Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 3 - Evidence - Meeting of January 30, 2008
OTTAWA, Wednesday, January 30, 2008
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:04 p.m. to examine such issues as may arise from time to time relating to Foreign relations generally.
Senator Consiglio Di Nino (Chair) in the chair.
[English]
The Chair: Honourable senators, I would like to welcome to this meeting of the Standing Senate Committee on Foreign Affairs and International Trade all of those participating. The committee is currently examining the emerging economic influence of China, India and Russia and Canada's policy response.
Appearing before the committee today is Professor Wendy Dobson, director of the Institute for International Business at the Rotman School of Management at the University of Toronto; and on behalf of the Conference Board of Canada we have Ms. Brenda Lafleur, Program Director, Forecasting and Analysis, and Sheila Rao, Senior Research Associate, Forecasting and Analysis. Once again, welcome to the Senate of Canada.
We will begin with opening remarks from the participants for about 10 to 15 minutes, and then we will move to questions from members of the committee.
Wendy Dobson, Professor and Director, Institute for International Business, Rotman School of Management, University of Toronto, as an individual: Thank you very much, and let me compliment you on the innovation of being able to participate by videoconference. I do not think I would have gotten to Ottawa today, given the weather.
I thought you wanted a slightly briefer statement than you indicated. I will forego much of the discussion of the large numbers that tell us about these two most populous economies in the world and simply make my point. I am happy to engage in answering questions, but I want to underline something you all know very well: The world's economic geography is changing, particularly because of the two most populous countries, China and India, which are integrating into the world economy. This gives us both challenges and opportunities that we cannot ignore.
I understand that you want to talk about Russia today. I will indicate at the outset that I have very little to say about Russia.
With respect to China and India, I think we have a relatively good-news story because their demands for our commodities have certainly strengthened our terms of trade over the last few years. However, I underline that relying on natural resources will not sustain our long-term standard of living. The world economy is turning into one where we must rely on our brains rather than our brawn. We must adjust to this changing economy in which competition is intensifying, and we should be engaging these economies.
I thought you would probably want to hear about some of the implications for our future. They can be sketched in terms of the major innovation in production over the last 15 years, whereby it has been possible because of falling trade barriers and because of the information and communications technology revolution to manage businesses across borders, and so production in both goods and services has become fragmented and reorganized into global supply chains.
An interesting issue is how far this process goes when we consider what it means for us. Of course, there is a logical extreme that everything that can be packed in a box and produced more cheaply somewhere else will be and that any service that can be digitized and delivered electronically without a decline in value will be.
Is this right? This is certainly a logical extreme. People ask me whether this means that China will produce all goods and India will produce all services. Of course, the economic answer is no. One country cannot have comparative advantage in everything. Indeed, studies of successful firms in the sunset industries in economies in the Organisation for Economic Co-operation and Development show how these firms, leveraging their strengths and being open to new opportunities and developing their capabilities in a constant march forward to novel products and processes, can succeed as producers still based in the OECD economies.
It is not just the producers. It is that these companies rely on the kind of societal capital that we put in place and must maintain. That includes our infrastructure, financial institutions, legal systems, research institutions, governance practices and public culture.
One main question is how we leverage our openness in the face of these changes. I put our people at the top of the list. We must change our thinking about education and think about people skills and how to develop people skills as well as computer skills. We have to move out of the old industrial economy mindset and think more about the knowledge economy of the future. Our education systems become ever more important in the advanced economies, as does an emphasis on early childhood education, because research shows that children who have been through good programs for early childhood education develop coping skills that help them to adjust to a changing world and to develop basic skills on which they can build in a life characterized by lifelong learning.
A second implication is that we need to evaluate the systems by which we assist people to become more flexible when they are confronted with economic change. This means constantly looking and re-evaluating. How efficient is our unemployment insurance system, our re-skilling institutions and institutions like pension portability that help people to adjust?
The third area is the knowledge-based economy itself. It is not just public support, although Canada has an excellent record over the last many years in investing more in the universities, investing more in research and development or encouraging more research and development. You may not be surprised to hear this from me, but I think we need to rethink North America.
The North American Free Trade Agreement really freed up the movement of goods. However, there are barriers that remain post-NAFTA. Many of them are regulatory. We have different regulatory systems in North America with poor reasons behind these differences. Of course, we still have rules of origin, which firms increasingly report they find onerous and not very helpful to achieving greater economies of scope and scale in the North American economy; and then the other area, which has become quite worrisome post-9/11, is the movement of people — of business people and, increasingly, technical people.
My vision of the North America of the future is a common, secure economic space with three sovereign political systems. We should be moving towards that. We should hold that vision and try to move towards that.
The final, most obvious implication is that we should engage these economies. Canada should be participating in the regional institutions that are coming up in the Asian region.
I would close my comments with an institutional one and point out that China and India are countries with 5,000 years of history each. We may not agree with all of their institutions, but I would suggest that when we disagree, we should disagree with respect. In 5,000 years, some institutions have become entrenched and difficult to change. Sometimes it is not clear to governments in those countries how they will bring about change that would be more in line with the kind of liberalization we would like to see.
However, I think we should put it in perspective, and I like to use the example of Senate reform. That does not happen overnight. It takes a long time. If you multiply that a few hundred times, you have some idea of the difficulties in changing institutions in these countries.
Thank you for this opportunity to make introductory comments.
The Chair: Thank you very much, Ms. Dobson. We will now move to the Conference Board of Canada. I understand both Ms. Lafleur and Ms. Rao will make comments.
Sheila Rao, Senior Research Associate, Forecasting and Analysis, Conference Board of Canada: It is a privilege to be here with you today. Thank you for the invitation. I am here to discuss findings from a Conference Board of Canada publication entitled The Rise of the BRICs: What Does It Mean for Canada?, which was released earlier this month. This report is the second under our How Canada Performs banner, the first one being A Report Card on Canada, in which we benchmarked Canada's socio-economic performance in six major domains against that of 16 other OECD countries.
I read the testimony from the last two meetings where there seemed to be quite a bit of discussion around policy response related to these countries. I stress that the report I am here to discuss is primarily an evidence-based briefing on the competitive nature of the BRIC economies and the opportunities they present. This report has its roots in our benchmarking work.
When we were doing research for our first report, we initially thought of including the BRIC economies, Brazil, Russia, India and China, given their tremendous performance in recent years. However, in the end we decided that it did not make sense to benchmark these countries with huge income disparities, high levels of poverty and severe environmental issues against developed countries in domains such as health, society and the environment. Also, if we were to look solely at economic indicators, countries like China and India — or Chindia, as they are increasingly known nowadays — have had and continue to have phenomenal growth, but they are starting from a much smaller base. Looking at a standard wealth indicator, GDP per capita, they are not even close to being on a comparable scale with countries such as Canada, the United States and Western European countries.
Therefore, we decided to put out a separate study on the BRICs where we looked at a select group of economic, education and innovation indicators to gauge the BRICs' strengths and weaknesses and the possible threats and opportunities that these countries may present to Canada in the future.
As discussed in the first two sessions, my report also stresses that these economies are large and growing and that China and India are where the true opportunities lie, given Russia's demographic challenges and Brazil's relatively low growth and low global integration. Our report did include Brazil, but I will exclude our analysis of this country because it is not the focus of your session.
China and India present challenges to Canadian competitiveness in the future, but they also offer enormous opportunities. China is already very open to trade and investment, and India is unlocking its doors. India is also very well placed for future growth with its huge English-speaking and increasingly better-educated population. As well, unlike China, it has youth on its side; over 30 per cent of India's population is under 15 years of age.
The BRICs already represent over one quarter of the world's GDP and over 40 per cent of the world's population. They are becoming increasingly integrated into the global economy and are driving global growth.
China and India have seen tremendous GDP and GDP per capita growth in recent years. Their GDP per capita growth, as well as that of Russia, also highlights the fact that there is a burgeoning middle class in these countries which could number hundreds of millions of people.
The productivity growth in these countries has also been astounding. For example, in China, labour productivity in 2006 was close to 10 per cent. Much of this has to do with the migration of workers from rural to urban areas as well as increased capital investment and openness to trade and foreign investment. The story is similar in India. Russia has also been experiencing strong growth, but most of this is thanks to its abundant natural resources and high commodity prices.
Another indicator we looked at is investment — in particular investment as a percentage of GDP — both investment in machinery and equipment and investment in infrastructure. Investment in Russia is less than 20 per cent of its GDP. On the other hand, India's investment as a percentage of GDP is almost 30 per cent and China's is over 40 per cent, which is quite high when compared to that of OECD countries. This is a good sign for both countries as they move toward more capital-intensive sectors and are keeping up with their economic growth as well as promoting future growth.
We examined in two ways the threats that these countries pose. We looked at BRIC exports to the U.S. relative to Canada's exports to see how they may be impacting Canada's share. This is telling given that the U.S. is by far our largest and most important trading partner. Of the BRICs, only China's share of exports to the U.S. is comparable to Canada's. Over the past decade, Canada's share of U.S. merchandise imports has dropped while that of China has increased. In fact, in 1997 China represented 7 per cent of U.S. imports, while a decade later they represent close to 16 per cent. The share of U.S. imports from the other BRIC countries has also increased, but to a much smaller extent.
While China's volume of exports to the U.S. is comparable to Canada's, we must keep in mind that, for the most part, their exports are not currently concentrated in the same areas. Canada's main exports to the U.S. are resources, resource-based goods and automobiles. China's main exports are a wide range of manufactured goods.
When we examined bilateral trade data for China, it appeared that to date the loss of U.S. market share has been limited to low-cost, labour-intensive manufacturing industries. Among their top exports are computers and computer accessories as well as telecom equipment. Given this, one might conclude that China is a threat in the high-tech sector. It is, after all, the world's leading exporter of IT goods. For the most part, though, its high-tech exports are only assembled in China for foreign-owned firms with most of the high-value-added components imported from other Asian countries.
We also examined the threat from the BRICs by looking at the inroads they may be making or could potentially make in knowledge-intensive areas. We did this by comparing education and innovation indicators. In terms of education, the fact remains that educational attainment and literacy rates in the BRICs, with the exception of Russia, are quite low, but steadily increasing.
Since the BRICs have enormous populations, it is more telling to look at absolute numbers of graduates versus proportion of graduates. In absolute terms, Russia, India and China have large numbers of well-educated people in their populations — millions more university-educated people than in Canada, particularly in science and engineering. While the quality of education may be disputed, the sheer volume of graduates will have an impact on these countries' future performance.
We looked at typical innovation indicators, such as patent filings and scientific article publications, in the same way, by looking at absolute numbers rather than proportions. In both cases, the numbers in China, Russia and India far exceed those in Canada. Also, residents in China and India are increasing the number of patents they are filing abroad and thus expanding coverage of inventions originating in their own country. The BRICs' share of world article output remains low, but it is growing. They are not centres of innovation just yet, but are making strides in the right direction with increased international collaboration, improved education outcomes and higher levels of R&D investment.
Given the huge and increasing global presence of these countries, they represent a wealth of trade and investment opportunities. However, Canadian businesses are not capitalizing on these opportunities. With the exception of China, the BRIC countries account for only a small share of Canada's merchandise trade. Less than 2 per cent of Canada's exports go to the largest BRIC export destination, China. The second highest BRIC export market for Canada is India at less than 0.5 per cent. In terms of goods imports, close to 9 per cent are from China. However, imports from each of the other BRIC countries are less than 1 per cent of Canada's total imports.
Since trade is becoming increasingly integrated, with more countries worldwide using inputs from two or more countries to produce a good or service, it is also important to look at Canada's involvement in the BRIC supply chains and vice versa. So far it is minimal. Although trade in intermediate goods has increased significantly, most of Canada's imports from the BRIC countries are still in the form of final products. In fact, over two thirds of imports from China are end goods. This is of course good for the Canadian consumers who benefit from their low-cost goods. However, we are under-using these countries for moving up the global value chain. We need to take greater advantage of the low- cost manufacturing and services that they provide and the abundant supply of educated, cheap labour that the BRIC countries have to offer.
We are even less involved in the supply chains of these countries. Most of the top exports to China and India are entry-stage raw materials. Over 50 per cent of Canada's exports to China are entry-level goods or resource and resource-based goods. The share of exports of intermediate goods, or goods that enter at a more advanced stage in the manufacturing process, has grown quite a bit in the past decade. However, the export share of final products has remained relatively constant. There are huge opportunities for growth here given the burgeoning middle class in each of the BRIC economies.
Canada's foreign direct investment, or FDI, stock in the BRIC countries is also quite low. The U.S. is still by far the largest recipient of Canada's outward FDI. Of the BRICs, most of Canada's outward FDI stock is in Brazil, in resource-based industries such as mining. In 2003, our FDI stock in China was about $500,000 million and it was less than $200 million in India. There is much more room for growth here. Outward FDI is important because it helps grant Canadian companies access to global supply chains and increases trade opportunities. It also makes it easier to reach foreign consumers.
There is a wealth of opportunities that these countries, particularly China and India, present to Canada and to other developed economies. First, they have a growing middle-class population that is boosting demand for more sophisticated products worldwide. China and India, with their spectacular growth, are increasingly resource hungry. Canada is resource rich, so we have enormous trade opportunities on this front, but just focusing on resource exports is not enough. While the Canadian consumer benefits from low-cost goods imported from China and India, the low-cost manufacturing and services that these countries have to offer also presents Canadian companies with the opportunity to boost imports of low-cost, labour-intensive goods and services and move up the value chain. Canadian companies also have excellent opportunities to satisfy the BRICs' growing demand for infrastructure and other capital investment.
There are three main take-aways from our report. First, China and India will remain the dominant pair of the BRIC countries thanks to their large and increasingly better-educated populations and growing middle class, their low-cost labour and their growing openness. Second, the threat to developed countries is most immediate for industries dependent on low-skilled labour. China and India are not innovation centres just yet, but they are making strides in this direction. Third, Canadian businesses must deepen trade and investment ties with the BRICs and concentrate on moving up the value chain. This will not only boost our organizations' innovation capabilities and productivity but will also prepare us for increased threats to manufacturing and service jobs. To date, we have been partly sheltered by our strong ties with the U.S. However, we need to wake up to the global realities and look beyond our neighbour if we do not want to be left behind.
The Chair: Thank you, Ms. Rao. Ms. Lafleur, do you wish to make a presentation?
Brenda Lafleur, Program Director, Forecasting and Analysis, Conference Board of Canada: No, but I will be pleased to answer your questions.
The Chair: In the last 22 years, I have been to India six times, and none of my trips has been on behalf of the government or in my capacity as a senator. They were personal and business trips. Colleagues, 15 years ago I had dinner with a businessman in Delhi, and he lamented the fact that only about 25 per cent of the population in India was in the middle class. That was about 250 million to 300 million people. That is a bigger market than the United States of America. It is about time the world woke up to it. Thank you for your comments.
Senator Smith: I was there 10 days ago. I go there for personal and private reasons as well. If you look at the BRIC countries — Brazil, Russia, China and India — China and India will be the two major cylinders. Maybe my question relates more to Russia. I am curious as to your thoughts on countries that have had a Marxist, communist society. When that changes, the people there have a mentality that is not really receptive to competitiveness because they have never had to deal with it. I was kind of lucky in that the first time I visited the Soviet Union was in the late 1960s, and everything seemed so grey and dull. The first time I was in China, Mao was still living and it was the twilight of the Cultural Revolution. It was not quite as grey and dull, but competitiveness did not exist much. You did not see signs and advertising.
In India, a few states have had communist governments — West Bengal, for example — but they do have a bureaucratic system. Consider banking, with which I am familiar. The state bank of India is the biggest bank, but in terms of market value private sector, the biggest market bank has only 10 per cent of the number of branches but has a greater market value, because in terms of competitiveness there is absolutely no comparison.
Professor Dobson, an analogy is Germany. East Germany and West Germany finally merged 18 years ago, and there are parts of East Germany that still are not competitive. Some people think it takes at least two generations and maybe even three to get into the competitive mindset that exists globally these days. This does not go to the root of what we are talking about, but it is something that I have always been curious about. The best example is the Soviet Union. I can ask you because this is the Rotman School, so business, not political science. When countries shift from a Marxist society to a competitive society almost overnight, how long does it take before they can really integrate themselves into a competitive global environment and be able to compete?
Ms. Dobson: Those are very good questions. Let me point out that both China and India, after the revolution and after independence, adopted a central planning model like the Soviet Union. They kicked out the foreigners. Of course, in China, they lopped off the heads of or sent down to the countryside all the entrepreneurs. This did not happen in India. India adopted a central planning system like the Russian one but did not go through a revolution. The entrepreneurs in India have actually flourished. Since you have been there so many times, you know that it was entrepreneurs moving around the restrictions imposed by bureaucrats and by the licence raj and inspection raj that created the IT services sector before government bureaucrats understood what it was all about. Government had enough sense to leave it alone and not to regulate it the way the goods sector has been regulated. There is a very interesting story there about entrepreneurialism in India. It is alive and well. However, one problem in India is that while they may have a young society, 50 per cent of India's women are illiterate. Literacy in China, on the other hand, is 91 per cent.
Let me then move on to China, where they lopped off everyone's head. In 1978, they were lucky. There are long- standing institutions relating to the merchant class in China that were not eradicated by the revolution entirely, and there was a quite remarkable entrepreneurialism in 1978. When Deng Xiaoping took over and faced the Malthusian crisis where they were not producing enough food for the growing population, people in the countryside were experimenting. I have a wonderful picture I took in 1978 of people in a small town in China standing around with scrip in their hands and pumpkins at their feet. It was the beginning of a market. The government had the sense in China to allow an institutional change to create the household responsibility system among the farms where everyone lived at that time and allowed people to keep or sell everything they produced over and above the government quota. Within two years, there was an absolute explosion in agricultural production.
Why does this not happen in Russia? I do not know enough about the Russian institutions to compare them, but I suggest that, in the large, Russia is in many ways still a feudal society. It has not gone through the kind of institutional changes that have freed up entrepreneurship in China and India.
Ms. Lafleur: We can add something to this, although it is not related to our study. Both Ms. Rao and I are involved in a project in Ukraine right now. We have been there probably six times in the last year and a half. The focus of the project is to help the Ukraine government do more analysis like the Conference Board of Canada does and get more civil society involvement in it.
I think countries like Ukraine, the Baltic countries and Poland are able to surmount the old-school systems. When you go to those countries, it is amazing because you can see many changes. However, the problem with Russia is that they are sheltered by the high commodity prices and the money they receive from resources. They are not forced, like Ukraine, Poland or the Baltic countries, to actually make those big-leap changes they know they have to make.
The rise of China is partly a result of the large population. Russia is decreasing in population, as is Ukraine, but these countries will become more integrated into the global economy as well. That is what we see. There is a deep hunger there for learning how to actually work within the global economy. We see less of that in Russia, however.
The Chair: Senator Smith, do you want to ask a follow-up question?
Senator Smith: No.
Ms. Rao: I would like to add to Ms. Dobson's comment on India having adopted central planning. Their IT industry did flourish as a result of no regulation. The government was not paying attention to this industry, which is where the entrepreneurs came in and were allowed to flourish. That is why this industry has been such a success for this country.
In terms of literacy rates, they are the lowest of the BRIC economies. For ages 15 years and above, the literacy rate is 61 per cent in India. However, if we look at the youth literacy rate, it is 76 per cent. We do show in our report that the rate is increasing; however, they have a long way to go, which will definitely affect their innovation capability in the future.
Senator Grafstein: Ms. Dobson brought to my memory an interesting conversation I had at Senator Smith's house in 1984 with the creator of the special responsibility agricultural policy, Zhao Ziyang, who as the premier of China at that time. I spent an hour with him. He was subsequently under house arrest because he objected to the Tiananmen Square situation.
The Chinese experience was quite interesting because it combined, as Senator Smith said, the regime in the agricultural districts of a communist system with entrepreneurship. It was not very complicated. Perhaps Ms. Dobson will remember this.
They understood that in China, all the great revolutions happened in the countryside, so they had to ensure that the countryside was better off than the cities. They took the entire countryside of China and took every commune in China into what they called a special responsibility household, and they established for them certain targets. These were agricultural targets of grain or rice, for example, including grapes, and they said that they would buy that at a fixed price. Each commune was guaranteed a fixed, established price. Then they said that anything they grew above that would be available for reinvestment. They doubled, tripled and quadrupled their quantum as soon as that happened, and that led to the modernization of agricultural China.
When I was there in the 1980s, each time I went I saw something I never saw before — brick factories. Right across China, these communes were changing from mud huts to brick factories with electrical energy. Today, part of the Chinese uplift has to do with the manufacturing in these small towns, which are subcontracted from the major towns and which are very efficient and effective.
By the way, the Chinese are very literate. A child is taught 5,000 letters by the time he is 5 years old, and we are taught 800 words. There is a huge difference in their system, but I do not want to deal with that.
I want to look at a more important question for me. Today's The Globe and Mail refers to a report by Ontario's Institute for Competitiveness and Prosperity. It compared the average GDP in Ontario with that of the 14 U.S. states that most resemble Ontario. The three states that are generally the same as Ontario are New York, New Jersey and Massachusetts. The institute demonstrated that those states average $20,000 more per capita in productivity than Ontario workers. When they dealt with the other 14 states, again comparable to Canada except for Michigan, per capita in productivity is $6,000 more per annum. Finally, with Michigan, which has had a huge economic downturn, per capita in productivity is $1,000 more per annum.
I do not want to think in terms of how we deal with China or Russia as opposed to looking at Canada's lack of productivity in the domestic market. How do we tie this into our study? In my view, one of the reasons the Americans have been more productive than us is their trade policy. We call ourselves a trading nation, but we are not. We trade with one customer. The Americans have diversified their trade. Mr. Bush, whom most of us revile, has entered into more free trade agreements in the last eight years than Canada has in the last 100 years.
What about accelerating to break through this complacency in the Canadian marketplace of more free trade agreements in order to give a jolt to Canadian industry, which was given a jolt when we entered into FTA and NAFTA?
Ms. Dobson: That is a very good question. I have seen the article in The Globe and Mail, but I have not seen the paper you are referring to.
Coming to your question about FTAs, first, having been deeply involved in the bilateral free trade agreement in the 1980s, what has always stayed with me was the immediate impact on major Canadian businesses when we proposed to negotiate with the Americans. If this became a possibility, then they began to think North America rather than just Canada.
We have obviously benefited enormously from the FTA and from NAFTA, partly because the U.S. economy has grown — it was very dynamic in the 1990s — and partly as the result of better access.
With respect to jolting business through negotiating a bunch of free trade agreements, I would go back to that experience and the value of the consultative groups. I have forgotten their names, but present were the International Trade Advisory group, ITAC, on which CEOs met; provincial advisory groups; and sectoral advisory groups. Those have since been replaced by Team Canada, which sometimes looks like a federal-provincial mission. That is not bad. It has produced sales but not frameworks.
With Indian, for example, we have a foreign investment framework, and we have a strategic framework with the Chinese. I have proposed in a publication for the C.D. Howe Institute in 2006 that we should explore a services-only free trade agreement with the Indians. They are not into full-blown free trade agreements. They are talking about it with the Chinese and they are very suspicious of the Chinese. They are very suspicious of us because of agriculture. Agriculture is still protected in India.
I have not completed a study with respect to the possibilities with China, mainly because I do not think China is interested.
If we are going to put more effort into trade and business facilitation and trade liberalization, we should go further in North America, go deeper without getting into a European-style integration that involves giving up sovereignty. No, in North America we are unique in that we will not give up sovereignty for economic gain. We should deepen North America, explore the possibility of a services-only free trade agreement with the Indians and deepen that strategic relationship with the Chinese.
Look at the big economies. We have apparently just signed an agreement with Peru. What is in that for us? Small economies getting together are not in a position to make any large liberalization. I have not seen the details, but I am skeptical of putting a lot of energy into FTAs with small economies.
I am glad we are discussing with the Koreans, and I hope something comes out of that, partly because I know what kind of a situation they are in stuck between Japan and China. They are between a rock and a hard place; they always have been. Cross-Pacific ties open up whole new possibilities for them.
The Chair: Thank you very much. Would Ms. Rao or Ms. Lafleur like to comment?
Ms. Lafleur: Your question is interesting and important and raises the point that we consistently make. These issues about trade with China and India and so on are all within a larger, more holistic kind of problem or challenge that Canada has.
We put out a product last year called Mission Possible. When we pulled it all together, we said that if you want to succeed, if you want to increase your trade, you have to increase your foreign direct investment, FDI, because FDI leads to more trade. How do you do that in an economy where, as you point out, our productivity is lagging? We go through various ways of holistically looking at that. You have to remove trade barriers and all the things that Ms. Rao has talked about, increasing the skills and flexibility of our labour force.
In particular, we push removing barriers to trade, investment and productivity. We put out a report, Death by a Thousand Paper Cuts: The Effect of Barriers to Competition on Canadian Productivity, which looked at over-regulation — we are not asking for no regulation, just smarter regulation — and how over-regulation actually inhibits the push and drive to increase productivity. As we mentioned before, some post-communist countries, like Russia, do not have the impetus to improve their productivity because they can depend on their resources. As Ms. Rao pointed out, it is a real problem for Canada. We have a window of opportunity as commodity prices are high, but we cannot sustain that over the long term. We have to push at this point.
Ms. Rao: I would like to add to the point about Canada making free trade agreements with small economies like Peru and Costa Rica when we should be focusing on large countries like China and India where the payoff would be much greater. If China is resistant, as Professor Dobson mentioned, the first step is increasing foreign investment in this country, which would lead to increased trade.
The Chair: I gather all three of you would be in favour of Canada aggressively pursuing free trade agreements with India and China; is that correct?
Ms. Dobson: I do not think so. As I say, I do not think the Chinese are interested, so a lot of groundwork would have to be done there. I have put forward an idea of a services-only agreement, not getting into goods where manufacturing is still a big problem and protected in India, and where agriculture is protected. Let us look at services where they are globally competitive and where they could help us get our costs down. They are also ahead of us technologically in some ways.
I do not agree that we should rush into trade agreements. We should study them carefully. We know a lot about how to deepen economic integration in North America, and the rise of China and India, one way or another, will be a catalyst for us doing that in North America. What could be the catalyst is China and India deciding to make a free trade agreement together. They are working on that. It may take more than my lifetime, but it may not.
The Chair: I suspect not.
Ms. Lafleur: We do agree with Ms. Dobson that they do not seem to be interested right now. As Ms. Rao mentioned, there are other ways to capture their interest. One of those is to increase investment. However, our position has always been that it is not a binary — the tyranny or the binary. It is not an either/or situation.
Obviously, the United States will remain our largest trading partner, and as Ms. Dobson has said, we have to deepen and pay attention to our relationship. It does not mean that Canada cannot walk and chew gum at the same time. We can do two things at once. We can look at the U.S. and pay attention to the U.S., but we can also pursue and lay the groundwork for better relations with China and India, and it has already started. I think that is the way to go.
Senator Smith: Professor Dobson just talked about caution on these free trade agreements. Would you like to comment on the Korean agreement, which is pretty hot right now? The government is looking at it. It is virtually impossible to get anything into Korea from any Canadian auto plant; and yet, Hyundai and Kia have never built an assembly plant here, unlike Toyota and Honda, though this would dramatically lower the prices. It is hard to see the case for that one. Do you have a comment on the Korean agreement?
Ms. Dobson: Hyundai had a plant in Quebec, and it moved it moved it south. Frankly, I cannot remember the reasons why, but it certainly had to do with us and our policies.
Senator Smith: Kia has never done anything.
The Chair: Would you like to comment on the Korean free trade agreement?
Ms. Lafleur: No, we have not studied that.
Ms. Dobson: On the Korea free trade agreement, again, it may be moving quickly in Ottawa, but I do not know the details. I know that autos are a sensitive issue for their relationships with Japan and with the Americans, and the opposition of the auto industry in the U.S. may be a factor in preventing that agreement from being fast-tracked. I think it is still eligible to be fast-tracked in the U.S. Congress.
The issue in an industry like the auto and electronics industries is differentiation; so maybe the answer is production here, which is an avenue that the Japanese followed because of trade barriers and restrictions back in the 1980s. However, I would want to know a lot more about the big three. I assume it is the American big three that are opposing Korea, both in the U.S. with respect to a free trade agreement and with respect to Canada.
The Chair: Thank you for that. I do not know the answer to your question. I suspect it is probably all companies. Ms. Lafleur, you have not studied that and have no comment?
Ms. Lafleur: No, we have not studied the Korean situation.
Senator Grafstein: I want to clarify the idea of free trade agreements. I agree that we should concentrate on larger markets. I agree they do not all have to be comprehensive. I agree that they can be specialized. I want to remind people that we built our free trade agreement on a separate agreement, the automobile agreement, which is not a free trade agreement with the United States. It is a managed free trade agreement, and it is the basis upon which we built the larger free trade agreement. There is no reason we cannot build a managed service agreement with India or a managed sectoral agreement with China. It requires innovation, desire, political will and economic creativity.
I said that the free trade agreement provided a jolt, and it is true that it was a jolt; it is true that when you enter into any sort of managed or bilateral semi-free trade agreement it provides an impetus to business, educational institutions and scientific institutions to get off their asses and become more productive and effective. I still believe in that thesis. I hope that clarifies my view on this, and I hope that I am not in opposition to Wendy Dobson, whom I respect highly, or to our other colleagues here. I wanted to explain my position.
Ms. Dobson: I agree with Senator Grafstein and encourage him to continue adding vitality and championing this avenue.
To add to his ammunition, I would also point out that evidence has been gathered and analyzed at the plant level by one of my colleagues, Dan Trefler; it shows that in those industries where tariffs were brought down in free trade with the Americans there was an increase in productivity as a result. It was not just because a lot of people were laid off; it was managers beginning to manage in a competitive world.
The Chair: Thank you for that.
Senator Dawson: You were a little severe on the Team Canada approach, saying it was probably too sales driven. The reality is that, at least at that time, the federal government, the provinces and private enterprise were focusing on targets. They may have been too short-term and too hit-and-run and perhaps they should have been continued, but do you not think it forced everyone to focus on a country when they were doing one? Perhaps we could look at the framework and try to keep the sales — we hope to continue doing sales. Perhaps we could look at it more in the long term and be sure that we have a renewed Team Canada approach rather than a hit-and-run approach.
Ms. Dobson: The ITAC approach was strategic in its focus. The International Trade Advisory Committee represented the private sector and academe from across the country. It was built around the consultation process for free trade agreements. I do not think one or the other is mutually exclusive, but it is unfortunate that that mechanism was dismantled and replaced only by Team Canada.
Senator Dawson: I agree with you.
Senator Corbin: Both of the witnesses are urging that government reduce the fiscal load on enterprises. I am reading, of course, from notes that were prepared by our researchers from papers that our witnesses provided. Can you elaborate on the impact, specifically on what that would do to our trade with these two countries? Are we on a relatively equal playing field when it comes to taxation of capital in our various countries? I wonder why this was raised at all in your paper. It sounds like chamber of commerce lingo, which comes up annually.
Ms. Dobson: It is not my paper, so I will not reply.
Ms. Rao: Are you referring to something mentioned in the executive summary in the BRIC report?
Senator Corbin: This is drawn from your paper, The Rise of the BRICs: What Does it Mean for Canada? On page 2 of our briefing note, our researchers have quoted the paper as follows:
The federal government must promote inflows of foreign direct investment and continue to lower the tax burden on businesses, such as by lowering tax rates on capital.
As far as Ms. Dobson is concerned, on page 3 of that research paper —
Ms. Dobson: I am sorry; I do not know what paper you are referring to.
The Chair: To clarify, this is the report put out by the Conference Board of Canada, to which the other witnesses referred at the beginning of our meeting. I am not sure whether Ms. Dobson has a copy.
Senator Corbin: It is extracted from papers that are footnoted on page 2 of our briefing note: Wendy Dobson's China's economic transformation: Global and Canadian implications; Wendy Dobson's Taking A Giant's Measure: Canada, NAFTA and an Emergent China, C.D. Howe Institute Commentary; and Wendy Dobson's The Indian Elephant Sheds its Past: The Implications for Canada.
I am sure the researcher read well when he summarized as follows:
For that to happen, we must raise productivity, deepen the knowledge-based economy, increase the skills of the labour force, and lower our costs. To this end, governments in Canada have important policy roles to play to boost investment in this country, improve education and skills development, and to further lower the burden of taxation on Canadian businesses.
What impact would that have? What impact do those recommendations have specifically with respect to trade with India and China? That is the question.
Ms. Dobson: I can certainly comment on reducing the cost of capital. We could take a leaf out of China's book. China's growth is currently largely driven by domestic investment. In fact, they are creating capacity that they cannot even use. The excess capacity in the steel industry in China is equal to the total capacity of Japan in steel, and Japan is the second-largest steel producer in the world. The Chinese are over-investing because the cost of capital is very low. It is kept artificially low by the Chinese government. That is one thing they must change.
In Canada, interest rates and other measures influence the cost of capital. If the cost of capital is considered to be too high for the investment opportunities available, the investments are not made. It is that simple kind of logic.
There are many studies on this. I would put you in touch with Professor Jack Mintz at the University of Calgary who is Canada's preeminent expert on tax policy. One of his consistent recommendations is to reduce the cost of capital in Canada.
Ms. Lafleur: The Conference Board of Canada has consistently been saying that. Our focus is, as always, on increasing productivity. Ms. Rao referenced our Mission Possible report. One of our key recommendations was to reform the Canadian tax system to improve productivity. It had three prongs. One was to encourage lower-income Canadians to stay involved in the labour force, but also to reduce taxes or eliminate taxes on capital investment and to ensure tax alignments among all the provinces.
Our focus on that is to increase productivity because we will not to be able to compete against China, nor do we want to compete on low cost only. We want to compete on productivity, being more efficient, putting out better, more high-value-added products, as Ms. Rao mentioned. Our focus on the tax side of it is to improve productivity within this holistic approach to actually move us up the value chain. We are consistent, and we stand behind that.
The Chair: We talked about foreign direct investment coming into this country. It is generally viewed as positive, and I think everyone would agree. Concerns have been expressed, though, about inflows of foreign direct investment from state-run investment funds, the sovereign wealth funds. An example may be the China Investment Corporation. Do any of our witnesses have comments or concerns about accepting or encouraging those types of FDIs to Canada?
Ms. Dobson: The China Investment Corporation, with $200 billion, is fairly far down the list in terms of the sizes of these sovereign wealth funds. Sovereign wealth funds also include the Norwegian government investment entity. In general, these funds have been passive investors. Recently, partly because of the troubles in the United States' financial system, there have been more active investments where equity positions have been taken in U.S. firms and also in U.S. banks. There are stakes that have been taken by the Chinese, both by Chinese banks and by the China Investment Corporation, in Africa.
So far, no sovereign wealth fund has acted in a way that would give any first-hand evidence to those who are concerned, because they have behaved like market-driven investors. The concern, however, is that at some point in the future, unless they would commit themselves to some kind of code of conduct, it is conceivable that they could behave in a way that appears to advantage or does in fact advantage producers or competitors from their countries over those of the countries in which they have invested.
Therefore, yes, there is a question here, and actions are being taken. Initiatives are being taken, like at the OECD, to create a code of conduct on our side, and the International Monetary Fund, IMF, is looking at the possibility of suggesting a best practice set of guidelines for sovereign wealth funds. The question is whether they would sign up, because they basically say, ``We are wealth generating. Why would we do anything that would be politically motivated when our mandates are to create wealth?''
Just on the basis of suspicion, for a country like ours, where we are getting a smaller and smaller share of foreign direct investment headed for North America as a whole, I am not sure it is in our interests to take unilateral measures, but it is certainly in our interests to work with international authorities who are developing codes of best practice on both sides.
Ms. Lafleur: We would agree with most if not all of what Ms. Dobson has said. Also, if you are interested in this topic, on Monday, Michael Bloom from the Conference Board of Canada put out a report on hollowing at a large conference on hollowing out. He has a lot to say about those wealth funds and things like that. I am afraid I might make a mistake, but if you do want to hear from him, I think he would be very interested.
The Chair: In reaction to your comments, in the last couple of weeks, I believe, and I may be wrong because I was actually hiking in Patagonia when I saw this on my BlackBerry, and strangely enough the BlackBerry works while hiking in Patagonia, the African Union discontinued trade negotiations with the European Union. One of the African economic groups commented that they are getting some sort of better deal from China or something. Am I remembering things correctly? Did anyone hear about that?
Ms. Dobson: No. My BlackBerry did not give me that message.
The Chair: You should have been in Patagonia, then.
Ms. Lafleur: Neither on our side.
The Chair: I will have to research that. It just came to mind.
Another question I would like to ask is probably more directed at Ms. Dobson, although many people have talked about this. In order to meet the new global competition, Canada needs increasingly to specialize in knowledge- intensive, higher-value-added goods and services. These are areas that we understand China and India are not yet competing in. Ms. Dobson, could you expand on your thoughts on that?
Ms. Dobson: This has to do with our education system, what exactly is the output of our education system and some of the numbers quoted earlier about education. In fact, in the Indian higher education system, education spending has been biased for many years. In India, yes, the literacy numbers are improving among younger people, but one reason for the state of affairs in India, where 50 per cent of women are not literate, is that they have under-invested in primary education in order to fund post-secondary education. China has funded universal education or universal literacy as well as higher education.
I start with the question of what are we turning out in schools. We should be investing in early childhood education, which has been shown scientifically to help people cope better with adjustment and stress. Therefore, higher value added then builds on that.
As has been pointed out, China is very successful as a low-cost, labour-intensive manufacturer. China is represented in most global production chains of manufacturers. Most of those kinds of activities have already left Canada. Some of them still will migrate. The question is how do we retrain people. How do we train our young people so that we have the human resources to start new businesses in knowledge industries, which include prominently the kinds of things that are done around Kitchener, Waterloo, Cambridge, around Ottawa in Kanata, and also in Vancouver and Calgary? The list goes on.
What attributes and skills do we need in our people? That should be one of the tests we apply to whether our education systems across the country are in step with the changing global economic geography. It is not just services. The knowledge-based industries are also advanced manufacturing. Although a lot of manufacturing and manufacturers are hurting mightily right now because of the U.S. dollar and U.S. downturn, some of that will go away; but some of it is the changing economic geography. That is what I focus on when I use the words that you read.
The Chair: Thank you. I appreciate that.
Ms. Lafleur: To confirm what Ms. Dobson has said, we have research in our first report showing how Canada performs on the education side. We tend to think about Canada as having a fairly good education system, and we do tend to put a lot of students through the education system at a relatively low cost. However, we found that we are missing out on two main groups, one being the low literacy.
Let us not forget that the international adult literacy survey that Statistics Canada was involved in showed that 40 per cent of adult Canadians have low literacy. That is grades 1 or 2 on a five-point literacy scale. Forty per cent is not a good statistic. In fact, about 30 per cent of that group are in jobs now. These are not typically what you would think of as unemployed, et cetera. We are missing out with those basic skills. There is a large cohort of people without those basic skills.
On the other end, we are also missing out on the highly skilled and PhD levels in science and engineering. We fall behind most OECD countries on putting out a large percentage of people in science and engineering at the post- graduate level. A two-pronged attack needs to occur.
Ms. Rao: I also point out that, because of the threat to manufacturing jobs from China, as well as low-value-added service jobs, there will be an adjustment process for Canadians. We need to focus on continuing education or lifelong learning. This is another area where Canada falls behind many OECD countries.
Senator Smith: This is another one-off, but I thought I would toss it out. When I was in India two weeks ago, the single subject of an economic nature that I heard more comment on by far is this $2,500 car, the Tata, that they are setting up production for. There are a number of domino effects that might follow, some of them positive, I suppose, in terms of the lower edges of the middle class being more integrated.
Believe it or not, I was riding around in the subway in Calcutta, which is quite impressive. Some people were talking about it in a negative way. In terms of the environment and traffic and pollution and everything like that, I am wondering, have you noticed this? Do you have any thoughts or reaction to the $2,500 car, and will they be shipping them all over the world?
Ms. Dobson: Yes, I do. It is good that you bring up the Nano. In India, the Nano is called the ``one-lakh'' car, because US $2,500 is 100,000 rupees. Tata is the company that has produced the Nano. I have taken students to Reliance Infocom outside of Bombay. What is significant is the model of industrial engineering. Reliance Infocom asked how much a farmer would be willing to pay for a mobile phone call. The answer was the price of a stamp on a postcard, 35 paisa, a third of a rupee. Reliance, working with a Chinese partner, re-engineered their entire value chain to get the cost of a mobile call down to 35 paisa.
Then they asked: What would an Indian farmer be able to pay for a mobile phone? The answer was $20, so they re- engineered the value chain again using Chinese engineering, Indian engineering and Chinese parts to produce a simple phone with a few bells and whistles that would be functional for a farmer. I do not know if you have noticed, but the demand for mobile phones is growing by 50 per cent a month in India.
The Nano follows the same industrial engineering model. What could a middle-class family of four that rides around on a scooter right now afford to pay for a scooter engine with four or five seats and a roof? No air conditioning, but it is a car.
It is very easy to say that this will have a terrible environmental impact and will clog the highways. They have a highway problem anyway. Infrastructure in India is a huge challenge they are trying to address.
The significance of the Nano — my students had seen nothing like this — is that you start out with a price point and then re-engineer your value chain. That is what is revolutionary here. I cannot quite imagine Rogers or Telus doing that for us in Canada. I am not sure how much of a threat it is.
The Chair: How about Bell?
Ms. Dobson: It does create capabilities on which they will build. That is for sure, and that is what we should be looking at.
The Chair: Innovation.
Senator Smith: I will always remember several years ago being in a remote part of Andhra Pradesh way out in the countryside. I was sitting there, and along came a man driving an ox cart very slowly. He was an old man and I thought, boy, some things never change. Then as he got closer I noticed that he was talking on his cell phone the whole time.
Ms. Dobson: Fishing off the west coast of India has been revolutionized because of the cell phone. When they have their catch, the fishers can phone port and figure out which of the ports is offering the best price, and that is where they go.
The Chair: Innovation.
Ms. Dobson: The same kind of thing is beginning to happen in agriculture.
The Chair: Good for them. I wanted to ask a question more practically about the trade commissioners we have in these countries, first about the presence and second, the quality. What is your opinion of our assistance to business from the trade commissioners and ambassadors? Do we have enough; are they good enough?
Ms. Lafleur: I do not think we have studied that.
Ms. Rao: We have not actually looked into that. It would be a matter of educating businesses and making them more aware of the opportunities available in these countries. I do not know if they are coming back and the information is being disseminated. That might be the issue.
Ms. Dobson: I have extensive experience with the ambassadors and trade commissioners and their staffs in both capitals, and they are first class. They are enormously helpful. Because of attitudes towards Ottawa, many businesses across the country never think of going to the embassy or high commission to help them find partners. However, I have had firsthand experience, particularly in India but also in China. The ambassador and trade commissioners down, the trade commissioners in Shanghai, Guangzhou and Bombay are absolutely outstanding and slightly under-resourced.
The Chair: Do we have enough offices in these two countries?
Ms. Dobson: I cannot comment on that. In China, we have offices in Guangzhou, Shanghai and Beijing; I assume we have someone in Chongqing, but I am not sure that we do inland. You would have to ask them. I do not know.
Senator Johnson: I have not been to China, but I was particularly taken by a film about Edward Burtynsky's work called Manufactured Landscapes. I do not know if any of you have seen this. He was very interested in knowing where all the computers go to die.
We are dealing with a country with an incredible history dating back 5,000 years. You have referred to it today in our discussions and how we must tread carefully to build relationships and so on. Yet, I saw that movie and watched people at waste sites tearing and prying apart discarded computers that came from all over the world looking for toxic parts. Given the lack of education and training that most people in China have and the incredible scenes in the film about mass production — these scenes are so massive. One of his pictures is historic. I think it will be in Canadian galleries and in galleries around the world forever.
My comment is that everything we are talking about has to do with the emerging economy, yet the average people are workers, and they are taking apart for parts computers that are dumped by our consumer society. While China is trying on openness for size and letting people do artistic and film work, they are still very nervous about it. They are careful about who they let in. I have many friends doing work in China on the arts side of things, and of course now the Olympics are coming.
As you say, they have a decreasing population, but that is not a big factor at this point. I am concerned about what I have seen, what I have learned from friends and what I have heard in discussions here. Where is their future if they are having to take apart the waste from our consumer society? Could someone comment on that?
The Chair: Did you want anyone in particular to comment?
Senator Johnson: I would love Professor Dobson to comment. I am sure she has seen the film I am speaking about.
Ms. Dobson: I am a great admirer of Mr. Burtynsky's work, not least in The Globe and Mail on the weekend where he went with them to the Alberta oil sands. You might ask similar questions about the oil sands.
When it comes to what he has photographed in China, I cannot remember whether the ribs of the ship photo, which is also very famous, were in Bangladesh, Pakistan or China.
Senator Johnson: That was in Bangladesh. That was very profound as well.
Ms. Dobson: Yes, that is a famous and haunting shot.
With respect to the first question, as an economist, tell me what the alternative is. Maybe I did not say this in my remarks, but the key objective of the Communist Party of China, other than to stay in power, is to create enough jobs. By my calculation, the potential number of 15- to 24-year-olds who are potentially entering the labour force in China is 20 million a year. In India, it is 25 million people a year. Those numbers are in relation to people potentially reaching the ages of 15 to 24, and if they do not go to school, they would have to find a job.
Burtynsky captures the vastness and scale of some of these activities in China, but he has not captured the scale of the population and the nature of the challenge. He did not set out to capture the challenge of employing people. I am sure all of us would like to see those activities cleaned up.
By the way, someone else photographed a similar kind of activity in Bangalore. That photograph was part of an article describing how kids are being taken off the streets where their only alternative was to have their parents maim them so they could beg. They had a full-time job. It is true that they should be in school, but the education system is not quite up to that yet.
Therefore, the question is what is the alternative. These kids do not have the education, and often they have very low income with limited prospects.
The other issue is institutions. Because it was occupied by the British for nearly 200 years, India has many institutions that we know and, to some extent, trust. Coming back to the safety issue in China, there was an uproar over food safety and lead paint in children's toys that occupied the press in the fall. One problem is that it is a vast country with institutions that are still getting off the ground. They executed the head of the drug safety agency because he was permitting pharmaceuticals that had no value or had negative value for their users. He was corrupt. We do not deal with things that way, and they probably will not either in 100 years. However, as I said in my prepared remarks, it is a matter of institutions being developed, which cannot be done overnight.
Ms. Lafleur: We do not have anything more to add. We have always made the point that the way you make changes to those kinds of systems is through dialogue, integration and helping them, like CIDA is doing with the judicial system over there. We agree with Professor Dobson that it will take time and it will not happen overnight. However, the process has started, and changes have been made.
Senator Johnson: The federal government has instituted a $60-million global commerce strategy. Is this of any value? Is money being spent in the right area?
Ms. Dobson: I am sorry, but I do not know the details of that strategy.
Ms. Lafleur: I do not know, either.
Senator Johnson: Not many people seem to know. I thought it referred to not making agreements with smaller economies.
The Chair: Our witnesses are not familiar with that issue.
Senator De Bané: There are several obstacles to Canadian companies' doing business abroad. One is that many of our large corporations are foreign-owned and they do not have the mandate to export to the three countries we are studying. It bothered me when a Canadian-owned company from Quebec went to Russia and said they preferred to lose their investment as there was no way they could do business sensibly there. PCL, a world-class company from Western Canada, won a competition in Shanghai and later said that they preferred to lose the investment they made in preparing their bid than to work under the conditions imposed. World-class Canadian financial institutions are still knocking on the door for the right to do business in those countries, and they are not allowed to.
Why do we not also talk about those impediments, which are real? Manulife Financial and Sun Life Financial have finally, after so many years, been allowed to do business in two provinces in China, but that is all. We can talk about how many other Asian countries have practised blatant protectionism, as Japan did for many years, and South Korea as well. Very gradually they allowed us to enter.
Until recently in India, by law the majority equity of a company had to be owned by Indian people. That could not fit for many of our companies that have to give the majority equity to local interests.
Why do we not allude to those impediments and obstacles in order to explain in part why we have difficulty entering those markets? Do you not agree that at the end of the day, for many reasons that from where they sit may be legitimate, they are very protectionist, which makes it difficult for our entrepreneurs?
Ms. Dobson: Those are very good questions. On the foreign ownership of our large Canadian firms and what that means for Canadian penetration of international markets, I have always asked Statistics Canada, when I have had the opportunity, whether we could gather better statistics on how what is produced in Canada is exported abroad through the United States and into global value chains. That has never been systematically measured, although much of it goes on. I have been on the boards of Canadian subsidiaries of foreign multinationals. The customers, primarily American, end up being customers in Singapore and parts of Asia, but it does not show up in Canadian statistics at all.
With respect to Canadian firms running into protectionism in these countries, PCL in Shanghai being one example, there have been many problems in the construction industry, partly because the Chinese are very good at it and partly because, like in other industries, they have a fairly well-developed methodology of imitating and perhaps appropriating intellectual property. Either you withdraw or you accept this as the cost of doing business in that country.
I am not sure what the circumstances were for PCL, but it could have been imitation or regulation, or they might have had the wrong joint venture partner. I do not know.
On your comments about financial institutions, in both countries the financial services industry is signed up for WTO standards. As you may know, China acceded to the World Trade Organization in 2001 and it used that negotiation to pre-commit to the opening up, over time, of the domestic financial industry. As I understand it, Manulife is profitable in China, and they are very proud of this.
They do talk about how much time they have to spend liaising with the regulators, but I would posit that that is partly a way for the regulators to learn from the foreigners. This often happens in developing countries. I thought that Manulife had penetrated the Chinese market more deeply than that.
The Bank of Montreal has a successful and profitable operation in China. I think that the Royal Bank has gone back. They have a representative office there now. They have to get regulatory approval just as foreign entities in Canada have to get regulatory approval before they expand their domestic businesses.
In India, financial services are more developed. They have a well-functioning, well-governed national stock market and the Bombay Stock Exchange, but it is true that the banks are still government-owned and that insurance is heavily regulated.
This is all because of vested interests that are protectionist and probably a finance minister who is not willing to take them on. When your coalition is 19 parties, you have to pick your fights, as you probably know in Ottawa these days. The date of 2009 has been set for when India will review its financial regulatory regime with a view to opening it further. Again, in India, Sun Life is in a joint venture with Birla, and it is an incredibly successful, innovative and profitable joint venture. The landscape is not quite as bleak as you say, but there are regulatory environments that are rather slow in their liberalization.
Ms. Rao: To add to the point about foreign ownership and integrated trade, it is true that much trade to China does go through the U.S. as well as Hong Kong. We noted in our paper that these statistics are often understated and there is more trade than appears to be the case.
The reason we have not had much trade and investment with India is because they have been very protectionist. However, they have been taking measures. For example, in 2005 they opened up their retail industry to allow foreign single-brand retailers to enter. The government raised the permitted level of foreign ownership in telecommunications. Just last year, 24 special economic zones were created. Therefore, they are becoming more open, and these are the opportunities that Canadian companies can now pursue that were not available in years past.
The Chair: Thank you very kindly. There being no further questions, it is left to me to express our gratitude and thanks to all three of you for being here. You have certainly shed some light on the issue and helped advance our understanding.
The committee continued in camera.
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OTTAWA, Tuesday, February 5, 2008
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 5:36 p.m. to examine such issues as may arise from time to time relating to foreign relations generally.
Senator Consiglio Di Nino (Chair) in the chair.
[English]
The Chair: Honourable senators, I see a quorum. I call this meeting to order. First, thank you all for coming. I welcome you to a meeting of the Standing Senate Committee on Foreign Affairs and International Trade.
The committee is currently examining the emerging economic influence of China, India and Russia and Canada's policy response. Appearing before the committee today on behalf of the Asia Pacific Foundation of Canada is Mr. Paul Evans, Co-Chief Executive Officer and Chairman of the Executive Committee. That makes you important, I guess, sir. We also have Professor Bernard M. Wolf, from York University, who is appearing on his own behalf. He is with the Department of Economics and is the Director of International MBA Programs at the university.
Each will speak for approximately 10 minutes, and we will then move to questions from senators on the committee.
Paul Evans, Co-Chief Executive Officer and Chairman of the Executive Committee, Asia Pacific Foundation of Canada: Thank you for the opportunity to appear before the committee today.
The Asia Pacific Foundation of Canada was created by an act of Parliament in 1984. We are government-supported but independent and non-partisan research organization that serves as a national resource for Canadians in understanding and connecting across the Pacific.
This committee has already heard from several witnesses about the economic dynamism of the countries we are looking at today and the global value chain that connects North America to production platforms across the Pacific. You heard several interesting ideas on what our government and citizens should be doing.
It is easy to present statistics that underscore the significance of the topic that you are addressing. When our foundation was created in 1984, about 1 per cent of Canada's trade was with China. Now it is more than 6 per cent. In 1984, China was not a top-10 trading partner of Canada or the United States. Now it is the second largest trading partner of both countries and the largest trading partner of Japan, Korea and Taiwan. In 1984, China attracted $6 billion in foreign direct investment. In 2007, it attracted more than $74 billion.
Something big is happening. Many Canadians are aware of it, and I will give some evidence of that from our opinion polling. I would like to focus on three issues that confront Canada in dealing with a globally active Asia, and that relates to our China policy, our India policy and the way we are approaching international institutions.
I am not sure how, in your deliberations, you will try to capture the power shift that is under way as Asia's new productive capacity develops. The economies of China and India are not just entering the world economy, they are changing the world economy. In some ways, China is now the shop floor of the world, and India is quickly becoming the laboratory of the world. Whatever the details are of what our trade policy should be and how we measure how we are doing in dynamic Asia, it is the big picture that matters. This is not a matter of adjusting trade balances with countries on the other side of the Pacific, because Asia is no longer out there: it is here.
The polling that we are doing with Canadians finds that generally people get it. They greatly overestimate in our polls how much trade we do with Asia. Two years ago, when I was visiting the Annapolis Valley in the Maritimes, I met an apple farmer selling apples out of the back of his truck. He did not know who I was and I did not know who he was. I asked him how business was, and he said it was not good. I asked him why, and he said, ``Because of China. Do you know China is the world's largest producer of apples?'' I did not know that, and, in fact, I was not sure that it was true, but I said, ``Maybe.'' He asked, ``Do you know that the Chinese supply more than half of the apple concentrate market in the United States?'' Again, I did not know that, and I did not know whether it was true. He asked, ``Do you know that apple pies sold by McCain's are in part produced in China — some of their apples and other materials — and sold as Canadian pies in Canada?'' Again, I did not know that, and I do not know whether it was true, but he thought it was. He knew his economic future as an apple producer in rural Nova Scotia depended upon how he would react to a competitive challenge from China.
I have polling material that I will present to you shortly. Canadians understand that something big is happening and that it is not just about trade across the Pacific but about each time they visit a shopping centre and buy goods that are likely manufactured in some other part of the country; about each time they negotiate a mortgage rate that is in part dependent on Chinese investment in U.S. securities and its effect on U.S. mortgage and interest rates; and about each time they fill up their gas tanks when they realize that prices for our natural resources are rising because of demand. Those are just some examples.
Those of us in the research institutes and government generally are playing catch-up in understanding what is going on in Asia and its implications for us. We are also playing catch-up with some of our own people who understand that something very big is happening to their economy, to their way of life, to the way we produce and sell goods and to the kind of labour we have. Manufacturing, agriculture and the service economy in Canada are all deeply affected.
In response to this situation, we have used the phrase ``global Asia.'' In particular, we are interested in global China. The concept behind global China is a rising and more powerful China but in a global process. China has been able to take advantage of globalization in remarkable ways. The big story is not China's trade figures, although that is a story in itself for foreign direct investment, FDI. Rather, the big story is the Chinese production system that has allowed high technology to be connected to low-wage labour. This is part of the world economy that is changing the global economy.
To see this in historical terms, some have suggested that we look at the rise of Japan in the 1980s. My suggestion is that we are dealing with something much bigger, and the kind of historical analogy we need is to look at another great power — the United States — about 100 years ago when the U.S. became the shop floor of the world with new technology, such as the Ford production system, and found a way to build political and economic power and world influence around that.
I suggestion to this committee that we are in the midst of such a power dynamic shift. We think that the phrase ``global Asia'' captures that something is happening that has worldwide implications, not just in simple relations but in profound economics and politics.
I will focus the substance of my remarks on three areas: China policy, Canada's approach to India and institutions. I am sorry that I will not address Russia today, although my colleague might do so or it could be part of the discussion.
On China policy, a consensus on how to deal with China was put in place about 1970 and lasted under several governments, but we are now at time when we need to be frank that that consensus is in question. Partly, a new government is taking a slightly different approach that some have characterized as cool politics-warm economics. In our studies and national opinion surveys, we find that Canadians too are aware of the big economic picture in dealing with China, but they have a series of concerns. Some of the various concerns relate to human rights and some to product safety. The consensus that we had on how to deal with China is in question. I offer some remarks in my prepared statement, which you will have shortly, about whether cool politics-warm economics is a sustainable or desirable strategy.
The basic case I am making is that this will be a difficult formula for us to use in grasping global China. Essentially, my argument today is that the key issue is not our trade flow. We found that in 2007 our exports to China increased approximately 27 per cent. Much of that can be accounted for by an increase in commodity prices and the value of the Canadian dollar, but by any indication our trade exports to China went up. Imports also jumped 15 per cent. Currently, we are doing about $4 billion per month in trade with China. In my view, that is the wrong kind of measure to know how we are doing vis-à-vis global China. It is a bit like measuring a hockey game on the basis of the number of shots on net, rather than looking at the bigger game of who owns the arena, who owns the team and who is managing the league. Whether we get a few extra shots on net or goals is not the issue. Rather, the issue is how we are engaging in production systems with China and with exchanges on megaprojects.
Over the last two or three years, we have not done well on megaprojects in China. Our strategic working groups with China are not functioning. This goes well beyond economics, but in that dimension, we are not hitting on all cylinders right now. My sense is that before we can keep up with our competitors in Asia, including Australia, the United States and the United Kingdom, we have to bring back on track the high-level political relationship with a difficult country. President Sarkozy, of France, has been in China four times during the last 12 months.
He hammered the Chinese on environmental issues at the same time that he sold $30 billion in deals. Those big picture deals, for the moment, are difficult in a political atmosphere. Most business with China is commercial, but certain kinds of issues depend upon an engaged, sustained full-court press with China to make progress. We will have a chance in a moment to talk a bit about China policy and some steps that we should take to improve it.
Two weeks ago, the University of Alberta held an interesting conference on Canada-China relations. It was a non- partisan event with academics and government officials. Ms. Helena Guergis gave a wonderful speech at the end of the meeting. We had a chance for a real debate on whether cool politics-warm economics works and on what we need to do to get to the next level of dealing with global China.
In India, we are dealing with a very different problem. It is not a political relationship that is running into difficulties, although we still have a nuclear issue to overcome with India in the Nuclear Suppliers Group, NSG. The challenge is getting traction.
Ideology and common values are not proving to be sufficient for us to move ahead on a number of issues. We will need to develop new contacts with India. Our business people know very little about India; it is a whole world, which Professor Wolf will address.
One area for this committee to pay particular attention to is the subject of higher education partnerships. Both India and Canada face serious skill shortages. We need to develop ways to connect more closely our universities, particularly our research institutions and science and technology organizations.
Right now, there are approximately 2,400 Indian students studying in Canada. There are 37,000 in Australia. As an indicator of where our relationship is going and where long-term connections can be developed, that is something we need to focus on.
I will conclude quickly with a remark on international institutions. Whether it is the G8, the Untied Nations Security Council or the Organisation for Economic Co-operation and Development, all of the institutions that we have created since the Second World War face a very important question: what role will China and India play in these organizations in the future?
There is a debate that I would say essentially has two perspectives. The first is that we should bring them into these clubs, bring them into the institutions. Get them in in new ways: think about UN Security Council reform with India on it. In the words of Robert Zoellick, an American with whom many in this committee are familiar, make China and India responsible stakeholders in the international system.
It seems to me that, although that is important, it is the wrong way of formulating the question. China and India will not only maybe become responsible stakeholders: they will become members of the board and will begin being chairs of the board of international institutions.
I would leave you with a question. If you project out 10 years, is it your view that China and India will be constructive members of the institutions we are all familiar with, or will they be creating institutions of their own? If a G8 was recreated today, would Canada be a member of it? I am not sure. Would the United Kingdom be a member of it? I am not sure. We could go through the list.
One of our challenges is that in dealing with India and China, we are dealing with countries with comprehensive power. We will need to work with them very carefully now in designing that architecture, so far as we can have some influence in it. It will be working with Chinese and Indians that will get us into those clubs in future, as much as working with our older friends in the United States and Europe. These are some provocative ideas for us perhaps to discuss over the next hour.
The Chair: I thank you for that, and I agree. There was some provocation there, which is good.
Bernard M. Wolf, Professor, Department of Economics and Director of International MBA Programs, York University, as an individual: I would like to thank the committee for the opportunity to speak today. I will not present many statistics. I agree with almost everything my colleague, Mr. Evans, said. However, I would like to give a bit of a different slant. Mr. Evans is a political scientist and I am an economist, but the two are very much intertwined. I agree that cool politics and warm economics do not go together very well and that, in the long run, they are not tenable.
There is a recent book entitled Dancing with Giants: China, Indi, a and the Global Economy. Russia is likely to join the league eventually. The theme of the book was how to dance with the giants without getting one's toes stepped on. I would like to talk today mostly about Canada's toes.
I too will say almost nothing about Russia; I do not have much expertise there. I will speak mostly about China and a little bit about India. I probably have the most expertise on China.
China also is clearly the country that is furthest along. Its growth trajectory is much steeper, and it started that trajectory much earlier. It has already left a large footprint, and that footprint, in terms of the world economy, is getting larger. In terms of world politics, it is also getting larger.
Clearly, Canadians and Canadian enterprises have to start looking more. I have not convinced even my secretaries about my views on China yet, but everyone seems to have one. The problem is that those people who can do the acting, the small- and medium-sized firms in Canada, do not seem to be looking adequately toward Asia.
The thing about China is not just the enormous growth, which is absolutely amazing — unprecedented, really. It is not yet such that China is a dominant force in terms of its importance in the world economy, but it is administering a huge shock. Part of that shock comes from its integration into the world economy, particularly the intra-Asian integration.
China's leap is based on manufacturing, whereas India's growth is based on services — business services, information technology services — led by companies such as Tata Consultancy Services, Infosystems, Wipro Technologies, et cetera. However, increasingly, India will move into the manufacturing area and also leave a large footprint.
China's comparative advantage is shifting from the labour-intensive textile and simple electronics sectors toward the mid-tech and lower high-tech sectors, including autos, white goods, machinery and more advanced electronics.
Ontario is the auto capital of Canada. Obviously, China's moves in the auto industry are bound to have an enormous effect. Clearly, the Chinese automotive industry will be geared mostly to its own domestic market, which is growing rapidly, but cars are really no different than DVD recorders. They are just a bit more sophisticated, maybe a lot more sophisticated, but the Chinese will deal with that. It just takes time.
We will see a lot of Chinese motor vehicles, just like we saw Japanese ones. We are already seeing a lot of Chinese auto parts. For a long time in the automotive industry, the operations were based on just-in-time delivery. The assembly operation wanted to have the parts produced very close by, so that the distances were short and they did not have to keep inventory. However, when the cost differences become too great, you forgo those advantages of just in time and bear the cost of the distance, because you are getting the goods at a much lower price. I think that is what we will see.
The Indian auto industry is behind the Chinese, but they are moving, too. You have firms like Tata Motors, which just announced is a US$2,500 car, the joint venture with Japan's Suzuki, and also the parts company, Mahindra and Mahindra. There is even speculation that Tata will buy Land Rover from ailing Ford. We are really going to feel it in the auto industry.
I have visited China a number of times, the first in 1990. I had a vision then of a postcard picture of Shanghai. In 2000, that picture was altered. In 2007, it was altered even more. In fact, if you compare the 2000 card and the 2007 card, there is very little resemblance. Pudong, the area on the east side of the river, did not exist in 1990. By 2000 it looked like a mini Manhattan.
I taught in Tianjin in 1990, and at that time there was one lonely department store with two levels. On the landing there was a huge spittoon. That really bothered my daughter, who had not seen pictures of banks in Canada around the 1890s.
I went back to Tianjin in 2007 and I could not get my bearings at all. There were department stores all over the place — Wal-Mart and Carrefour, for example. The whole physical infrastructure had changed enormously. It was a huge sprawl with buildings that had not been there before.
Compare this to Canada. Physical infrastructure in Canada appears very slowly, at a snail's pace, and sometimes not then. For well over a decade we have been talking about getting a subway to York University, and not one little trowel full of dirt has been moved.
Senator Grafstein: Two decades.
Mr. Wolf: The point is that everything moves so slowly here and much faster there. There are all sorts of reasons for that, but I think we need to concentrate on the fact that things move too slowly. The decision making is too slow, the environmental assessments take too long — though they are necessary — and the actual work gets done too slowly. This must change. We are badly in need of improving the infrastructure. Anyone who visits China sees what kind of infrastructure they now have.
In a moment I will give you an example in education. You do not have to listen to many news reports in Toronto to hear about the burst water pipe and the sink hole, and there is no rapid transit to the international airport. You know all this.
The point is that we need to do something about the contrast between China and Canada. It is not just the physical infrastructure, it is also the educational or knowledge infrastructure. Universities in this country were starved for a long time. The situation has gotten a bit better, but if you have starved universities then you do not get the flexible, well-trained labour force that is necessary. You can give all the research and development grants in the world, but if you do not have the people to carry out the R&D, firms will not be interested in doing it here. They may go through the motions, but they will not be able to do very much.
In terms of education, let me give another example in China — and this really threw me for a loop. Last year I visited an island out of Guangzhou but still in the province. What did they do there? They built 10 university campuses for 100,000 students, and they built the labs, dormitories, classrooms, everything. These were second campuses of existing universities. How long did it take them to do that? Two years. That is absolutely amazing. This is what we have to think about. I know the quality of the instruction still lags, but it will catch up.
Also, in terms of education, the number of younger Chinese who could speak English was remarkable. Here, again, we do not seem to be making the efforts in terms of language.
In my program at the Schulich School of Business, the international MBA — if I can give a plug for it — we teach international business, and students must have a second language and do an internship. That is a drop in the bucket. We need to do more, and we need to get people more interested in such opportunities.
We must be more receptive to what is going on elsewhere in the world in order to grasp it and see how we can change our own institutions and adapt them to make this actually a better place. In this global world, the notion that if it was not invented here, we do not want it makes no sense.
Another pet peeve of mine concerns integrating immigrants. We are also too slow to recognize credentials, and so on. That all has an impact on how competitive this economy is.
If you want me to be provocative, I will. I do not think this will go very far. I think that many of the problems in this country lie with the division of responsibilities. We need to do more work there. Sometimes the money is in one place and the needs are in another. This is the whole question of federal, provincial and municipal jurisdictions. We need to sort that out better. We need to move together and not in opposite directions.
In order to make good policy you need good data. Here also we are lacking. Mr. Evans talked several times about global value chains and global supply chains. The world is becoming like that. Economists are increasingly not talking about comparative advantage in a particular good but in a particular activity. We need to know more about these global value chains, but our statistics do not help us much. We need to help Statistics Canada to collect better data so that we can make more informed decisions. Decisions need to be evidence-based; otherwise, they do not really do what they are supposed to do.
As an economist, I think that with the kind of competition China represents, it would be a big mistake to move into any kind of protectionist mode, because that will not work. It just does not work in the long run.
The next item I want to talk about is foreign direct investment, FDI, both inward and outward. If you are talking about global value chains, you are not talking only about trade, but also about investment. When you are talking about investment, you must look at the politics as well. There are clear benefits to inward foreign direct investment to Canada; there are some negatives as well. On balance, however, I think it is good. There are areas where one might want some protection, but even in those areas, some of those rules are pretty old. We should be examining whether those rules are still doing what they are supposed to do or whether we are protecting the wrong things and causing damage. We need to look carefully at them. If we start to say that we are not so sure about Chinese investment because there are too many state-owned enterprises and sovereign funds, we may be dealing ourselves out of a lot of potential investment.
That is not to say we should not have policies to safeguard the country; competition laws, et cetera, are absolutely essential. However, we must be careful about how we do this and careful about the signals that we send. Otherwise, we will be dealing ourselves out of a lot of potential investment. The Chinese are very sensitive and unhappy about the welcome mat not looking all that welcoming. With respect to this welcome mat, I will stray into Mr. Evans' territory in terms of the politics.
If we start objecting to Chinese investment and, at the same time, we criticize some of their other policies, such as human rights, which are certainly questionable, there are ways to do that and ways not to do it. We have clearly chosen the wrong way to do it, as far as I can see and from what my Chinese colleagues tell me.
Let me provide an anecdote. When I was in Tianjin in 1990, the way I got around was like every Chinese person, on my bicycle. Since I could not read Chinese characters, I followed the No. 8 bus from Nankai University into town and made sure that I did not get off the bus route; otherwise I would get lost. Because I could not speak Mandarin, that could cause some problems. I did not want people to have to come and rescue me.
One day I was on my bike and the pedal came off. That was not a problem in 1990 because there were bicycle repair shops on every corner. In other words, guys with boxes and tool kits were on all four corners. I could choose on which of the four corners I wanted to get my bike repaired. I got off my bike, took the pedal, went to the nearest repair shop, showed him the pedal and the bike and he knew what to do. He started working on it.
I could not speak Mandarin and he could not speak English. Yet, somehow, he was able to communicate to me he wanted to know where I came from. He knew, obviously, that I was not Chinese. I told him, ``Canada.'' Immediately he said, ``Norman Bethune, Norman Bethune.'' He repeated that several times, all the while very excited about it. I had not realized the impression it made, but Dr. Norman Bethune went to China and lost his life doing operations under poor conditions.
The point is that there was a bond between this repairman and a Canadian because of Norman Bethune. When it came to paying — and this guy had far less money than I did — he would not accept any money. He just kept saying, ``Canada; Norman Bethune.'' The only thing I could find other than taking my clothes off was to give him a pen that was made in Canada. These days, that pen would probably be made in China, but that is different.
He had learned about Norman Bethune, as every other Chinese of his generation, through the essay that Mao had written.
The point I want to make with this story is that we have to some extent eradicated the goodwill that we had through our present clumsiness or, as Mr. Evans put it, cool politics. We need to warm up the politics if we are to do the business.
The final point that I want to make is that we also need to put some pressure, diplomatically and subtly, on the Chinese to get their exchange rate more in line with what it should be. At the moment it is causing problems in the world, and it is exacerbating the imbalance in savings, which, in turn, has its counterpart in current account imbalances. I will not elaborate on that. I think I have talked long enough, and perhaps I have been provocative enough.
The Chair: I thank you for that.
Senator Johnson: Mr. Evans, I totally agree with you on the need for China and India to become involved in our international institutions, but what about our multilateral ones like the International Monetary Fund and the World Bank? How do you foresee the agenda evolving and the effect this will have on the influence of Western member states?
Mr. Evans: In the context of IMF and World Bank, China in particular is already a big player. Some of you might have heard today that the new chief economist at the World Bank is someone who runs a think tank in Beijing; he is a national of the People's Republic of China. Those institutions have been open and responsive to China and are bringing in expertise.
The big challenge is not just Chinese and, to some extent, Indian participation in those institutions; it is voting rights in those institutions. It is not personnel; it is the agenda that those institutions will pursue.
We already see some examples in Asia of Asians not only having integrated economies but also creating new institutions that do not include the United States. There is now an East Asia Summit that involves China, India and 14 other countries in the region, including Australia and New Zealand. These organizations are now being created to deal with talking, but they are starting to deal with some real issues. They are dealing with financial issues and with the terms of aid in the context of economic crises — that is, how you help a neighbour.
My sense is that we are starting to see parallel universes emerge. We are familiar with existing institutions that China and India are a part of, but those countries are also beginning to create new institutions that are constructed a bit differently. Some of our friends in Asia now talk about a Beijing consensus replacing a Washington consensus behind IMF and World Bank. Remember it was only a decade ago that there was a major economic crisis in Asia. Many Asians feel that the IMF, the World Bank and the American and Canadian governments did not do enough to help Asia in its time of crisis, and we are seeing the creation of some of their own institutions.
The big questions for the next 20 years are these: What can we learn from these new Asian-based institutions, and how can we keep our existing institutions and these new ones moving along the same path? At this stage, it in Canada's interests and in most of Asia's interests not to see the United States excluded from the new architecture of the world.
It sounds extraordinary to say that the global super power is excluded, but we are now seeing institutions emerge that involve big countries and for which the United States is not setting the rules. I think the challenge for the United States and Canada is to design multilateralism with new commitments so that these challengers will be complimentary rather than alternatives to the existing system. This is big. Our friends in the United States, whether on the Republican or on the Democratic side, are taking these new institutional questions very seriously, more so than our parliamentarians and academics here.
We are not suggesting some division of the world into different blocks. We are saying that there is enough dynamism behind some of these that we must watch them carefully and be proactive in dealing with them. I am not sure, senator, whether that gets at the heart of your question.
Senator Johnson: It does.
The Chair: Mr. Wolf, would you like to add something to that?
Mr. Wolf: I certainly agree with Mr. Evans. These countries are becoming so important that the institutions basically have to change to accommodate them. If those institutions do not change to accommodate them, there will be new institutions in their place, and that may not be very desirable.
Senator Johnson: Mr. Evans, what about the concept of engaging the diaspora of countries like China and India as a strategy to promote our trade relationships? Do you think the liberalization of Canada's immigration policy vis-à-vis these countries is warranted as the natural extension of this strategy?
Mr. Evans: Many interesting questions are built into the alteration of our immigration policies. There are many dimensions, but let me suggest two challenges: first, new immigrants coming to Canada; and second, Canadian citizens who live outside of Canada, where instead of immigration at our foundation we are talking about transnational migration. The idea of people moving from one country to another and then staying or going home is not really what human migrations are about now. We are looking at large numbers of citizens in the different stages of their life who see themselves living in different locations.
On transnational migration, the biggest challenge we face with incoming is how to get the mixture right. This is particularly an India challenge. How do we bring in a set of immigrants with the skills to participate in a knowledge economy? This is a major political challenge. One of the motors in U.S.-India relations and why their economic relationship is so dynamic is because Americans of Indian decent have been pushing the relationship and are at the forefront of a number of high technology sectors. The Silicon Valley is populated by Indian immigrants. We face a whole set of issues there.
For this committee has an opportunity to think about the other side of transnational migration. Our foundation has done studies, and we estimate that there are about 2.7 million Canadians who live outside of Canada. As a percentage of population, that number is much bigger than it is for the United States and bigger than it is for India or China. These are Canadian citizens who have regular residence outside of Canada. About half of them are in the United States, but more than a quarter of them are in Asia. How they connect to the Canadian economy is an interesting question. We do not see them as lost Canadians; we see them as Canadians with part of their experience here and who might be here at different stages of their life.
Let me give you an example that has to do with China's Silicon Valley, which is not far from Beijing. We figure there are about 15,000 Canadian citizens, many of whom are of Chinese decent, living there. How are they connecting to Canadian businesses and helping overcome some of the difficulties that Professor Wolf mentioned in information and in culture of doing business? We do not know. We think that the equation is not just coming here; it is going there, because in Hong Kong we have 300,000 Canadian citizens living in one place, the transnational migration story, the connection, and both what we might call the economic assets and the liabilities. How many people at the age of 65 will come back to Canada for health services in particular?
These are big questions and they are social questions, but we think they are also economic questions that fall within the purview of your discussions of how the overseas Canadians will be connected to global Asia, because this is not just about Asia. This is now about the way the world is being organized with mobility.
The Chair: Mr. Wolf do you have a comment?
Mr. Wolf: Yes. I agree with Mr. Evans regarding Canadians abroad. It has always puzzled me that we just have not made adequate use of the Indian-Chinese diaspora that live in Canada and how we could mobilize them to be much more into whatever the global value chain is and manufacturing services. This partly has to do with the way we deal with immigrants, but it goes deeper than that.
There was an article in one of the Toronto newspapers the other day indicating where there were pockets of various groups, for example, Indians or people of Chinese origin. Why have they not made more of an impact in terms of our doing business outside of Canada?
Senator Dawson: You have heard the expression, ``Go west, young man.'' I did that this weekend with the Transport Committee. We went to Prince Rupert. If there is anything obvious about the Western eyes towards Asia, it is Prince Rupert. There has been phenomenal growth, and there is great need for investment. I was quite impressed by where they are but more impressed by where they have to go and how we are not helping them get there, for example with subsidies for building the ports.
Relating to foreign direct investments, since we have to grow that port faster than the government is ready to invest, could we look at people investing in it, that is, sort of a privatization? That being said, the is very nice and we will have millions of containers passing there over the next few years.
As Canadians, we do not want to be looking at those containers going from Asia to Prince Rupert and down to Chicago and just let them pass. How do we get inland ports involved in transformation when the containers are coming in, and what do we do about empty containers leaving for Asia when we should be trying to find ways to fill them up with specialty products, specialty grains and specialty assembled products? Even if we have to send back trash, for all I know, how do we assure ourselves that we look at the containers as an opportunity?
I will put all the questions on the table. There is the question of investment from foreigners. If we will not do it ourselves because the government does not seem to be involved enough — and all governments are the same — should we permit foreign investments?
Regarding import versus export, how much in that gateway issue should we assure ourselves that we are not being used only as a gateway to Chicago and Memphis? Can we seize that movement of containers as an opportunity for our businesses?
There are federal and provincial issues. We held hearings, and probably 70 per cent of the issues raised by people complaining about difficulties in building and sustaining the container ports were provincial issues, for example roads and municipal cooperation on rebuilding the airport. We, as a federal government, should be all over those issues and trying to cooperate, but that federal-provincial mentality does not make things easy.
Our role on international issues and organizations is next. We have been through a cycle of three or four years of minority governments, and perhaps we are looking inwards. We are not talking about or using the same active role we have in the past on international associations. You asked whether we would be in G8. Are we playing a role? Are we being as active and aggressive as we should be? Probably not. If we do not use the positions we have now, why should we think that they will be asking us to cooperate in future positions?
Finally, you talked about dancing with giants. We have had a relationship where we use the expression ``the elephant and the mouse.'' We have succeeded because we have always been careful about our relationship with the United States in focusing what we do. We still have those opportunities. If we know how to concentrate on the issues that you talked about, using overseas Canadians and people from overseas that are here. However, we are not seizing those opportunities at all. We do not have any mechanism for using that opportunity that only Canada has right now.
Mr. Wolf: I will not answer all of those questions, but on the foreign investment issue, yes, we should encourage foreign investment in things like ports. We have it for Highway 407, for example, and I do not see any problem with that. If we are in need of capital, we ought to be using the capital.
In terms of the port's facilitating traffic to Chicago, I do not see anything wrong with that. However, I agree with you that we need to do more to make ourselves competitive to fill those containers going the other way, not just to have whatever it is that the Chinese are sending us as they develop and redevelop their dynamic comparative advantage.
With respect to the U.S. — and I think we ought to concentrate on this as well — is that the U.S. will still be our major trading partner for the foreseeable future. There again we have real problems. If the border between Canada and the U.S. is not easy to cross, that creates huge difficulties. If you are a firm and the border is a problem, where will you invest, in Canada or in the U.S.? You will invest in the U.S., because it is the larger market. Therefore, we also need to be careful about our relations with the U.S. and to move toward making sure that the border does not create an obstacle to moving goods back and forth.
Mr. Evans: Thank you for bringing up the Asia Pacific Gateway as an example of how Canada is changing its connections to Asia — not just measured in trade statistics but in real economic links. We are doing a lot of work at the foundation on gateway because we think this has been a great success of government policies, under both the former Liberal government and the Conservative government.
Whatever else we are talking about today in international institutions and trade flows, gateway is essentially for opening the Canadian economy in a much deeper way to the global supply chains that Professor Wolf mentioned. In that context, the political skill that has been necessary to overcome anxiety about bigger connections with Asia — in particular, China — has been adroit and one of the areas of bipartisan or non-partisan consensus. This is a success story, but it is just at the beginning.
On the investment question, my sense is that investment in our gateway is not the problem. I think government is close to putting the regulatory framework in place where this should be done by the private sector. This claim that we need more government money in gateway is misleading. What we need in this era is to open on a much larger scale.
We can call the St. Lawrence Seaway a gateway for our generation, and there was roughly $50 billion in expenditure on that project. We are spending something like $3 or $4 billion now. Our guess at Asia Pacific Foundation is that to make Prince Rupert, Vancouver and Halifax gateways, we will need $50 billion in investment over a decade. However, that investment does not need to come from government.
What is behind your question, if I interpret it correctly, is whether we should be looking at Chinese investment in our gateway. I think we have to look at it carefully, but my sense is that we should open it to them. Already there are discussions about major Chinese investments through some things they would like to do, particularly in the northern corridor that you mentioned from Prince Rupert. We have regulatory issues to get over and we have to demonstrate a political climate that this will help.
Think about China as a source of capital, not a destination for capital. We do an investment survey every year with 200 to 300 Chinese firms, and we ask them what they are thinking about in Canada. We are in the midst of doing this year's survey. They are interested in investing in our auto sector, not just to export cars but to put part of that investment in production technologies.
It seems to me as we look at gateway and Chinese investment, this is a big gain. It is not just about the oil sands; it is not just about energy. In fact, that is not the top Chinese interest in Canada. It is other things, and our transportation system is a part.
Another part is your interesting point about the back-haul problem — a lot of empty containers going back across the Pacific. In your desire to see the gateway not as an end but as a means for transforming the Canadian economy, filling the back haul is important.
It is exciting to be with the people in Prince Rupert, because they are on the edge of moving from being a resource- extraction economy, where commodities were exported across the Pacific, to being part of a global supply chain. You do not think about wood chips in the same way. Wood chips will now be sent to China for another kind of processing that might be sent to Canada again. This is a more complex game.
My thinking is that you have half of a story in the back haul. At the foundation, we think that the big picture is not the transportation of the goods or the filling of those containers, it is the logistics systems around those. The big picture will be the research and engineering and design. That is where the money is.
In a recent visit to ports in Hong Kong — which are very sophisticated, big scale ports — I asked some of the shipping companies and port authorities where they make money. It is a fascinating question. They said that they do not make money loading up containers; it is such a cutthroat, competitive business with such low margins. They said that they make more money on the packaging technology, and they use firms just across the border to put those packages together. There is more money in the labels on the crates than in what the container is. There is more money in designing the software that will be part of the security systems.
For us, a gateway is not just about the movement of goods; it is about changing how we think about transportation and how it brings value to Canadians. To be the 21st century equivalent of the hewer of wood and the drawer of water — the simple mover of containers — is a mistake. It is the challenge for a knowledge economy; and it is the challenge not just for Vancouver and Toronto. It is a challenge for Prince Rupert and Prince George, down the line through Edmonton and along the way. The transport infrastructure is just a means. Gateways are important not for what passes through them, but what happens within them.
For us, the gateway is just the beginning. Partnering with the Chinese on this — and the Japanese and others on the other side of the supply chain — is Canada's economic destiny. That is why I used the analogy of the St. Lawrence Seaway. It was not simply about allowing some ships to move in different directions: it was reorienting our industry and our mindset to connect into international intercourse in a new way. Thank you for your question; I think it is truly fundamental.
Mr. Wolf: We have to keep in mind that the Chinese now have very deep pockets. In terms of reserves, they are sitting on roughly US$1.4 trillion or US$1.5 trillion or its equivalent. They do not want to accumulate more reserves. Reserves have low yields.
They are now really into buying assets. If we do not make ourselves attractive, we will miss out on those assets. If they do not do the investment, then they also may decide that Prince Rupert is not the port; there are ports further south or wherever.
Senator Smith: I am quite sympathetic with the comments of our witnesses. I have one off-the-wall question, but I cannot resist a 60-seconder with regard to your comment on Norman Bethune.
I went to China for the first time 33 years ago. Mao was still alive, and it was the twilight of the Cultural Revolution. The first night there was a banquet. When I was asked to comment, I casually mentioned that when I was born my father hired a nurse to look after me. She was with us several years, and her name was Grace Bethune. She was Norman's first cousin. It is impossible to describe how I got the royal treatment for the next week, even flown to Beijing. It was unbelievable. Every child in China by the age of seven knew the whole story of Norman Bethune.
It is inevitable that China will move into more of a position of global leadership, and it should. However, while India inherited a parliamentary system from the British, just like we did — it is not perfect, but it is a reasonably well- functioning democracy — there is none of that in China at all, none of that tradition.
North Korea is probably the most bizarre, crazy state in the world. It has been a communist monarchy for the last six decades, a dictatorship. The percentage of money that goes to the military is unconscionable. A couple of million people have literally starved to death while the great leader has six palaces, foie gras and champagne. It is unbelievable.
In the 1980s I used to go to Korea on business a fair bit. I went to Panmunjom a few times. There was a platform from which you could look over into a perfect little village. The peasants would walk through the village scattering flowers and singing songs to the great leader. They were actors bused in every day. Finally when Kim Il Sung died, they stopped doing that.
China has all the leverage imaginable to influence and move North Korea. Sometimes I wonder if it is almost like having a pit bull on a leash that barks and scares the hell out of the Japanese and the Americans every now and then with the missiles.
As China moves into a global leadership role, do you think they will ever do anything to get some type of a civilized society functioning in North Korea so that people have rights? Will China have any positive influence on North Korea or keep them on the leash? What are your thoughts on that?
Mr. Evans: I have had a chance to visit North Korea on five occasions and have organized 29 meetings with North Koreans, half of which Chinese attended. Some of you might know that before the six-party talks that are dealing with the nuclear question, it was Canada — when Joe Clark was foreign minister — that began the first set of multilateral discussions in the North Pacific that involved the North Koreans, the South Koreans, the Chinese, the Americans, the Russians, the Canadians and the Mongolians.
You have asked an unusual question, because many Canadians are asking how to encourage human rights, democracy and good governance in China. You have raised the stakes and asked when will we expect the Chinese to move the North Koreans in some of those directions. That is a pretty big expectation of China.
My sense, senator, is that China is being very helpful in dealing with North Korea in two particular areas. One is the nuclear problem. China has played an indispensable role in trying to find a peaceful solution to North Korea's nuclear problem. It is not moving as quickly as some of us would hope, but their support for a multilateral institution — and in this case working with the United States — has been exemplary.
I think if President Bush or Ms. Rice were with us today they would make the same claim. It is one of the good things the Chinese are doing. Should we expect more from them on North Korea? I think it is a very delicate relationship. They live next door to each other, the little brother and the big brother. North Koreans have remarkable pride. They sometimes feel about China as at least some Canadians feel about the United States pushing us in some directions.
I do not expect China to move North Korea towards democracy, human rights and rule of law in the near future. What we need of China is to get the Chinese to defang North Korea's missile program, and particularly its nuclear program. Then we can open it up. Curiously, when I ask my Chinese friends what the long-term solution is to this crazy regime that lives next door to them, their answer is ``economy.'' Handle the nuclear problem enough so that you can get economic interaction with North Korea. It is what changes us. Maybe not as fast or far as some Canadians want, but the river that will break down that great wall that divides North Korea from the world will not be blown up. It is best to let an economy erode its foundations and open North Korea to the world. When we get Chinese saying that that is the solution, some things are moving in the right direction.
Mr. Wolf: Clearly it is also the economy that is helping to erode some of the things we do not like about what happens in China in terms of human rights.
Senator Grafstein: Thank you, witnesses. I have found it fascinating. I think we have all spent time in China. Senator Smith was involved.
I travelled about 450,000 kilometres in China myself, and I discovered wherever I went that if I could speak English, someone could lead me from place to place. You are right: Bethune — in Urumqi and the far north or down in Guangzhou — is a big hero. You just have to say, ``Canadian,'' and we had this great relationship and still do. As Senator Smith said, that history is taught in the schools. From the bottom up they think of Canada as an old friend of China's. In every corner of China it is part of their educational system.
Our history in China goes way back before Bethune. We go back before the turn of the century. I once did an analysis of Canada's foreign policy, and our foreign policy was based on our Christian social gospel policy through our missionaries. Our first foreign affairs department was made up of missionary sons and grandsons; Mr. Pearson, Mr. Skelton. It all happened not too far away in the East Block, and it was all based on the China experience.
Toronto was the core of the China experience. It was the Scarborough fathers, and it was also the Anglican movement and the United Church. There is a deep history that is well-known in China. The first Western-style university was formed by Canadians. Mr. Henry Luce was taught at a Canadian missionary school. The head of the Sichuan Communist Party was taught Chinese by a Canadian missionary. There are huge connections there. To my mind we have not — as you pointed out — refurbished them and brought them up to date. They are there and are taught in the schools. When I invited a delegation from Chongqing to come to Toronto, I gave them postcards of Bethune's house. This was like the biggest thing they ever had. They framed it and put it in their office.
We have not properly examined our own history with China — which is very positive — and built on that relationship. At one time we did. We did it in 1957 with Mr. Diefenbaker.
Let me get to the process. I wanted to make that point. It is there to be dug out.
I want to talk about processes and strategic partnerships. I agree with you that the key to developing engagement with China is twinning partnerships. A number of Canadian cities have twinned with cities in China. Toronto twinned Chongqing, and then we lost money and so on. However, we had a huge relationship for about 15 years where we travelled regularly to China to twin with that tiny little city — the old Chungking — of 35 million people. We let that die, but we try to twin our universities; York University and the University of Toronto was involved. There was a whole twinning exercise that has gone fallow here. It is time for your efforts to fire it up because it means twinning universities, cities and consuls and entering into business relationships with Chinese communities participating in all these twinnings.
I want to ask one strategic gateway question. We lost a big step when Seattle rather than Vancouver took over the whole huge container issue. There was a great opportunity for traffic to be diverted to Vancouver and Prince Rupert, but Seattle got the grab on that. We missed out. Now we are playing catch-up ball.
There is another strategic economic opportunity, and that is the channelling of the Bering Strait. If I were to talk about how we could engage the Chinese, the Russians, the Americans and the Canadians in an unbelievably easy thing to do, instead of worrying about containerism, we would worry about railways. That would entail thinking about getting on a railway in London, England, travelling across China and Russia, ending up at Vladivostok, channelling through the Bering Strait — which is narrower and shallower than the English Channel — ending up in Alaska and coming down through the territories into British Columbia.
Mr. Evans, has there been any discussion with your group about this? I have spoken to the Government of Alaska, and they are prepared to move. If we did this with the Chinese, they would put up the money and the labour and we would be huge beneficiaries.
Mr. Evans: That is the biggest question I have ever been asked about gateway.
Senator Grafstein: Think big.
Mr. Evans: That was a dream a hundred years ago of several Canadians, and it has run into a couple of world wars and some geostrategic problems. I cannot give you an answer on how feasible it is. We are certainly hearing conversations now involving Churchill and a new kind of gateway that would develop as ice melts.
Senator Grafstein: Churchill to Chicago.
Mr. Evans: I think your imagination is running in the right direction. This is the time to think big. I do not know the feasibility. We cannot comment on the land bridge and the channel tunnel that would move across. It is not unimaginable. It will be there one day.
In the short term, I am less worried than you might be about Prince Rupert and its capacity to attract container vessels. COSCO, which is the Chinese overseas shipping company, has diverted from Seattle a once-per-week route to Prince Rupert. That is why it is going into Prince Rupert.
Senator Grafstein: When did that happen?
Mr. Evans: About six weeks ago. October 31 was precisely the first day it arrived. My sense is that the port capacity crunch is so large that while Seattle is competing with Vancouver and Vancouver with Prince Rupert all the way down the West Coast, if we doubled our capacity in the next five years at all of those ports, we could not meet projected demands.
Competition is a short-term issue. The bigger picture is how to find the investments, how to find the regulatory framework and how to find the political will that will have Canadians and Americans seeing their economy change through much bigger imports and exports from Asia.
Some of the analysts are telling us now that the biggest restriction on the growth of U.S.-China trade and Canada- China trade is port capacity. It is almost forming a kind of non-tariff barrier to reduce how quickly goods move and how many we can move. It is protectionism by another name.
Senator Grafstein: Hence the railways.
Mr. Evans: Maybe Professor Wolf can get into an analysis of the Canadian railroads. It is wonderful to see these big thoughts and to dream them with the Chinese. Let us see what happens.
Senator Grafstein: I have discussed it with the Chinese. They are very excited.
Mr. Wolf: I very much agree that we need partnerships with the Chinese and the Indians on all levels. At the Schulich Business School at York University, for example, we have made an arrangement with Peking University, which probably has the best business school in China. Students complete the first year of an MBA in Beijing and do the second year at Schulich. Again, though, it is only a small step. We need to do a lot more and we need to be willing to explore.
There is another thing that creates great problems for universities and business schools like us. When we have foreign students at the graduate level, we get nothing from the provincial government. That, of course, deters us from being able to attract students from abroad. Students from abroad make those very valuable connections once they graduate, and we are losing out on that. It is very myopic, in fact, on the part of provincial governments not to provide us with any funds for foreign students.
Senator Downe: Mr. Wolf, I do not share your enthusiasm for the speed of development and environmental assessments in China. I think it leads to a lot of mistakes, and I think that is reflected in their environment, which in many parts of their country is in terrible shape. The citizens are bearing that price.
Do you make a distinction between Chinese investment as opposed to investment from other countries that would have a free market system where the corporations are interested in generating a profit for the shareholders as opposed to state-owned firms that may indeed be owned by the military and that would have a different objective when they invest in Canada?
Mr. Wolf: First, I agree with you that many mistakes have been made in terms of infrastructure. It is also true that the Chinese are getting much better at it. They are, in fact, starting to consider their environment much more than they have in the past. You have to think about where they started from.
Also, they obviously have a different political system that allows them to do things much faster. My point really is that while maybe they are too fast in terms of not thinking things through fully, we are much too slow. There is a happy medium.
With respect to your main question, yes, there clearly are distinctions between motives that firms may have. However, more and more Chinese firms, even though a golden share may be held by the Chinese government — by the way, when we talk about the Chinese government, it is not necessarily the Beijing government. It may be the provincial government or the municipal government, or it could be the military; it varies. It is possible to look at this on a case-by- case issue.
I do not think you want to throw the baby out with the bathwater and say that we do not want to play. I think we would be missing out on a lot. It is the same thing with sovereign funds coming from the Middle East. Clearly, U.S. banks are having a lot of trouble; they need recapitalization and this was a good source of funds. We have to do this in a delicate way. We need a paring knife and not a meat cleaver here.
Mr. Evans: We have recently submitted to Mr. Wilson's committee an analysis and set of recommendations around Chinese foreign investment in Canada, particularly the sovereign well funds. My colleagues on the economic side have done some careful thinking.
My sense is that it is a question of real importance to public policy in Canada. Signals will be sent. It is important that they not be discriminatory against a particular country. My sense is that there might be one or two particular areas, the nuclear field and one or two others, where national security concerns will come into a calculation regarding many countries and not just Chinese investment.
The key for us on the Canadian side will be calculating the governance practices that we feel are necessary for any foreign investors in Canada. This is whether they are state-owned or others, how they will operate in the Canadian market, by what disclosure rules, a whole set of technical issues that must be looked at. The guidelines Mr. Wilson and his group recommend will be crucial.
At the same time that we are working on those guidelines, it is crucial that in this stage of a delicate political relationship we handle communication on this carefully. I have been meeting with David Emerson and others regarding how we will communicate with the Chinese about this.
Even more than existed two, three or four years ago, right now there is a belief in some quarters in China that we are uninterested in Chinese investment. That perception is unrealistic. Canadians are generally very open on this issue. However, we must handle the management of it carefully in our discussion with the media and others: this is not exclusively a China issue; it is our looking at a whole range of countries that are interested in investment in our country. In our deliberations here, there is more than the normal political element of sensitivity.
Senator Downe: I assume the Chinese have a list of restrictions about what foreign investment cannot be involved with in their country. Would they expect to have different treatment in Canada? In other words, would they expect to be able to invest in things that Canadians would not be able to invest in within their country?
Mr. Evans: I am sorry that I cannot give you a detailed answer to that, but I think the issue of reciprocity is crucial, and not only for investment but in several other areas as well. While we are welcome, we do not have a free trade agreement with China or a full foreign investment protection agreement with the Chinese. We need several things in a better architecture with China to minimize some of those possibilities and also to bring China along on some of these matters. This is hypothetical because we are finding the level of Canadian investment in China very low. It is tiny compared to the Americans and many other countries, but we have an interest in opening China and showing the way some things can be done in cooperation with them.
I do not mean to skirt around your question, but I do not know the technicalities of it. You are correct. This must be put into the context of sophisticated discussions with them that send the right signals and are handled very carefully.
Senator Stollery: I know it is getting late and I do not want to hold things up. However, whenever Norman Bethune comes up, I am taken back to World War II, when I was a student in Toronto at public school. We were taught that Norman Bethune was one of Canada's great contributions to the war effort, with nothing to do with China, because he invented the mobile blood bank. Anyone who went to Grade 3 or Grade 4 in Toronto in 1943 or 1944 learned all about Norman Bethune, but not about the fact that he died in China.
My question concerns an interesting point raised by our witnesses about transmigration — the fact that people move around a lot now since the jet airplane and so on. I was the member of Parliament for Spadina, which is Toronto's Chinatown, during much of the period when we established our relationship with China, and I have many friends who live in Hong Kong.
The idea is around that people came to Canada to get a Canadian passport and then left, but that has not been my experience. When I was in Hong Kong with Senator Di Nino a couple of years ago at the Doha, at the Hong Kong WTO Ministerial Conference, I ran into friends of mine who had been in Canada for years with successful careers in Canada. They were living in Hong Kong. My impression was that they liked is the action. They were not living there because they need the money, particularly. I do not know how many hundred thousand Canadians you said are in Hong Kong, but there are a significant number of them. There is huge amount of moving back and forth. Their children are going to school in Toronto; they are living in Hong Kong or in China, as you said, in the equivalent of Silicon Valley.
I think these are extraordinarily important elements of a potential policy, which is maybe too large a word. It seems that we have not been taking advantage of this to a serious degree, because we have huge numbers of Canadians of Chinese descent. Not only that, but in many cases they are the children of people who came to Canada looking for action. That has always been my impression when I talk to them. They just like the pizzazz.
There is another aspect to my question. We are not studying only China, but that is how this conversation has gone, and I think it has been a useful one. I have had some experience with Chinese friends. The Chinese have differences of opinion just like we have, like anyone has. However, I have noticed that in the Chinese provinces there is an importance of families. I happen to know of instances where a family, with all that involves, extended family, has enormous political importance in Chinese provinces. I will not go into which ones, but a close friend of mine is very important. I was surprised when I was in Europe and a delegation from China was visiting that my friend had to go off because they all know each other and there is a certain family part of this. Would you like to comment on that? Perhaps there are two questions there. I hope they are brief.
Mr. Evans: I will touch on Norman Bethune. I wrote a book on Canada-China relations and the use of Norman Bethune as a symbol in different stages of our relationship, what he meant at the time he was there, what he meant in the early days when we were trying to build a political relationship with China around the recognition period, and how over time we looked at him as different kinds of persons and symbols.
For the committee's consideration, if I were putting forward a Canadian whom we should pay attention to, it would be a living Canadian named Dashan, the young Mark Roswell, a fantastic linguist who can deal in both Chinese and English. Do you remember Abbott and Costello's skit ``Who's on First?'' Dashan does that in Chinese for a Chinese audience and entertains and educates them in an extraordinary way. He is the new cross-cultural communicator for our era and by far the best-known Canadian in China now, with the exception of Norman Bethune.
On your more substantial question — the matter of how families operate — my sense is that the pressures on the social structure within China are so enormous that many things are changing. Imagine an industrial revolution that in England took 150 years, and in the United States took 75 years. In China, it is happening in the course of 25 years. The stresses and strains on the society have produced an encyclopaedia of evils and problems. We see them in the news every day with bad products, with 300 million Chinese that are moving around inside their own country — a population larger than the United States floating around the country. Any kind of social problem that one can look at is there.
The stresses and strains on families are enormous. Their capacity to keep family structure together at a holiday season like this one is extraordinary. So, too, is their capacity to connect in different parts of the world. In this overseas Chinese family, the transnational Chinese family, there are tens of millions of Chinese living in this way. How they maintain family virtues and values at the same time that they deal with cutthroat capitalism and the extraordinary pressures of globalization is a great human story. Perhaps the Charles Dickens of our century will be writing about what is happening in China as the best and worst of times, talking about the stresses it puts on how people live. We have something to learn from that, I think.
Mr. Wolf: That suggests that we need to be sensitive to what is going on there and to be able to take into account the cultural values. We often do not do this in our business dealings, and that is often why we fail in them.
The Chair: I know that we have gone a little over time but I want to put one question on the record. I will make it brief, and hopefully you will be able to give us some wisdom.
The issues of human rights, labour laws, environmental degradation, social responsibility, health care and so on that we must consider when we look at the relationship with other countries are issues that we often do not talk about when we talk about the relationship between China and Canada — or also, to some degree, other countries such as India. Would either of you like to share your thoughts on that?
Mr. Evans: I think you have raised a fundamental question. With respect to returning to a relationship with China that emphasized the big, the amazing, the remarkable — all of which applies to many of the dynamics in China — I do not think that politically, or in terms of the values of our society, we can divide off an economic agenda with China from a values-based agenda that runs across the human rights — some call it democracy or good governance or rule of law. I think it is a mistake to have two sides to our brain, with one side focusing on the fascinating, huge economic challenges that we have to deal with and the other half looking at China as not doing so well in a variety of areas.
I am a kid of the 1960s and I remember a film called The Good, the Bad and the Ugly. I think that China is all of those things right now. I might add the beautiful.
Senator Grafstein: It was a spaghetti western.
Mr. Evans: I think it is a big policy question in Canada that our parliamentarians and think-tank people are wrestling with — how we can look at China not with one side of the brain or the other, but have a set of glasses that lets us look realistically and constructively at what we are dealing with.
I have a story that might help here. If I am right that what is happening in China now is the equivalent of what happened in Britain in the 1800s and in the United States at the end of the 19th century and into the First World War, these enormous productive and social forces are moving. China faces every kind of social ill we can imagine, from organ transplants through to problems with developing representative organizations, whether we call it democracy or deliberative. There is a full cavalcade of problems, but they are not unique. Other countries, as they have gone through this, have come up with big changes.
In our foundation and others, we are debating the question of whether China is on the edge of a progressive era. In the face of these huge problems that the country is facing, what is the response of people to an environment that is almost unliveable, to working conditions that, in many places, are out of another century?
Sometimes, in our experience in Europe, in the United States and in Canada, out of some of the darkness of quick industrialization came social movements for improvement. My sense — and why this is a political debate — is that many of our scholars perhaps follow my argument so far, but they then make the case that what we need to see is Western-style human rights and democracy promotion in China.
My suggestion for your consideration is that, in essence, we are seeing all kinds of social change in China now. We are starting to see groups and the media being more critical of their government. We are starting to see what in our world earlier we would have called ``muckrakers'' — journalists who expose problems of the government. They cannot expose them openly and in all areas, but there is a more dynamic civil society just beginning to take root.
In the next five to 10 years, if I were making Canadian policy, I would be looking at ways we can work more deeply with Chinese citizens and the government to create social justice in their country, rather than democracy and human rights of a particular sort. There are deep forces within the society, within the party, that are looking for changes. It is not a matter of allowing China to be different — ultimately it will have to embrace institutions that will allow its people to deal with this industrial world. We need to be positive parts of that process.
All of us around this table could put together a list of 10 things about China that we think are difficult, wrong or horrible by our value code. The question is how we help the Chinese to make those changes in their own society. For me, the priority is dealing with social justice and with environment rather than putting democracy as the first target of Canadian policy.
Mr. Wolf: I sense that the Chinese leadership realizes that change is required on many fronts. They are, however, very much afraid of any kind of social unrest — large unemployment or anything that will damage the pillars on which this economy has grown.
We have to be a bit sympathetic to that. At the same time, we must provide subtle pressure and dialogue to help them move in the direction that I think they do want to move. I think they also realize that the extent to which their economy is export-oriented is not really in their own interest. It is in their own interest, in fact, to move somewhat from this export orientation to more domestic consumption. That will provide a better balance in the world and will be much better for the Chinese. I do not necessarily mean bigger television sets, and so on. I mean things like health and education — particularly in the rural areas, where relatively little has happened compared to the big cities. This kind of movement is taking place. I think the government realizes that it is necessary, but they do not want to move too fast.
I know less about the debate on human rights. I do know that we see much more economic debate. That is, people are much freer to talk about where they would like to see the economy go and where the renminbi and the exchange rate should be. We already see more openness. Also, the Chinese must be given a pat on the back for the number of people they have managed to pull out of poverty. They have a long way to go, but they have done a lot.
Senator Johnson: In terms of social justice, because it is so critical, what groups in China could you name right now that we could work with?
Mr. Evans: A map of who is moving would include new associations of lawyers and jurists, some of whom have already been trained or are working with Canadians through programs that our aid agency, CIDA, has put in place; and media who cover particular kinds of stories, especially related to environment, workers' rights and property rights. That is a constituency that is showing some dynamism.
There are agents not only in civil society but also in the government who are very progressive-thinking — and I use that word carefully — people who feel that China must deal with a new set of questions in new ways. I would be delighted to share with you the results of meetings we have been holding on this subject and some of the Chinese we talk with about it to bring them into the picture. I think our chair's question is fundamental. Canadians will no longer be satisfied with a China policy that feels we can do economics and hold other things to the side.
I would suggest that for this committee in particular, which is looking at economic issues, part of the agenda with China now — if we were looking at the real issues where partnerships and some things are needed beyond the questions that Professor Wolf put on the table — should be corporate governance issues as they relate to workers' rights and treatment of workers. We are having to deal with a whole set of questions on corporate social responsibility.
Chinese firms are dealing not only with their own citizens but also with people in many other parts of the world. Global China or Global India means that Chinese investment and business is moving out globally. When Mr. Emerson or our trade minister is dealing with the Chinese it seems to me absolutely natural and essential that he deal with human rights questions during those meetings as well — not in the sense of hectoring or lecturing the Chinese, who face problems just as we do — because that agenda is where corporate social responsibility connects with social change. When we are dealing with China, we need both parts of the brain at the same time to deal with economic issues and human rights issues, and we should not be fearful of raising issues with China in the context of a positive political relationship.
There is an old saying: You hold your friends close to you and tightly, and you hold those ones you are concerned about even more tightly. I think that building a relationship, even in the recognition that this is not a perfect and beautiful partner, is something we have to do.
I would be delighted if we can help the committee with some of the technical issues we are working on and also with some of the social justice issues, where economics connects to society. That is a positive set of issues for Canadians to be debating now. We might not always agree with the Chinese, but we can work with them maybe occasionally with some common purpose.
The Chair: I would add to your comments about influences. Cyberspace is a very important component. I think it has played a huge role.
Senator Grafstein: Regarding the question of democracy in China, have either of you done any work on the transformation of the agricultural communes into a more quasi-democratic nascent model? When I visited them I was surprised that the heads of those communes were elected. They were not appointed from the central or provincial government. If an individual did not get a consensus and election from his or her local constituents, then he or she was not the head of the commune. It appears the people tended to choose the best and most competent guy or woman. I saw in that a form of grassroots, nascent democracy — on a socialist model, obviously.
Have either of you detected that or done any work on it? Someone at York University who was an expert on China and Russia did some studies.
Mr. Evans: Yes, Bernie Frolic. Academics are paying a lot of attention to this. There are a variety of experiments and movements at the local level in China around selection processes of individuals for lower-level positions. This is where democracy becomes complicated: it is not democracy as we know it because it is not multiparty competition; rather, it is around individuals. There are some experiments where some new parties are being allowed, but these are experiments at the grassroots level and should not be confused with the democratization that we have seen in other parts of Asia, in Thailand, the Philippines, Taiwan, or in other parts of the world. It is a different process. It suggests that what is taking place is experimentation in what my political science colleagues call ``deliberative democracy.'' This is how there is participation in a process that might not have elections in the sense that we understand them — democratic competition and a free press that covers them — but is deeper participation.
China is a vast encyclopedia of experiments now. I do not mean to overestimate them. Democracy is not knocking on the door of China. However, there are these experiments, and it demonstrates some of the search for social justice and the desire to have leaders who are not corrupt and leaders who work in the interests of people at the local level. It is part of that uncertain experiment that is going on in the Chinese political system.
Mr. Wolf: It also illustrates the differences that exist around China. You cannot really lump China as one. There are big differences in different areas as to what is happening. It is a very complex kind of society. We need to appreciate that a bit more.
The Chair: Thank you to our two expert witnesses. We have gone half an hour over our limit. Obviously that is an indication of the interest our colleagues have in the comments you have made. We are still in the process of trying to focus on this subject. Mr. Evans, you challenged us, and we will try to encapsulate all of this. You and Mr. Wolf have helped immensely in focusing our thoughts. The comments you have made will be very useful to us as we continue our deliberations and prepare our report.
The committee adjourned.