Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 18 - Evidence, November 4, 2009
OTTAWA, Wednesday, November 4, 2009
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:10 p.m. to study the rise of China, India and Russia in the global economy and the implications for Canadian policy.
Senator Consiglio Di Nino (Chair) in the chair.
[English]
The Chair: I would like to call the meeting to order and welcome everyone to this meeting of the Standing Senate Committee on Foreign Affairs and International Trade, which is continuing its special study on the rise of China, India and Russia in the global economy and the implications for Canadian policy.
Today appearing before us we have people from Foreign Affairs and International Affairs Canada. In particular, we welcome back Ken Sunquist, Assistant Deputy Minister (Asia and Africa) and Chief Trade Commissioner. This is the person we need here. Accompanying him is Ms. Ping Kitnikone, Director, North Asia Commercial Relations; and Eric Walsh, Director, North Asia Relations.
Ken Sunquist, Assistant Deputy Minister (Asia and Africa) and Chief Trade Commissioner, Foreign Affairs and International Trade Canada: I am delighted to be here again as you continue your study on China, India and Russia in the global economy and the implications for Canadian policy.
As you mentioned, Mr. Chair, Ms. Kitnikone and Mr. Walsh are with me today. I hope between the three of us we can handle any issues you raise. If not now, we can always get back to you, since you are disappearing on your trip in the near future.
I will provide a few brief comments, if I might, on a number of issues. Then if you wish to engage further on these or other issues, I would be happy to do so.
As you said, Mr. Chair, I had the good fortune to be here on April 15, 2008. It seems like a lifetime ago in the world's economy, but it was not that long ago. I do not propose to speak to the same priorities as last time, but to provide a few updates as well as comments specifically to your trip later this week.
I would also like to talk about it a little bit it in the context of Prime Minister Harper's trip to China from December 2-6 of this year. I would also add that the visits of Minister Day and Minister Cannon, as well as the recent visit of the Canada-China Legislative Association, CCLA, have done much to enlarge and energize the relationship and move our relations to a more balanced approach. Visits this year by Ministers Lunn, Baird and Flaherty are good indications of this new approach.
In addition, other visits by Canadian ministers responsible for agriculture, natural resources and health, combined with frequent visits over the last couple of years by trade and foreign ministers underline the importance of the relationship. Visits by Canadian premiers and provincial ministers have been particularly helpful in raising the Canadian profile and in opening new areas of cooperation.
We have also had incoming visits by a range of Chinese ministers, including the Ministers of Sport, Labour, Commerce, Foreign Affairs and Justice, as well as the Chair of the National People's Congress, NPC. We have hosted senior officials looking at a range of issues, such as merit-based promotions in the Chinese public sector and those looking at governance of Crown corporations. Bilateral meetings at the highest level have been held on the margins of G8, G20 and APEC summits.
Before leaving this introduction, I would like to highlight the issue of past meetings of this committee. I should mention how helpful the testimony of other witnesses has been. We have reviewed presentations by people such as David Fung, George Haynal, Peter Harder and others. Where we can borrow an idea, we have done so.
Turning to your visit, I am pleased that our staff here in Canada, and particularly in our missions in China, has been helpful in confirming arrangements for you, as well as providing briefing material. I believe the new relationship that you and the CCLCA have established with your parliamentary colleagues in China is an excellent initiative.
The NPC is responsible for your program, but our ambassador and staff will be pleased to meet with you on a range of issues. We have designed several briefings by our officials in China from the political, social and particularly the economic aspects of Canada-China priorities and Chinese policies.
You will be meeting with senior officials of the National People's Congress, the Ministry of Commerce and Chinese business associations. I am anxious to get your impressions, on your return, of the substance of these meetings. In addition, you will be meeting officials of the Ministry of Foreign Affairs, as well as Canadian companies established in China.
Leaving Beijing, you will visit the economic dynamos of Shanghai and Guangzhou. The regional differences will become readily apparent and this is something you will really see in China. The entrepreneurial spirit of municipal politicians in both cities drives economic growth. While your stay in Hong Kong will be brief, I hope that the economic and political climate of the Special Administrative Region, SAR, will be evident in your meetings.
Here is a quick update on a few economic and trade issues. China's growing economy presents a tremendous opportunity to Canadian companies. Given a reduction in demand from our traditional markets, the survival of our businesses depends increasingly on securing a share of other markets, among which China is key.
China has been much less affected by the economic crisis than other G20 countries. Year-over-year growth in the first half of 2009 was 7.1 per cent and the quarterly profile shows acceleration in output from quarter 1 to quarter 2, Q1 and Q2. With growth exceeding expectations, the private sector and international organizations have marked up their forecasts and now foresee full-year GDP growth between 7.5 per cent and 9 per cent.
Other developed nations such as the United States, the EU and Australia have also identified China as a priority, thus becoming tough competitors. Furthermore, through its growing production and technology capabilities and capacities, China is becoming a big competitor for Canada in our traditional markets. We see China as a partner, as a competitor, and as a regional and global strength.
Our China strategy is based on matching Canadian capabilities and expertise to Chinese demand in particular sectors. These sectors include agriculture and agri-food, information and communication technologies; automotive, aerospace and metals; minerals and related services; as well as environmental technology. The strategy also looks at two-way investment and greater market access for Canadians.
Canada maintains high-level engagement with Chinese policy and decision makers through mechanisms such as the Joint Economic and Trade Committee and other joint working groups. Canada continues to promote the Asia-Pacific Gateway and Corridor Initiative, which links our transportation systems directly to trade, directly benefiting provinces through a number of sectors.
Through the Canada-China Agreement for Scientific and Technological Collaboration, Canada will boost research and development collaboration between Canada and China to share knowledge and expertise for enhanced commercialization, and thus wealth creation for Canadian companies.
The Government of Canada is coordinating clean-technology initiatives, such as results-oriented demonstration projects in the municipality of Chongqing. This strategy will promote successful pilots to key central government, provincial and municipal Chinese decision makers to foster Canada's competitive advantage and position as an influential partner for China.
We currently have a bilateral umbrella mechanism called the Strategic Working Group, which operates at the deputy minister level and which was formerly established during the visit of the former Prime Minister Martin in January 2005. The deputies of Foreign Affairs, International Trade, and Natural Resources comprise the core group. This forum has the potential to be an effective clearing house for a variety of priority issues.
Expo 2010 offers a number of significant events and visits. For instance, Expo 2010 in Shanghai is expected to be the largest Expo ever staged. The Canadian Pavilion will be an impressive venue and will provide Canadian governments, organizations and businesses an opportunity to engage Chinese partners, clients and decision makers.
Additionally, we are already planning events to celebrate the fortieth anniversary of Canada-China diplomatic relations, taking place throughout 2010. This will provide a number of opportunities to raise Canada's visibility in China and advance our bilateral relationship.
In 2009, six high-level Canadian officials visited China, including Minister of International Trade Stockwell Day and Minister of Foreign Affairs Lawrence Cannon. Since June, seven high-level Chinese officials have visited Canada, including the Minister of Foreign Affairs and the Vice-Minister of Commerce.
For our discussion today, I look forward to hearing, as indicated in your preparatory materials, your points on the challenges of Canadian companies in China, as well as your ideas on strategic investment attraction from China and on enhancing our federal-provincial-territorial collaboration.
Here are a few quick statistics in preparation for your trip. In 2008, Canadian merchandise exports to China totalled $10.5 billion. That is a 10.1 per cent increase from 2007, making China Canada's fourth largest merchandise export market. Shorter-term trends also show substantial growth in exports, up about 6.5 per cent over the January to August 2009 period.
In terms of imports, China continues to be Canada's second largest source of imported merchandise, with imports valued at $42.6 billion in 2008. There is quite a discrepancy between the imports and exports, as you can see.
While a substantial number of Canadian firms have invested in China, the stock of Canadian direct investment into China stood at a mere $3.6 billion at the end of 2008 and accounted for less than 1 per cent of total Canadian foreign direct investment. At the end of 2008, the stock of direct investment in Canada from China amounted to only $2.8 billion, accounting for less than 1 per cent of total FDI into Canada, but this figure shows possibilities of real growth.
Since our last meeting, we have moved aggressively to enlarge our footprint in China with additional offices and staff to assist Canadians. Currently we have the embassy in Beijing, three consulates general in Shanghai, Guangzhou and Hong Kong, and one consulate in Chongqing. We have six trade offices that open as part of our trade portfolio in the Canadian Commercial Corporation. They are in Shenzhen and Chengdu, which are open and operational, and four others — Shenyang, Qingdao, Wuhan and Nanjing, which will be open before you arrive.
Total Canadian government staff, including trade, political, immigration, CIDA and all of our partner organizations, number approximately 560 people, of which local hires are obviously the vast majority. Trade has approximately 80 staff, and with the six new offices, the total will be more than 90 people.
Let me turn to an issue that the chair raised with me before, which is the issue of human rights. The protection and promotion of human rights around the world is an integral part of Canadian foreign policy. The Government of Canada has concerns about the human rights situation in China, and we consistently raise human rights issues with the Chinese government. Through high-level dialogue and collaboration, Canada seeks to help China adopt and implement internationally agreed standards on issues including human rights, the rule of law and sustainable development.
China is a developing country and still confronting many challenges in its efforts to improve its human rights situation. It has made great progress in poverty alleviation, health and education. In April 2009, China published its first National Human Rights Action Plan for China, covering 2009-2010, which aims to strengthen the protection of civil rights, including those of ethnic minorities, women, children, the elderly and the disabled. The Government of Canada is committed, through the work of many departments and NGO partners, to working with China in a positive and constructive manner in order to meet the challenges in many areas, especially in that of labour rights, ethnic and minority rights and rights of the disabled and governance. Canada also seeks to engage China in multilateral fora such as the UN Human Rights Council.
I emphasize that the visit of the Prime Minister to China in December is a great opportunity to inject new vitality into the relationship and take our bilateral engagement with China to a higher level in a systemic fashion. The visit by this committee is a key component to a bolder and more visionary approach as we seek to expand our economic, parliamentary, our people to people and the full range of how nations of people can work together. China should be seen as a partner, a competitor and a major regional and global power.
We would be pleased to answer questions and explore other ideas you might have on Canada-China. I look forward to returning to this committee as you prepare for your trip to India later in the new year. Thank you very much.
The Chair: Thank you Mr. Sunquist. In your presentation, you gave us some encouraging information about our exports to China and some statistics on the imports. Could you tell us what the two or three major items are in both those categories?
Ping Kitnikone, Director, North Asia Commercial Relations, Foreign Affairs and International Trade Canada: The major Canadian merchandise exports to China are wood pulp, nickel products, oilseeds, organic chemicals, machinery, and natural resources. The imports from China are mainly electrical, electronic components, machinery, toys and parts, some clothing, furniture and bedding.
Senator Dawson: I thank you for your opening remarks in the sense that I am happy you have been following our witnesses. One objective when we started this study was to raise debate on the issue and put pressure on the government, the opposition and on Canadians to help them to understand this opportunity.
One witness this week said that we have a roller coaster relationship with all three countries. Currently, we are at the height of the ride, and we have to seize those opportunities.
Certainly, you talked about the difference between the imports and exports. What are the opportunities that can narrow the gap by raising one to the other's standard. As you know, the Senate Transport Committee studied containerized freight traffic, where there is a major gap. The majority of the containers that come into Canada through the Asia-Pacific Gateway are going back empty. The committee will have to explore those opportunities so that containers do not go back empty.
What are your recommendations for bringing Foreign Affairs, Transport and Economic Development together to discuss ways to fill up those containers?
You talked about the fortieth anniversary. This committee might be part of the success because we put pressure not only on government but on opposition. As you know, the opposition leader was supposed to visit China but I believe it will happen later. What is your department doing to promote economic growth and economic trade with China in growth of economic investments both ways?
[Translation]
The deadline of the fortieth anniversary forces us to say that we have developed this relationship for 40 years and to consider what we are going to do from now on. And I think the committee's report will be essential.
As you may know, we have already decided to prepare an interim report on Russia because we saw things in Russia that we believe are quite obvious. Our report will be coming out as soon as possible to ensure that there is action to be taken, so that we do not wait until the end of the process of the three studies, but that we move forward gradually.
I think it may be the same thing for China. But the report will concern the deadline, the containers, the gap between the actions of the Department of Foreign Affairs and International Trade and those that must be taken by Transport and Canada Economic Development.
[English]
Mr. Sunquist: I will begin where you ended on the provisional report on Russia and how we are looking at other witnesses' comments.
This is an ongoing process that we can learn from on a daily basis. We take to heart what people say about sectors of opportunities or problems of access. We take to heart some of the issues that have been raised by others. For example, one of your witnesses recently described Beijing and Shanghai as a façade with poor peasants behind it. In fact, China is 50 per cent urban and 50 per cent rural. Compare that to India, which is 80 per cent rural and 20 per cent urban, and you can see where the next big growth in India will be. The opportunities include environmental technology and others.
The roller coaster with China happened earlier. Most of the issues where we are succeeding are on an upward slope for the most part and on a plateau at times.
You talked about containerization. We have been sending our sector reports and market reports to companies, in particular SMEs that lack the ability to access information on a regular basis. The market for environmental technologies in one city in China is not the same as in another city. It might be easier for some Canadian companies to get into the interior. How do you pull that information together with other means to get companies to focus more broadly and not just on Shanghai and the Beijing? You do air negotiations, which can initiate carriers and charters to move inland. One of the biggest things we did was get permission to go from 16 flights per week to up to 66 flights per week. That means your people can skip the coastal communities where all the competition is and move to other places. It is all about how you tie public policy issues to what companies can do. Give them market intelligence, not information.
That gets us into issues such as Transport Canada and Foreign Affairs and International Trade combining on the Asia-Pacific Gateway and Corridor Initiative. On the one hand, we are all concerned about the infrastructure in Prince Rupert, Vancouver and the corridors into Winnipeg or how you use airports as keys. On the other hand, you try to attract the Chinese sourcing companies to open offices in Calgary, Winnipeg and Vancouver so they can help you to source with Canadian companies to fill up those containers.
One or two of the positions we put into China over the last year deal with global supply chains. How can Canadian companies get into the supply chains that have moved to value chains and value networks? It used to be simply a matter of dollars and how cheaply you got in but today it is how to bring creativity to the table.
This is a rather long answer but your question gets to the heart of how we can move that $10 billion up. Why set a target; the sky's the limit.
When I was posted to China for the first time in 1994, the Team Canada approach worked. We had to write a speech for the Prime Minister, and I wrote that by the year 2000, we should be at $2 billion in two-way trade. People said we will never make that. I said if you pull in Taipei, Hong Kong, Macao and all of China, we might make it. Besides, we will be gone before the year 2000 arrives. Here we are today at close to $60 billion in two-way trade.
Canadian company investment in China is much lower than Australia, Germany, France, Britain and obviously the U.S. If we looked at two-way trade for the U.S., about 52 per cent to 56 per cent of Chinese exports to the United States actually come from American companies in China.
Canadian companies have been extremely successful. We must look at a whole series of issues from supply chains to investment to market access. Our transportation problems are not solved, but there is good cooperation and people talking.
Senator Dawson: The ratio is four to one. How has that evolved over the last say 10 to 20 years?
Ms. Kitnikone: If I may, the ratio is four to one, but the growth rate over the last few years in Canada has been, on average, 20 per cent over the previous year. For China, it has been about 10 per cent. In fact, it is still the four to one ratio, but the growth is reflected there.
The other witnesses might have told you that these are merchandise export figures. They do not look into services, which, as we know, is one of the strengths of Canadian companies. There has been an ongoing argument in academia, in government and in private sector about how to capture that data better. There is also the issue of trans-border import/export activities that is not captured. The fact of the matter is that some of the Canadian exports to other countries outside China may have Chinese content, but more importantly and more interestingly, we are also looking at how much Canadian content is in Chinese exports to other countries.
This comes back to Mr. Sunquist's point about the global value chain. It is not strictly looking so much at the manufacturer and shipping, et cetera; it is also about how we plug into the large market share that China has and supply the Chinese companies that service these market shares. That goes to the heart of the integrated trade model, where it is not strictly looking at trade promotion anymore; it is also looking at investment promotion, innovation and other kinds of collaboration.
Senator Andreychuk: Thank you to Mr. Sunquist and the team for appearing. I have been at this committee for quite some time, but it is the first time that we have had the trade services appear and incorporate more than the trade but human rights issues as well. I particularly like the phrase "balanced foreign policy" in that you are taking into account all of the cornerstones of our foreign policy.
There is a lot of discussion that we rely on the statistics coming out of China. To what extent can we rely on their information and statistics when we transfer it over to our businesses? There are hidden subsidies, different ways of tracking and different cultural issues. We do not have the same certainty of projecting and planning that we may have with another country with which we have had some historical involvement. Some of the issues are things like their reliance on and appetite for the American dollar. How will that work out with the recent economic situation in the United States and the discussions they are having?
How do we get reliable information from a government source into the hands of our businesses with any assurance that we are giving them good and sound advice?
Mr. Sunquist: You ask a question that bedevils public policy development. If I took it one step further, if you were to look up all of Africa in Statistics Canada information and try to find out how much investment we have in mining in Africa, it would come to about $800 million. On the other hand, Natural Resources Canada will tell you it is closer to $18 billion because the investment goes through London, Paris and other places.
This gets to the heart of things, especially with the previous comment on statistics. When we were simply — if you can call it that — in an export/import mode, the statistics we received from China and the statistics we could use from Canada were excellent and you could base decisions on them. I think the speed and the globalization of information and trade means that statistics are less and less the barometer we can use.
If 80 per cent of Canada's economy is in a service mentality, it is pretty hard to negate the fact that our service companies, whether they are engineering or technology services, do not even come into that figure. We do not measure it. If you look at some of the biggest exports we have to China, they have gone via the United States at times. Where do you truck it? From Saskatchewan, it might go straight south before it goes on rail westward.
We try to use the statistics we have as well as Chinese customs import statistics. However, I am less certain of the validity of that than I was even 10 years ago. It is not necessarily the Chinese way of doing things.
With respect to the second question you ask surrounding exchange rates, in essence, is a major issue for G8 and G20 countries. The U.S. and others have made their points very clear about the Chinese and what they have or have not done in exchange rate policy. It has been fairly straightforward.
One of the briefings you will have when you arrive in China will be from our finance counsellor Mark Kruger. The exchange rate in Canada as well has hurt some of our SMEs in terms of getting into the Chinese market. Mr. Kruger will address those issues with you. The question you raise has about 42 different parts to it, and they are all difficult ones with respect to exchange rates and statistics.
I would look at it the other way and say our officers are on the ground, we have a footprint, they are actively out there with networks of people looking for opportunities and communicating those opportunities to Canadian companies to take advantage of. Governments are looking at the bigger projects of how we can get into it. We have excellent support from Export Development Canada, the Canadian Commercial Corporation and other government departments, whether it is the Department of Transport, the Department of Health or the Department of Justice; everyone is involved in looking at China. It is too big to leave alone. The private sector and indeed the public sector in Canada are taking advantage of it and rushing in there.
I made the point with respect to Canadian premiers and provincial ministers, that we have had more visitors from the provinces in the last several years than has any other nation in the world. It is a massive undertaking, but the provinces have been a great partner as we try to develop the market. A year ago, the National Council of Provinces went to China with five premiers. I think a couple more would have gone, but they had an election so they could not all go.
It is not a foreign affairs or trade priority; it is becoming a Canadian priority. I think Senator Dawson also addressed that issue. I am not sure that answers your question adequately.
Senator Andreychuk: It is helpful from our perspective, what your job is; that is part of what we a looking for. With respect to the human rights issue, which you have put in here, I have never been an advocate for shrill human rights because I think it is counterproductive, but rather consistent human rights.
The other perspective is it is not so much conveying Canada's human rights: We stand for what we are; we explain who we are; we explain our values. However, we engage one of our best tools, our international instruments, whether on human rights, the rule of law or international values that hit trade.
To what extent, in our relations, do we engage the Chinese on setting up their dispute-resolving mechanisms, insurance of WTO standards, all of the issues that go into helping a business understand the rules? When you do run into a dispute, is there some fair mechanism that you can rely on or are you at the whim of a particular company?
I would like to know if you concentrated on any of that in China.
Mr. Sunquist: If I take the economic side of the equation for a moment, it is how you pull things together. CIDA, in the past, was working on governance and judicial issues and that got us into intellectual property. If you talk to any of your witnesses, intellectual property is the first issue that comes up. Ten or 15 years ago the Chinese did not play by international rules. They have more to lose now so they are actually moving.
On the other hand, if we work with the judiciary, if we work with senior policy and business leaders, we get them to start insisting upon the rules for themselves. When you talk WTO, we have continuing discussions with them in Geneva, Beijing and here. We have a host of priorities for the Canadian government and corporate social responsibility. We have international environmental obligations that we would like them to buy into, just as we are.
I think you described it best: We use Canadian mechanisms if we need to and can. As examples, we have the Canadian Standards Association, CSA, versus Chinese standards and you talk together to make sure there is some correlation between the two. On agri-food, using our chief veterinarian and their inspection services, how do you get together so you have science-based decisions as opposed to political decisions?
Whenever we can get it out of that political realm into a science-based decision on their part, it is much better for us.
Eric Walsh, Director, North Asia Relations, Foreign Affairs and International Trade Canada: I am happy to address human rights issues. I should say the focus on the rule of law and transparency are two of our keys when we talk about human rights with China. China does have quite an extensive body of law. In some cases, whether it is on economic or human rights files or lawyers or ethnic minorities or whatever, our assessment is that they actually do not follow the rules that they have even set out for themselves.
When that kind of situation happens, that provides a solid basis for us to engage them, to ask questions, why did it happen this way, why did not it happen that way, what is required? Is there room for Canada to have further discussions about this topic? Can we share our experiences and will that be helpful?
When you are there, this is also an appropriate topic for you to raise with your counterparts and with the people to whom you are speaking.
The Chair: Our witness yesterday described China as the world's greatest mercantile state, using 17th and 18th century rules, supported by the power of the state, which is not necessarily within the framework of international standards.
Is this one of the things you are talking about?
Mr. Sunquist: I do not think there is much about China that is 17th century. It is an apt description of a time period when China saw a closed border around them, and protectionism was what it was all about.
The economic meltdown in North America, Europe and other places has given the Chinese good reason to see that their future is about how they react in a global situation. I am not here to either laud them or to scold them. There are some things we can do on both sides. However, in relation to 17th century mercantilism, they are at least into the 20th century. I am not sure about the 21st century in all our dealings, but they are moving quickly in a number of areas.
We engage with them in market economy debates. They wish to be recognized as a market economy for purposes of dumping and other types of trade remedies. We look at each case on an independent basis. If I am not mistaken, in all cases so far, we found that they are into a market economy situation in an investigation by Revenue Canada. The long answer to your short question is I think they are beyond that now.
[Translation]
Senator Fortin-Duplessis: Welcome to the committee; it is always a pleasure to see you. My question concerns the exuberance of the Chinese markets. That exuberance seems to be based mainly on the fact that they have benefited directly from a suspect inflow of liquidity. The Chinese recovery plan has reinforced trends that were already perceptible before the crisis through a potentially dangerous financialization of the economy.
It is estimated that nearly 20 per cent of funds allocated under the recovery plan was invested by businesses in a speculative manner on the Shanghai and Hong Kong exchanges, which enabled them to inflate their profits artificially and increase their borrowing capacity.
China's growth model is getting ahead of itself and that is causing bubbles to form. According to a recent study by Pivot Capital Management, the Chinese economy, based on certain criteria, the ratio of Gross Fixed Capital Formation to Gross Domestic Product and domestic credit, is at levels very close to those of Japan in 1991, Thailand in 1997 and the United States in 2008.
Are you concerned that the expansion of credit cannot be extended for long without a risk of provoking a major crisis?
[English]
Mr. Sunquist: I think the Governor of the Bank of Canada and others would love to answer that question, too.
You raise a fundamental question about the bubble economy, which many economists write about and are worried about. The question to ask is — as public policy in the United States did — when you get too big, can you fail?
China has over $1 trillion invested in the U.S. marketplace. They were in no position to let the U.S. fail. If they pulled that out, I do not know where we would be today.
It has forced them, in terms of their international economic relations, to have another look at a China-first policy. Can you do that all the time? You have to become more and more of a global player.
That is my initial comment. The bubble economy is worrisome to economists. I will not say it is worrisome to business because business is just doing business. It is worrisome to people like this, wondering whether it is sustainable and, if it is, for how long.
The Chinese government has taken steps to rein it in. Credit has become more difficult. They have looked at where you have two companies associated and they lend money to each other. There have severe limits on that practice now.
In terms of stock market use, there were rules about how you could use money, such as whether you used internal money versus putting money into Hong Kong and then re-lending it back in to China proper.
This speculative bubble just grew and grew. I think their regulators were trying to address it but they had not addressed it by the time of the meltdown. I love the word "exuberance" and the term "bubble economy." They sum up, not only the economy but also the Chinese culture in the government right now. They have moved from being a laggard in the pack to a world leader. I am not one who proposes to talk about the G2 or the U.S. and China type of thing, but it is clear that they have moved ahead. My other comment about the regional and global powerhouse is apt. They see themselves as moving into that fix.
We watch it more from the economic side than the business side. To some extent, it is like the comment about whether GM is too big to fail. You go in and you make sure it does not fail.
Ms. Kitnikone: The question you just raised is, I would say, if not the number one thing on the Chinese government's mind, it would be high on the list. For them, stability is number one in terms of the health of the party, as well.
They very much want to avoid a meltdown, such as was experienced by the West and the U.S. You are quite right: There was a stimulus package announced following the global meltdown in the neighbourhood of U.S. $780 billion. The government injected those funds in an effort to anticipate and counteract what they foresaw as a decreased demand for Chinese products from the rest of the globe. They have met with some success. Depending on what you looked at, their growth rate last year was between 6.5 per cent to 8 per cent, which is pretty good from our perspective. However, for the Chinese, who have been enjoying double-digit growth, that was not a performance they would anticipate. That rate of growth is not enough for them to absorb the additional young people coming into the workforce. They need a double-digit growth rate to sustain the economic growth they have been enjoying. The government has paid a lot of attention to stimulating the domestic economy to ensure the domestic demand would help in some part to take up the burden.
During his recent visit to Canada, the Vice Minister of Commerce said that China is looking at turning China from a global factory into a global market. They have released the credit on some of the domestic demand, such as mortgage lending, so that the Chinese people can start buying houses, knowing that, when people buy houses, they usually want to upgrade their furniture and their appliances. In their view, that stimulates domestic demand and helps to tide over the crisis.
The banks are keeping a very close eye to see if there is any sign or suggestion of inflationary pressure. I am sure we will see some rapid tightening on the flow of credit. In addition, they are helping this by the fact that the Chinese banks, particularly the three major banks, went through the economic crisis very well. They are profitable and have healthy balance sheets. That certainly puts them in a good position to help the government deliver these stability policies.
[Translation]
Senator Fortin-Duplessis: On page 5 of your document, you state, and I quote:
Expo 2010 in Shanghai is expected to be the largest Expo ever staged. The Canadian Pavilion will be an impressive venue and will provide Canadian governments, organizations and businesses an opportunity to engage Chinese partners, clients, and decision-makers.
With its "Better City" slogan, the Expo is especially intended to transform Shanghai into a green city. However, the exhibition's organizers have announced that 60 per cent of the buildings, all financed by participating countries, will be destroyed, that is to say that tonnes of steel, cement and glass will be wasted and will pollute the future green city of Shanghai. Do you know whether the Canadian building will be one of the buildings destroyed?
[English]
Mr. Sunquist: I honestly do not know. The idea was that the pavilions would be developed and would be open longer than the period of the world's fair. However, I do not have the time frame. We will get that information from Heritage Canada and get the answer to the clerk tomorrow.
It is a sizable investment from Canada; our pavilion is in the range of $50 million to $60 million. Seventy to 90 million people will visit this world's fair, and it is a chance for high visibility. We can use it as a focal point, as I said before, in terms of the fortieth anniversary of our relationships, it was designed that we would use this for government- to-government and business-to-business and other aspects. We will have that answer for you immediately — before you leave, for sure.
[Translation]
Senator Fortin-Duplessis: In view of Canada's significant investment, I at least hope they keep it.
[English]
The Chair: I have a couple of quick questions. Although we are aware that statistics on the services side are a little more difficult to obtain, but would you be able to send us some information on that topic. That information may be useful for our discussions.
The other question relates to the global supply chain, which is becoming an issue that is difficult to identify and yet it will be as important as direct trade. Could you give us a little more information on that?
Mr. Sunquist: Senator, we will get you information on both topics. First, we will give you information on services and trade.
On global supply chains, let us start in Shanghai. Ten years ago, General Motors decided to build an assembly factory. All of the cars were Buicks coming from Southern Ontario. They were built here and assembled there. That was all the parts. That was a simple supply chain mechanism. They started building the parts there and Canadian companies invested in the Shanghai region with tool and die manufacturers and all the bits and pieces of it. Therefore, Canadians were involved in the GM chain in Shanghai and in China. That is now the world's largest automotive plant in the world, and we are part of it. That is one simple example.
You then talk about aircraft. Bombardier builds planes. They have bits from everywhere. I do not know how many countries in the world, but I think George Haynal had it in his testimony before you. Regardless, Chinese parts are coming into Canada on that, or whole sub-assemblies are being built there, in India or in other places. Again, that is fairly easy because it involves manufactured products crossing borders and you could somehow track it.
Then you get the technology and the creative design services happening in Montreal, Vancouver or Toronto and used by Bombardier in Korea for a project in Kuala Lumpur, but using Korean labour. Then it becomes more difficult.
I think business has been ahead of government in terms of addressing the global supply chain issues. We are fully involved in it. We have a division that does little other than global supply chains. If you take the aircraft industry, a few years ago, if you were trying to sell to Airbus, you went to Toulouse, France. That was it. Today if you want to do avionics for Airbus you go to Honeywell in Chicago, because they are the platform provider of avionics.
We are chasing this in all of its factors, whether it is simplistic bits and pieces or more difficult technologies and services. Clearly, China is one of the largest assemblers of many things, but Vietnam, Singapore and Japan are also involved.
Most of it is still in the United States and this is why export statistics do not always make sense. We may be selling to China, but doing it via products where final assembly is in the United States. That happens quite often, so we are overstating our exports to the United States and understating them to China. We do not know by what factor. It is like in the cattle industry where you raise a cow in an Alberta feedlot and where does the meat go? The export from Canada is all to the U.S.
We have a special project with Statistics Canada on this issue. We are trying to look at the impact of these kinds of things. I know that the committee was looking for this kind of information too and having some difficulty and some frustration, I think, trying to grapple with that issue.
We can provide you with additional information on global supply chains as well, if you would like.
The Chair: We would appreciate that and anything else you can think of to assist us in the analysis of the Chinese issues. If you have any ideas of items we might pursue we would appreciate that information as well. Obviously, we want our report be as complete as possible.
Senator Housakos: What percentage of exports from Canada to China are broken down in the four sectors of raw material exports, finished good exports, service sector exports and technologies? Even if you do not have the statistics handy, I would venture to say the largest percentage of trade is in raw materials.
As Canadians through the years, we have always focused on our strength, which is exporting our energy, our steel, our lumber and raw materials to developing countries, wherever markets require them. It has been a challenge when we have been doing trade with the United States through the years of trying to ensure our finished goods take up a good chunk of the market and stay competitive.
I think it is fair to say that over the last two decades, the Canadian manufacturing sector has been challenged by the emerging markets such as China. What can we do to better prepare our finished product sector to be able to compete in the Chinese market and get as much out of that market as possible?
We are talking about a market of 1 billion people, which will be getting stronger. Their buying power will become more prevalent. What do we need to do to get that sector of the Canadian market well positioned to compete in the Chinese market?
Mr. Sunquist: There are two parts to that question. I have quite a statistical annex and analysis that I will give you. I do not have it totalled by those groups but we can do that. We have the whole thing here. That is not a problem.
The second part of your question concerns commodities and commodities-based trading. When I was a youngster, we were told our strength was in raw materials. Then we grew up believing that high tech and other products were the way of the future. When you look at the strength of the Canadian dollar today, it is all around commodity pricing — kind of a petrodollar, in some ways. When you look at that, you realize that the strength of Canada, whether it is uranium, wheat, iron ore or steel, is still the strength of Canada.
All of our market studies, all our real sectoral interventions are on either services or manufactured products. We are giving information to SMEs and larger companies on those issues. If you find environmental technology or some other product, our people on the ground are trying to find the opportunities and networks for those Canadian companies.
Every company needs to have a China policy. The policy might be not to go to China, because it is expensive, it takes time and you need to have deep pockets to get there. However, you still need that China policy; you need to have thought through it or you have to think about it in the sense that there may be a Chinese company in the same sector. Therefore, the Chinese market is of interest to you, but they are selling into the U.S. now, so your U.S. market is under attack, or they are selling in Moose Jaw and you are from Moose Jaw, and suddenly you are under attack in your home market.
There are three different parts to that. Every Canadian company needs to have a China policy related to where the competition is coming from.
What we can do to help, mostly for those companies looking at the global response in either their primary markets or China itself, is to provide them with the market intelligence of what the competition is doing, who the decision makers are and how they can be successful.
We cannot make the sale for them, we cannot manufacture the product, but we can give them the information that allows them to get through the door and be competitive. After that, we have to rely on the brains and the entrepreneurial ability of Canadian companies. We are pleasantly happy with the success of Canadian companies; it is just that we need to go further.
As former Minister of Trade David Emerson used to say, if you go back 15 years ago, we would have talked about governments facilitating the private sector's success. The big change that today governments compete with governments. Therefore, it is how do we help the Canadian private sector to be successful in China or any other market?
That could be any range of things. In China, we are looking at a foreign investment protection agreement, at a number of formal agreements that would give market access for Canadian companies in different areas. When you ask how you help those companies, that is what we must do. It is the intelligence side of the marketplace and what the effects are.
Several of you asked questions around things like exchange rates. We have Canadian companies that are worried about Chinese banks paying. There are those kinds of issues that we must stay on top of on a daily basis.
Senator Housakos: Canada's strength has always been small- and medium-sized businesses. What are some of the challenges they face in the Chinese market in creating partnership arrangements and penetrating the market? Again, as a government, what can we do?
The big players will get in. The Bombardiers and SNC-Lavalin's of the world will find their way; they seem to muddle around wherever they need to go in the world and do well. My question concerns the small- and medium-sized companies that need the extra edge and the added value that they can bring as a Canadian product to China. What do the small- and medium sized companies need to do? What do we need to do to get them situated to penetrate that market?
Mr. Sunquist: First, some of the large Canadian companies bring small companies with them. It does not matter whether you are an Alcan doing a project and have 20 or 50 or 100 sub-suppliers working for you, we work with the big companies doing the big projects to maximize Canadian content within them. That would be one.
That is particularly for those who really do not have their feet in the market already. How do you get them involved in that project? If SNC-Lavalin is building the Expo 2010 and Cirque du Soleil is doing the inside, which Canadian companies are working to provide lighting, heating and cooling? Once they become involved in a project, they have a track record and they can use it to say, yes, we are here in China and this is what we have done. That is one example, but there are many others. That is for both small and big companies.
How do you do that? The second part is that most of our effort goes to the SMEs, whose issue is usually with working capital. They will not make a sale on the first visit and that will mean three, possibly four trips. The government could provide the financing through EDC for the project. The government could help with other things, on the intelligence side. SMEs might have a vice-president of production, but they do not have a vice-president of international marking. How do you help them there? A grouping of companies can solve problems.
Ms. Kitnikone: We recognize that the small- and medium-sized enterprises face different challenges in the China market. In some instances it might be that they need to look carefully at their market plan, at their corporate plan, and decide, as Mr. Sunquist said, that China is just not in the cards for them now. However, for those enterprises that have what we think is the right fit, if we determine there is an opportunity here in the sector for Canadian products, there are creative ways we can help. When I say "we," I mean our colleagues out in the field in Shanghai and on the ground in Chongqing, Guangzhou and Hong Kong. I will give you an example of what we have been doing.
In the agri-food sector, in finished products, Hong Kong is a very sophisticated market where consumer spending and disposable income is quite high. The High Commission has organized what they call the virtual trade fair. We have a big trade board room; the Canadian companies ship in a few of their products, juices, drinks and similar products. We invite Hong Kong buyers to the High Commission and then we set up the video conference so the Hong Kong buyers can taste the products and they get a chance to talk to Canadian businesses. This is all done virtually. The company might have to stay up overnight in Canada, but they save on the plane ticket to the market, because it is a big-ticket item for them to be spending money on plane tickets flying back and forth.
We also have virtual sector newsletters. For instance, in Shanghai, the global value chain is a key area of concentration. In the automotive and information communication technology area, two areas that the consul general is focusing on, the trade commissioner would have the virtual sector newsletter distributed through our virtual trade commissioner network. The company can sign up for those. They would have access to these newsletters and to opportunities and contacts that might benefit them. If they are interested and want to follow up, they can get in touch with our trade commissioner by email, which is fairly inexpensive.
We think of ways to use technologies as well as the knowledge of our trade commissioners on the ground to help Canadian companies, SMEs, to break into the market.
Mr. Sunquist: We also have 18 regional offices across Canada. This is important, particularly for new-to-market or smaller companies. They can talk to someone in their local neighbourhood. They can get the information they need, focused, pinpoint information on China or wherever else. It allows companies to make decisions without spending a lot of money.
The Chair: It is likely a very good point that we will include in our report for the purposes of helping you get more business.
Senator Smith: Ms. Kitnikone, you used a good phrase, "right fit." To go back to your point, anything that has to do with labour costs, we will never be competitive unless in some unique, high-tech way, and raw materials and things like that. One thing that did intrigue us on our trip to Russia, up in Siberia we were not near the Kinross gold mine but we certainly heard a lot about it. We also saw many Canadians, mostly from Alberta, for oil technology. The similarities between Russia and Canada make for some unique opportunities for Canada.
This may sound far off, but I want to explore an odd area, the impact of the increasing immigration of people from China to Canada.
I am looking forward to the trip to China. My first time there was 35 years ago when Mao was still alive. At that time, no one was getting out. You would not see a commercial sign or advertising. The Red Guard would come every day to talk about Chairman Mao's thoughts from the Red Book; it was unreal.
More and more we see the market economy becoming really rooted. The numbers are staggering; the four to one numbers and $10 billion and $40 billion are unbelievable.
There has been more of a flow of immigration from India for a number of years. Now, it is sort of nip and tuck between India and China each year, but I am aware of many well-established Indian business people who have been here quite a while who are helping to make things happen back and forth.
Do you see much happening with people who have come to Canada in recent years? Maybe it takes a generation or two of doing business and being aware of opportunities that might be the right fit for Canadians over there. These people need personal connections and the network that comes with them to start these types of businesses. Is that starting to happen a bit? What can you tell us about that?
Mr. Sunquist: You address a question that I should have answered in my opening remarks. The largest diaspora in Canada is in fact Chinese and it is larger than the Indian diaspora. It is about 1.2 million Chinese and just under 1 million of Indian descent.
Senator Smith: There are the two categories. There is the old original Cantonese crowd and then the more recent group.
Mr. Sunquist: It would appear that the diaspora from China would be associated more with the smaller entrepreneurial group. We would like to have them within the government and we are trying to attract some of these people to be part of our foreign service. We would hope that more and more people would end up in senior positions in Canadian companies, as that is how you get that cultural understanding of the marketplace. You are seeing a lot of the Chinese ethnic origin in business across the country. Much of it would be around SMEs right now, but increasingly in the big companies, too.
Senator Smith: In terms of the Indian diaspora, there is Prem Watsa, who is huge, with a lot going back and forth. I am not aware of many from the Chinese community in that category, but I want to believe they are coming and I want to believe it will happen. Do you have that sense?
Mr. Sunquist: I do not think in terms of the larger ones. Li Ka-shing would be the best example. He owns 20 per cent of the ports responsible for 20 per cent of world trade. He has two sons, one being Husky Oil. You get some of that, but it is not the mainstream.
I will come back to the chair's comment after about what you could be looking at and the importance of Chinese perceptions of Canada, but it is like education. I think if you looked at one sector that is most important sector of all, it would be education marketing and getting more Chinese here, because they become your best salesmen. They are the alumni association; they are benefactors of universities; they believe in the research and development that comes from Canada, and they know us. They know Canada. There are many sectors. We talked about it in terms are SMEs and commodities.
However, long term, the biggest thing we can do involves academics at all levels, from English and French second language, to technologies, universities and graduate studies.
I do not have the right title, but there is a Chinese professors association. There are about 1,200 professors of Chinese ancestry in Canadian universities today. They have an association. It is those kinds of things we have to support and cherish.
Senator Mahovlich: Of the top 10 banks in the world, how many are Chinese? During the economic meltdown, many American banks closed their doors. I have not heard anything about the banking system in China. Could you comment on that?
Mr. Sunquist: The Canadian financial system has proven to be so strong that a number of our banks that were about twentieth in the world are now in the top 10. Exactly as you said, much of the competition has disappeared, but it is also because of good management and good regulation.
In China, we would talk about the strength of the financial community. If I am not mistaken, two of the Chinese banks are in the top 10, but four or five others are in the top 25 as well, so it has a very strong financial system. It is also why Canadian banks, such as the Bank of Montreal, Scotiabank and the Royal Bank have all been in China, as well as our big insurance companies, such as Manulife and Sun Life.
The financial community has some respect for each other in the sense that they can work together. This is more recent than long-standing. If you go back 10 or 15 years, could you believe the balance sheets or the risk management of the Chinese banks? It would have been questionable. Many Canadians got caught in who they were dealing with. Today, I do not want to say that the Canadian and Chinese financial systems are equally good; I think the Canadian system is far better. However, Chinese banks did not suffer the way the European banks did during the economic crisis.
Senator Mahovlich: We do have Canadian banks in Beijing?
Mr. Sunquist: I do not know if you are meeting with them in receptions, but Scotiabank and Bank of Montreal both have a presence in China. Some of the activity is lending to their corporate clients from Canada who are there, but others have representative offices there.
We will be sure to get a message to our economic counsellor and see whether they can be included in some of the receptions so you can meet some of them. You raise a good point.
Senator Mahovlich: My last visit to Beijing was in 1988. Hong Kong was a different place. It seems to me Hong Kong has influenced China more than China has influenced Hong Kong. Do I see that correctly?
Mr. Sunquist: You could ask five people and get six different opinions on that. Hong Kong was always viewed by the Chinese as their public face, going back to the 1980s. In Hong Kong, with the good banking system, the good trading companies and the globalized perception, it is clear that the policy-makers in China have learned from Hong Kong. Hong Kong, in turn, has profited from being the main financial community for all the big projects in China. It has been a mutually beneficial relationship. It is one country with a special autonomous unit.
The CCLA, the Canada-China Legislative Group, deals with the NPC, National Peoples Congress, which is in China. We do not have that with Hong Kong right now. The wealth of Hong Kong has multiplied many times over since it again became part of China. It is an interesting evolution. You are right; China has learned much from that, and of course now Shanghai and Hong Kong compete for the honours.
Senator Mahovlich: We are known around the world for our mining expertise. Do we have many Canadian mining companies in China?
Mr. Sunquist: Yes, but it is one of our issues because we can explore but not exploit. Gold mines might be there, but we do not have legislation so that we can translate that into profitable ventures. We are into all sorts of mining over there, but with a lot of frustration.
Senator Mahovlich: We are still working on it?
Mr. Sunquist: Yes.
Senator Mahovlich: What about hockey? Do they have any arenas in Beijing?
Mr. Sunquist: The Chinese women have a hockey team. The Chinese men have a team, but they are kind of level C in the world pool. Their speed skaters challenge us, but hopefully we will have home-ice advantage at the Olympics.
Senator Mahovlich: We do not have anything to worry about for the next few years?
Mr. Sunquist: They won figure skating championships a couple of years, and other events. Like many countries, they put a priority on sport. There is enormous money going into sport infrastructure, for rinks and so on. Who would have thought they would win at curling? You name the sport; they are putting the money into it.
The Chair: Mr. Sunquist, you may wish to give some thought to an idea I just had. If the Chinese would like to trade for Frank Mahovlich, I do not know what we could get in return, but it would have to be pretty big; otherwise we would not do it.
Mr. Sunquist: I was posted in China when the tallest national basketball league player was there. This guy was over seven feet tall. He came to the immigration booth and we asked him in for an interview because every immigration officer wanted his autograph. That is a different issue.
There should be some exchange. Maybe future draft choices could be one Frank Mahovlich for a NBA star.
The Chair: You should give some thought to that and give us ideas, because we may want to put him on the market when we are there.
Mr. Sunquist: I would not want to comment on that.
The Chair: He is my old school buddy, so I would be in a lot of trouble if I did that.
Senator Zimmer: Common to many emerging markets is the presence of barriers to investments. Foreign companies operating in emerging economies cite problems with a lack of transparency in the certification process, burdensome requirements and long processing times for certifications, and since 9/11, it has been a tough balance. There is the desire to engage in open markets but at the same time ensure that our countries are secure; it is a tough call.
Can you describe some of these barriers to investment and provide a few examples of how they affect Canadian businesses' ability to invest and operate in China? In your opinion, which barriers to investment are the most serious and how might they be overcome?
Mr. Sunquist: In most cases, investment into China by Canadian companies is by a region or even by a municipality. For instance, when Manulife first went into China, it was for one city. To invest a huge amount of resources for marketing or anything else in one location is difficult. We just talked about the mining situation. People are going on spec because they believe the legislation will change to allow them to not only explore but to exploit the resources.
This gets back to questions raised by others around the table about the legislation in China becoming more regional as it evolves from a centrally controlled type of economy.
Going to Shanghai makes it easier because it is farther from Beijing. They are getting rid of the regulatory processes. The former minister of commerce is now the party secretary in Chongqing. They are using it as a model to bring in foreign investment. The most difficult part about investing in China is that it is regional or even local, so companies have to gauge whether the market exists for them the way they want it.
The lack of transparency issue was greater than it is today but it is still there. I do not want to mislead you, but there are more Western law firms and people who understand how to get through the myriad of issues. I addressed questions like standards in working with the Canadian Standards Association Group to do MOUs for joint recognition of electrical standards. There are many issues.
You have to remember that the bad part of bureaucracy was perfected in China. It is rules based. Therefore it is much easier and less risky for an official to follow the rules as opposed to looking for a way around them.
Our investment is relatively low compared to a number of other countries. If others are finding the way and the will to do it, then we have to do something about that.
Ms. Kitnikone: I had the honour to serve in both India and China. I do not know where the bureaucracy was perfected, whether in India or in China. In spite of what Mr. Sunquist has said, the UN has some interesting statistics in its review. China is the third largest investment destination just behind the U.S. and the U.K. Clearly, despite the barriers, it is a popular investment destination.
We are concerned about the lack of transparency. This is mainly because much of the Canadian investment interest in China is in the mining sector, natural resources. The difficulty, as Mr. Sunquist mentioned earlier, has to do with the fact that we cannot exploit what we have explored. More than that, much of our strength is in the area of advanced technology and we would like to benefit from that with investment in China but we are concerned about the intellectual property protection element, IPR.
China has fairly acceptable legislation on IPR; its failing is on the implementation. When a Chinese company gets into copyright infringement, the case may be heard by a local court and at times, local politics become involved. This situation can result in an outcome with which we do not agree. This is why we would like to conclude a FEPA agreement with China. Such an agreement would provide for a greater degree of predictability for our companies interested in investing there. Until we can conclude the agreement and can use due process in China, we have other mechanisms, such as the annual Joint Economic and Trade Commission that we have at the deputy minister level with China. They are a working group that has been struck under the JETC to review IPR issues. The minister of commerce, who is our counterpart in this, demonstrated great willingness to hear our case. We raised with them a recent case concerning companies such as Corel. There are mechanisms to ensure that the Chinese government is aware of the interest that Canadian companies have, and that it might be an advantage to them if they were to strengthen their own IPR implementation process.
During the recent visit here, the vice-minister of commerce, who was responsible for the investment portfolio, indicated that he is very aware of the importance of IPR because China is taking on a great deal of research and development to advance its industry from basic manufacturing to a more value added industry. It is in the interest of China to look at IPR protection because it is experiencing exponential growth in research and development and publication. It could be an interesting development as the Chinese become more and more active in that area.
The Chair: Thank you for coming here to help us to understand some of these complex issues. I am sure we will get back to you in the not-too-distant future, not only to talk about some of the other countries but also to review some of the findings that we will put into our report.
Mr. Sunquist: Mr. Chair, the members of this committee travelling to China will meet with senior people. Keep in mind that much of it is about the perception of Canada and the perception of Canadian companies. If you were to look at public policy or talk to the NPC or talk about Chinese business associations, ask how they see Canada as a partner. How do they see Canadian companies? Is it lack of aggressiveness? Is it lack of product? Are the companies too small? It would help you in your report and it would certainly help me to understand from your interlocutors just how they see Canada. In a big way, it would tell us where we have to spend our priority time and attention over the next weeks, months and years.
Thank you for this opportunity. I wish you well on the trip. I can assure you that our ambassador — our minister responsible for economics and commerce — is looking forward to your visit, as are the Chinese.
The Chair: Thank you.
(The committee continued in camera.)