the impacts are quite different from country to country.
You will all have seen in the media some considerable speculation suggesting that the Japanese economy and its financial system are on the brink of virtual collapse. This is not the reading of my department or many other colleagues, some of whom from the banking sector you met with last week.
Japan will certainly feel the impact of the Asian "flu." There will be some impact in the short term on Canada-Japan trade and investment. In terms of the overall relationship and of trade and investment opportunities with Japan, we remain very strong supporters.
The Japanese economy is one of the world's largest, the second. In fact, it accounts for 18 per cent of the world's GDP. It is the world's second-largest trader after the United States. It is certainly our second-largest trading partner.
Their economy has slowed in recent years, particularly if you compare it with the heady days of strong growth in the 1980s. It slowed sharply in the second quarter of 1997 as Japanese consumers reacted negatively to an increase in tax, particularly in consumption tax, social security taxes and also to an increasingly uncertain unemployment market as several large corporations started taking steps away from the practice of life-time employment. There have been a number of stimulation packages put out by the Government of Japan, but they have not revived growth, and even a 1 per-cent rise in GDP during the fiscal year 1998 is probably optimistic.
The Japanese, however, have been successful in maintaining considerable exports. The focus of many of their corporations will be, in the current situation in Asia, to increase exports, particularly with the United States. Looking down the road, it is rather easy to predict trade frictions on that score, particularly as the Japanese surplus, as well as the trade surplus of other countries with the United States, continues to grow, particularly as we move towards a presidential election year.
Many Japan watchers say that the only effective means to return to a sustainable growth path, if not to the 9 or 10 per-cent growth of past years but to something more promising than 1 per cent, would be through widespread and deep deregulation and reform. To what extent the Japanese government will be able to do that remains to be seen. This would require a very strong leadership role. Certainly the United States, the EU and others are pressing Japan to take that leadership role, to be the engine of growth for Asia out of the financial crises.
Leadership is required to overcome sectoral and special interest groups in Japan, as elsewhere, a situation which is very problematic. This is the one reason why Japan's response to the Asian crisis has focused more on financial aid than on fundamental reform of its own economy. You will have noticed that Japan has been a leader in providing billions of dollars to the rescue packages for Korea, Indonesia and elsewhere.
The aftermath of the financial sector crisis has been a temporary policy shift, it appears, away from implementing the reforms of the financial sector, from implementing the kind of government reforms that Prime Minister Hashimoto spoke of when he was here in Ottawa last November, to institutional support, injecting money into the banking sector to address the problems of non-performing loans and to try to shore up the banking sector as a whole. They are focusing on preventing further failures along the lines of the failures that were rather high-profile of four regional institutions in Japan that attracted a great deal of media attention.
I would now like to talk about the impact of the Asian financial crisis on Japan. It is affecting Japan at a time when their own economy has already been slowing down. Japan has huge financial interests in Asia. Certainly in the years since I first visited Japan in 1970 there has been what is sometimes called a hollowing out of the Japanese economy, with much of the manufacturing by companies such as Matsushita or Toshiba moving offshore to countries like Malaysia, Thailand, Korea and others. It is still, even though much of that manufacturing has moved offshore, making statistics somewhat hard to read, in the sense of: When is a Japanese product a Japanese product, or when is it Malaysian or whatever? Nevertheless, Asia is still the most important export market for Japan. It accounts for 45 per cent of total 1996 exports. It is the most important source of imports, 46 per cent in 1996.
Slower GDP growth in Asia as a result of the financial crises in countries such as Malaysia, Thailand and Korea will obviously slow the demand for Japanese goods. On the other hand, for the Japanese factories, the production cost of exports by these factories in U.S. dollars will be much less. This will have a compensating factor.
Japanese exports to the most seriously affected economies of ASEAN and Korea represent about 25 per cent of total Japanese exports. However, these exports, to put it into context of the overall strength of the Japanese economy, still only account for 2.2 per cent of Japan's GDP.
The drop in exports to those most seriously affected economies, Thailand, Korea, Indonesia, are offset by the continuation in growth in Japanese exports to countries such as China, with a growth of 11.7 per cent, Taiwan, with a growth of 16 per cent, and India, a growth of nearly 24 per cent, as well as Japanese trade surpluses with the United States and the EU. This has helped offset the decline in their exports elsewhere.
Moreover, the increased competitiveness of ASEAN exports due to devaluation should not have much of a negative affect on Japanese exporters due to the fact that their products tend not to compete directly in the same areas. They will, however, face stiffer competition from such Korean exports as electronics, shipbuilding and computer chips. As mentioned earlier, this may result in a diversion of Japanese exports to North America, particularly the United States, and to some extent Canada.
Within this context, I would like to provide the committee with a brief overview of Canada Japan trade relations. Japan is our second-largest trading partner, purchasing more Canadian products than the U.K., Germany, France and Italy combined, or nearly half of all Canadian exports to Asia. Based on preliminary statistics, our two-way trade in 1997 was $23.4 billion. That represents a small surplus of imports; that is, 4 per cent of our total Canadian exports and 5 per cent of our total Canadian imports.
They have also become increasingly diversified. When I first was working at the Canadian Embassy in Tokyo in the late 1970s, by far the greatest amount of our trade was in commodities. Presently, there is an increasing amount in areas such as agrifood -- Japan is the world's largest net agrifood importer -- in increasingly sophisticated building products, as well as computer software, telecommunications, computer components, and in an increasingly sophisticated array of value-added goods.
Senator Whelan: Wine, too.
Ms Huber: Very good wine. The amount of our exports to Japan during this past year, despite all the pressures in Asia, will show a growth over 1996.
I would like to talk very briefly about some of the export success stories, as well as touch on some areas of concern that bear watching. I mentioned that Japan is the world's largest net agrifood importer. This will increase and we will be looking to increase not only pork and beef exports, but also processed foods of various kinds. We would also like to continue to push for greater market access in the agrifood area and have had some success in this regard in the past year. For example, there had been some problems with regard to Japanese acceptance of gene-engineered food, particularly in the canola area.
The lumber market, which had been on a very sharp growth curve, particularly after the Kobe earthquake, which took place while I was in Osaka, and thereafter produced a very strong increase in what had already been a growing demand for Canadian building products, is now certainly slowing down and in fact has seen a drop of about 15 per cent. The longer-term projection, however, in the building products area remains very good.
The stock of housing in Japan, much of which was built after the war, remains inadequate. The demand for new housing, as well as for housing renovation, particularly for elderly parents, often requires Canadian building products. As well, new housing provides an opportunity for Canadian furniture makers and others. The long-term prognosis in that area continues to be very good.
Japanese consumers have very large personal financial resources on which one can look for further growth, particularly once consumer confidence is restored to some extent. This is a very different situation from that of economies such as Indonesia's where you simply do not have that bedrock of personal wealth on which to draw.
I would now like to talk briefly about Japanese foreign direct investment in Canada. The flows of Japanese foreign direct investment -- here I am using Japanese Ministry of Finance figures -- peaked at $67.5 billion U.S. in the fiscal year ending March 1990, but fell to $34 billion U.S. in 1992.
Our share of total Japanese foreign direct investment has averaged a very modest 1.7 per cent since 1981. We are very well aware that there is great room for improvement in this area and have been working closely with Industry Canada and other departments here in Ottawa, as well as with provincial governments and the private sector. Among the two brochures which I brought today, for those who would like to take them away, there is one recently released called "Asia Pacific Investment Strategy." Both that document and "Canada's Action Plan for Japan" focus on investment and the need to encourage further Japanese investment in Canada.
Although in the shorter term probably we will see a slow down, a diminution of Japanese investment globally, particularly with uncertainty as to what will happen in Asia, the stability of the Canadian market and the many attractive features that we can offer to international investors, including those from Japan, means that we will see both additional investment as well as expansion of existing investment.
Mr. Michael W. Donnelly, Professor and Associate Dean, Faculty of Arts and Sciences, University of Toronto: As members of the committee probably know, I am a political scientist, not an economist. I began my academic career at the Public Law and Government Department at Columbia University. For my dissertation work, I studied agriculture in Japan. I have worked on a farm and transplanted rice.
I have organized my comments in a way that will emphasize the centrality of politics. As well, having heard Ms Huber's presentation, I will not repeat some of the comments she made. I do not think you need to hear the song sung twice on many of these issues because for the most part I am in agreement with her.
There are three central concerns. First, is Japan really desperately at risk at the moment? If the economy is deeply and fundamentally at risk, then what are the consequences for us? Essentially I believe that Japan is at risk. At the same time, I do not think that Canadians must be grievously concerned. We must watch developments in Japan with great care and scrutiny because the country will emerge in the next three or four years as a slightly different place and different in important ways.
It is hard to be optimistic or upbeat about the short-term prospects of Japan. For example, once the budget gets through in April, Prime Minister Hashimoto will discover that indeed there should be an additional supplementary budget. This will be another stimulation budget, presented slightly in advance of the Upper House elections. Whether or not its economic impact will be significant is a separate question <#0107> and I am not sure of the answer to that.
The second concern is Japan's response to the turmoil in Asia. Japan is like any other large economy in the world today. It is experiencing negative impact. It is certainly true as well that, all things considered, Japan has not displayed significant independent leadership in Asia on this question. That is too bad. I was hoping that Japan would be able to crystallize a new approach and join the debate in a different way from the IMF-led proposed resolution, not necessarily because the IMF resolution is wrong or that the Japanese would have the right answer, but because we need to think deeply, seriously and fundamentally about the crisis in terms other than financial. The crisis will have sociological and political ramifications and it could have a profound impact on the world in the next few years.
In any case, all the evidence suggests that Japan remains embedded in the economic structure of the region. Asians will continue to look to Japan for capital, for markets, for technology, for managerial skills, and indeed, Asians will look to Japan for political leadership.
The third concern is reform and change in Japan. The IMF is concerned about reform in the world and so is Prime Minister Hashimoto. He is a reformer in Japanese politics. He has embarked upon an extraordinarily broad program of reform. My view is that reform will happen in Japan and it will probably result, in the end, in a stronger and more competitive Japan. However, I do not believe that Japan's economic and political leaders will embrace the kind of market-based economy urged upon them by the Americans and other foreign governments. I do not think that reform will in any way solve all the problems that foreign firms confront when trying to do business in Japan. I do not think that it will lead to a complete erosion of national, economic and political differences; and I do not think that Japan, in that sense, will embrace the kind of idealized marketplace, the hopes and expectations that the IMF has regarding the rest of Asia. It would be parenthetically quite interesting to see how Japan would respond to an IMF-led program of reform if proposed in Tokyo.
Is Japan at risk? Every economic indicator you can find is sloping in the wrong direction, except perhaps the current account surplus and the trade surplus. It is clear that Japan's global trade surplus is moving in the wrong direction. This is a trend considered by many experts to be an unacceptable development because it means the world's second-largest economy is relying again, to some extent, on an export-led strategy to achieve economic growth. I do not think the United States will accept this. My prognosis is that there will be a period of mutual recriminations between the United States and Japan. Canada must be very careful not to become ensnared in this conflict in the wrong way.
Japan is seriously at risk. The destruction of wealth in that country has been remarkable. Imagine a stock market going from almost 40,000 to 14,000. I know what that would mean to my mutual funds. It is an extraordinary story that is not fully and completely understood.
There is a joke going around right now in Tokyo that 10 years ago we were in fear of Japan; we then decided that it was time to bash the Japanese; then about four years ago, as the alluring potential China became more and more a focus of journalistic attention, it was by-pass Japan. Now in the last two years, the view is that Japan is nothing; that is to say, Japan is so deeply, darkly in trouble that we must think beyond Japan. That would be a terrible misunderstanding of Japan's place in the world and we should not believe that Japan is not as significant as it once was. Japan is at risk. I will come back to whether or not Prime Minister Hashimoto's reforms will make a difference, in a moment.
What about Japan and the Asian turmoil? You have had a number of statistical indicators that simply reinforce the extent of the crisis in terms of depth and breadth. In terms of Japan's involvement in the region, Asia is absolutely fundamental. Measured in terms of trade, direct and indirect investment, and technology flows, financial services, and aid programs of various sorts, Asia continues to be absolutely fundamental to Japan. To the Japanese, Asia is their natural community; Asia is their natural sphere of influence.
Since the end of the cold war, there have been clear signs that the Japanese want to play a larger, more significant geo-strategic role in Asia. Historians will probably judge that domestic circumstances in Japan were a misfortune because this was one opportunity where Japan might have been able to etch out for itself a different position in Asia; but because of the difficulties at home, they were not able to do so.
As to whether or not Japan will become an engine for economic recovery in the region, it is unlikely in the short term, and perhaps even the near term, given the information we have already.
How will economic and political reform in Asia be linked to the Japan crisis? Will the IMF-imposed changes in other Asian countries inspire the Japanese to move in the same direction? Will the Japanese be inspired -- maybe even more than being inspired -- to address some of the fundamental reforms that are being linked to the IMF requirements for aid in other Asian countries? Indeed, some optimists suggest that the trade crisis and the IMF solutions will inspire more domestic changes in Japan than a decade of pressure by American trade negotiators. On balance, my view is do not count on it. I do not think the new Asian model will be imposed upon the Japanese in that way. Clearly reform will be in the air. Changes will be made throughout Asia and clearly they will have an impact, directly or indirectly, on Japan in terms of financial arrangements.
To what extent is Japan's role as a provider of capital in Asia endangered by the financial crisis at home? It is, but Japan is still the largest capital provider in the world today, in part because of remarkable savings rates. The savings rates in Japan are going up. It is hard to estimate the amount of savings available in Japan at the moment. However, they are clearly astronomical.
How precarious is the position of Japan's banks in Asia? We do not know, of course, because the information is not altogether available, but my impression from the Bank of International Settlement analysis is that probably only 10 or 12 Japanese banks are significantly involved in Asia. Probably the one country that should be of concern is Indonesia. Also, we do not know about Korea altogether. The information that is available is not reliable.
Will the currency crisis affect Japan's production networks in Asia? Will the contagion effect of the crisis have changed the manner and way in which Japanese do business in Southeast Asia? Yes. Exchange rates deeply matter, in terms of exports, imports, capital flows, debt, inflation, unemployment, social stability, and political order. We are discovering something we all knew, that exchange rates really make a difference and you will be seeing in some fashion Japanese firms in Southeast Asia absorbing difficulties, but at the same time creating new opportunities. So therefore, to take a Canadian perspective, we must be careful to keep an eye on those changes.
Reform and change in Japan is extremely difficult. I am reading a book right now that reminded me that Japanese bureaucracy is very old. An energetic 22 year old who has been able to pass all those difficult tests and get into the Ministry of Finance is told on the first day of orientation about the traditions of the Ministry of Finance, that the ministry can trace its history back to the year 607 A.D. Bureaucracy in Japan has been there for a long time.
Second, there are probably no more than six or seven economists in the Ministry of Finance. However, probably 80 per cent of the top-ranking officials in the Ministry of Finance have gone to Tokyo University and studied public administration, so it seems to me by instinct and education and background, their solutions are not market-oriented. The solution is not to look at this as an economist. The proposed solution is to discover what kind of regulation is needed. Regulatory reform in Japan is not deregulation. It is to mitigate regulation, not to eliminate regulations. These historical traditions in Japan are quite important.
What about today? Why is reform so excruciatingly slow and difficult? It is important to realize that the role of Prime Minister Hashimoto is not the same as the role of the prime minister in our country. Neither can we view the Prime Minister of Japan as having the same kind of powers for changing things as an American president or any other parliamentary prime minister. It is misleading for us focus on the prime minister alone.
Japanese politics is extremely personalistic, within and between political parties as well as within the bureaucracy. Do not accept the notion that you have, within the Japanese bureaucracy, hard-working officials, neutral officials without a soul and a passion and political loyalties. These ties and connections with individuals mean a great deal. It is often said that the Ministry of Finance is all bureaucracy, no ministry. There is something to that.
Therefore, there is often a lack of firm organizational loyalties in Japan. This means that coalition-building is often more difficult than building castles in sand, both inside the political parties and within the public service. The result is that politics is deeply fractionalized. Government has always been divided. I have been studying Japan for almost 30 years; the Japanese government has always been divided and fractionalized. Politicians have always disagreed among themselves. This particular crisis has not prompted a sudden appearance of fission politics in the last few years.
The process of politics therefore becomes the clash of vested interests, pitting competing groups against each other within specific, narrow segments of public policy.
Considerable emphasis is placed on the need for consensus in decisions. This always slows things down. Indeed I would argue that there is a deep resistance in public life to permit decisions to produce clear winners and losers. An enormous amount of attention is given to make sure that winners do not seem like winners and losers do not seem like losers. Think of the time requirements.
The lines of accountability are not always clear. Often decisions involve rather opaque procedures, a good deal of formalism on the one hand combined with an illusive, puzzling informality. It is difficult for us to figure out what is formal, what is informal, and what the relationship is between the informality of a decision and the real decisions. Of course, other countries have the same kind of illusive elements to politics.
We also see the use of commissions and councils as a means of achieving consensus on major initiatives put forward by bureaucratic agencies, rather than, for example, extensive deliberation in the nation's parliament. Decisions, ideas, practical solutions are worked out in the first instance by bureaucratic initiatives, through commissions and councils. This gives policy-making a strong bureaucratic cast and places political parties and organizations in a secondary role.
Extensive use of informal methods of governance are also used. The famous Japanese bureaucratic style of administrative guidance is not rooted in law. It is not that people in the private sector, people in organizations respond to government directions, regulations or suggestions because officials are empowered by law. They are not. It is informal. It is a simple, informal way by which government officials are able to monitor, suggest, require, exhort, and so on.
There is also an extremely vague distinction in this country between private and public, market and government. A great deal of private-sector discretion is permitted through, for example, industry level associations, but industry associations have close and intimate ties with the government.
Finally, because of the long period of one-party rule in Japan, a number of frequently autonomous, industrial and other sectors have developed, populated by "iron triangles" of regulators, the regulated and Diet members, who are called "policy tribes" in Japan -- or zoku giin. They back up their supporters, who are usually the most protected, subsidized and frequently the least competitive sectors in the economy.
In an odd political way, both the competitive and protected sectors of the economy are woven together. Society is not altogether divided. For example, consumer groups are often against liberalization. I recently saw a survey of Japanese housewives, who were asked whether or not they thought it was a good idea for the banks to offer competitive interest rates. Eighty per cent of the respondents said that they did not want competitive interest rates.
More generally, whether it is consumers or even exporters, organizations do not usually define their priorities strictly in terms of favouring or disfavouring liberalization. Both the protected and the unprotected, the competitive and the not-so-competitive parts of the economy are interlinked in a way that makes reform cautious, slow, incremental, difficult. Policy decisions are marked by political bargains involving a great deal of compensation to losers, involving a kind of caution about reform.
Will Japan change? Indeed, Japan is in the midst of change. If you think about change in the following way, it might be sort of useful. Change will take place in the first instance within the kind of large, political, economic coalition of groups of interest that rule the country. For example, the various weaving together of new political parties in Japan is slowly changing, in a significant sort of way, reshaping the character of the political parties, the groups and the associations with which the parties are connected. So also is the connection that government has with society and with the economy. So change is taking place there.
Change is also taking place within the bureaucracy. Changes are taking place, not only within government, but also within corporations. Japanese corporations are undergoing an enormous amount of corporate restructuring. On the other hand, the front page of The New York Times carried an article about Chase Manhattan releasing thousands of people. That would be very unusual in Japan.
Nonetheless, I do think that corporations and government are being restructured. The political coalitions are changing. The institutions through which power is exerted are changing. The policy profile of government, that is to say the policies that have marked the basic direction of government involvement in the economy, are also changing. So on those three dimensions, the socio-political coalitions that rule Japan, the institutions through which power is exerted, and the basic fundamental direction of policy in terms of attitudes toward policies towards the market, changes are taking place.
The implications for Canada are straightforward. We must clearly have our fundamental objectives in mind.
Mr. Ursacki: I have been editing furiously, in an effort to reduce overlap. It was suggested to me that you might be interested in three areas: the present situation of the Japanese economy; the affect of the Asian crisis upon it and how that would affect Canada-Japan trade; and ways of possibly liberalizing trade with Japan. I will focus on the response of Canadian firms to that and how governments should respond to help Canadian firms deal with this situation.
There has been a lot of detail on this topic about the Japanese economy. In the fiscal year ending March 31 of this year, the Japanese economy will register its first decline in 23 years in GDP. The government is capable of doing very little at this moment. Interest rates are still low. It is hard to stimulate the economy with monetary policy. The budget deficit is quite large and the Ministry of Finance is reluctant to see it get larger, so there is limited room for fiscal stimulus. If they try to lower the yen and export their way out, they risk trade friction with their partners. So I am not sure what they can do there.
As a result of this situation, there is extremely poor consumer confidence, evidenced in declining retail sales and declines in the price level. There is extremely poor business confidence. The Tankan, a key indicator of business confidence in Japan, was down sharply at the last reckoning in December. It should be out again any day now and will show another drop. The financial sector has a large number of problems. Many people fear losing their jobs in that sector; also, there is opposition to the use of public funds, which seems to be necessary if certain institutions will be saved. If that is not done, then some of those institutions will probably go to the wall. So essentially a very gloomy situation in Japan.
There is a relative inability to take dramatic action to deal with it, due to a variety of bureaucratic obstacles and a fragmented political situation, which is compounded by a constantly widening series of scandals in Japan which are sapping people's energy to pursue dramatic reforms. At least that is a temporary diversion, although it may help in the end to break some log jams.
On the other hand, it is important to recall that some of the firms in Japan are very strong still, particularly the export-oriented firms. Even if profits are down sharply, in many cases, they are still very strong technologically, very strong in their competitive position. Many of them are very strong financially as well. Although consumers may be very gloomy, it is a very rich gloom, which is quite different from being in a poor and gloomy situation. Personally I do not know if it is better to be gloomy and rich or happy and poor. I have been one and would like to try the other.
What does this mean for Canadian exporters? The problem that we face is the risk that this general gloom in Japan is likely to infect Canadian firms. What I mean by that is that this will certainly make the Japanese market tougher. You cannot just be carried along by the rising tide. This is what many Canadian firms have done in the past. The market was growing and was buoyant in Japan or another Asian country, and they would simply get carried along. Now the importance of knowing the market and having an organized strategy and being committed is more important than ever.
However, with this kind of gloom, coupled with a relatively positive economic environment in Canada, it is likely that fickle Canadian companies will once again show their opportunistic nature and abandon the market. I have some anecdotal experience of Canadian companies doing business in Japan doing exactly that. "The market for housing in Alberta is booming. The market in Japan is down. Why should I bother going off and fighting my way through the thicket of problems in Japan, even though they are much improved due to some work from the Department of Foreign Affairs and International Trade? It is much easier to build houses in Calgary and Edmonton." That is a risk we need to deal with.
What is important is to ensure that Canadian companies do not use this as an excuse to drop the market because sooner or later there will be an upturn and Japan will recover somewhat, and then Canada will be poorly positioned to take advantage of any upturn that does result. I am not particularly optimistic that that will happen in the short term.
The other point I wanted to discuss was the idea of approaches to liberalizing trade with Japan which is basically how governments can help Canadian firms. Periodically, one hears mooted plans for free trade agreements with various parts of the world. There has been talk of a transatlantic free trade agreement. Right now there is a free trade area of the Americas initiative which seems to be revving up a bit. One hears talk sometimes about doing the same kind of thing with Japan.
My reaction to that idea is that it would be nice but it takes two to tango, and I am not sure that the Japanese would have a whole lot of interest in doing this. There is not a whole lot on our part to give. We are only 3 per cent or so of their trade. We do not have a whole lot of bargaining chips to go in with. Doing a deal with us before doing one with the United States would certainly annoy the U.S. Japan has so many other priorities on its plate right now, the recession, the disastrous state of the financial sector, bureaucratic reform, this series of scandals which I mentioned, so it is unlikely they will do anything dramatic in this regard. That does not mean that we cannot actively pursue a variety of areas which would be of benefit to Canadian firms. In this area, there are already a number of initiatives, such as APEC, the WTO sectoral talks, as well as preparations for the next round of World Trade Organization talks, which offer us opportunities for somewhat broader discussions to liberalize trade, but probably those will take some time.
What is more important for us is the seemingly mundane work of detailed, bilateral, sector-specific talks on procedural issues, which is done on an ongoing basis. This is the type of seemingly minor thing which can have a major impact dealing with things like mutual recognition of standards, certifications being able to be issued here rather than in Japan, things of that nature. These are the kind of things that can go on without a lot of great publicity, without a lot of dramatic signings of documents, but which nevertheless can be very important to the development of Canadian firms and business in Japan.
Lastly, if Japan does end up with a substantial increase in its trade surplus and this leads to greater trade friction, that is something that will bear very close watching, because the way that Japan tends to respond to pressure on this issue -- and it is usually pressure from the United States -- is usually somewhat lacking in vision. It is basically putting a bandage on the situation by making some concession to the Americans. Sometimes those concessions can help Canadians, and sometimes they can help the Americans over us. That is a specific manifestation of the general point that our trade policies with any part of the world must take into very careful account the context of having 80 per cent of our exports to the United States, because anything that slightly affects our trade with the United States could drastically outweigh any effect it might have with another trading partner.
The Chairman: We have tended to focus on the economic situation in the Far East because of the current financial sector crisis. Yet we are told again and again that Japan has had domestic economic problems for almost a decade now. What is the explanation of the end of growth in the domestic Japanese economy? Is it a situation where we have a mature, industrial, socio-economic situation with an aging population and no new products coming on?
The situation in the past was such that the Japanese produced a motorcycle that people in North America wanted; then it was good cameras, good electronic radio and television equipment, and then lately more sophisticated electronic equipment. There has been no new product to give another round of economic growth. If we can get away from the financial sector crisis for a moment, let us look at the industrial substructure, the foundations of the economy. Is that healthy?
I have another question that relates to where all this money has been saved. What do we know about total Japanese foreign direct investment? We have been told that the portion of it coming to Canada is relatively small. Is the situation such that Japanese money has gone into far away places, creating jobs in far away places rather than producing a revitalised, domestic, industrial economy as distinct from the financial economy?
Ms Huber: Your first question was the reasons for Japan's domestic economic problems. As you quite rightly say, it is not so much tied to the current financial crises in Asia as it is to fundamental domestic problems within Japan. There are a couple of reasons that underlie that -- and I would ask my colleagues to comment as well.
One is that Japanese banks during the bubble years were loaning out a tremendous amount of money for the purchase of land. The land value of property in Japan, particularly in the major cities of Tokyo and Osaka, went beyond reason. At one point part of Nihonbashi in Tokyo was said to be worth more than all of California. The companies who had such land on their books with such inflated values could then borrow money based on the property that they owned. A lot of those borrowings are still on the books of several Japanese banks, and not all recognized as non-performing loans. The property values in Japan have gone down tremendously.
As an aside, it is kind of interesting that in Korea property values have not yet dropped much. In terms of other reasons, anyone who has lived in Japan or visited there frequently cannot help but notice that parts of the economy are extremely competitive, particularly the manufacturers, Toshiba and the like. The service side of the economy, the banking and insurance sectors, are spectacularly uncompetitive. Agriculture also tends to be amazingly protected; for example, the price of rice is being more than seven times the world price of rice. When you have such anomalies in the market, the need for corrections becomes more and more apparent, particularly with global pressures to be globally competitive.
Parts of the economy recognized it. It was, after all, in Japan the phrase "borderless world" became popularized, but because of the bureaucratic friction and resistance that Professor Donnelly so eloquently outlined, the economy has slowed to the extent that it has.
Mr. Donnelly: It is a misunderstanding to think that somehow Japan's crisis is the result of a blunder by Prime Minister Hashimoto, for example at a time when the economy was in the doldrums, to continue with the consumption tax. Several hypotheses focus on the macro-economic management skills of the current Japanese government and suggest that essentially the economic problem is rooted in a mistake that was made about a year ago.
The Japanese fundamentally are asking: "If the market is not right for us and what we have done thus far will no longer work, then how will we co-ordinate in new ways? If we do not rely on the marketplace to co-ordinate, what do we do in its place?" They do not have an answer. That is fundamentally what they are trying to figure out.
How do we coordnate? Should the country coordinate through bureaucracy, public service and political parties. If we understand the market as being a fundamental way for societies to co-ordinate a myriad number of economic decisions, if that is not what we want -- and we know we cannot have all of the things we have done thus far because everybody is complaining about it, and we see also that past practice is inefficient -- what do we do?
It seems to me that the historical struggle in Japan concerns what co-ordinating devices Japan can create when there is a suspicion of contracts as we understand them? What kind of co-ordinating device do we put in place? The answer is still uncertain.
The Chairman: No one has touched my question about foreign direct investment.
Ms Huber: On foreign direct investment, I should note that last year Japan invested $50 billion overseas. Of that, 48 per cent went to the United States. That is their most important export market. They also saw that the exchange rates were such and their expected return on investment was such that that made for good business decisions. Of that, 24 per cent went to Asia, a lot of that to expand their existing manufacturing operations in Asia, various levels of complexity, some assembly plant, some real transfer of technology, and 15 per cent went to Europe, which they also see as an important growing market.
In terms of why has Canada not been doing better, partly it is a perception of what kind of return they can get on their investment taking into account foreign exchange rates. Although they recognize that Canada has taken very determined and successful steps to grapple with the deficit and to set our house in order, they remain mystified as to why our dollar should continue to be so low and see that this is not the right time.
The Chairman: My concern though was something slightly different. Capital is being invested overseas. Now dividends are coming back to the Japanese owner of the capital, but the new jobs, the new factories, the new and more efficient production is taking place elsewhere. Surely this does have an impact upon the maturation of the Japanese economy.
Mr. Ursacki: There are two aspects there. The critical thing to recognize is that what has tended to happen, particularly with respect to Asia, is that this investment has been very closely linked to the exports that Japan has had to the places where this investment has been made.
So, for example, if you buy a VCR or some other piece of electronic equipment, it may have a label on it that says "made in Malaysia" or "Taiwan" or "Korea", something like that, but most of the sophisticated parts in it are usually from Japan. So these investments that they have made abroad have in essence been a part of international division of labour. Japan makes only the core parts and even those core parts are becoming smaller and smaller as other places become better able to make more of those core parts. So it has saved the markets of the Japanese firms. At Japanese wage rates, they could not have continued to make the whole VCR, but they can make the core components and have them assembled, in the case of VCRs, most commonly in Malaysia.
One must see that as a positive corporate strategy for self-preservation. This is a common practice. We tend to see that in most of the industrialized countries.
You mentioned this in the context of savings. One of the things about this huge amount of savings that is piling up is that in connection with the increased riskiness of the financial sector, particularly the banks, there has been a flight to quality. One sees more of the personal deposits, for example, shifting to the postal banking system because then it is a direct government obligation rather than one of a bank. Even within the banks, some banks are seeing their deposits drift down whereas others are seeing them drift up if they happen to be a little bit strong. Even foreign banks, which are quite small players in the market as a whole, have seen their deposits shift up dramatically because they are generally better credit risks than the Japanese banks.
So in the past, the Japanese have never had to worry about the safety of their savings. One of the reasons that they are not so keen on the idea of deregulating interest rates and so on is they have never had to worry about such things. They could put it in anywhere and it would be safe. Now they must worry about these things.
Senator De Bané: You asked a question about the nature of the industry there. Are they copying other products from other countries?
The Chairman: No, I did not ask that. Suppose there were a new breakthrough in production, some highly sophisticated electronic invention. Would this give a stimulus to the Japanese domestic economy? We talked about expensive labour force. We talked about a highly sophisticated labour force. Do they need some new invention? I am talking about the whole question of economic growth. We have seen it described in the case of the history of the United Kingdom. Do we need a new engine of economic growth?
Ms Huber: The kind of next generation jump that you are talking about, like the shift to transistors for example, I think what the Japanese economy actually needs right now is a cut in income taxes significant enough to restore consumer spending. That is the shot in the arm that is doable and that they really need. You cannot wait for the next scientific leap forward.
Mr. Donnelly: The Japanese know absolutely what you mean. They realize that they have reached the frontiers of technology in so many ways. That is one reason that investment in technology is so high in that country. They recognize that in the end the competitiveness of firms, and maybe nations, is rooted in technology and new developments. They have reached a certain level of technological sophistication and they recognize that they must build new frontiers. That is why they are putting more money into science than ever before, and that is why they are looking for new products. However, the trickle-down effect of technological breakthroughs takes a long time. They are aware of that problem too.
Senator Whelan: I have listened to John Klassen from your department. He has been around a long time. He attends all these world meetings. I listen to Mike Gifford in agriculture. Those are old guys.
Ms Huber: Please do not say that. John Klassen is from my year.
Senator Whelan: "Old" as far as going to world meetings. They think politicians should come and go like the wind, but they stay forever. I asked Mr. Klassen, who attended before our committee once, why they talk to us about global trade, about these countries and Japan. Mr. Klassen told us that Japan practically said no to agriculture and fisheries. We are given a snow job in Canada. We must accept all these things. Here is our biggest trading partner next to the United States telling us no. That is one of my questions.
Did any political scientist or economist ever forecast this? I do not remember reading one pessimistic forecast about APEC. Maybe there was. I read a lot of magazines and a lot of publications. I read Diane Francis and others talking about how wrong and how corrupt everybody was. Why did no one see any of this? We farmers and ordinary professors, we might have had some reservations. I dealt with Japanese at a lot of different world meetings, OECD and others. They were immovable on a lot of subjects.
For instance, we had the most modern electrical cable manufacturing industry in the world. Canada could not sell one foot of cable in Japan because they were all told not to buy it. We could meet all the restrictions and everything, but we could not sell one foot because their culture was 100 per cent Japanese and they would not buy from those Canadian manufacturers.
Also we have lost on commodities -- soy beans, corn, wheat, lumber.. It has been horrendous. I only have a few thousand bushels of soy beans in storage, but I have lost about 40 cents a bushel since January. The fact that they are refusing to buy is a hell of a loss to farmers and to the wheat sales.
My nephew is a robotics engineer and he works with a Japanese colleague. Professor Donnelly stated that the Japanese like their Canadian way of life much better. They did not like all this meditation and exercise. They like playing golf and they like going to some of these other things. Some of them did not want to go back to Japan. This Japanese fellow worked at Ingersoll in the robotics plant when they were putting all that new machinery in. My nephew associated with these young people all the time and he maintained that they would change.
I disagree with one thing you said about cutting taxes. You stated that the Japanese savings are so huge. Why would cutting taxes make them spend more? They have bundles of money now. You sound like Mike Harris in Ontario. These are some of the things that I am concerned about.
I do not have much confidence in the IMF or the World Bank. I remember these people well. I went to a lot of these meetings.For example, someone who is at the World Bank used to be an economics lecturer in Budapest. Now he is over advising Ukrainian farmers what to should do. Has he changed from one side to the other just like that? I cannot believe that. He was indentured for years and now he is telling them how to privatize and how to do things. I cannot believe that that kind of competence exists in this man representing the World Bank. Those are some of my reservations.
I planted rice in the Philippines, too.
Mr. Donnelly: You are right. I have heard some of the IMF staff are now saying that even a year ago they were quietly, unobtrusively warning Thailand and Indonesia that troubles were on the horizon, but they did not want to make these meetings public for fear of the political implications and attention. I have read, at least on two accounts, that IMF officials checked into hotels under false names and had meetings with officials of the governments.
The bigger point is, yes, to some extent it is really unfortunate that the World Bank called this a miracle in Asia. Yes, those of us in the academic world were somewhat misguided, but again a lot of capitalists were misguided as well, insofar as they put their money into Southeast Asia. So if there is a flawed intellectual judgment by professors of economics and political science, there are others who joined us in our misplaced enthusiasms.
How fundamental is this? What happened to all these lessons that we learned and all these explanations that we nodded our head at, saying, "Yes, more education; yes, higher savings," and so on, the elements of the Asian economic miracle? Whether or not the basics are still right, and it is just a question of the financial question, the experts are divided.
Last weekend there was a meeting of 400 specialists in Asia and it turns out that they were divided too. I do not have any prognosis. I cannot predict.
The Chairman: Would someone deal with the question about the tax cut?
Ms Huber: At the beginning of 1997 when it was apparent that Japan could be headed for a recession, rather than sort of loosening up, the Japanese government decided to go ahead with some major and high profile tax changes.
This was a Japanese version of the European value added tax, although it was certainly not in the 19 per cent or 20 per cent level that you find in Europe. Because it was significant enough for every housewife and every salaried man to feel, that cast a pall on consumer confidence.
At the same time, with speculation in the press about this being the end of the lifetime employment system, there was a lot of uncertainty about people being able to retain their jobs, even though Japanese employment rates, by our standards, are very high. Indeed, with unemployment of 3.5 per cent, and you could probably double that to include underemployment, that is pretty modest by many standards.
The uncertainties caused by the introduction of new taxes, set their recovery back.
Mr. Donnelly: There is a lot of anxiety and concern among ordinary Japanese that they will not have a pension because of the performance of the insurance companies, the pension funds and so on.
Ms Huber: It is also an aging society.
Mr. Donnelly:They are concerned about social welfare. They are worried about how much the public will have to pay to bail out the banks and the other financial institutions. As well, there is the uncertainty about employment.
Senator Whelan: You mentioned, Mr. Donnelly, the problems related to doing business in Japan. Could you elaborate on that?
Mr. Donnelly: There are mysteries surrounding how to deal with government regulations. There is the opaque, non-transparent, nature of rules, regulations, and procedures that have a direct impact on the ability to sell. As well there is the opaque sometimes unfathomable character of the distribution system.If you want to market a product, you must go through the mysterious distribution system.
Senator Bolduc: It is a slow process, particularly now. Is the basic keiretsu system in the process of disappearing or will it somehow maintain the actual power structure? For example, in Canada there is a distinction between trust companies and banks, but that is not so in Japan. At one point the land on which the Canadian embassy was located was worth $4 billion. I suggested selling the embassy at that time, and that we should house people at the hotel.
What has happened to the Japanese power structure?
Ms Huber: Under the keiretsu system, there are groups of companies, such as Mitsubishi and others, which are linked, but it is not apparent. Sometimes they have interlocking directorship and there is socializing among CEOs. Those groups do continue, but they are under a lot of pressure to be competitive. There is much more intra-group competition than there used to be. However, the keiretsu system, for them, has been a source of strength in that it has helped members of the group that are not as competitive as they might be.
Senator Di Nino: I would like to comment on Ms Huber's remarks with regards to the uncompetitive service sector in Japan, with particular emphasis on the banks and the agricultural community. For a moment I thought you were referring to Canada when you were speaking about that.
Notwithstanding the recent article in the Economist and what some economists have said, you stated that Japan may be able to overcome its current problems and that it will not affect Canada or Canadian investments? Is my understanding incorrect?
Ms Huber: There will be a certain impact on Canada. One wild card relates to what extent Japan will be affected by the Korean situation. Will Korea be able to recover? Another wild card relates to China. Will China be able to resist pressures to devalue the renminbi? Will they be able to maintain the peg for Hong Kong? If not, that would have a domino effect on Japan.
Should those worse case scenarios proceed, to what extent would they try to export their way out of trouble vis-à-vis the United States because, as Professors Donnelly and Ursacki mentioned, protectionist pressures in the United States could very well affect us. I am not so worried about Japan making special side deals with the United States because, thanks to the multilateral agreements that we all belong to, the WTO for example, we can take them to a panel and force equal treatment.
However, unfortunately those same rules require the United States, if they want to punish a certain trading partner, to do it on a multilateral basis, in which case Canada would get caught in the cross-fire. It has happened before.
Senator Di Nino: My concern deals with the fact that, for the past number of years and months in particular, our officials have been telling us not to be concerned about the Asian situation, that the problems are minor. The result was that we got caught with our pants down. The turmoil was much more severe than our officials were telling us. Neither Mr. Donnelly nor Mr. Ursacki made a comment which supported your position. I wonder if they would be prepared to comment on that, because in the final analysis, this is one of the most important messages that we need to hear from people out there. If there are opinions that we should be listening to that we can act on, let us hear them.
Mr. Donnelly: I am not an economist, but I believe that if consumer spending is down, corporate investment in Japan will be down, and if there is pressure on Canadians to reduce the price of, say, the coal we sell to Japan, and if the housing market is in the doldrums in Japan, it will have an impact. How much of an impact, I am not qualified to guess. In a very straightforward sort of way, if Japan's economy is not performing well, then those macro-economic conditions -- consumer spending, corporate investment -- will have some kind of impact.
The Chairman: Last week an economist from a bank provided us with his estimate of the impact on British Columbia, Ontario and so on. We have that on record.
Mr. Donnelly: How did he characterize the impact?
The Chairman: It depended on the area of the country. The scenario in British Columbia was bad. As I recall, the effect on Ontario was about 2 per cent.
Senator Bolduc: On the whole it was minimal. In Japan, it was considerable.
The Chairman: It was considerable in Atlantic Canada which surprised us a little bit. Those are figures we need not debate here because we do not have them before us.
Senator Di Nino: The Japanese economy seems to go up and down in great peaks and valleys. Is that a result of mismanagement? Is it a result of some great scheme of the limited number of people who have the influence in that country? Are these planned peaks and values? Can we foresee them and avoid them in the future so that the chaos they create when they do happen will not affect us?
Ms Huber: No government would deliberately -- or if they did would never admit it -- plan for the valleys in the sense of trying to create them. Certainly, all of us want to mitigate the negative impacts.
When we refer to "large" fluctuations, we should remember that this has been a remarkably stable economy and that it has had tremendous growth since the end of World War II. They have had very low inflation or even deflation in the last couple of years as they bring in cheaper imports. They have managed to maintain a remarkably low level of unemployment that would be the envy of Europe or even the envy of us here in Canada. We must keep that in context.
That was one of the reasons why, long-term, I am very optimistic about not only the Japanese ability to recover, but also the Asian recovery, because their economies have very strong economic fundamentals, similar to those in Japan. Another major reason that three-fifths of the world's population live in Asia, and demographics are on their side, more so than, for example, Europe.
Senator Di Nino: What impact will the growth of the other economies around them, particularly China, have on the leadership role that Japan has played for 25 years?
Ms Huber: From an economic point of view, to be immediately adjacent to huge pool of consumers who are getting richer could be seen as a very desirable situation.
Senator Di Nino: Do you think the Chinese will sit back and watch the Japanese manufacture all of the goods that they will need?
Mr. Donnelly: I think the Japanese are very nervous about that.
Senator Stollery: I take a slightly different tack on the issue of Japan. In 1959 when I was in Rangoon they had just changed from the bicycle rickshaw to the motor rickshaw. The Japanese invented the motorized rickshaw. They were part of Japanese war reparations. It was predicted that, through the use of war reparations, Japan would introduce itself into the economies of Southeast Asia -- Burma, Siam and Indo-China -- and of course that is what they did do.
I am off to Japan in a few days, where I will bicycle from Osaka to Nagasaki so that I will have better sense of the flavour of the Japanese people and of Japan. I have read a great deal about Japan, particularly in the Nihongi. However, I don't think accurate history was written in Japan until the middle of the seventh century.
Japan, as a culture, and Japanese as a language, stand on their own. The Japanese language is unconnected to any language group in the world. Japanese culture is a very "stand-alone" culture.
I am sure most people would think that their language belongs to the Tibetan-China school of language. However, the Japanese language has only 120 or 125 sounds. They are a relatively recent people by European standards, in that their recorded history only starts in the seventh century A.D. and they consider themselves homogeneous. At the same time, every Japanese is conscious of the fact that the Japanese are a unique people. Their culture is a Japanese culture. Some things have come from Asia, some from Indonesia, some from Polynesia, but they stand alone.
Economists assume a standard that is constant everywhere, basically, arithmetic. That is their strength and that is their weakness. They do not consider the culture and the ethnography of peoples. The women are the ones that keep the money, and increasingly they are keeping it in their socks because they do not trust the banks. Anybody who reads the newspapers knows that.
This stand-alone country has a most erratic recorded history of clans and factions. I did not know that during World War II, the high command of the Japanese army was in the control of a faction from what we today would call one prefecture; and the high command of the Japanese navy was in the total control of a group of people from another prefecture, and they hated each other. They had great difficulty working together. I do not think the question of clans and factions and families died with the restoration in the 1860s. After all, we have just seen the President of Indonesia giving all the money to his relatives. The kinship question is an important one. It is part of a society.
I thought Japan was a homogeneous country. A hundred years ago the people from the north part, Honshu, did not speak the same language as the people in Kyushu.
What affect does all of this have on the current situation in which the Japanese find themselves?
The Chairman: I will ask Professor Donnelly to deal with the question because earlier he said he believed that the Japanese were unwilling to accept the market notion of civil society. They felt that some of their traditional ways were not working and they had not explored a third possibility.
Mr. Donnelly: You have posed one of the most profound conundrums we have in dealing with Japan. More generally, the question is how culture affects economic decisions and how culture does make a difference in every day ordinary life, whether we barter, buy things and so on. There are no easy generalizations. The Japanese are divided. They are not divided necessarily in the ways that we assume a country is divided. A Canadian might ask, "Why would they be divided when they speak the same language and they study the same subjects? Young students, whether in Kyushu or Hokkaido, are all reading the same thing about how Japan is quite different." In fact they are divided and that division is related partially to power, partially to economics, and partially to the geography of the country, surprisingly enough.
The Japanese do not have a single view. There are many free marketeers in Japan. Many people generally believe that Japan's problems could be resolved in dramatic ways if only the country would embrace the idealized ways in which the American economy or the Canadian economy works.
However, many others argue quite the contrary. Mr. Sakakibara, a Ministry of Finance official, is one of the most outspoken people in the public service in Japan. He believe that Japanese history, culture and sensibilities are different, and that their organizations are different. He has told the Americans that the Japanese will never be like them.
I cannot answer your profound question. I agree with you that economies resonate with cultural differences. Economists have to take that into account, but how is that to be done? How do you demonstrate it? It is very difficult.
Mr. Ursacki: I am not an economist, although I did a lot of economics in my graduate studies. My Ph.D. is from the Faculty of Commerce and Business Administration.
There is danger on both sides of this issue. I have always been fascinated by how economics and culture interplay with one another. I think we have seen the danger of going too far in accepting the argument that: "We are different and all of these rules do not apply to us." This, to a large extent, is why there is an Asian crisis.They believe they have solid Asian values which are higher than those of western societies. They think that we are decrepit, fat, slovenly workers. They will not listen to the IMF because they do not want to lose face. If a society goes too far along the line of accepting the idea that they are different and that the rules of economics does not apply to them, they end up with something like the Asian crisis and the bursting of the bubble of the Japanese economy.
On the other hand, particularly in the short run, economies are different and people react in different ways. In Canada, if there were a tax cut, people might run out and spend that money. In Japan, they may react differently. People do not necessarily react the same way to cultural factors or economic factors, but they cannot be ignored. However, we accept that "difference" argument in its extreme form at our peril.
Senator Andreychuk: Professor Ursacki has touched the kinds of points I wanted to raise. This committee's mandate is to examine and report on the importance of the Asia Pacific region and, in particular, Japan today. Our interim report was based on the evidence of those people who told us to pay attention to cultural differences and not impose our values on others. In our report, however, we did note that we had not studied Japan sufficiently. Thankfully it was an interim report.
What advice can you give us today? Our focus was on more trade with the Asia Pacific region and what Canada's hopes were in respect of trade with this three-fifths of the population. Professor Ursacki has told us that Canadian business has a short attention span. What advice should we be giving the Canadian government today in their practices and policies? Should there be more Team Canadas? Should we change our strategies? In other words, what should we be saying to the Canadian government about the importance of Asia Pacific for Canadian trade and investment, and in particular Japan, given the current crisis and given's Japan's internal difficulties?
Mr. Ursacki: It is important to remember two things. One, there certainly are very great differences across Asia. If there is anything common at all across Asian cultures, it is the importance of relationships. It is vitally important that we use this as an opportunity to demonstrate at both the governmental and corporate level that we are not fair-weather friends. Earlier I mentioned companies that are not necessarily doing this. By way of an example of a company that is doing this, a former student of mine is the president of a company which made a large advance purchase from one of their Korean customers to assist them financially, thereby indicating that they had faith in this company and in their country's ability to resolve its problems. It is important to do that type of thing.If we do set up another trade mission, we must ensure that people attend and not cancel them because of lack of interest.
This crisis in itself creates opportunities for Canadian businesses because there will be dramatic structural reform in many areas of these countries, and the sooner that those opportunities are pursued, the better. For example, if you look at the financial sectors, many of those business opportunities were never open to people in the past. Now, in many instances, foreigners are permitted to pursue those opportunities, to make investments that they might otherwise not have made. Even when it is not a matter of investment, for example a financial sector that is modernizing and that requires all kinds of financial software, Canadians can provide services. There are opportunities in crises.
Combining those two elements -- the idea of maintaining our relationships, making sure that we demonstrate that we are not fair-weather friends and at the same time pursuing the selected opportunities that a crisis like this represents -- should be the pillars of what I would say should be policy for Canadian business and government.
Senator Andreychuk: There was some discussion previously that Japan is already well-established because of those relationships, and that perhaps should be putting our energies into China. Some say that is where the Canadian government's pre-occupation should be, and that is where the opportunities for businesses are still fresh and new.
The counter-argument is that Japan, being the larger economy and more intertwined with world economies, particularly with the United States as you pointed out, is where our efforts should be focused.
Mr. Ursacki: First of all, to a certain extent when you talk about where Canadian companies should be going or what Canada as a whole should be pursuing, China and Japan are two totally different areas. The things that might interest Japan, because of their income levels, are dramatically different from the types of things we might be able to sell in China. If you have a difference in per capita income from less than $1,000 to $20,000 dollars, the nature of the products sold will be dramatically different.
The other point is that, although it is a tough market to break into, the Japanese people are relatively well off and capable of paying for products. In China many of the things that we have to sell, given the level of their economic development and the types of interests they have, are things that require for example maybe some form of concessional financing. The carrot that businesses see is a billion Chinese consumers and, if they all bought 10 cents worth of our product, it would put us over the top, and that leads to people making concessions. The Chinese know they have this leverage and use it to the nth degree. The opportunities for companies to actually make profits in many cases are greater in Japan than China even though there are a lot more people there. I may be somewhat prejudiced, but that is my personal reading of the situation.
Mr. Donnelly: Are Senators permitted to give advice to the Canadian people? I say that not in a facetious way. I associate myself with everything that has just been said, but it is more than government. It is more than what Ms Huber's department can do. In certain ways we are missing the possibilities of doing things in a different sort of way because we are narrowing the focus too much. You should address universities and tell them of ways to do things that will not directly cost the taxpayer any additional expense. Asia Pacific remains important to the future of the globe and the world we live in. We must realign or connect in different ways the private sector, universities, governments, federal governments, and local governments.
For example, it would be wonderful to have internship programs available for students who are either finishing university or M.A. students so that they could spend time in Asia, not just Japan. I would encourage you to think broadly and to address it as a larger issue, going beyond government.
Senator De Bané: Is there any basis to the widely held belief that the Japanese lack creativity, that they are better at improving or copying other people's inventions? Do any of you have any data about the percentage of patents that they register? They are the second largest economy in the world next to the United States. Obviously their defence industry is less developed than the one of the United States. Do you have some data about their patents?
Ms Huber: The Japanese tend to be very sensitive about this question: Do they lack originality or creativity? Even though they recognize they certainly have been unparalleled in terms of taking the ideas of others or the approaches of others, internalizing them, often improving upon them, and either exporting them or using them in creative ways, they ask themselves, "If we are so good, why have we not we been getting more Nobel Prizes? Why have we not come up with revolutionary new products as have the Chinese or the Americans?"
They have tried to address that by setting up science cities outside of Tokyo and outside of Kyoto. In the past it, no rewards have been given to students for questioning one's professor or established values. As a society that sees itself headed more and more towards becoming a knowledge-based society, and that being the basis of their international competitiveness, this is something they are grappling with.
I do not have the statistics respecting the number of patents they register. However, I see that Professor Ursacki is better prepared.
Mr. Ursacki: For 1994, the total number of patent applications in Japan was 353,000, of which 320,000 were from Japanese companies. The total number granted was 82,400. The total granted to Japanese applicants was approximately 72,800.
I also have the national shares of patents registered in the United States. Unfortunately, try as I might, I cannot find the actual percentage. They have given it in graphical terms. It appears that the share granted from Japan increased from less than 10 per cent to approximately 15 per cent or 20 per cent of the total patents in the United States.
Mr. Donnelly: Patents are defined and awarded for different purposes and in different ways. The Japanese and Americans, for example, despite international agreements, have different guidelines as, I expect, do the Canadians. Those statistics can be confusing.
Mr. Ursacki: The general impression that people have is that the Japanese tend to produce a large number of relatively minor patents. For example, an American registers a patent and then the Japanese register a whole bunch of variations around it so the person who had the original patent ends up not being able to exploit it because he runs into these peripheral patents.
Senator De Bané: Is it true that Japan has half the population of the United States but produce as many engineers as the United States?
Mr. Donnelly: It is something like that. Whatever the percentage might be, there is certainly a dramatic difference.
Senator De Bané: The information I received from the Canadian embassy about patents is at significant variance with the numbers I have heard this afternoon.
Ms Huber: There is a very strong emphasis on the sciences in their education system. Companies and government institutions tend to put much less R&D into the pure sciences rather than in the applied. It is that drive to applied sciences that has, historically, served them so well.
Mr. Ursacki: We must be careful when discussing, say, creativity which has a large value component to it. We think of creativity as a good thing. Perhaps we also think of it as a kind of internal, personal characteristic. The Japanese themselves sometimes seem to do this. I have been to research facilities for example where they have said, "Japanese salaried men always wear blue suits and are not creative. Foreigners are more free, and they are creative, so we will tell our salaried men to wear funny clothes and sit on beanbags, then they will be more creative." One must be very careful in assessing what is meant by "creativity."
One of the key issues has been that there is much more incentive and reward for creativity in the North American context, and much more opportunity to develop original ideas through greater development of venture capital markets, for example. A creative Japanese person may, simply, not have the same opportunities or incentives to develop that creativity as he she would have in North America.
Mr. Donnelly: As Senator Stollery is discovering, Japan is a terribly rich, wonderfully exciting, wonderfully vibrant, wonderfully alarmingly, surprising world to visit. It is a deeply artistic society. In fact, the aspect of Japanese culture that I really enjoy is the surprising amalgam of Chinese, Japanese and New York style art that is woven together in one portrait. It is really different. That vibrant, cultural aspect of Japan is ever-alluring and ever-wonderful to experience.
The Chairman: We are all most appreciative of the help we have been given this afternoon, and on your behalf, I would thank our witnesses.
The committee adjourned.