CHAPTER 4
CANADA AND ASIA PACIFIC
A. Links between Canada and Asia Pacific prior to the Crisis
1. Canada-Asia Pacific Trade Links
2. Canada-Asia Pacific Investment
Links
3. Canada-Asia Pacific Immigration
Links
4. Japan and China: Key
Countries for Canada
B. Economic Impact of the Crisis
on Canada
1. Direct Trade Effects
2. Commodity Price Impacts
3. U.S. Indirect Effects
4. Impact on the Canadian Dollar
5. Regional Consequences
6. Tourism
7. Canadian Bank Exposure
C.
Increased Asia Pacific Trade and Investment Promotion: Requirement or Lost Cause?
CANADA AND ASIA PACIFIC
A. Links between Canada and Asia Pacific prior to the Crisis
1. Canada-Asia Pacific Trade Links
Prior to 1997, Canada often was referred to as a Pacific nation; yet the trading patterns shown in Figures 2 and 3 demonstrate that over the years, this country had overwhelmingly become a North American nation. Canadian merchandise exports to the United States doubled in the 1988-96 period, registering US $210.1 billion in 1996. As a result, the proportion of Canadian merchandise exports destined for the United States rose from 73% of total trade in 1988 to 81% in 1996. Although the absolute value of exports to the Pacific Rim(54) had been rising in the years before the crisis, the share of Canadian exports destined for that fast-growing region declined from 13% of all merchandise exports in 1988 to 9% in 1996.(55)
Figure 2 Figure 3
Source: Statistics Canada
Table 3 shows the levels of Canadian merchandise exports to selected APEC markets. For almost 25 years, Japan has been Canada’s second largest trading partner. In fact, the value of Canada’s 1996 exports to Japan was greater than the combined value of Canada’s exports to its next seven largest trading partners in the region and accounted for almost one-half of all our exports to Asia. Moreover, Mr. Klaus Pringsheim (President, Canada-Japan Trade Council) told the Committee that Canada’s exports to Japan exceeded this country’s combined exports to the United Kingdom, Germany, France, and Italy.
Table 3
Canadian Merchandise Exports to Selected APEC Economies
(in millions of Canadian dollars)
1996 |
|
Japan |
10,377 |
China |
2,707 |
South Korea |
2,676 |
Taiwan |
1,362 |
Hong Kong |
1,109 |
Indonesia |
826 |
Thailand |
503 |
Malaysia |
500 |
Singapore |
529 |
Philippines |
258 |
Source: Statistics Canada, Canadian International Merchandise Trade
On the import side, Canadian trade with the Pacific Rim (East Asia and Oceania), especially with countries other than Japan, was rising. Yet imports from the United States were increasing even more rapidly, so that slightly over two-thirds of Canada’s total imports originated in the United States. As a result of rapid increases in Canada-U.S. trade, the proportion of total imports originating in the Pacific Rim in 1996 was slightly lower than the level registered in 1988.
A number of witnesses in the first phase of our hearings told the Committee that Canada’s share of the East Asian import markets had been declining. Dr. William Saywell pointed out that Canada’s import market share in the region declined from about 2% a few years earlier to about 1.4% in 1995. Mr. David Hecnar (Senior Policy Analyst, Canadian Chamber of Commerce) explained that, "If you look at Canada’s own trade figures within that group there is actually some worry because our trade share is diminishing" (18:25). Table 4 confirms that, with the exceptions of Hong Kong and possibly Australia, Canada’s shares of the import markets of most major East Asian and Oceania countries were small and had been in a state of decline.
Why had the Canadian export share of these markets been falling off? This result should not be surprising, given the high growth of Canada-U.S. trade following the advent of the Canada-U.S. Free Trade Agreement in 1988 and the subsequent introduction of NAFTA. Another possible explanation may be the rising share of trade occurring within the East Asian region. Increased intra-regional trade implies proportionally less trade with outside sources. The rising share of intra-Asian trade may have merely reflected the increased size of the East Asian economies and the proportionally greater weight of their trade within the world trading system. On the other hand, it may have reflected an increasing appreciation of the value of intra-Asian trade as compared with trade with outside economies.
Table 4
Canadian Merchandise Exports
Percentage Share of Import Markets
of Selected APEC Trading Partners
1981 |
1983 |
1985 |
1987 |
1989 |
1991 |
1993 |
1995 |
|
Japan |
3.1% |
3.5% |
3.7% |
4.0% |
4.1% |
3.3% |
3.3% |
3.2% |
China |
5.4% |
7.4% |
2.7% |
3.2% |
1.8% |
2.6% |
1.3% |
1.7% |
South Korea |
2.0% |
1.7% |
2.0% |
2.3% |
2.7% |
2.3% |
2.1% |
1.9% |
Taiwan |
n/a |
1.5% |
1.7% |
1.7% |
1.6% |
1.5% |
1.1% |
1.2% |
Hong Kong |
0.6% |
0.7% |
0.7% |
0.5% |
0.5% |
0.4% |
0.5% |
0.6% |
Australia |
2.6% |
1.9% |
2.0% |
2.0% |
2.4% |
1.7% |
1.7% |
1.9% |
Indonesia |
0.8% |
1.1% |
2.0% |
2.4% |
1.9% |
1.4% |
1.4% |
1.2% |
Thailand |
1.3% |
1.4% |
1.2% |
1.2% |
1.4% |
0.9% |
0.9% |
0.6% |
Malaysia |
1.2% |
0.9% |
1.2% |
1.0% |
1.0% |
0.8% |
0.5% |
0.5% |
Singapore |
0.5% |
0.4% |
0.3% |
0.5% |
0.5% |
0.6% |
0.4% |
0.4% |
Philippines |
0.9% |
0.8% |
0.7% |
1.4% |
1.6% |
1.3% |
0.9% |
1.0% |
New Zealand |
2.3% |
2.2% |
2.6% |
1.9% |
2.0% |
1.6% |
1.6% |
1.7% |
Source: Calculations based on IMF, Direction of Trade Statistics
Another reason for Canada’s loss of import market share in these economies may have been that traditionally Canada’s exports to East Asia had consisted of resource-based and semi-processed materials, such as lumber, wood pulp and paper, cereals, fertilizers, and minerals. The share in world trade of natural resources and resource-based products had been declining, owing to falling commodity prices and energy consumption relative to GDP and more substitution of synthetic materials for natural products.(56) Furthermore, Canadian natural resource exporters were facing a significant increase in the efforts of traditional competitors in Australia, the United States, and New Zealand, as well as of new competitors in China and ASEAN countries.(57)
A study received as evidence by the Committee found that Canada had inexplicably high levels of natural resource exports to East Asia, even after accounting for Canada’s sources of comparative advantage, including this country’s large resource endowments.(58) This result suggests to the authors that Canada may have an implicit industrial strategy buried in its tax structures and elsewhere that "may have directed Canada to inappropriate specialization in natural-resource-based industries. What may be called for is a new pattern of industrial incentives that would encourage Canadian entrepreneurs to migrate out of natural resources and into growth-oriented, high-wage technology industries."(59)
In the run-up to the crisis, Canada’s exports to East Asia of manufactured goods, such as machinery, plastics, aircraft, and precision parts had been gradually increasing. Mr. Dan Gaw (M.K. Wong & Associates Ltd.) told the Committee that in order "to redress our trade imbalance with the region, Canadians need to more aggressively market value-added goods to the Asia-Pacific region (19:95)". According to Mr. Gaw, this is true of traditional sectors, such as agricultural and fisheries products, as well as goods, such as aircraft exports, more commonly thought of as containing high value-added.
In terms of trade in services, Canadian balance of payments data reveals that, over the past twenty years, Canada’s aggregate level of service exports increased at about the same rate as that of merchandise exports. However, trade in one group of services, known as commercial services, has been rising faster than merchandise trade. Although historically Canada has experienced an overall deficit on trade in commercial services, we have run a payments surplus in the component of services trade identified as architectural, engineering, and other technical services. This surplus tends to confirm the commonly held belief that Canada has a comparative advantage in the area of architectural and engineering services. However, it should be remembered that most of the surplus in trade in this component is accounted for by trade with economies other than those of the United States and the European Union (EU).
According to the World Trade Organization, APEC economies accounted for 42% of global commercial service imports in 1994, with Asian APEC members purchasing almost one-quarter of the global total. As with merchandise trade, Canada’s services trade is heavily weighted toward the United States, with Japan representing Canada’s next largest services trading partner. South Korea, Hong Kong, Australia, Taiwan, and the ASEAN economies also figures predominantly in Canadian service trade.
Prior to the onset of the crisis, it was predicted that the East Asian economies would need to spend an estimated $1.5 trillion on infrastructure over the next decade. Further, it has been demonstrated that demand for services tends to increase with higher levels of GDP. This positive income elasticity of services consumption, combined with infrastructure bottlenecks, is likely eventually (i.e., post-crisis) to raise East Asia’s share of world service imports. In the long-term, these developments may bode well for Canadian providers of engineering and architectural services, as well as certain other types of services such as financial, educational, and environmental services.
2.Canada-Asia Pacific Investment Links
It is in Canada’s interest to attract as much foreign direct investment as possible from Asia. However, foreign direct investment(60) in Canada (FDIC) from East Asia was still relatively modest before the onset of the Asian crisis. At the end of 1995, there was $11.8 billion worth of FDIC from the Pacific Rim countries, representing just 7% of total FDIC (Figures 4 and 6).
Figure 4 Figure 5
Source: Statistics Canada
"… Japanese direct investments in Canada are not in real estate, but in wealth and job-creating industrial and manufacturing operations. They are export oriented rather than focusing on the domestic market, with an ever-increasing amount being exported to countries other than Japan."
(Mr. Arthur Hara, Chairman of Mitsubishi Canada Ltd.)
Japanese investors accounted for more than one-half of FDIC from the Pacific Rim (57% or $6.7 billion). In the late 1980s, Japan was the world’s largest source of foreign direct investment. In the early 1990s, financial instability in Japan, connected to a downward correction in the Japanese stock market and the collapse of international real estate values, caused a reduction in Japanese FDI outflows. Nevertheless, Japan remained one of the world’s largest sources of FDI.
Hong Kong investors accounted for another 27% of Pacific Rim FDIC. A considerable portion of new investment from Hong Kong was being attributed to investor-class immigrants, who must invest at least $250,000 in Canada in order to qualify for entry. Investment from Australia, Singapore, South Korea, and Malaysia comprised most of the remaining FDIC. Between 1985 and 1995, the share of FDIC accounted for by Pacific Rim countries doubled, from 3.5% to 7%.
Other East Asian countries, in addition to importing large amounts of FDI, were also becoming important sources of FDI outflows. Indeed, Japan’s position as East Asia’s largest source of FDI outflows was overtaken by Hong Kong in 1993, 1994, and, possibly, in 1995. Other large regional sources of FDI outflows include Taiwan, China, Singapore, South Korea, and Malaysia. Despite East Asian countries’ high savings rates, most were continuing to be net importers of capital because of their high demand for investment funds. However, as these economies develop, they are likely to change from net importers to net exporters of capital.
In summary, prior to the crisis FDIC from East Asia had been increasing but still totalled less than $12 billion in 1995. Furthermore, there is evidence that Canada had not been getting its "fair share" of investment from Japan, one of the world’s largest capital exporters. In the future, this issue may become a consideration in relation also to other East Asian countries.
On the other side of the investment ledger, the stock of Canadian direct investment abroad (CDIA) in the Pacific Rim amounted to $14.7 billion at the end of 1995, or about 11% of total CDIA (Figures 5 and 7). CDIA in Japan accounted for 21% of all CDIA in the region, followed by Australia (21%), Hong Kong (17%), Singapore (14%), and Indonesia (8%). CDIA in the Pacific Rim had increased from $4.0 billion in 1985 to $14.7 billion in 1995, with the result that the share of total CDIA located in the Pacific Rim had risen from 7% to 11% over the period. Clearly, Canadian companies were beginning to invest actively in the region.
Figure 6 Figure 7
Source: Statistics Canada
Data are not available on flows of portfolio investment between Canada and East Asian countries, other than Japan. At year-end 1995, Japanese investors held $32.5 billion in Canadian bonds and $542 million in Canadian portfolio stocks. These amounts represented 9.8% and 1.7%, respectively, of the total amounts owned by foreign investors. At yearend 1995, Canadian investment in Japanese portfolio bonds was $1.1 billion. Canadian portfolio investment in Japanese stocks amounted to $4.0 billion at the end of 1995. These investments accounted for 5.7% and 6.3%, respectively, of total foreign portfolio bonds and portfolio stocks owned by Canadians.
3.Canada-Asia Pacific Immigration Links
"One of Canada’s key strategic advantages in strengthening our economic ties to the economies of Asia may, in fact, lie in our growing human links with the region."Asian Canadians: Canada’s Hidden Advantage, Asia Pacific Foundation of Canada
The above examination of aggregate Canadian trade and investment data suggested that prior to 1997 Canada-East Asia commercial links, although growing, did not predominate. The same conclusion does not apply to Canada-East Asia immigration links, which for a number of years had been extremely robust. In 1996, four of the top ten sources of immigration were East Asian countries, and people from East Asian countries accounted for more than one-third of all immigration to Canada in 1996.
Canada’s links with the greater China (Hong Kong, Taiwan, and China) grew especially quickly; immigrants from the greater China accounted for more than one-quarter of all immigration into Canada in 1996. Chinese is now the third most common mother tongue in Canada. By far the largest single source of immigration was Hong Kong, accounting for an average of 16% of all Canadian immigration over the five-year period ended in 1996. Much of the immigration from Hong Kong can be explained by the uncertainty related to the anticipated restoration of this British colony to China in July 1997. Ongoing levels of immigration from Hong Kong will at least partly depend on how smoothly Chinese rule continues, with the early indication being that some movement back to Hong Kong has occurred.
"The secret weapon Canada has is our multicultural society. We have ambassadors of goodwill from probably every country in the world. If you want to market in Hungary, Poland or any country in Asia our secret weapon is those people in our country who can help us to bridge those cultural gaps."
(Mr. Bing Thom, Principal, Bing Thom Architects Inc.)
Apart from contributing in a very real way to Canada’s productivity growth and social fabric, immigration from East Asia can help strengthen this country’s trade and investment links with the region. This may happen in several ways. One mechanism by which immigration can expand exports is through reducing the transaction costs associated with doing business in foreign markets. East Asian immigrants have knowledge of their original countries’ markets; they have business connections in the region; and they have the language and cultural skills necessary to make business deals. If East Asian immigrants have preferences for goods produced in their country of origin, this may also increase imports from the region.
Also, Canada-East Asia investment flows can be affected by immigration. Foreign investment in Canada may be increased when East Asian immigrants arrive in this country with capital to invest in Canadian business ventures. Canada’s Immigrant Investor Program (IIP), introduced in 1986 and redesigned in March 1997, allows immigrants to satisfy certain immigration requirements by investing a minimum of $250,000 or $350,000 (depending on the province) in eligible business ventures. In March 1997, the Canadian government estimated that, since inception, the IIP had attracted $3.75 billion in investment funds and had created over 33,000 jobs.(61) Immigrants accounted for much of this investment from East Asian countries, especially Hong Kong.
In addition, immigration from East Asian countries might facilitate foreign investment by improving information flows between Canada and the region. Immigrants have local contacts and first-hand knowledge of investment opportunities in their countries of origin. At the same time, immigrants can provide information about Canadian investment opportunities to potential investors from East Asia. The Committee is of the view that considerable benefit could be derived from greater promotion of these interregional links.
Mr. Dan Gaw (M.K. Wong & Associates Ltd.) emphasized to the Committee the importance of East Asian immigration for British Columbia, in particular. He noted that, although the IIP has been successful in stimulating British Columbia’s economy, it also is true that family class immigrants from the region become successful entrepreneurs, leading to job creation and capital investment. According to Mr. Gaw, the sectors that benefit most from immigrant entrepreneurs are services, wholesale and retail trade, and manufacturing. Immigration data show that Ontario, Quebec, and Alberta also have received large numbers of immigrants from East Asia over the years. In fact, the 1991 census revealed that Toronto had more residents of Asian ethnicity than did Vancouver.
Canada could make better use of the professional skills, knowledge, and experience of Asian Canadians. This was the consensus reached at a number of roundtable discussions held across Canada by the Asia Pacific Foundation of Canada. These discussions dealt with the trade and investment opportunities for Canada presented by East Asian markets, and with how to capitalize on Canada’s East Asian human resources in order to make the most of these opportunities, particularly by encouraging greater collaboration between Asian Canadian and non-Asian Canadian business people. The report based on these roundtable discussions issued 22 recommendations under three general themes:
- bridge-building between the Asian Canadian and non-Asian Canadian business communities;
- information sharing on trade and investment opportunities in the East Asian region; and
- sharpening Canada’s trade development efforts in the region.
Several witnesses stressed the importance of developing cross-cultural communication between Asian and non-Asian cultures. Mrs. Tamako Yagai Copithorne (Member, Canada-Japan Forum 2000) said: "Canadians must learn more about the people they are trading with -- their language, their values and cultures -- to understand and appreciate their differences" (19:70). Mrs. Copithorne explained, for example, that understanding Japanese culture can be crucial to designing export products that satisfy the Japanese aesthetic sense. Dr. Jan Walls (Director, Asia-Canada Program, Simon Fraser University) outlined the work of the Asia-Canada program at his university and of the David Lam Centre for International Communication in helping non-Asian Canadian students, professionals, and business and government people acquire competence in Asian languages and cultures.
Mr. Bing Thom (Principal, Bing Thom Architects Inc.) told the Committee that much of the credit for obtaining the huge contract to design the new city of Dalian in China can be given to a recent immigrant to Canada from the Dalian region, Dr. Li. With the assistance of Dr. Li, Mr. Thom was able to tap into the local culture and the local subtleties of doing business.
4. Japan and China: Key Countries for Canada
Japan is Canada’s second-largest trading partner after the United States, its third largest source of FDI inflows (after the U.S. and the U.K.), and a major contributor of portfolio capital and tourist revenue. In 1997, two-way trade in goods exceeded C $22 billion, representing an increase of over 5% over the comparable figure for 1996.
Table 5
Canada’s Merchandise Trade With Japan
(C $ millions)
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
|
Exports |
7,490 |
8,496 |
9.741 |
12,054 |
11,160 |
10,760 |
Imports |
10,762 |
10,723 |
11,367 |
12,096 |
10,444 |
12,508 |
Source: Basic Facts Ni-Ka Online
Japan is a major manufacturing economy with little in the way of natural resources. While it is a sophisticated and highly competitive market, it is also one that relies extensively on imports of commodities required in its various manufacturing processes. Since the end of the Second World War, Japan has employed a strategy of diversifying its sources of supply of these important commodities.
Canada’s comparative advantage in natural resource-based products therefore has made us a natural supplier of products such as forest products, coal, wheat, canola seed, and other commodities. In 1996, the leading Canadian exports to Japan included forest products, coal, oilseeds, fish, and agricultural products, with manufactured products accounting for only 5% of total exports to that market.
The Japanese market is also beginning to provide export opportunities in the area of processed food, consumer products, information technologies, and other high-technology sectors, as well as services. To respond to these opportunities and to enhance the bilateral commercial relationship, the federal government has developed an Action Plan. A number of promising sectors have been identified therein: food and fish products; consumer and building products; information technologies; medical equipment and devices; and tourism. Already, Canada has become a leading supplier of building products, prefabricated housing, and processed food.
Mr. Yozo Yamagata (Member, Canadian Advisory Board, Marsh & McLennan Limited) told the Committee that the stock of Japanese foreign direct investment in Canada was C $6.7 billion (US $4.9 billion) at the end of 1995, compared with US $108.6 in the United States. He noted that Canada has not been particularly successful in attracting Japanese FDI. Based on the relative sizes of the United States and Canadian economies (about 10 to 1), Japanese FDIC should be approximately twice as large as the amount actually registered in 1995. Furthermore, as Mr. Yamagata explained, Canada’s share of Japanese direct investment outflows has been declining in recent years.
Why has Canada failed to attract a proportionate share of Japanese FDI? Mr. Yamagata provided the Committee with a number of possible reasons. First, although Canada has a population of 30 million, the market is spread out geographically. Second, labour costs are not low by international standards. Third, Canada is thought to be more interested in protecting the environment than in encouraging industrial and commercial development. Fourth, when governments change at the provincial level, sudden changes can occur in industrial policy and legislation, particularly in labour and environmental legislation. Fifth, there is an impression that Canadian tax rates are higher than those in the United States.
Mr. Arthur Hara (Chairman, Mitsubishi Canada Limited) explained that effective marketing by U.S. states is another reason why the United States has been more successful than Canada in attracting Japanese FDI. He told the Committee that 36 U.S. states have Tokyo offices, which are used to attract Japanese investment. Moreover, Mr. Hara said the U.S. states "will take the Japanese investors to their state and they will hand-hold them through the regulatory mazes and ensure that the state government opens the door all the way down. More often than not in Canada, and in the provinces, when Japanese investors are invited to Canada or the provinces, they are left alone to find their own way through the maze.... Anecdotally, I can recall one Japanese investor who came to Vancouver and threw up his hands and walked away because he was told he had to go through 26 different federal, provincial and municipal offices to get clearance" (19:76).
The Committee received a study of the competitiveness of U.S. states and Canadian provinces for attracting new Japanese investment in manufacturing.(62) It examined the relative competitiveness of states and provinces in attracting Japanese FDI on the basis of a number of criteria: access to domestic and export markets; government policies that influence investment; and proximity to other manufacturers, to specialized labour, and to suppliers. California, the top ranked-location, is estimated to be more than 5½ times as likely as Ontario to obtain Japanese investment in the overall category of manufacturing. The study shows that only Ontario-ranked thirteenth-placed among the top twenty locations for manufacturing in the two countries.
One sector that already has shown the benefits of Japanese investment in Canada is the automotive sector. Yet with respect to investment in motor vehicle parts manufacturing, Ontario ranks seventh as a location attracting Japanese investment. At the same time, Indiana, Michigan, and Ohio are estimated to be, respectively, 7.3 times, 5.7 times, and 5.5 times as likely as Ontario to obtain Japanese investment. Even in pulp and paper manufacturing, an industry where Canada should have a comparative advantage, Quebec is ranked only tenth among all locations in the two countries (British Columbia ranks twelfth and Ontario ranks fourteenth). These results explain the evidence presented earlier on the size of Japanese FDI flows to the United States relative to those coming to Canada.
We turn now to China. That country contains nearly one-quarter of the world’s population, and a middle class that is expected to reach 500 million by the year 2010.(63) It is already the world’s seventh-largest economy. Needless to say, it represents a huge market for goods and services and could become the world’s largest consumer market if, and when, the Western style of life becomes more popular.
Owing to its population, its economic progress, its importance in the world, and its potential for Canadian exporters, the Government of Canada considers China to be a key part of its international trade agenda. The recent economic difficulties in Asia have not altered that view. With respect to the Asian financial crisis, for example, Canada’s International Trade Minister (Hon. Sergio Marchi), has referred to China as "an island of stability in turbulent waters." Ms. Margaret Huber (Director General, North Asia and Pacific Bureau, Department of Foreign Affairs and International Trade) was even more explicit, making the point to the Committee that even if China were to experience an economic slowdown, Canadian efforts to access Chinese markets would not be materially affected.
Trade between Canada and China more than doubled during the 1991-97 period. In 1997, total bilateral trade attained the C $8.5 billion mark, exceeding the results for 1996 (C $7.9 billion) and 1995 (C $8.1 billion). In terms of its share of aggregate Canadian trade, China accounts for a mere 1.5% of the total. Even though this bilateral trade is still in a relative state of infancy, China is already Canada’s fourth-largest trading partner (after the U.S., Japan, and the U.K.) and it ranks third if one includes Hong Kong. On the other hand, Canada only ranks sixteenth as a source of China’s imports.
Canada’s trade deficit with China has been rising since 1993, owing to a decline in exports of wheat (historically our major export to China) and other commodities, as well as a surge in imports. The deficit stood at over C $4 billion in 1997.
Total imports from China were valued at C $6.3 billion in 1997, well above the C $2.2 billion export figure for that year. By broad category, Canada’s chief imports from China include consumer products (C $3.4 billion); machinery (C $1.7 billion); metals and minerals (C $0.3 billion); and raw materials and chemical products (C $0.2 billion).
Exports to China declined in 1997 by roughly 26%; this decline does not appear to be out of line with that experienced by Canada’s chief competitors in the Chinese market (U.S., EU, Australia, and New Zealand). Hardest hit was trade in commodities. Wheat exports decreased last year, because of both a record 1996 harvest in China and transportation difficulties in Canada. Our export offering has been diversifying considerably lately, with the principal export groups now including metals, minerals, and chemical products (C $0.6 billion); electrical equipment (C $0.6 billion); wood and wood products (C $0.4 billion); and cereals, primarily wheat (C $0.4 billion). Canada also benefits from our exports of services associated with Chinese infrastructure projects.
In 1994, Prime Minister Chrétien and Chinese Premier Li Peng set out an objective of achieving C $20 billion in bilateral trade by the year 2000. The current financial difficulties in Asia, will cause the achievement of that goal to be delayed.
Nevertheless, it is anticipated that China will continue to offer a sizeable potential market for Canadian goods and services. To penetrate this market further, Mr. Marchi led a business delegation, of over one hundred, to China in the first week of April 1998. A total of almost $800 million in new business deals were signed during the course of this Team Canada trade mission.
In the fall of 1997, the federal government released its Canada-China Trade Action Plan, providing information on sectoral trade and investment opportunities. Among the possibilities discussed, three are worth special attention: construction and construction materials; agriculture and agri-food; and the infusion of more diversified Chinese investment (such as telecommunications, information technology, and agri-food) into Canada.
From a Canadian standpoint, a number of important trade issues remain unresolved. These are being addressed within the negotiations (both bilateral and multilateral) currently underway regarding China’s accession to the WTO. They include the existence of high Chinese import tariffs; non-tariff barriers such as import licenses and quotas; the use of certain Chinese standards as disguised barriers to trade; a lack of simplicity and transparency in China’s customs regime; the lack of uniformity within China in its application of laws and regulations (i.e., an unpredictable legal system); and investment issues such as the need for national treatment of foreign investors, most-favoured-nation status (equivalent treatment of imports from different countries).(64) Also, China tends to restrain domestic prices of many of the products in which Canada has a comparative advantage (e.g., foodstuffs, crude materials, and resource-based manufactured goods).
Canada is diligently aiming to achieve the full integration of China into the world’s economic and political institutions. At the same time as it is making progress on the trade agenda, Canada is also actively supporting the development of human rights and religious freedoms in China. To that end, the two countries commenced a bilateral human rights dialogue in April 1997, including the establishment of a Joint Committee on Human Rights to serve as the forum in which formally to discuss human rights issues. In May, both countries co-hosted a multilateral symposium on legal questions related to human rights.
Canadian direct investment in China has grown considerably this decade, from a value of C $15 million in 1991 to a total of C $340 million in 1996. However, our 0.8% share of total foreign direct investment in China is rather meagre.
Our investment outflows, designed to produce goods and service for the Chinese market, have been typically destined for the manufacturing sector. Lately, however, the Chinese authorities have stressed the importance of infrastructure development. Natural resource projects have also become increasingly popular with Canadian investors. However, a number of key barriers to investing in China remain: bureaucracy; language and culture; regulatory obstacles and frequent changes in regulation, often causing investment delays; financing difficulties; and human resource shortcomings.
Currently, Chinese investment in Canada is largely limited to the natural resource and real estate components of the Canadian economy. It is not expected that such investment will record high rates of growth in the near future.
B.Economic Impact of the Crisis on Canada
What have been the repercussions of the financial crisis for Canada? There is no doubt that "the Asian flu" has hit here. Falling commodity prices and weakened export demand have begun to sapped Canada’s all-important trade sector and have taken a toll on the value of the Canadian dollar, on corporate earnings, and on our economic-growth prospects. On the other hand, the slump in Asia and the corresponding surge in exports of low-cost Asian products into the North American market have dampened inflationary forces here.
With East Asia accounting for only 8% of Canadian merchandise exports, and such exports to that region only amounting to 3% of GDP (see Table 6)(65), the direct impacts of the Asian financial crisis on this country as a whole can be categorized as relatively minor.(66) However, the existence of weak commodity prices has depressed important natural resource sectors of the economy. Also, there are important regional considerations to take into account, with the country’s exposure to the crisis varying from province to province. British Columbia, plagued by shrinking commodity markets and severe employment losses, has been by far the most adversely affected. The regional impacts of the crisis are outlined below.
Developments in Asia have already resulted in downward revisions of forecasts of Canada’s economic growth for 1998, although these have been relatively slight. The IMF in its May 1998 World Economic Outlook has lowered its projection of Canadian economic growth in 1998 to 3.2% from its previous forecast of 3.5% ¾ still the highest in the G-7 countries. Statistics Canada has reported that First Quarter 1998 growth has slowed to the 2.5% mark, below an anticipated 3.0% for the entire 1998 year. For their part, both the Toronto-Dominion Bank and Scotia Bank have lowered their growth projections for this year, but to a still respectable 3.0%.
Since Canada’s merchandise exports to East Asia make up only 3% of Canada’s GDP (1996), it would take a large reduction in exports to make a noticeable direct impact on our economy. If Canadian exports to East Asia were to suffer a swift decline, say in the order of 20%, the direct impact on GDP growth would be limited to 0.6%. While not insignificant in its impact on the overall Canadian economy, such an effect would not be catastrophic, unless of course contagion were to occur and the crisis spread to other regions, for example, Latin America and Europe.
Table 6
Canadian Merchandise Exports to East Asian Countries, 1996
Country |
% of GDP |
Japan |
1.3 |
China |
0.6 |
South Korea |
0.3 |
Hong Kong |
0.1 |
Singapore |
0.1 |
Malaysia |
0.1 |
Thailand |
0.1 |
Indonesia |
0.0 |
Other |
0.4 |
Total |
3.0 |
Source: John McCallum, "Asia Crisis – Consequences For North America And Europe, Econoscope, Royal Bank of Canada, 1998, p.5.
Why would Canadian exports decline? The answer to this question is twofold. First, they would drop because of the economic slump in the Asian region as Japan’s economy stagnates and the economies of other East Asian countries contract. Demand for Canadian products would naturally decline as incomes in the importing countries dropped. In Japan, this translates into lower demand for Canadian coal and forest products.
A second factor involves the significant depreciation of various Asian currencies. By making imports much more expensive, these depreciations have made it increasingly difficult for Canadian firms to continue to be competitive in Asian markets. East Asian currency declines effectively represent major price reductions for manufactured products from these countries, including textiles, footwear, steel, petrochemicals, as well as semi-conductors and other electronic goods.
At the same time, the robust strength of domestic spending and investment in Canada has resulted in a surge in imports into this country. It is anticipated that this situation will be exacerbated by a flood of relatively inexpensive imports from those East Asian countries whose currencies have experienced sudden declines, provided working capital to finance such an export push is available.
The good news here is that the competitive pressure from Asia is serving as somewhat of a brake on inflation in North America and Europe. Whereas Canadian consumers will not complain, domestic producers will likely face stiffer competition as a result of the inflows of lower-priced imports. Industries that could be affected include computers, consumer electronics, textiles, clothing, steel, and automobiles.(67)
In terms of actual results, Statistics Canada’s June 1998 monthly trade report shows that the Asia crisis has contributed to a decline in Canada’s overall trade surplus for the first four months of this year, down C $4.4 billion from 1997’s C $10.5 billion.(68) In April alone, the merchandise trade surplus fell sharply, by a full C $600 million to C $1.2 billion. The reason: continuing weakness in sales of natural resources (e.g., wheat; forest products, especially newsprint and lumber; metals and minerals) and industrial products to Asia, particularly Japan. In fact, exports to Japan alone in the first four months of 1998 were running at a level of 34% below levels in the comparable period in 1997, and those to Canada’s five main trading partners in Asia (Japan, South Korea, Hong Kong, Taiwan, and Singapore) were down by 41%.
In the meantime, imports from those five countries rose 18% so far this year, while imports from Japan increased 20%. If current trends continue, Canada could post its first merchandise trade deficit in nearly 25 years.
The indirect effects of slower growth in Asia have been more significant for natural-resource-based countries such as Canada, Russia, and those in Latin America. Direct trade effects are only one part of the puzzle; there are also important commodity price effects to be considered. The Asian crisis has eroded the value of Canadian natural resource exports (and, by extension, total exports(69)), primarily through a price effect as commodity prices have weakened sharply right across the board and, as of yet, have shown no lasting sign of resurgence. In fact, the slump in prices for the commodities that Canada exports has deepened, as a result of concerns about deteriorating economic and financial conditions in Japan and throughout East Asia. For a commodity exporter, falling commodity prices imply a real loss of national wealth. Although the resulting drop in the value of the Canadian currency (see below) does compensate for this commodity price weakness, the offset is only partial.
While Canada’s dependence on natural resources in its export base has been halved over the past 25 years (from 80% to just under 40%), this ratio is still quite large compared with that of other leading economies. Moreover, the share of total exports to Asia made up of resource-based products has declined only marginally during the past thirty years. In its second annual Canada Asia Review 1998, the Asia Pacific Foundation argues that the failure of Canada’s private sector to diversify Canada’s exports to that region away from resources will affect Canada immensely, as resource-based exporters are especially hard hit by depressed markets in Asia. "Generic commodity exports are more sensitive to fluctuations in overall levels of economic activity than the more distinct or brand-name outputs of manufacturing industries. Not only does demand for most raw materials fall sharply in a recession but markets are apt to be lost to lower-cost competitors."(70) The Foundation criticizes the private sector for having failed to seize the opportunities that Asia had presented. While the federal government, through its Team Canada trade missions, has tried to increase the share of manufactured goods exported to Asia, it is the private sector that, in the end, undertakes trade.
The United States sends a higher percentage (30%) of its total exports to Asia, and receives thence a greater share of its imports (39%) than does Canada. On the other hand, trade makes up a much smaller fraction of GDP in the U.S., so the net effect is that the U.S. is only slightly more dependent on exports to Asia than are Canadians. While Canada’s direct trade links with the Asian region may not be high, its links with the U.S. are, with over 82% of our exports heading to that market.
Canadian exports to the U.S. may be affected in at least two ways. First, the precipitous decline in the value of our currency makes our products more competitive south of the border. However, Canadian exports may also suffer declines to the extent that the crisis continues adversely to affect net U.S. exports to East Asia – the U.S. merchandise trade deficit has risen by US $33 billion during the past four quarters – and to harm U.S. economic growth. Any sustained downturn in growth south of the border will, therefore, also affect Canada’s economic performance.(71) Put another way, any Asia-related weakness in the U.S. economy could reduce somewhat our exports to the U.S. market. The downturn in Asia is already having an impact on U.S. exports, forcing production to be scaled back to keep inventories in line.
Furthermore, any flooding of the American market with suddenly inexpensive Asian products could lead to mounting protectionist pressure in the U.S. Congress. "While the bullets would be fired at Asia, Canada would likely suffer collateral damage."(72) Canadian exporters into the key U.S. market will also face the increasingly competitive Asian products, given new advantages because of the exchange-rate devaluations.
4.Impact on the Canadian Dollar
The Canadian dollar, whose value hit yet another all-time low of 63.11 cents U.S. at the end of August 1998, has perhaps been the real victim of the deepening Asian financial and economic crisis. The domestic currency is worth less now than at any other point in its 140-year history, having lost about 7% of its value compared with the U.S. dollar since July 1997. The Canadian dollar, while registering a 13.8% rise in value against the Japanese yen during the same time period, has dropped 6.6% against the British pound and by 3.1% against the German mark. Using a trade-weighted basis, the dollar has declined in value by just over 5% since July 1997.
Several causes are working here. Economic uncertainty in Asia ¾ such as further slumps in commodity prices, the potential devaluation of the Chinese currency, and the policy stagnation and political developments in Japan ¾ has led to a run by Asian and other investors to safety, at this time perceived to be the U.S. dollar. Also, the deteriorating financial situation has led to a decline in Asian demand for commodities, and therefore to a precipitous drop in commodity prices. As the value of Canada’s exports of these goods falls, so too will the demand for Canadian dollars with which to pay for them. Thus, the domestic currency has suffered as a result of the reality that Canada is a major commodity exporter. Finally, the deterioration of our balance of payments during the past few quarters brought about by high rates of import growth relative to that of exports and to our slumping trade relationship with East Asia, also has contributed to currency weakness.
A rebound in the value of the Canadian dollar can be expected to materialize once the Asian financial markets stabilize, the region begins to pull out of recession, and commodity prices improve. For now, however, there is little sign of a durable recovery in Asia or of improved prices for exports of Canadian natural resources. With the Bank of Canada reluctant to hike up interest rates for fear of depressing the economy, the outlook for a quick rebound in the value of the dollar is not bright.
In the short term, the decline in the value of the Canadian dollar versus the U.S. dollar should lead to an increase in exports and especially in the value of the non-commodity type, which have not experienced the same price declines. In this sense, the weak dollar will cushion our trade sector against the full impacts of the Asian crisis, giving a boost to our exporters selling into the U.S. market. However, this temporary benefit could give exporting companies a false sense of security in that it could remove the perceived need to continue with measures to enhance competitiveness, such as productivity improvements. In the long-term, the prospects of these firms to compete effectively in American markets could be threatened by an overdependence on the cheaper dollar as a source of competitive advantage. The lower value of the domestic currency could also prompt a reduction in higher-priced imports from the U.S., although Canadian manufacturers still require technology and materials as inputs for their production operations.
"On a regional basis, of course, one is immediately focused on a province like British Columbia with all its resources, particularly the forest sector, and its much larger proportion of trade with Asia than any other province. The difficulties in that province are quite evident for anyone who has visited there in the last little while. There were difficulties there before Asia’s problems started, beginning with the lumber exports to Japan, but the problems have been compounded in the last six to eight months."(Mr. Joshua Mendelsohn, Senior Vice-President and Chief Economist, Canadian Imperial Bank of Commerce)
The rapid plunge of Asian economies with its corresponding reduction in Asian demand, combined with the current slump in commodity prices poses severe risks for those parts of Canada that remain dependent on sales of commodities to that region. It should come as no surprise then that British Columbia has been the most seriously affected by developments in Asia, given that this province displays the greatest trade dependency on Asian markets and that it is a major commodity exporter. Whereas total Canadian exports to Asia account for 3% of GDP, those from B.C. amount to a full 7.5% of the provincial economy. Unlike other provinces and regions, it will not be in a position to participate fully in the continuation of the economic boom; in fact, the provincial economy is believed to be in recession.
Much of this declining performance can be attributed to the fact that typically 36% of the province’s exports are destined for Asian markets, with the greater part headed for Japan. Of primary concern is the deteriorating state of lumber and pulp exports, which traditionally make up a full 50% of total exports from that province. Exports of coal and base metals are also affected by the developments in Asia. Much of the province’s resource activity is suffering under a combination of falling commodity prices and sharp cutbacks in exports.
Ontario and Quebec are less directly exposed to developments in East Asia. Combined exports from these two provinces to this region make up a mere 1% of total provincial exports. In these two provinces, the auto industries should face somewhat more intense competition because of the devaluation of Asian currencies, and metal producers are expected to be harmed by reduced prices. The effects of the Asian crisis on the economic well-being of other raw-material parts of the country ¾ Alberta, Manitoba and Atlantic Canada ¾ will lie somewhere between the extremes of British Columbia and central Canada (Ontario/Quebec).
Asian tourism, an important advantage for this country, has historically exerted a noticeable impact on the Canadian economy. As with trade, much of the tourism activity has been dominated by visits from Japan, which have left visitors with a favorable impression of Canada. In 1996 Japan continued to be Canada’s largest source of overseas tourism revenue, with tourists from that country generating a record $690 million, excluding international air travel. All told, just under 648,000 visits were recorded that year. Of all the overseas travel markets for Canada, the Japanese tourist remains one of the highest spenders per trip.
On top of the large number of visitors, the Japanese are also contributing to our economy by investing in the Canadian tourism sector. Examples of such direct investment include the development of hotel and resort properties across Canada.
Canada’s tourism industry is being adversely affected by the loss of wealth in Asia and the lower purchasing power of Asian currencies. This effect is being felt in two ways. First, the financial crisis has exerted a negative impact on leisure travel by Asian residents. Currency depreciations in Asia have also made it much more expensive for tourists from that region to visit Canada. Already, we have witnessed a decline in the flow of Japanese tourists to Canada, with overnight trips down by roughly 13% in 1997 (to 566,000 visits). Such visits in the second quarter of 1998, compared with the corresponding total for the previous year, had also declined by 13% (129,000 versus 149,000).
The exposure of Canadian banks to East Asian countries exceeds C $40 billion, as Table 7 demonstrates. Just over one-half of the total involves banking transactions with Japan. The figures presented cover all forms of risk exposure, including loans, acceptances, interbank deposits, securities, as well as derivatives and other forms of off-balance-sheet exposure.
While this total exposure to the troubled region represents a full 91% of the combined common equity in the entire banking sector, there continues to be reason for optimism that the Asian losses of the Canadian banks will not be excessive. For one thing, the exposure that the banks have in Asia is of high quality, in the sense that the bulk of the commercial dealings, including derivatives, have been undertaken with the strongest financial institutions within these countries or the strongest corporations, or the transactions have involved trade finance. Another point to highlight is that countries such as Japan, Hong Kong, and Taiwan, in which the Canadian bank exposure is largely concentrated, possess substantial financial resources to deal with their current financial difficulties. It would take a serious implosion of these extremely wealthy countries to affect seriously the Canadian banks. Moreover, if such a cataclysmic event were to occur, the entire global economy would be seriously eroded.
Notwithstanding the above, the crisis in East Asia was of sufficient scope that by January 1998, a leading bank analyst with Nesbitt Burns had come to the conclusion that the assumption of zero Asia losses was unrealistic.(73) For the entire banking sector, he calculated a loan loss reservation of some $700 million, which in practical terms would translate into a negative impact on total 1998 bank after-tax earnings of $250 million.
A representative from the Office of the Superintendent of Financial Institutions (OSFI), appearing before the Committee in February 1998, explained that the Asian crisis had not yet had a major effect on the Canadian banking system, but that the requirement for loan-loss provisioning could rise in the future. Even so, the financial sector, he believed, should be able to absorb the additional requirements. Of course, the financial situation has deteriorated considerably since those views were expressed.
Table 7
Canadian Banks’ Risk Exposure* To East Asia, 30 April 1998
(C $millions)
C.I.B.C. |
Bank Of Nova Scotia |
Royal |
Toronto Dominion |
Bank Of Montreal |
National |
Total |
|
Japan |
4,600 | 4.300 |
4,847 |
4,000 |
2,854 |
56 |
20,657 |
Hong Kong |
2,300 |
1,200 |
915 |
150 |
123 |
120 |
4,808 |
South Korea |
615 |
1,100 |
899 |
169 |
934 |
56 |
3,773 |
Taiwan |
900 |
300 |
1,052 |
450 |
350 |
15 |
3,067 |
Singapore |
1,500 |
350 |
498 |
100 |
226 |
0 |
2,674 |
China |
600 |
200 |
320 |
250 |
50 |
0 |
1,420 |
Indonesia |
289 |
200 |
224 |
473 |
137 |
0 |
1,323 |
Thailand |
294 |
450 |
208 |
35 |
56 |
3 |
1,046 |
Malaysia |
222 |
650 |
46 |
2 |
36 |
0 |
956 |
Philippines |
68 |
450 |
0 |
41 |
23 |
0 |
582 |
Other |
227 |
150 |
16 |
135 |
21 |
0 |
549 |
Total |
11,615 |
9,350 |
9,025 |
5,805 |
4,810 |
250 |
40,855 |
| As % of Common Equity | 126% |
112% |
98% |
81% |
59% |
10% |
91% |
* Covers all forms of risk exposure including loans, acceptances, interbank deposits, securities and derivative counterparty and other off-balance sheet exposure
Source: Nesbitt Burns
C. Increased Asia Pacific Trade and Investment Promotion: Requirement or Lost Cause?
"Notwithstanding the recent economic difficulties this part of the world has faced, the projection is that over the next 30 years this will be the fastest growing region of the world. This is an area that must be of paramount interest to Canada and other countries that are dependent on trade and investment."(Mr. Peter Sutherland, Director General, Trade Commissioner Service, Planning and Policy, Department of Foreign Affairs and International Trade)
It is common knowledge to many Canadians that exports are the lifeblood of the Canadian economy. Of all the developed countries of the world, Canada is the most dependent on international sales for employment and growth. A full 40% of its GDP (up from 26% in 1992) can be attributable to exports of goods and services. Moreover, exports have served as the real engine for new jobs in Canada, with these accounting for 39% of net new jobs created in the first half of the 1990s.(74)
Another exciting development is the emergence of foreign direct investment (FDI) as a key contributor to growth in our economy. FDI inflows now account for 30% of total employment, using DFAIT’s ratio of 45,000 jobs for every one billion dollars’ worth of exports.(75) Especially worth mentioning is the fact that with trade increasingly following investment, a phenomenal 50% of total Canadian exports, and 75% of manufactured exports, are derived from FDI in Canada. The perceived economic benefits from FDI include job creation, increased economic output, enhanced productivity, high wages, and stimulation of economic activity in supporting industries.
Attitudes toward FDI have changed markedly since the 1960s and 1970s when some governments, concerned about the degree of foreign ownership in their economies, established elaborate foreign investment screening procedures and performance requirements. In the 1990s, governments have competed actively to attract foreign investment, especially where this involves "greenfield" investment in manufacturing. The Committee is convinced of the importance of continuing the task of promoting Canada as a desirable location for investment.
Historically, the focus of the federal government’s trade and investment promotional efforts has been on the United States and Europe(76). Recently, however, the Asia region became Canada’s second-largest trading partner outside the U.S., and four of our ten leading trade partners are to be found in that region. At the same time as phenomenal expansion was being experienced in the region, and Canada’s trade with the region was expanding, its share of the market was falling. This combination of high growth in the Asian market and our declining share led to pressure on the Canadian government to expand its trade promotion efforts in the region and led inevitably to the high-profile Team Canada missions there.
The key question now becomes: in the wake of the financial turbulence in Asia and given the current economic conditions in certain Asian countries, should Canada retrench its promotional efforts in this part of the world and shift back to less risky regions? Alternatively, is promotion now more necessary than ever before?
Obviously, the responses to these questions hinge on one’s view of the longer-term economic prospects for the region. While the short- and medium-term outlook for the region and for Canadian trade and investment with Asia-Pacific is decidedly cloudy, it is entirely reasonable to suggest that 3 to 5 years down the road the situation could look quite different. In fact, it is possible to believe that by that time our trade with Asia-Pacific will, once again, be growing at rates exceeding our trade with many other regions.
Mr. Terry Ursacki (Associate Professor, Faculty of Management, University of Calgary) felt it was vital "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" (11:16). The results of an International Chamber of Commerce survey on the issue seem to suggest that both the Canadian and international business communities also believe that now is not the time for firms to abandon long-term business relationships in the region.
For his part, the Federal Minister of International Trade, the Hon. Sergio Marchi, remains bullish on Asia, arguing that "the current difficulties will eventually provoke the adjustments that will result in stronger, more robust Asian economies in the medium and longer term."(77) According to the Minister, business opportunities will continue to be found for Canadian firms in a host of sectors, including telecommunications, information technology, transportation, energy, environmental industries, and human resource development.(78) The federal government remains committed to promoting trade opportunities in Asia-Pacific.
The potential size of the Asian market is certainly not an issue. On the other hand, the Committee received evidence about Canada’s loss of market share in East Asian markets. Business representatives emphasized to the Committee the difficulties they face penetrating East Asian markets, problems that include fluid business contracts, inadequate trade financing, high transportation costs, and uneven trade promotion. While the Asia–Pacific Economic Cooperation (APEC) organization is a relevant regional forum for eventually easing access to these markets, and EDC and the banking community for ensuring adequate trade financing, there is an important role for the federal Department of Foreign Affairs and International Trade (DFAIT) to play in enhancing trade promotion.
Since the publication of the Committee’s Interim Report, the federal government has clearly improved its international business development (IBD) program. The centrepiece of the IBD program is the October 1997 merger of existing trade promotion services under one umbrella referred to as "Team Canada Inc." This new co-operative federal (DFAIT, Industry Canada, Agriculture and Agri-Food Canada), provincial and private sector network, offering simplified access to exporter services, should not be confused with the much higher-profile Team Canada trade missions. Team Canada Inc. "… is designed to bring, simplify and coordinate access to government providers of export services, whether it be at the federal level or the provincial level. The intent is to make it easier for the exporter to deal with one location, one voice, when seeking information on various types of statistics or training programs, or seeking someone to consult to pursue a particular market interest" (12:9). Key features of the new network include:
- enhanced 24-hour one-stop trade information access service, available on the Internet
through Export Source (an on-line link to export information especially designed for small
and medium-sized firms), as well as through a toll-free number connecting trade centres
across the country. This service is designed to impart a diverse set of export-related
departmental information directly to three types of business clients: those who have not
exported before; those who are novices; and those wishing to diversify their export
activity;
- a new electronic export guide for Canadian exporters of services (Take a World
View…Export Your Services);
- creation of a Team Canada Inc. Advisory Board to provide direction to the IBD program;
- the establishment of a special SME unit within DFAIT to serve the needs of smaller
companies, the SMEs; and
- gradual redeployment of Trade Commissioners (TC) into the field, with an increase in TCs in the field of 30% over the next five years and an eventual target of 70% of them based outside the country by 2006 (versus the current 50%). DFAIT is planning to deploy ten additional Trade Commissioners each year to accomplish this objective. At the time of the announcement in October 1997, the Department’s intentions were to make this deployment to Asia(79) and Latin America, as well as to certain high-growth markets in Europe and the U.S. Starting in the summer of 1998, Trade-Commissioner positions will be reassigned from regions of lower priority to those of higher priority. This reallocation of resources is designed to enhance the Department’s market intelligence-gathering ability and to refocus attention on investment flows, a key driver of trade.
In their appearance before the Committee, the representatives of the Alliance of Manufacturers and Exporters Canada were quite appreciative of the above mentioned Team Canada initiatives. To reinforce the federal government’s drive to achieve a more efficient and effective IBD program, the witnesses suggested that considerable effort be expended by the various levels of government in streamlining the provision of export services to businesses. Such action would ensure "consistency of program delivery across all departmental, functional and geographical boundaries" (12:17). The Committee finds this suggestion to be eminently sensible and recommends:
Recommendation 6:
That the federal government, in conjunction with other levels of government, strengthen and render more efficient its methods of delivering export services to Canadian businesses. To this end, the number of federal government departments with responsibility in this area should be reduced. To improve the quality of information on local markets emanating from overseas Canadian diplomatic posts, the government should devote greater attention to its economic intelligence pursuits.
On the investment side, other witnesses suggested that Canada might attract more foreign investment if the country were properly promoted abroad, and local and provincial regulatory processes were streamlined. Our success in attracting job-creating business investment has not been as strong as it should be, given today’s increasingly globalized economy. Yet Canada has a good story to tell to prospective investors: it possesses strong competitive advantages in its access to North American markets, its low energy and other costs of business, low inflation and interest rates, developed human and physical infrastructure, and strong economic growth. "The problem, it seems, is that while we have an excellent product – the Canadian economy – we have done less well than our competitors in marketing that product."(80) As Mr. Peter Sutherland (Director General, Trade Commissioner Service, Planning and Policy, Department of Foreign Affairs and International Trade) noted, "… there is a perception gap between that reality and the way that we are seen by potential investors overseas"(12:8).
Perhaps the problem lies in the fact that historically these Canadian advantages were not well documented. This deficiency has now been rectified, with the release of two recent studies that place Canada in a highly enviable position in terms of attracting new investment. The first of these is an independent study conducted by the international consulting firm KPMG on the costs of establishing new businesses in a range of developed countries (United States, United Kingdom, Germany, France, Italy, Sweden, and Canada).(81) KPMG’s report found that within the leading European and North American economies Canada possesses the lowest business start-up costs (most attractive investment climate) in eight key manufacturing industries. Canada also enjoys low telecommunication rates, low interest rates, and, undoubtedly of surprise to many, the lowest overall tax burden of the seven nations studied.
Another survey, undertaken by the Economist Intelligence Unit, a think tank affiliated with The Economist magazine, ranked Canada 11th out of 27 countries in terms of overall business costs. However, only two developed economies (Spain and Hong Kong) were ranked higher. Specific business advantages cited include moderate wages, low housing prices, high quality and inexpensive telecommunications, an effective transportation system, low-cost sources of energy, and relatively little corruption.
Given the financial turbulence in Asia, which has caused potential investment funds from Asia to be relatively scarce, effort needs to be expended to inform Asia Pacific decision makers of Canada’s investment attractiveness. Both the KPMG and the Economist Intelligence Unit studies would appear to be useful tools to employ in any revamped campaign in that region to promote Canada as an ideal business base for entering the NAFTA market.
"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."
(Mr. Terry Ursacki, Associate Professor, Faculty of Management, University of Calgary)
"We know that the basis of successful trade and investment in Asia is to develop a long-term relationship and partnerships. That will not change. For many investors, if they were leaving now when there are difficulties, it would send a distinct message to their Asian hosts that, in fact, they are really not serious about that market."
(Mr. Robert Keyes, Senior Vice-President, International, Canadian Chamber of Commerce)
Notwithstanding current economic difficulties, the Committee is convinced of Asia’s long-term economic importance. We believe that the federal government must continue to treat Asia as a priority geographical area.
The Committee is also supportive of Ms. Hall’s comments (Director General, South Asia and South east Asia Division, Department of Foreign Affairs and International Trade) about the opportunities that the Asian crisis has provided for Canadian investors seeking to purchase relatively low-cost businesses in East Asia. We therefore recommend:
Recommendation 7:
That the federal government maintain a strong trade and investment promotion presence in Asia Pacific, both in the short and long-term. Asia should continue to represent a top geographical priority for Canadian trade policy. In the short-term, the federal government should devote attention to assisting Canadian firms invest in strategic and economically affordable business opportunities in East Asia. At the same time, the Department of Foreign Affairs and International Trade must undertake its important responsibility of alerting Canadian companies of the risks attached to carrying out business in Asia. Canadian businesses should only be encouraged to invest if adequate financial and institutional reforms have been carried out in countries seriously affected by the crisis.